Southeast Asian Capitalists 9781501718793

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SOUTHEAST ASIAN CAPITALISTS

h the Social Science Research Council and the American Council of Learned Societies, with partial funding from the Mansfield Center for Pacific Affairs.

Ruth McVey, Editor

SOUTHEAST ASIAN CAPITALISTS

STUDIES ON SOUTHEAST ASIA

SEAP Southeast Asia Program 120 Uris Hall Cornell University, Ithaca, New York 1992

Editorial Board Benedict Anderson George Kahin Stanley O'Connor Keith Taylor Oliver Wolters

Cornell Southeast Asia Program Publications 640 Stewart Avenue, Ithaca, NY 14853-3857 © 1992 Cornell Southeast Asia Program First published 1992. Second printing 1993. Third printing 1997. All rights reserved. Except for brief quotations in a review, no part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system, without permission in writing from the Cornell Southeast Asia Program. Printed in the United States of America ISBN 0-87727-708-7

CONTENTS

The Materialization of the Southeast Asian Entrepreneur RuthMcVey

7

Capitalist Development in Postwar Thailand: Commercial Bankers, Industrial Elite, and Agribusiness Groups

35

Industrialization and the Economic and Political Development of Capital: the Case of Indonesia

65

Entrepreneurship and Protection in the Indonesian Oil Service Industry

89

Akira Suehiro

Richard Robison

Jean Aden

The Transformation of Malaysian Business Groups

103

The Chinese Business Elite of Malaysia

127

Marcos, His Cronies, and the Philippines' Failure to Develop

145

Changing Patterns of Chinese Big Business in Southeast Asia

161

Politics and the Growth of Local Capital in Southeast Asia: Auto Industries in the Philippines and Thailand

191

Contributors

219

Sieh Lee Mei Ling

Heng Pek Koon Gary Hawes

Jamie Mackie

Richard Doner

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THE MATERIALIZATION OF THE SOUTHEAST ASIANENTREPRENEUR Ruth McVey

he specter of capitalism is haunting Southeast Asia. A most concrete ghost, it has revealed itself in office blocks towering above Kuala Lumpur, in banking palaces glittering amidst Thai district towns, and in the whitewashed moorish mansions of an Indonesian elite whose wealth comes neither from landholding nor bureaucratic position. And yet it seems not part of the "real" Southeast Asia. That region, save for the city-state of Singapore, has long been imagined as quintessentially agrarian, its symbol the peasant toiling in his paddy-field, and plantations the only real representatives of the modern economic sector. In that world, businessmen cannot be as important as bureaucrats or landowners; political patronage and not entrepreneurial energy is the means for accumulating wealth. The skyscrapers and factories which now dot Southeast Asia's horizons cannot be emblems of indigenous but of alien accomplishment, and the native elites involved in these enterprises are either the parasites or the agents of the foreigners. In this vision the new industry is a mirage, spectacular but insubstantial—"ersatz capitalism" as one commentator has called it.1 Is this so, or do we need to change our way of looking? The essays in this volume, which consider the origins and role of Southeast Asia's business groups, may help explore this question.2 They are concerned with the region's domestic big business, particularly as it developed in the 1970s and 1980s, crucial decades for Southeast Asia's capitalist transformation. The most striking element of this period has been the development of manufacturing industry, not because it has become a dominant sector—it has not, in any country—but because it is there at all, contradicting the stereotype of a peasant Southeast Asia and raising speculation on whether the region is embarking on an industrial revolution. Indeed, some analysts have taken the development of a viable

T

1

Yoshihara Kunio, The Rise of Ersatz Capitalism in South-East Asia (Singapore: Oxford University Press, 1988). 2 These studies arose out of a conference which was held in Sukothai, Thailand, in December 1986, under the sponsorship of the Joint Committee on Southeast Asia of the US Social Science Research Council and the American Council of Learned Societies. In addition to support from the sponsoring organizations, the Social Science Association of Thailand most generously helped with the logistics. None of these bodies is, of course, responsible for the views expressed here.

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(that is, internationally competitive) manufacturing base to be the measure of any true capitalist character.3 We have not been so restrictive here, but have understood capitalism as a system in which the means of production, in private hands, are employed to create a profit, some of which is reinvested to increase profit-generating capacity. Thus we deal with agribusiness, banking and other services, construction, trade, mining, and other non-manufacturing activities, provided they are carried on in a capitalist manner and involve domestic capital. Determining whether they meet these criteria is not always easy, for it is often difficult to discern precisely where foreign business control ends and domestic begins. Nor is it a simple matter to distinguish between rent-seeking—taking advantage of control over a resource, such as land or a government-granted monopoly, to extract profit without productive investment—from capitalism proper.4 Yet these are issues of central importance for estimating the significance of Southeast Asia's business expansion, and they have been the source of much of the disagreement concerning the "reality" of Southeast Asian capitalism.5 Generally, studies dealing with economic transformation are peopled with abstractions—capital, labor, world systems, development strategies, hard and soft states—whose struggles determine the outcome. In the presence of these titans the endeavors of mere humans seem the dithering of ants; we may forget they are behind the abstractions. Moreover, as we shall see, much of the argument concerning the nature and prospects of Southeast Asian capitalism has turned on the social sources and cultural orientation of its business leadership, and the nature of its relationship to the political elite—questions about the doers rather than the done. By looking at the changing patterns of business leadership and business-political relations, we may 3

This is a major reason for Yoshihara's negative opinion of Southeast Asia's capitalist development. For a thoughtful critique see Richard Robison's review of The Rise of Ersatz Capitalism in the Bulletin of Indonesian Economic Studies 25,1 (1989): 119-24. 4 Max Weber employed the term "political capitalism" to refer to systems in which office and connections were employed to ensure profits; he saw this as a common feature of pre-modern economies and illustrated it particularly with China (see The Religion of China [New York: The Free Press, 1968], and The Theory of Social and Economic Organization [New York: The Free Press, 1964], pp. 278-80). It would appear, then, that he did not see the line between capitalism and the rent-seeking of power-holders to be as absolute as many present analysts do. The difficulty of distinguishing between true capitalist and pre-, quasi-, pseudo-, or plain non-capitalist behavior can be illustrated by the fact that in some fields, such as agribusiness, multinational companies may organize their activities in quite different ways in order to fit with local hierarchies and culture; sometimes they have direct capitalist relations with local producers, and at others they work through clientage systems. See Mariko Asano-Tamanoi, "Farmers, Industries, and the State: The Culture of Contract Farming in Spain and Japan," Comparative Studies in Society and History 20, 3 (1988): 432-52. Of course, we do not hesitate to label a large corporation as capitalist and to view apparently anomalous behavior as an adjustment to local conditions; but when we talk about individuals or firms whose quality is uncertain it becomes much less clear. 5 The argument over the capitalist qualities of bureaucratic rent-seekers, which has been most developed for Thailand and Indonesia, will be gone into in detail below. In the Philippines, a central issue has been whether domestic plantation owners should be classified as true capitalists, since they tend to use the profits of their otherwise unarguably capitalist operations to acquire more land rather than to improve the means of production. As a result, some analysts have applied to Philippines estate agriculture Hans Bobeck's theory of "rent capitalism" as opposed to the "productive capitalism" of a fully modern agribusiness. See Alfred W. McCoy and Ed. C. de Jesus, ed., Philippine Social History: Global Trade and Local Transformation (Quezon City: Ateneo de Manila University Press, 1982), especially the contributions by McCoy and Brian Fegan.

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also hope to trace the outlines of a broader evolution in Southeast Asian societies and states. For these reasons, it seems useful to approach our subject using the tools of political economy, but emphasizing in particular the character and role of the people who carry on Southeast Asian business. We have restricted our study to big business, in the first place because it is at this level rather than that of petty and middling entrepreneurs that Southeast Asian capitalist development has been most marked in the last two decades. Whatever the entrepreneurial urges of small businessmen in the hinterland, it seems unlikely that a great transformation would have occurred had it not been for the political-economic linkages among the powerful which bore fruit in this period. They brought the removal of many of the disabling conditions which nationalism and bureaucracy had hitherto imposed on business growth; they created the environment—ideological as well as economic—which spread sympathy for capitalist endeavor among the power elite. The industrial development that has fanned Southeast Asia's recent growth has depended greatly on arrangements negotiated at the top level between entrepreneurs, bureaucratic chiefs, and foreign sources of aid, investment, and markets. Small producers may supply the major firms which made the deal, and pathways to investment and markets, once opened up, may become directly accessible to middling businesses, but their opportunities arose from the groundwork laid at the national government/big business level. Finally, it is at the level of major industries that we find most clearly displayed the nexus of business, politics, and the state, which, as we shall see, has been central to the Southeast Asian capitalist upsurge. THEORETICAL VISIONS AND REVISIONS

Studies of Southeast Asian capitalist development have hitherto tended to draw on one of three main explanatory streams for their arguments: CC, MM, and SS, as Gillian Hart has succinctly put it6—Confucian culture, the magic of the marketplace, and the strong state. All three of these themes reflect general debates on the nature of development and entrepreneurship, the particularity of "Confucian culture" being a variant of a broader discussion regarding the role of culture in economic behavior. We will discuss them later in their Southeast Asian context, but at this point I should like to introduce them generally and to note their origins in broader assumptions. The "Confucian culture" argument has had a curious career, for it began not in its present role of explaining why capitalist development in East Asia has been such a success but rather of suggesting why the Chinese were unlikely to make good capitalists. The problem it was addressed to, a century ago, was why industrial revolution had taken place in Europe and America but not elsewhere in countries of otherwise advanced civilization. Innate white superiority was at the time the obvious answer, but less complacent spirits looked to the new social science to find the cause. Thus Max Weber explored the relationship between Chinese ideology and social structure, and concluded that China's economic backwardness was fostered by the values inculcated by Confucianism.7 This explanation was taken over into studies on Southeast Asia, where (since the entrepreneurial role of Chinese immigrants to that region could not be denied) it was used to show why Chinese businessmen did not develop corporate businesses or seem able to compete with big Western firms. 6

Gillian Hart, personal communication. Weber, Religion of China, especially the final chapter, in which he compares Confucian and Puritan values and relates them to capitalist development.

7

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Japan's postwar capitalist success was first explained by the fact that it shared with Europe a feudal past. But when not only South Korea but also Taiwan and then Hong Kong and Singapore joined the ranks of the newly industrializing countries (NICs), and China itself showed entrepreneurial stirrings, a more general explanation seemed necessary. It no longer seemed so obvious that the reason would lie in a similarity to European structure or experience, and accordingly some analysts discerned in these countries a common strand of Chinese cultural tradition, whose values of diligence, order, individual responsibility, and so on promoted capitalist behavior. Needless to say, they averted their eyes from economically unsuccessful Vietnam, whose claim to a Confucian cultural heritage is rather more substantial than Japan's.8 For Southeast Asia this line of argument has strong political resonance, for it implies that the economically powerful Chinese minority has a cultural edge over the indigenous population, something which was already widely suspected.9 Save in Chinese-majority Singapore, whose superiority it confirms and which therefore has made it part of its political rhetoric, the theory has confronted Southeast Asian political leaders with the thought that their struggle to throw off Western hegemony has left them vulnerable to yet another culturally and economically advantaged minority. In effect, they have been put in the same place as the Chinese in the original version of the theory, and told they will have to sacrifice either their cultural identity or their ambition to get ahead in the capitalist world. As we shall see, in some countries a great deal of effort has gone into attempts to reduce the presumed advantage of the Southeast Asian Chinese and thus avoid the horns of this dilemma. Explanations based on the magic of the marketplace have their origins in capitalism itself, with its assumption that competition will sort the efficient and innovative from the pack and provide a rational distribution of rewards. That things do not always work that way we know well enough, but since attempts to rectify imbalances and injustices, usually by state intervention, have often resulted in stagnation or corruption, periods of emphasis on public control of the economy have tended to alternate with arguments for a return to capitalist first principles. The 1980s saw a great upsurge of faith in marketplace magic, with the rhetoric of Reagan and Thatcher, emphasis on supply-side economics, and the crumbling of Communist systems. Needless to say, reliance on marketplace magic has been at the core of advice to developing countries by donor states and institutions, particularly the World Bank and the IMF. It offers a better guarantee for their investment, and in particular it assures them access to the economy concerned. The recipes for success which they proffer therefore tend to stress an open economy, a restricted state role, seeking comparative advantage, working hard, and getting the price right by restricting domestic consumption and labor's rewards. 8

See G. L. Hicks and S. G. Redding, Industrial East Asia and the Post-Confucian Hypothesis: a Challenge to Economics (Hong Kong: University of Hong Kong Center of Asian Studies, 1983). Much of the argument about the role of Chinese culture, as it has developed for Southeast Asia, seems to hinge on whether one sees Chinese business strategies primarily as cultural or historical products: contrast Hicks and Redding, "Culture and Corporate Performance in the Philippines: the Chinese Puzzle," in Essays on Development Economics in Honor of Harry T. Oshima (Manila: Philippine Institute of Development Studies, 1982), pp. 199-215, with Victor Simpao Limlingan, The Overseas Chinese in ASEAN: Business Strategies and Management Practices (Manila: Vita Development Corporation, 1986). 9 See for example Mahathir bin Mohamad, The Malay Dilemma (Singapore: Donald Moore, 1970).

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For newly independent nations this course seemed fraught with risk, however; how can one compete successfully with forces which are infinitely more powerful, more expert, and already in place? A possible reply is that if one is going to be overwhelmed one might as well take advantage of it; as we shall see, this has been Singapore's response. However, what works for an already established trading emporium might not seem a viable option for a nation with a large agrarian hinterland and no visible capitalist niche save at the bottom. It seemed, as the dependency theorists assured, that they were doomed to a servile position. A common compromise, particularly prominent in the independent Southeast Asian states of the 1950s, has been the strategy of import-substituting industrialization (ISI). The idea here is to create a space in the domestic economy in which industry and entrepreneurial talent can be nurtured. Firms established in this arena can supply the country with common manufactured goods which would otherwise have to be imported, thus saving precious foreign exchange. All this, of course, requires major state intervention, which it was hoped would become less necessary as the economy matured. Thailand's pursuit of this strategy began in a rather ad hoc manner, as a way to rescue the industrial remnants left by the stagnant state capitalism which had resulted from Phibun Songkhram's efforts at autarky in the 1930s and 1940s. Indonesia's was expressed in the "Banteng" program of the 1950s, which not only protected domestic capitalists from foreign competition but excluded non-indigenous (i.e., local Chinese) businessmen as well. It was an unmitigated failure from the viewpoint of industrial development, a giant porkbarrel into which politicians and their friends, newly dubbed entrepreneurs, dipped their fingers. In the Philippines, as Hawes' paper shows, the strategy also produced corruption, but, perhaps because there was much greater business and administrative experience and because the question of the Chinese role was less acute, it also produced an exuberant flowering of business activity. By the late 1960s, however, it had run into what was already familiar from Latin American experience as the crisis of industrial deepening. An ISI strategy, it seemed, was relatively easy to pursue in its early stages, when with comparatively little investment and technology one could produce simple manufactures to satisfy local demand. There was only a limited range of these, however, and the domestic market of a poor country was quickly saturated. To expand into more sophisticated products (not to mention the basic industries beloved of nationalist regimes) meant importing more materials and more technology from abroad; eventually, the cost of these far overshadowed the savings on foreign exchange which local production entailed. Both inexperience and protection against competition from imported goods meant that local manufacturers were inefficient and their products uncompetitive; they passed on the high costs of their operations not only to consumers but to domestic firms which were forced to use locally produced components. As a result, the strategy moved away from, rather than toward, international competitiveness, and its expensiveness only reduced the size of the market at home. Stagnation, political bickering, and popular unrest were the result, as the Philippines' experience well shows. A way out of this crisis, pressed especially by the World Bank and IMF from the mid-1960s, was the strategy of export-oriented industrialization (EOI). Developing countries, in this vision, should concentrate on those manufactures which they could produce more efficiently than mature industrial economies (mostly because of lower labor costs, and increasingly because of fewer regulations against pollution and lower tariff barriers in the countries that bought their goods). In this effort, they

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should take full advantage of relationships with multinational corporations (MNCs) and other foreign sources of capital, technology, and international marketing knowhow in order to overcome their initial weakness in these respects. Discreet supervision by the state should see to it that foreigners did not take undue advantage of their partners' initial lack of sophistication. The result would be manufactures that would bring in rather than suck up foreign exchange, and experience and technological advance that could extend the international competitiveness of the economy into larger fields. It was pointed out, as firms not only in the United States and Japan but also Korea and Taiwan began to transfer manufacturing operations abroad, that Southeast Asian countries could take advantage of the product cycles of these investments to establish themselves in new and increasingly higher-value manufactures. What was less often mentioned was that it would make them dependent on highly specialized and labile international markets, and that they could soon be overtaken in competitiveness by countries offering foreign interlocutors still lower labor costs and better protection. It is export-oriented industry—in particular electronics and textiles—that has been the hallmark of Southeast Asian economic success in the last two decades, though in fact (as these studies make clear) both ISI and EOI strategies have been pursued depending on what seems most feasible and advantageous for the industry concerned. Both strategies require a considerable input from the state, the former in overt control and the latter in a less visible but equally important facilitative role. Indeed, so important has the role of the state appeared in creating the conditions for capitalist development in the late twentieth century, and so central has it seemed to East Asia's economic success, that a growing number of analysts have seen in it the essential ingredient of successful industrialization. The "strong state" argument began to become widely popular in the mid-1970s, but it can trace its intellectual background to the previous decade, when, in reaction to civil unrest in Western Europe and the United States, and to the failure of democratic and populist regimes in third-world countries, a new appreciation of order, hierarchy, and stability began to replace liberal assumptions regarding participatory democracy. This approach, exemplified by Samuel Huntington's Political Order in Changing Societies, found an echo in discussions of why third-world countries failed to develop, which Gunnar Myrdal articulated in terms of "hard states" vs. "soft states."11 By the mid-1970s the new focus on the role of states in development resulted in an academic campaign for "bringing the state back in" as a central concept12—rather an Anglo-Saxon conceit, as it had never been out so far as the rest of the world was concerned. The state was seen as the key to the conundrum posed by dependency theorists, whose argument that there was no way for third-world coun10

Samuel P. Huntington, Political Order in Changing Societies (New Haven and London: Yale University Press, 1968). 11 Gunnar Myrdal, The Challenge of World Poverty (New York: Pantheon, 1970). 12 For a theoretical statement of the autonomy argument see Dietrich Rueschemeyer and Peter B. Evans, "The State and Economic Transformation," in Bringing the State Back In, ed. Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University Press, 1985), pp. 44-77, and also the concluding essay by the editors, "On the Road to a More Adequate Understanding of the State," pp. 347-66. For critical evaluations of this approach which place it in the general evolution of development analysis, see Leonard Binder, 'The Natural History of Development Theory," Comparative Studies in Society and History 28 (1) (1986): 3-33, and Scott Werker, "Beyond the Dependency Paradigm," Journal of Contemporary Asia 16,1 (1985): 79-95.

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tries to industrialize save by revolutionary withdrawal from the capitalist system was being challenged in Latin America by the emergence of what became known as "developmental authoritarian" regimes.13 The essential ingredient of the strong, developmental state has been seen as its possession of autonomy from sectoral and societal interests, and hence its ability not only to reconcile differences and maintain order but to map out a strategy for improving the country's place in the world capitalist system. We will dissect the assumptions of this approach later; for the moment, we should simply note that the theory adapts the arguments of Marx's Eighteenth Brumaire, which sought to explain why a bourgeois state (the France of Louis Napoleon) was able to undertake stabilitypreserving policies which went against sectoral interests.14 For the industrializing countries of Asia, it also brought political economy for the first time into a discussion that hitherto had looked to culture and society or to a politically indifferent economics for its explanations. There followed a spate of case studies on the East Asian economic miracles, which discovered, not surprisingly, that state guidance and not unassisted get-upand-go lay behind their success.15 (This is not to imply that the state did not in fact play a major role in these countries—the evidence is abundant that it did and does— but rather that what we investigate and how we go about it is very much conditioned by the circumstances of our day.) Needless to say, the new enthusiasm for the state as the deux ex machina of development aroused some reservations, for not only did it go 13

For discussions which are useful for comparing Latin American developmental authoritarianism with the Southeast Asian experience see David Collier, ed. The New Authoritarianism in Latin America (Princeton: Princeton University Press, 1979), especially the essays by Collier, Fernando Henrique Cardoso, and Guillermo O'Donnell. Also useful are J. and A. Valenzuela, "Modernization and Dependency: Alternative Perspectives in the Study of Latin America/' Comparative Politics 10 (1978): 535-59; Fermin D. Adriano, "A Critique of the BureaucraticAuthoritarian State Thesis: The Case of the Philippines," Journal of Contemporary Asia 14 (1984): 459-84; Peter Evans, "Class, State and Dependence in East Asia: Lessons for Latin Americanists," in The Political Economy of New Asian Industrialism, ed. Frederic C. Deyo (Ithaca, N.Y.: Cornell University Press, 1987); M. K. Datta-Chaudhuri, "Industrialisation and Foreign Trade: The Development Experiences of South Korea and the Philippines," in Export-Led Industrialisation and Development, ed. E. Lee (Geneva: ILO, 1981), pp. 4&-77. ^ K. Marx, The Eighteenth Brumaire of Louis Bonaparte; originally published in 1852, third edition 1869. 15 See for example Stephan Haggard and Moon Chung-in, 'The South Korean State in the International Economy: Liberal, Dependent or Mercantilist," in The Antinomies of Interdependence, ed. John Gerrard Ruggie (New York: Columbia University Press, 1983), pp. 131-39; Thomas Gold, State and Society in Taiwan's Economic Miracle (Armank N.Y.: M. E. Sharpe, 1986); Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization (New York: Oxford University Press, 1989); Robert Wade, 'The Role of Government in Overcoming Market Failure: Taiwan, Republic of Korea, and Japan," in Achieving Industrialization in East Asia, ed. Helen Hughes (Cambridge: Cambridge University Press, 1988), pp. 129-63; idem, "State Intervention in 'Outward-Looking' Development: Neoclassical Theory and Taiwanese Practice," in Developmental States in East Asia, ed. Gordon White (New York: St. Martin's Press, 1988), pp. 30-67; and Richard Ludde-Neurath, "State Intervention and Export-Oriented Development in South Korea," in White, Developmental States, pp. 68-112. For studies which provide useful cautions against the applicability of the East Asian experience to Southeast Asia, see Bruce Cumings, 'The Origins and Development of the Northeast Asian Political Economy: Industrial Sectors, Product Cycles, and Political Consequences," and Stephan Haggard and Tun-jen Chang, "State and Foreign Capital in the East Asian NICs," both in Deyo, Political Economy of the New Asian Industrialism.

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against the grain of currently popular free-market thinking but it proffered a monolithic and decisive entity which seemed only dimly related to political reality. Consequently, the argument began to slide away from the "black box" of the autonomous state and towards a crucial alliance between state actors and business sectors. Their interaction with each other and with foreign interlocutors is seen as the source of dynamism and coherence, or of defeat. A new interest was displayed in theories of the corporate state, disinterred after years of intellectual exile endured as punishment for its sometime identification with fascism.16 This concept sees in the purposeful alliance of leading economic sectors with state organs the source of the mobilization and focus necessary to provide the resources, discipline, and energy essential to successful international competition. To be sure, just what keeps the alliance purposeful remains a mystery, for corporatism provides abundant opportunities for the political backscratching, sweetheart relationships, and asset stripping that have ruined many an economy; so one suspects the discussion will not stop there. It is at this recent point that studies of the political economy of Southeast Asian industrialization have begun to come in. The earlier, "black-box" stage of explanation is hardly represented, partly because most Southeast Asian states were too clearly "soft" to be an argument for anything except backwardness, but also because emphasis on a cultural and historical approach to politics turned attention away from political economy, and because until very recently the image of Southeast Asia as rural was scratched too firmly on our minds.17 So far, they have tended to concentrate on the way in which business interests have organized themselves and made an impact on bureaucratic decision making, thus addressing themselves to what had hitherto seemed the main stumbling-block to Southeast Asian development: the imperviousness of bureaucracy to the arguments of domestic capital.18 16

See especially the works of Philippe Schmitter, e.g. "Still the Century of Corporatism?" Review of Politics 36 (1974): 85-131, and "Reflections on Where the Theory of Neo-Corporatism Has Gone and Where the Praxis of Neo-Corporatism May Be Going," in Patterns of Corporatist Policy-Making, ed. Gerard Lembruch and Philippe Schmitter (Beverly Hills: Sage, 1982). ^ The only Southeast Asian country for which political economic studies of business have any historical depth is Malaysia, thanks largely to James Puthucheary's pioneering Ownership and Control in the Malaysian Economy (Singapore: Eastern Universities Press, 1960). This was updated to include the impact of Malaysianization and the NEP by Charles Hirschman, "Ownership and Control in the Manufacturing Sector of West Malaysia/' UMBC Economic Review 7,1 (1971): 21-30, reprinted with discussion in Further Readings on Malaysian Economic Development, ed. David Lim (Kuala Lumpur: Oxford University Press, 1983), pp. 209-37; Lim Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (Singapore: Oxford University Press, 1981); and Sieh Lee Mei Ling, Ownership and Control of Malaysian Manufacturing Corporations (Kuala Lumpur: UMBC Publications, 1982). Subsequently, attention has shifted to the increasing role of the bureaucracy and the state in Malaysian capitalism. See Jomo K. S., A Question of Class: Capital, the State, and Uneven Development in Malaya (Singapore: Oxford University Press, 1986); Lim Mah Hui, "Contradictions in the Development of Malay Capital: State, Accumulation, and Legitimation," Journal of Contemporary Asia 15,1 (1985): 3763; James Jesudason, Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia (Singapore: Oxford University Press, 1990). *° See for example, Richard F. Doner, Driving a Bargain: Automobile Industrialization and Japanese Firms in Southeast Asia (Berkeley: University of California Press, 1991); Anek Laothamatas, "Business and Politics in Thailand: New Patterns of Influence," Asian Survey (1988): 451-70; Andrew James Maclntyre, "Politics, Policy, and Participation: Business-Government Relations in Indonesia" (Ph.D. diss., Australian National University, 1988); Ian Chalmers, "Economic Nationalism, the Third World State, and the Political Economy of the Indonesian Automotive Industry" (Ph.D. diss., Australian National University, 1988); Yoon Hwan Shin, "Role of Elites

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Our own investigation studies the relevant characteristics of Southeast Asia's business leadership and its relationship to political powerholding, first on a countryby-country basis and then comparatively. The discussion of Thailand, the historical roots of whose domestic capitalism are perhaps the most clearly understood of the region, shows how big business leadership emerged and why major business sectors show distinctly different entrepreneurial features. It demonstrates both the centrality of the state and the degree to which business groups have been able to escape subordination to political powerholders. The chapters on Indonesia continue the exploration of the relationship between business and politics, first at the general and then at the sectoral level, emphasizing the problem of developing effective business leadership in a bureaucratically dominated society. The studies of Malaysia look at this question from the aspect of pressure by an expanding state apparatus on a wellestablished and hitherto autonomous business community. Can government manipulation actually create new sources of entrepreneurship, or does it merely suppress old ones? Is massive state intervention for political ends incompatible with capitalist growth? The discussion of the Philippines, which also concentrates on the relationship between political policy and business leadership, shows how institutional and political factors may combine with economic circumstances not simply to brake but actually undo industrial progress. All these studies of individual countries show Southeast Asian domestic private enterprise to be overwhelmingly in the hands of local Chinese. The significance of this is considered in a chapter which is concerned to map recent changes in the character of the region's Chinese big business. Finally, a comparison of Thai and Philippine experiences in a single industrial sector illustrates the different ways in which Chinese business fits into individual Southeast Asian polities and considers how this explains Thailand's relative entrepreneurial success and the Philippines' decline. The relevance of these studies to our topic should be clear enough from this brief description, and there is no need for me to do violence to the contributors' arguments by attempting to paraphrase them here. Instead, I should like to take up some themes which run through their discussions and are central to the debate on Southeast Asia's entrepreneurial development. CONFOUNDING A DILEMMA

I should like to begin by examining some of the basic assumptions which lay behind earlier scepticism concerning Southeast Asia's ability to "modernize" economically and which remain at the heart of reservations concerning its present capitalist growth. They were most systematically expressed in an argument developed in the 1960s by the American scholar Fred Riggs, which had considerable impact on studies of developing countries in Southeast Asia and elsewhere. It is worth considering in some detail for our purpose. On the basis of research done in Thailand, Riggs concluded that that country had bogged down halfway on the path of modernization.19 It seemed to him that the administrative and economic reforms undertaken by Siamese kings in an effort to in Creating Capitalist Hegemony in Post-Oil Indonesia," paper presented to the Symposium on the Role of the Indonesian Chinese, Cornell University, July 13-15, 1990; Kevin Hewison, "Capital in the Thai Countryside: the Sugar Industry," Journal of Contemporary Asia, 16,1 (1986): 3-17. 19 Fred W. Riggs, Thailand: the Modernization of a Bureaucratic Polity, (Honolulu: East-West Centre Press, 1966).

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avoid colonization had created a centralized bureaucracy which was strong enough, by 1932, to overthrow the absolute monarchy and establish itself as the sole effective decision-maker; and, having achieved this, there had been no particular reason for the state to evolve further. No non-bureaucratic institutions had developed which could take over the job of disciplining the officials, and the bureaucrats themselves had every interest in preventing the emergence of such a challenge. Thailand's ruling class was, in effect, its bureaucracy (a category which included the military), and its administrative structure existed less to execute policies than to provide its members with access to resources and an arena for power struggle. Under these circumstances, Riggs argued, efforts at increasing bureaucratic capability merely led to the proliferation of office but never to increased coordination or effectiveness. Consequently, the efforts of outsiders counselling administrative improvement were largely meaningless: the Thai bureaucracy was simply not concerned with the things they imagined it should be. It was certainly not interested in any kind of economic development that would free business from bureaucratic control or recognize entrepreneurial activity as of equal social value to office holding. To the contrary, having inherited a social system in which the merchants were mostly immigrant Chinese, they sought to keep local capitalists as social and political outsiders, "pariah entrepreneurs" who depended on the bureaucrats for political protection and who were in turn parasitized economically by the officials. Riggs suggested that versions of this "bureaucratic polity" were likely to emerge in societies which—through colonialism or to avoid colonialism—had developed modern administrations out of all proportion to other institutions. With the weakening or destruction of traditional bases of power this resulted in rule by a bureaucratic elite which discouraged any further modernization that could threaten its control. As a result, a nation could find itself stuck in an institutional limbo that was neither traditional nor modern, and at the mercy of a parasitical office-holding class. At a time of determined optimism regarding third-world development Riggs' gloomy conclusions struck a discordant note, but his assumptions regarding the importance of free enterprise and institutional competition were very much part of the mainstream of Western analysis of the "third world." As more and more newly independent countries abandoned parliamentary or revolutionary trappings for militarybureaucratic rule and economic stagnation, his vision seemed increasingly relevant, and notions akin to that of the bureaucratic polity became embedded in explanations of the failure to modernize. Not all Southeast Asian countries in the early 1960s seemed so thoroughly mired in the morass of semi-modernization as did Thailand, whose smoothness of passage from traditional to modern bureaucratic rule had given the office-holding elite a particularly uncontested purchase on the society. Indonesia under Sukarno was pursuing an economically ruinous course, but the society had been mobilized by genuine revolution and the country possessed powerful non-bureaucratic institutions— important factors, in the Riggsian analysis, for eventually establishing control over officialdom. The Chinese population of emerging Malaysia, while distinctly separate from the politically dominant Malays, had an effective say in shaping state policy through close elite-level connections with its Malay counterpart, and its business activities were relatively unhampered by bureaucratic control. Singapore had merely to extrapolate on its colonial entrepot role in order to develop economically, but, other than that city-state, the brightest possibility for capitalist modernization appeared to be the Philippines. Here there was no overwhelming bureaucracy, nor were there pariah capitalists. The elite itself was largely Chinese mestizo in origin,

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having developed from alliances of old landed families and Chinese entrepreneurs in the nineteenth century. To be sure, later Chinese arrivals were discriminated against, but they constituted only a small part of Philippine business life. By the 1960s the advance of local capitalism was reflected in a growing economic nationalist movement, which demonstrated the will to protect fledging industrial enterprises at the expense of the old export-oriented agrarian interests and their foreign allies. Members of the landed elite were investing seriously in the manufacturing sector. Moreover, Filipinos generally had a high educational level, had imbibed much American entrepreneurial ideology, and had developed industrial activities to a higher degree than other Southeast Asian countries. Here, surely, capitalism had the best chance of succeeding. But quite the opposite happened: a generation later, at the end of the 1980s, it was Thailand, paragon of the bureaucratic polity, which had become the widely praised model of Southeast Asian capitalist transformation, while the Philippines was clearly the least successful of all the non-socialist Southeast Asian states. What caused this reversal? Will it help us to understand the strengths and weaknesses of the new Southeast Asian capitalism? On the face of it, the cause would hardly seem to have been relative institutional changes towards liberalization, touchstone of the Riggsian analysis and of many more recent discussions. Thailand, after a brief period of parliamentary democracy in the 1970s, returned to a military-dominated bureaucratic rule which only gradually attenuated in the succeeding decade. Indonesia replaced Sukarnoist populism with a military regime which effectively eliminated all non-bureaucratic sources of power. In Malaysia, the role of the state expanded enormously, the Chinese population was politically marginalized, and Chinese businessmen found themselves increasingly at the mercy of Malay politicians and officials. In Singapore, economically the most successful country, the state has been omnipresent and increasingly illiberal. Everywhere the power of the bureaucracy increased, and everywhere government penetrated deeper into the lives of ordinary people and into the workings of business. Enterprise itself has remained largely in the hands of the Chinese: indigenous participation increased, but this was largely because of political pressures and patronage. Even in the Philippines, where members of the Chinese minority had not had a central position in the business world, they emerged in the 1980s as a serious element on the big business scene.20 In other words, the two principal components of the bureaucratic polity remained central to the Southeast Asian political economies: the state (that is, the bureaucracy and political powerholders, usually part of or closely allied to officialdom) and the local Chinese, who were the sole effective source of domestic private entrepreneurship. Perhaps this means that Southeast Asian capitalist development has indeed been more apparent than real, and that the growth which has so visibly taken place derives from external and not domestic dynamism. But equally it may signify that the relationships of the bureaucratic polity are not so hostile to economic growth as has been imagined, and that we need to look more carefully at our assumptions regarding them. 20

Rigoberto Tiglao, "Gung-ho in Manila," Far Eastern Economic Review, February 15,1990, pp. 6&-72.

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CHINESE ENTREPRENEURS: FROM PARIAH TO PARAGON

Let us consider, first, the part of the Chinese and "pariah capitalism." Of course the existence of capitalism as such in Southeast Asia does not depend on autochthonous enterprise. Capitalist transformation has, after all, been taking place in Southeast Asia for well over a century. The rural and traditional character which until now seemed to characterize the region has been to an important extent a fiction, masking great social and economic shifts resulting from increasing involvement in a world market system. What is really at stake is whether Southeast Asians will continue, as under (semi- or neo-) colonialism, to experience this transformation largely as victims or whether they will attain a capitalist stake of their own. In this connection we need to remember that the region's Chinese are a settled minority and function as domestic capitalists. Hence, Southeast Asia's capitalism is not affected systemically by the ethnicity of its business class. Certainly the international character of the overseas Chinese diaspora gives a particular fluidity to Southeast Asian Chinese business organization and capital placement, but this does not constitute a fundamental difference and in the recent Asian capitalist upsurge it has been distinctly to the advantage of the Southeast Asian economies. The problems that are perceived to lie in Chinese domination of business activity stem partly from concern over an eventual nativist political reaction and partly from the earlier-mentioned suspicion that it implies indigenous Southeast Asians are not capable of competing in the capitalist world. The arguments explaining the Chinese' continued centrality to the region's economy, while they may take note of historical and economic factors, tend to find the principal reason in culture: roughly, that Southeast Asia's Chinese have a value system which elevates business success and promotes business-like behavior, while the indigenous populations do not. The entrepreneurship of the overseas Chinese is perfectly observable, and so is the relative lack of business participation by native peoples. As national character is something we imagine as relatively fixed, it seems a strong argument. In accepting this, we rather tend to forget that the overseas Chinese economic role is relatively recent and was determined by historical-political factors which had little to do with Chinese culture. There was nothing particularly entrepreneurial about the China from which the immigrants to Southeast Asia came. As we have seen, they left a society whose evident inability to modernize was widely assigned by foreign observers to the stultifying effect of "Confucian values." This does not mean we should cease to take cultural characteristics seriously: values are important, but they must be observed in social and historical context. It is not only that outside observers too readily seize on evident cultural differences to explain things they do not, but that over time members of the society concerned may come themselves to interpret their way of life very differently. In other words, people are not always the way they are. Any cultural tradition has many strands of meaning, which may be emphasized, forgotten, and reinterpreted over time, providing legitimacy for quite contrary modes of behavior. Thus far, the Malay tradition of setting forth to seek one's fortune—cari rezeki—has been taken to indicate a certain adventurousness and inconstancy in the culture; but should Malay business involvement continue to deepen we will very likely see it referred to (by Malays no less than outsiders) as a root of indigenous entrepreneurship. In former times, Balinese rulers assigned their Muslim subjects the role of merchants, for such was thought to be the particular genius of Islam; and no doubt the

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urban, mercantile associations of that faith will be more generally recollected should capitalism flower in Muslim lands. Recent observations of the historical role of Siamese kings as "great merchants'' no doubt owe something, consciously or unconsciously, to the new appreciation that Thai values are not inconsistent with entrepreneurial capacity.21 Rather than lose ourselves in the deceptively easy observation of cultural differences, let us start with the historical sources of the Chinese economic role and see how changing times have shaped it. The essays in this book will explore this in recent detail, but it is as well to remind ourselves at the outset of the broad beginnings of modern Southeast Asian Chinese business activity. Although Chinese immigrants had long played significant roles in the economies and society of Southeast Asia, their massive presence dates from the nineteenth century, at the time when, largely under European direction, the region was being incorporated into the rapidly expanding world capitalist system. Rather than take the local peasant populations away from the land, rulers thought it easier, and less disruptive of the local hierarchies deemed essential to the preservation of order, to bring in outsiders for coolie labor and to occupy the lower levels of industry and trade. Chinese were easily recruited, since their homeland was in turmoil. Eventually, in much of Southeast Asia a three-tiered system developed in which the upper level of business was dominated by Europeans and the middle by Chinese, while the indigenous population was restricted to the margins of petty trade. The natives were peasants or (if of gentle birth) officials, and any taste they developed for entrepreneurial advancement was firmly discouraged by the workings of the system if not by actual intent. Adapting themselves to their new environment, the Chinese immigrants acculturated to the style of the ruling groups, which in most cases were Western, and this resulted in a further estrangement between them and the indigenous elites. Only in two countries was this not the case, Siam and the Philippines—in the former because the indigenous elite remained in political (if not economic) power and in the latter because there had evolved under Spanish rule a powerful landowning and culturally Hispanicized native elite which, largely as a result of involvement in sugar planting in the nineteenth century, became economically entangled with, in debt to, and ultimately intermarried with successful Chinese mill-owners and merchants. Not surprisingly, the Philippines and Thailand are the two Southeast Asian countries where the "Chinese problem" has seemed less vexed in recent times. Relations between the Chinese and indigenous communities have been far more problematical in Malaysia and Indonesia. This has often been taken to reflect a lack of compatibility between Chinese and Muslim cultures, but that is probably another case of assigning a rigidity and consistency to cultures which they do not possess. Rather, cultural differences have served to underline and exacerbate contrasts which arose for reasons of interest. What we have seen in Malaysia and Indonesia since the end of the colonial period is a slow and often painful adjustment in which local Chinese have had to look to indigenous and not European patronage, and in which the 21

For the Siamese kings as "great merchants" see Yoneo Ishii, "History and Rice-growing/' in Thailand: A Rice-growing Society, ed. Ishii (Honolulu: University Press of Hawaii, 1978), esp. p. 26. For the Balinese example see Adrian Vickers, "Hinduism and Islam in Indonesia: Bali and the Pasisir World," Indonesia, no. 44 (October 1987): 31-58. For a cogent critique of generalizations about the role of Muslim culture in economic development, see John Clammer, Islam and Capitalism in Southeast Asia (Singapore: Chapmen Enterprises, 1978).

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new ruling elites have had to work out a viable relationship between political and economic might. Even in the relatively integrated societies of the Philippines and Thailand there have been times when political leaders have found it profitable to attack domestic Chinese business,22 and—given the convenience of the scapegoat and the pressures of indigenous constituencies—there is no reason to assume that anti-Chinese campaigns are a thing of the past. At the same time we need to bear in mind that, in all countries except Malaysia (and of course Singapore, where the Chinese dominate), the "Chinese problem" is receding as a real factor both by virtue of immigration restrictions now long in force and because economies are expanding beyond the point where a tiny minority can fill in the middle levels. Direct pressures, acculturation to the model set by the ruling elite, and the business need for close relationships with the state all make for downplaying overt Chineseness, and the line between what is Chinese and what is indigenous is becoming increasingly uncertain. As happened in the past in the Philippines and Thailand, future anti-Sinic campaigns may find a significant part of those who could claim Chinese ancestry to be on the "native" side, and the "unacceptable" features of Chinese business activity-may increasingly appear as the characteristics of a more general capitalist elite. If the Chinese economic role in Southeast Asia flourished under the colonial presence, it prospered even more as a result of colonialism's retreat. Nationalist regimes could rail against the Chinese economic position, but they were usually too weak to really affect Chinese business activity. Government pressures were more than compensated for by the opportunities for enterprise which were opened up by the European retreat which began with World War II. Thus, even though Chinese suffered from economic and political measures against them at the outset of Indonesia's Guided Democracy period, their economic role grew, for, either directly or as contractors or agents for state-run enterprises, they moved into the positions formerly dominated by Dutch and British interests, effectively capturing Indonesia's economic heights. In Thailand, as Suehiro's essay describes, it was the removal of the Western capitalist presence during World War II which gave Chinese-dominated Thai banking its big chance. Two characteristics inherited from colonial (or semi-colonial) times helped to strengthen the Chinese position in a later day. The first was that, though the role of Chinese businessmen was usually encouraged by rulers, they were "pariahs" in the sense that they were politically dependent and could not really rely on the state to protect their interests. As a result the financial networks and business relationships which they developed did not rely greatly on state enforcement—indeed, they avoided as much as possible exposure to official control. This made it easier to avoid government exactions, and it also helped to transform Chinese-dominated sectors of the economy into closed shops which indigenous entrepreneurs (and often Chinese 22

The Thai king Wachirawut (Rama VI, r. 1910-1925), who attempted to construct a royally oriented Thai nationalism, took a strongly anti-Chinese stance as a rallying-point for antiforeign sentiment. He drew for ideas on the anti-semitism of late nineteenth-century European nationalism, accusing the Chinese of being heartless capitalists and the "Jews of the East." The theme was taken up again by the military ruler Phibun Songkhram in the 1930s and 1940s, who greatly restricted Chinese opportunities for economic activity. In the Philippines, members of the Chinese minority found it extremely difficult to obtain citizenship and suffered considerable disabilities as a consequence; only under Marcos was legal discrimination against them ended, though—as Doner's paper in this volume makes clear—Chinese businessmen still did not feel they were treated as equals.

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who belonged to different speech-groups) could not penetrate—not simply because the insiders wished to keep them out but because the networks centered on relationships of trust and enforcement which depended on group identity. Secondly, Chinese business activity was cosmopolitan, in two ways. From their allotted position as intermediaries between Western big business and the local economy, Southeast Asian Chinese business leaders gained both knowledge of modern trade and manufacturing techniques and (which Western firms rarely did) the local market. This was a major factor influencing Japanese firms to seek overseas Chinese interlocutors when re-establishing their presence in Southeast Asia after World War II,23 and needless to say that choice was vital to the continuing domination of Chinese business in the region. Southeast Asian Chinese entrepreneurs also used the links of relationship and trust created by the overseas Chinese diaspora to found trading and financial networks which covered Southeast Asia, Taiwan, Hong Kong, and eventually the general Pacific rim. This became a powerful resource both for protection and for the mobilization of capital. Regimes contemplating the reduction of the local Chinese position have to reckon with the ease and crippling consequences of Chinese capital flight. Moreover, the flowering of Taiwanese and Hong Kong capitalism has provided a source of investment capital which in some areas has become more important than the Japanese. These circumstances rather than a special entrepreneurial genius have determined the Southeast Asian Chinese' centrality to contemporary Southeast Asian economic development. Of course, a population group that is assigned a business role in society will come to emphasize business values; it is also likely to accumulate and pass on wealth and connections to its succeeding generations. But this does not mean that the third and fourth generations will show the same entrepreneurial drive as the first. Moreover, the characteristics required for major business success in the present age run counter to many of the older Chinese entrepreneurial values and practices, and—as Heng Pek Koon's essay illustrates—those who cling to those ways are being marginalized. Nowadays, requirements for capital, political connections, and broad international operations make for an opening-out in terms of finance, business organization, and social style. Family firms have become family-controlled corporations, and these in turn have increasingly included outsiders in their direction and have moved towards public listing. INDIGENOUS ELITES: FROM PARASITES TO PROMOTERS

Who are those outsiders who have found places on Chinese corporate boards? They do not come from the parts of the indigenous population usually thought of as entrepreneurially inclined. Indeed, these were few enough: save for the Philippines, whose elite was both mestizo and, as landed "rent capitalists/'24 of dubious entrepreneurial quality, Indonesia was the only country in which until very recently academic observers discerned indigenous business activity at all. There, entrepreneurial instincts were seen to reside in certain groups marked by a particular cultural bent, such as the Minangkabau, the adherents of reformist Islam, and in the batik and clove cigarette manufacturers and traders of Java and the rubber-growing smallholders of Sumatra. In such minorities, and particularly among the adherents of reformist 23

The point is made in Yoshihara, The Rise, pp. 49-50. One might add that the Chinese made themselves readily available for this role, while Western firms were either overconfidently uninterested or too suspicious of the Japanese to respond to overtures. 24 For the concept of rent capitalism, see note 4.

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Islam, analysts espied the elements of a Weberian "Protestant ethic'7 that constituted Indonesia's best hope for a native capitalism.25 Alas these groups, losers under the colonial order, were if anything more marginalized by independence, when their interests were neglected for those of the political-bureaucratic elite and the carpetbaggers of the Banteng policy. It seemed, therefore, that Indonesia was doomed, like Thailand's bureaucratic polity, to an economic development in which pariah capitalists depended on the patronage of native powerholders. And it is indeed mostly members of the politicalbureaucratic elite, in Indonesia as elsewhere in the region, who are the indigenes now included as directors of major Chinese-owned firms. They owe their business role overwhelmingly to their government connections, which can produce licenses, inside information, and protection from state exactions. To Riggs and other analysts of the 1960s and early 1970s, the increasing presence of such people on the boards of Chinese-run companies, particularly in Thailand, was simply the modern guise of the older relationship between pariah entrepreneur and political patron/protector/parasite: it implied neither growing equality nor increasing indigenous participation in management.26 In retrospect, however, it is clear that great shifts in business-political relationships and attitudes were in fact taking place. What Riggs saw as an economic slough of despond was in fact the beginning of Thailand's great leap forward, which began in the early 1960s under Field Marshal Sarif s regime. From our present vantage-point the features of the bureaucratic polity—its inwardness, the indeterminacy of its institutions, its lack of direction—have less the aspect of a developmental bog than of a container for fundamental transformation, a chrysalis in whose apparently confused interior the change from one sort of socioeconomic order to another was taking place. For it has now become clear that there is increasing intimacy and equality between business and political leadership, and that members of the indigenous power elite are playing serious business roles. One reason for the earlier (and still persisting) assumption that apartheid between political and economic power would continue indefinitely was the analysts' belief that traditional elite values denigrated entrepreneurial activity and that the 25

See Clifford Geertz, Peddlers and Princes. Social Development and Economic Change in Two Indonesian Towns (Chicago: University of Chicago Press, 1963), and "Modernization in a Muslim Society: The Indonesian Case/' in Religion and. Progress in Modern Asia, ed. Robert N. Bellah (New York: The Free Press, 1966), pp. 93-108; W. F. Wertheim, "Peasants, Peddlers and Princes in Indonesia/' Pacific Affairs 87 (1964): 307-11; Lance Castles, Religion, Politics and Economic Behavior in Java: The Kudus Cigarette Industry (New Haven: Yale University Southeast Asian Studies, 1967); James L. Peacock, Muslim Puritans: Reformist Psychology in Southeast Asian Islam (Berkeley: University of California, 1978). 26 Although G. William Skinner provided an excellent basis from which to observe the rapidly evolving role of business-political relationships in his magisterial Chinese Society in Thailand: An Analytical History and Leadership and Power in the Chinese Community of Thailand (Ithaca, N.Y.: Cornell University Press, 1957 and 1958), Riggs and other scholars of the time tended to see the 1950s relationships which Skinner described as a final product rather than as a stage in development. The recent success of Thai capitalism has inspired students of the region to trace its roots in the past, with the result that what appeared as a sudden efflorescence now shows a long evolution. See especially Suehiro Akira, Capital Accumulation in Thailand 1855-1985 (Tokyo: The Centre for East Asian Cultural Studies, 1989); Kevin Hewison, The Development of Capital and the Role of the State in Thailand (New Haven: Yale University Southeast Asia Studies, 1990); also Suthy Prasartset, State Capitalism in the Development Process of Thailand, 1932-1959 (Tokyo: Institute of Developing Economies, 1978).

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current powerholders were, spiritually if not physically, heirs of that thinking.27 In good part, as is now being rediscovered, the absence of entrepreneurial activity by native elites was a product of colonial rule; but in any case the Southeast Asians who rose to political power after World War II have mostly been new men with a marginal relationship to older values. Their "neotraditional" style of rule28 was less a return to congenial ways than a guise which legitimated their claims to rule and liberated them from the need to prove themselves in terms of Western models they could not realistically imitate. They were not businessmen, but they were for the great part political entrepreneurs, men who had made their way up by finding footholds on the crumbling face of a decaying power system. This was at least as true for military as it was for civilian leaders. Men like these were glad to make business arrangements which provided a slice of the profits in return for protection and preference, but where real money was concerned they were unlikely to leave it at that. Who could know if his portion was fair if he did not really understand how the business was being run? Were people who spent their days in the pursuit of power likely to remain uninterested in gaining control of the sources of wealth? There was, moreover, the vexing vulnerability of riches based on office holding. The endless jockeying for office and advantage by members of the bureaucratic polity may have been disastrous for administrative effectiveness, but it was essential for staying in the game. Loss of a patron or a transfer of function from one ministry to another could spell economic misfortune; to belong to a clique that lost out meant disaster. Simple retirement brought cuts in an official's living standard which by no means were limited to the difference between wage and pension, and the cessation of access and protection made it hard to ensure the prosperity of one's heirs. In capitalist Southeast Asia access to office holding could not effectively by restricted by aristocratic, caste, or nomenklatura systems. What was available instead was investment in business enterprise. Wisely made, this could provide a safe landing in case of political adversity and a guarantee of continuing family fortune. But this strategy required two things: first of all, the acquisition of sufficient business knowledge to enable the official to oversee the handling of his money; and secondly, effective legal guarantees for private property, so that political misfortune could not sweep it all away. Both of these conditions worked against the continuation of the division between political and economic power, for the first meant that members of the political elite (and in particular the offspring of powerholders) began taking a 27

Aside from the Thai case, where there was no real argument against this assertion before the 1970s, the theme was most developed with regard to Indonesia, where revolution and aggressively modernizing elements seemed locked in struggle with powerful traditional(izing) forces. The result was a spirited debate on the cultural orientation of the Indonesian elite which has run through discussions of that country's politics. For a good overview see Benedict Anderson and Audrey Kahin, eds., Interpreting Indonesian Politics: Thirteen Contributions to the Debate (Ithaca, NY: Cornell Modern Indonesia Project, 1982). 28 Ann Ruth Willner, "The Neo-traditional Accommodation to Political Independence: the Case of Indonesia," in Cases in Comparative Politics: Asia, ed. Lucian Pye (Boston: Little Brown, 1970), pp. 241-306. Thak Chaloemtiarana, Thailand: The Politics of Despotic Paternalism (Bangkok: Social Science Association of Thailand, 1979) illustrates vividly how political and cultural traditionalism could be used (by Marshal Sarit, architect of Thailand's economic takeoff) to disguise and mediate a drive for capitalist modernization. We might also note that Suharto, leader of the New Order that turned Indonesia decisively towards capitalism in the 1970s and 1980s, has also stressed Javanese cultural symbols far more than any preceding major political leader.

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serious and active role in business, and the second meant ending the pariah dependency of businessmen on political protectors. An excellent and early example of these considerations is provided by the career of Marshal Phin Choonhavan, senior member of the first politico-military clique to rule postwar Thailand. Although his position was undisputed, he chose to withdraw gradually from political activity in favor of developing business interests (we will see some of his links with Sino-Thai entrepreneurs described in Suehiro's essay). Phin's "Soi Ratchakhru" clique was overthrown by that of Marshal Sarit in 1957, and for the next thirty years the group was out of power. But, thanks to its founder's investments and business connections, a great deal of its fortune and influence remained, enough to support the political career of (among others) his son Chatichai, who in 1988 became prime minister. Chatichai was also a general, but business and not military connections formed the basis of his political backing, and as the country's leader he appeared unambiguously as the advocate of Thai big business. Often, now, sons of officials do not seek bureaucratic careers. There has been a marked ideological shift among the elite from valuing status to valuing money and material consumption. Moreover, as it gradually becomes less legitimate to use one's office as a source of private income, business seems a better way to justify wealth. Thus we find that some sons of high officials take MB As instead of attending military or civil service academies. None of Indonesian President Suharto's sons has followed his father in a military career; all are prominent, one way or another, in business.29 The question asked about them, as with other business-oriented scions of the ruling elite, is the extent to which they are "real" entrepreneurs and not just playboys dabbling with the family wealth. Either way, they identify themselves with business, thus adding to business' legitimacy as an elite occupation and making its claims more acceptable. A prominent illustration of the changes which this new acceptability of entrepreneurship has wrought is a willingness to give up the sacred cow of nationalism (and its guarantee of bureaucratic control) for the sake of arrangements more favorable to business interests. As Robison's essay illustrates very well, the concessions the Indonesian bureaucracy was prepared to make in the 1970s and 1980s for the sake of business development quite surprised outside observers. In fact, the chief arguments for a strong ISI emphasis in Indonesia's macro-economic policy have been made less by nationalist politicians voicing old fears of neo-colonial domination than by administrators who share with leading military figures the belief that Indonesia is potentially a major power and should possess a concomitant industrial base.30 29 For the Suharto family's business activities, see Steven Jones and Rafael Pura, "All in the Family: Indonesian Decrees Help Suharto's Friends and Relatives Prosper/' Waft Street Journal, November 24, 1982; idem, "Power and Privilege in Indonesia," Asian Wall Street Journal, November 24, 25, and 26,1986; Adam Schwarz and Jonathan Friedland, "No Mere Middleman," Far Eastern Economic Review, August 23,1990, pp. 56-59. 30 Since prominent officials with strong professional credentials (most notably the Germantrained engineer, Minister of Industry Habibie) were arguing for a strong ISI content to Indonesia's industrialization, it became common for analysts during the mid-1980s to distinguish these as "economic nationalists" or "engineers," reserving the title "technocrat" for those officials who argued the internationally approved EOI line (see Jamie Mackie and Sjahrir, "Survey of Recent Developments," Bulletin of Indonesian Economic Studies 25, 3 (1989): 32-33. For a reasoned presentation of the "economic nationalist" argument by a leading policy-maker, see A. R. Soehoed, "Reflections on Industrialisation and Industrial Policy in Indonesia," Bulletin of Indonesian Economic Studies 24,2 (1988): 43-57.

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The melding of culture as well as interests between the Chinese and indigenous elites raises the question whether it is still useful for regimes to emphasize the separateness of the local Chinese for scapegoating purposes, as Malaysian and Indonesian powerholders have been accustomed. If an indigenous elite is too closely identified with Chinese businessmen, scapegoating may merely provide a way in which people can express their resentment of the status quo through attacks on the Chinese. Something like that seems to have happened with the Indonesian anti-Chinese riots of 1974 and 1980, and in this light it is not so surprising that the New Order stalwart Gen. Benny Murdani announced in 1984 that it was no longer desirable to distinguish between pribumi (indigenous) and non-pribumi Indonesians. Since that time government spokesmen have encouraged attitudes which not only ignore the Chinese as an issue but inculcate respect for entrepreneurship and wealth.31 If Thailand and Indonesia illustrate the movement of bureaucratically dominated polities towards greater independence for business, Malaysia would seem to have journeyed in the opposite direction, imposing increasing political controls on property and pushing its Chinese capitalists towards something of a pariah dependency. In part, however, this contrast is an illusion, for it reflects the fact that Malaysia was the last major Southeast Asian country to be freed from colonial status, and the nowembattled institutions protecting private property and allotting economic and political power were those inherited from colonial rule. In other words, the Malaysian economy has been enduring the intrusion of domestic political interests that Indonesia underwent (though in a very different way) in the 1950s. Since Malaysia's capitalist infrastructure is far more developed, its socio-economic problems much less intense, and the opportunities for profitable symbiosis between Malay and Chinese elite interests are highly apparent, it might seem to stand a sporting chance of finding a mutually tolerable equilibrium. But precisely because the process involves a major social re-ordering whose end is by no means clear, it gives a tenseness and uncertainty to the Chinese-indigenous relationship and to the question of the proper relationship between business and political leadership that we do not presently find elsewhere in capitalist Southeast Asia. Sieh Mei Ling's paper gives an idea of the enormous shift brought about by Malaysia's New Economic Policy, the instrument of this restructuring. It involved a move not only from a pattern of European-Chinese to Chinese-Malay capital, but from private ownership to ownership by state and quasi-public bodies. Bureaucracy's role expanded greatly, not only because of increased government supervision of the economy but because direct state ownership became common and because individual bureaucrats were coopted onto the boards of major private firms. Malay ownership is much enhanced but, as Sieh shows, this did not reflect participation by a large part of the Malay population. Rather, business went to a narrow band of the already wealthy (in effect, the old princely families) and the politically highly-connected. Pension and investment funds may give lesser folk a stake in the system, but these institutions serve mainly to mobilize capital in the service of the politicobureaucratic businessmen who lead them. In short, the redistribution has taken place 31

For the early New Order anti-Chinese attitude, see Charles Coppel, Indonesian Chinese in Crisis (Kuala Lumpur: Oxford University Press, 1983), especially pp. 89-90. For Murdani's proclamation that the distinction between native and non-native Indonesian be ended, see Hal Hill, "Survey of Recent Developments," Bulletin of Indonesian Economic Studies 20, 2 (1984): 22; and for the general evolution of government policy towards Chinese entrepreneurs in the 1980s see Shin, "Role of Elites."

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at the top: the income difference between the Chinese and Malay population in the 1970s and 1980s did not decline but widened, and this fed the resentment of lowerclass Malays. At the same time, in spite of fears of capital flight, Malaysia continued to receive a high level of foreign and domestic investment; it would seem that the advantages of a strong local elite interest in encouraging capitalist development outweighed the costs of giving Malay leaders a share of the game. As members of the Malay elite became more involved and confident in business activity they began to ponder the wisdom of relying on a heavy bureaucratic hand. Government regulation interfered with some promising speculations, and it irritated foreign interlocutors—no small consideration in the business downturn of the mid1980s. Consequently, in the latter part of the decade a certain relaxing of public control took place, and in the political-bureaucratic-business equation the bureaucratic element diminished and the political one grew. Using political leverage rather than government controls, Malay business leaders could act much more flexibly and— given the UMNO's political paramountcy—with nearly equivalent authority. From our viewpoint, the principal significance of the shift towards and then partly away from an emphasis on government control is that it shows clearly the Malay decision makers saw the bureaucracy primarily as an instrument. Whatever the value of office holding in Malay tradition, the political entrepreneurs who shaped the country's course were quite willing to set it aside when another tool seemed handier. Sieh's study also illustrates how the coming together of political-bureaucratic and entrepreneurial interests was greatly facilitated by the organizational characteristics of modern capitalism. The corporate form enabled indigenous political and Chinese economic leaders to sit down together on directorial boards, to gain a measure of trust, and to induct the politicians into the mysteries of business behavior. Most Southeast Asian corporations, as these essays show, are still very much in single family hands, but already the need for professional management and the desire for more capital are prizing apart the family grip. The fact that modern big businesses are bureaucratically organized and require advanced education also makes a business career more attractive to aspiring younger members of the indigenous elite—not to mention the fact that they pay much better salaries than the bureaucracy, which has ever fewer desirable posts on offer. The need to act in an increasingly internationalized business world imposes forms and behavior which erode Chinese exclusivity, and both business interests and cultural forces bring together overseas Chinese and indigenous elites into a common, cosmopolitan nouveau-riche consumer style which offers itself as the high culture model for modern capitalist Southeast Asia.32 It is still early days for most Southeast Asian politico-bureaucrats turned businessmen, and it is still difficult to see where the line between rent-seeking and real entrepreneurship has been crossed, and whether investment in new enterprise is spurred by speculation or prestige seeking rather than a serious aim at development. From the studies here, however, we can see signs of the gradual crystallization of entrepreneurial attitudes, a shift in weight from bureaucratic and political to business values, and the emergence of more long-term commitment. Of course, speculative investment and short-term profit taking are rife; this, after all, was the age of the junk 32

This argument has been forcefully presented in Linda Lim, "Chinese Business, Multinationals and the State: Manufacturing for Export in Malaysia and Singapore," in The Chinese in Southeast Asia, vol. 1, ed. Linda Y. C. Lim and L. A. Peter Gosling (Singapore: Maruzen Asia, 1983), pp. 245-74.

Materialization of the Southeast Asian Entrepreneur

27

bond and leveraged buy-out, and Southeast Asian capitalists can hardly be required to be more virtuous than their peers. But speculative investment is necessarily shortterm, and as we have seen a major motive for members of the political-bureaucratic elite turning to business is the continued safeguarding of their fortunes. Hence, speculation is likely to be only one aspect of their investment interest, and we can probably assume that as their businesses gain solidity and as family members acquire managerial expertise they will increasingly settle money in enterprises on a longterm basis. One country in Southeast Asia has a ruling class that is not new to entrepreneurship, nor is it identified with the bureaucracy or dependent on the state. With such long experience in business and such direct command over the country's resources, why did the Philippine elite so signally fail to profit from the general Southeast Asian boom? As we shall see from the discussions which follow, one reason seems to lie in the Philippines elite's apparent strengths—its long dominance of politics and the economy and its cohesiveness. As a result of its hegemony it needed to make few domestic concessions, and little of its wealth or opportunities was shared with those below. As the comparison of the Philippine and Thai auto industries in this volume makes clear, the Thai environment with all its surface rigidities was in fact more open and egalitarian than the Philippines, for all the latter^ long experience of democratic forms. Nor can one find in the Philippines the rise of new entrepreneurial groups based on upcoming economic sectors, such as are described in the essay on Thai business elites. As Hawes' essay indicates, when interest in manufacturing developed in the Philippines it was a matter of members of the landed elite turning their attention to a new field of endeavor, and not of any real infusion of new blood. Marcos made an attempt to bring forward new groups by way of establishing a social basis for his dictatorship, appealing to middling landlords and favoring new men in business. But it was a half-hearted and eclectic effort, fueled by no real purpose for change, and it ended by simply transferring resources from a part of the old elite into the hands (or rather the pockets) of palace favorites. Since the "Cory revolution" of 1986 restored the disenfranchised section of the old elite and thus the pre-Marcos status quo, it too did little to open up opportunities for new sources of enterprise. THE STATE: FROM INCUBUS TO INCUBATOR One of the Philippines' previously imagined advantages was the relatively modest role played by the state. Until very recently it was taken as axiomatic by most Western analysts that for entrepreneurship to flourish in Southeast Asia it must have autonomy from the state. As we have seen, this ideologically comfortable assumption was reversed by "developmental authoritarianism" and the general rediscovery of the state. A new model has emerged to describe the kind of state appropriate to third-world economic modernization. Let us recall some of its outlines: we will now find them oddly familiar. The exemplary modernizing state, as observed particularly in the newly industrializing countries (NICs) of South Korea, Taiwan, and Singapore, as well as in Japan and Europe of an earlier capitalist age, is said to have the principal quality of being "strong." This strength is revealed particularly in the fact that a politically dominant bureaucracy is by far the most powerful institution in the society. The successful state is thus relatively impervious to the demands of social groups, and hence it can act independently of them, in the long term interests of the nation's capitalist development. It is not "penetrated" or "colonized" by social forces that can bend the state for

28

Southeast Asian Capitalists

their parochial ends—as, for example, was the case in the Philippines, where political power was made to serve the interests of wealth. On the basis of this analysis, it is easy to see why Thailand made the transition from non-developer to modernizing success so smoothly, for what makes for an industrializing state in this vision is what made the bureaucratic polity. What Riggs and other earlier commentators saw as the isolation of the Thai political-bureaucratic apparatus from the rest of the society and hence the cause of its stagnation is celebrated by the new theory as a source of "autonomy" and strength. What occurred, then, to make the bureaucratic polity realize its potential as the engine of capitalism? Or is this another example, like the "Confucian values" interpretation of Chinese entrepreneurship, of a Vicar-of-Bray explanation, ready to serve whatever principle is in power? That the state has played a key role in Southeast Asian capitalist development is undeniable. Indeed, if we look at the country generally conceded to be the most successful developer, it would seem to prove that the state and not private enterprise is the vital capitalist ingredient. Singapore, the one Southeast Asian country so far to be awarded the accolade of NIC,33 essentially ignored its own capitalist class in its industrialization drive, relying instead on direct foreign investment and public enterprise.34 This choice, while justified officially on the grounds that Singaporean entrepreneurs did not have the resources and experience that permitted Hong Kong to rely for its industrialization on domestic capital, was basically a political one, born of the city-state's feeling of vulnerability in a hostile Malay-Indonesian world and a consequent desire to involve powerful foreign interests in its fate.35 In other words, the Singaporean state by no means put politics behind economics in fostering its industrialization, and we cannot speak of a single-minded commitment to growth. But we can say that the state in Singapore is strong: its leadership is authoritative and its writ runs to the farthest corner of the land (not, admittedly, a far distance in a citystate). 33

There is no study of Singapore in this volume, but the reader seeking interpretations of its experience can refer to laian Buchanan, Singapore in Southeast Asia, (London: Bell, 1972); Lee Soon Ann, Industrialization in Singapore, (Camberwell: Longman Australia, 1973); Goh Keng Swee, "Why Singapore Succeeds," in his The Practice of Economic Development (Singapore: Federal, 1977), pp. 1-19; Frederic C. Deyo, Dependent Development and Industrial Order: An Asian Case Study (New York: Praeger, 1981); Linda Lim, "Singapore's Success: The Myth of the Free Market Economy," Asian Survey 23 (1983): 752-64; Hafiz Mirza, Multinationals and the Growth of the Singapore Economy (New York: St. Martin's Press, 1986); Lawrence B. Kram, Koh Ai Tee, and Lee Tsao Yuan, The Singapore Economy Reconsidered (Singapore: Institute of Southeast Asian Studies, 1987); and Garry Rodan, The Political Economy of Singapore's Industrialization: National State and International Capital (London: Macmillan, 1989). 34 In a system which might fairly be called state capitalism, Singapore public enterprises occupy a considerable part of the economy; they include an array of companies which compete directly with local private enterprise in such normally non-public endeavors as the manufacture of plastics and fertilizer. The public firms are autonomous and managed by seconded civil servants; they are supposed to be profitable (and generally seem to be so) but are minimally accountable. What large-scale domestic business there is has been locked into joint enterprises with foreign firms. In the late 1980s government leaders began to call for an increased role for domestic private business, perhaps because the state-run undertakings were beginning to show signs of sinking into bureaucratic routine. 35 Garry Rodan, 'The Rise and Fall of Singapore's Second Industrial Revolution," in Southeast Asia in the 1980s: The Politics of Economic Crisis, ed. Richard Robison, Kevin Hewison, and Richard Higgott (Sydney: Allen & Unwin, 1987), pp. 149-76.

Materialization of the Southeast Asian Entrepreneur

29

Even so, the stigmata of strength are difficult to verify. A state's "strength" is said to lie in the ability of a regime to make unpopular decisions stick. No doubt, but unpopular in whose terms? Singapore took decisions which were unpopular with its domestic capitalists and (since it preferred foreign investors labor discipline and low wages) with its work force; but can it take decisions which make its foreign interlocutors unhappy? Its determination in the early 1980s to move toward higher valueadded manufactures, the nearest it came to such a challenge, brought a decline in investment and an eventual retreat. Moreover, in spite of Singapore's NIC-ness, industry is not the main source of its capitalist income, but rather the activities as an entrepot which it inherited from colonial days. What today appears to most observers as strong and autonomous would by once-fashionable dependency theories have been labeled as a compradore state, a servant of foreign capitalist masters which derived its ability to impose domestic discipline from the fact that it relied not on internal but external support. This is not to deny that Singapore has flourished; it does mean that the criteria by which we judge strength are ideologically heavily laden. Estimating the "strength" of the other Southeast Asian states is even more difficult. New Order Indonesia has been labeled variously as weak or strong, depending (it would seem) on the temper of the analyst and the current guesses as to its economic prospects. As it is certainly stronger than the pre-1965 Indonesian state in terms of being able to impose its will on the population and weak if we measure it against more developed economies, there is ammunition for either argument. In the Philippines, Marcos' New Society was widely considered relatively strong until the mid-1970s and weak thereafter, though the only real change it underwent was that economic decline became apparent. In other words, success tends to be a sign of strength and failure of weakness—which leads us, as so often, in a circle. Thailand is perhaps most vexing from this analytical perspective, for there has been no qualitative leap from its existence as a "weak" bureaucratic polity. Indeed, in terms of being able to take unpopular decisions, Sarit's regime at the beginning of the 1960s was undoubtedly much stronger than Prem's at the height of Thai capitalist success in the 1980s. To be sure, the intervening years saw an improvement in bureaucratic performance—an essential element in estimates of state strength, since administrative effectiveness and the "reach" of a state into society are deemed major criteria—but this development has been very gradual, and it seems less likely that it came about because of changes in the nature of the state. Rather, Thai administrative effectiveness seems to have improved largely because developing private enterprise and a growing middle class in the provinces have brought increasing local pressures on and utilization of the bureaucratic apparatus, which has accordingly become rather more responsive and effective at the local level. In other words, in Thailand it seems as if the development of capitalism and its penetration into the countryside have been prerequisites for the strengthening of the state rather than the other way round. As the studies in this volume show, protectionism has generally been essential to the emergence of any sizeable domestic industry. But, having been restrained by the state from overwhelming local business, foreign interests have helped to protect domestic capital from the state. They provide an alternative source of funding and support, and they are a powerful ally in lobbying against policies and practices hostile to business. In the particular case of the Chinese, as we have noted, international connections and pressures have been important in staving off anti-Sinic measures. In Thailand, as we shall see in Suehiro's essay, industrial success was at last achieved

30

Southeast Asian Capitalists

not by the state enterprises which for decades had attempted it, nor even by established private business groups, whose attention remained fixed on trade and banking and on their connections with the political-bureaucratic elite. Rather, it was accomplished by "new men" in the Thai business world who obtained backing from foreign interests. In Indonesia, as Aden's study shows, oil service industries born of state patronage were able to survive their leaders' loss of political favor partly because foreign investors were able to insist on working with them rather than with the newer, less experienced recipients of official backing. To the extent that foreign capital frees domestic business from dependence on the state and helps to generate the articulation of demands by local capital, it reduces the state's autonomy from society. Does it follow that this weakens the state? Only if we posit an extreme opposition between state and society; the cases in this volume seem rather to indicate the opposite. They show instead that the relationship between state strength, foreign interests, and domestic capital is by no means simple, that it changes over time, and that we need to consider its domestic socio-political context as well as the international economic one. THE ENVIRONMENT OF GROWTH

Rather than attempting to measure the muscles of a reified state, we can more profitably seek the source of Southeast Asian capitalist energy in the combination of factors that have encouraged business and political-bureaucratic groups to work together. For it is the fact of their cooperation and evident optimism regarding a capitalist future that have been crucial to their countries' economic development. Something happened to cause political-bureaucratic power-holders to believe that their interests would be better served by promoting rather than squeezing business. What persuaded them? One reason was certainly the economic upsurge of the Pacific area. There is money to be made, lots of it, but it involves opening out to the greater capitalist world. Had it not been for the East Asian capitalist boom, the connections of Southeast Asian businessmen around the Pacific rim, and the desire by more industrialized countries to invest in a region with low environmental protection and cheap labor, it would have been much less easy for the region's political leaders to see the virtue of encouraging rather than bleeding domestic enterprise. The connection of the international environment to Southeast Asia's capitalist expansion can be seen from its earliest stages: Thailand's leap forward of the 1960s was fuelled in good part by capital injected into the country by the United States in connection with the Vietnam war. Japanese capital looked to Southeast Asia after the development of Korea and Taiwan, replacing the US from the 1970s as the principal source of investment in the region. In the 1980s Taiwan, and eventually Hong Kong and Singapore itself, became exporters of capital which looked, naturally enough, to the region with which their business networks already had ties and which was an abundant source of cheap labor and raw materials. In other words, in spite of business downturns, investment capital has been readily available to Southeast Asia in recent decades. But it has not come as a gift: investors would not be drawn to a country which set its conditions too high, was mismanaged, or seemed unstable. They stayed away, eventually, from Marcos's Philippines. No doubt their requirements impressed themselves on Southeast Asian politicalbureaucratic leaders, persuading them that not only was it worth their while to promote capitalist growth but that they must do so by cooperating seriously with business interests.

Materialization of the Southeast Asian Entrepreneur

31

As the focus of this volume has been at the national level, we have not dealt, save in passing, with the international environment in which Southeast Asian capitalist expansion has taken place. It is, however, vital to understanding this growth, and as yet it has not been sufficiently studied. There have been works on Japanese investment in individual countries, and a beginning has been made at locating Southeast Asia in terms of world capitalist development,36 but the intra-regional and international connections of the Nanyang business families have hardly been mapped, and little is known about how their capital flows from one area to another. No doubt, as the study of the region's business history becomes more developed, the exploration of these connections will seem a less daunting task; in the meantime, we must note it as a major white area on the Southeast Asian political-economic map. While the incentives offered by available investment have certainly been a major factor in energizing a productive alliance between political, bureaucratic, and business interests, they are surely not the whole story. We may, with the theorists of corporatism, try to find the magic mix of state and sectoral interests that gives rise to productive endeavor, but I suspect that what is a dynamic relationship in one experience will turn out to be a recipe for stagnation in another. In the end, as with most human undertakings, it may come down to something of the spirit: a feeling, part inspiration and part contagion, that great things may be gained and that the moment must be seized. Of course, what lifts the spirit up may very easily let it down; faced with serious setbacks, entrepreneurial optimism may very easily degenerate into asset-stripping defeatism. Southeast Asia's capitalist development is certainly still fragile enough for this to be a danger should the favorable environment change. As we have seen from the Philippines, factors which seem at one stage positive for industrializing potential may appear negative at another. There are the eventual limits of import substitution in all but the largest economies, the conflict of interests between agriculture and manufacturing and between import-substituting and export-oriented enterprises. Suppose, for example, that Marcos had been serious about engineering a fundamental change in Philippine development strategy instead of, as Hawes argues, using EOI as a talking-point for obtaining foreign support. Could he have imposed the new policy against domestic vested interests? Perhaps; but very possibly not. The other countries of Southeast Asia have not yet had to face the problem of powerful domes36

The role of foreign investment has been most thoroughly examined for Singapore: see especially Helen Hughes and You Poh Seng, eds., Foreign Investment and Industrialization in Singapore (Madison: University of Wisconsin Press, 1969); Yoshihara Kunio, Foreign Investment and Domestic Response: A Study of Singapore's Industrialization (Singapore: Eastern University Press, 1976); Lim Joo-Jack et al, eds., Foreign Investment in Singapore: Some Broader Economic and Sociopolitical Ramifications (Singapore: Institute of Southeast Asian Studies, 1977); Chia Siow-Yue, "Direct Foreign Investment and the Industrialisation Process in Singapore," in Singapore: Resources and Growth, ed. Lim Chong-Yok and Peter J. Lloyd (Singapore: Oxford University Press, 1986), pp. 79-118; Garry Rodan, The Political Economy of Singapore's Industrialisation. The principal attempt thus far to place Southeast Asian capitalist development in a theoretical framework is Richard Higgot and Richard Robison, eds., Southeast Asia: Essays in the Political Economy of Structural Change (London: Routledge & Kegan Paul, 1985); for a contrasting approach see Mohamed Ariff and Hal Hill, Export-Oriented Industrialisation: The ASEAN Experience (Sydney: Allen and Unwin, 1985). Useful for the regional links of Southeast Asian businesses are J. Panglaykim, Emerging Enterprises in the Asia-Pacific Region (Jakarta: Center for Strategic and International Studies, n.d. [1979J), especially for the listing of Southeast Asian MNCs, pp. 32-68; and Yuan-li Wu and Chun-hsi Wu, Economic Development in Southeast Asia: The Chinese Dimension (Stanford: Hoover Institute Press, 1980), pp. 90-107.

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tic vested economic interests other than the politico-bureaucratic one, but capitalist growth is creating them. Then, too, there are the political consequences of the social changes attendant on evolving capitalism: increasing material expectations, widening income gaps, rapid urbanization, the breakdown of older mechanisms of social control. Above all, there is the question of which direction the world economy will take—for the realization of Southeast Asia's capitalist promise depends ultimately on forces which the region has little power to affect. Domestically, what is crucial to Southeast Asian capitalism's future is the extent to which the flourishing of enterprise extends beyond big business and national political elites to affect the activity and purchasing power of the provinces. We noted earlier that the Southeast Asian capitalist upsurge was pioneered by big business, and our focus in this volume has been on that level. However, increased activity at the level of middling and small business and growing prosperity in the hinterlands is essential to making Southeast Asian capitalism more "real." Development in the provinces has clearly been central to Thailand's evolution from the classical bureaucratic polity, and the Philippines' failure to achieve a favorable environment for medium and small-scale business and greater purchasing power for its population certainly had much to do with that country's failure to profit from the region's general boom. The Indonesian government's encouragement of rural capitalist development has created the conditions which make it much more likely than could be imagined two decades ago (or in the Philippines today) that local markets and medium-scale enterprises will develop to complement the big business of the capital. As yet, only Malaysia and Singapore possess much of the infrastructure, skills, and linkages needed for sustained capitalist growth. It has given them a clear advantage in the competition for foreign investment in spite of their higher labor costs, a lesson which has not been lost on Thai and Indonesian decision makers. So far, relatively few studies have been devoted to the political-economic aspects of current capitalist development at the medium- and small-scale levels, but this should clearly be high on the scholarly agenda. Increasingly, what determines Southeast Asian policy-makers' strategic decisions will be the interplay of complex interests—bureaucratic, political, and business, national and regional—which will be expressed more and more through agencies, associations, and lobbies rather than through the dyadic relationships of patron-client networks. The emergence and role of such groupings has only recently come into focus as a subject of study, though its interest is considerable given its implications for political as well as economic change.37 Whether or not industrialism flourishes in Southeast Asia, we can be sure capitalism will continue to bring the region change. The emergence of domestic business 37

For studies directly addressed to the question of emerging business associations and bureaucratic decision-making see Andrew Maclntyre, "Politics, Policy and Participation"; Makarim Wibisono, 'The Politics of Indonesian Textile Policy," Bulletin of Indonesian Economic Studies 25, 1 (1989): 31-52; Alasdair Bowie and Richard F. Doner, "Business Associations in Malaysia: Communalism and Nationalism in Organizational Growth" (paper presented to the American Political Science Association, September 1988); and two doctoral theses, unavailable to me at the time of writing but no doubt of great interest: Anek Laothamatas, "No Longer a Bureaucratic Polity: Business Associations and the New Political Economy of Thailand" (Columbia University, 1989); and Yoon Hwan Shin, "Demystifying the Capitalist State: Political Patronage, Bureaucratic Interests, and Capitalists-in-Formation in Soeharto's Indonesia" (Yale University, 1989).

Materialization of the Southeast Asian Entrepreneur

33

groups, their particular composition, fields of endeavor, and relationship with political power have been shaped by involvement in a world market system, from which, short of profound revolution, the Southeast Asian economies cannot secede. As we have noted, this engagement began under (semi-)colonialism, long before the rise of a significant domestic capitalism, so that in a sense what we are witnessing is not a sharp break with the past but the revealing of relationships which earlier had been hidden by tradition-preserving government policies, by "post-traditional" social accommodations, and by the assumptions of observers. At the same time, the new centrality of business and of materialist values to government and society means that the softening and mediating role of "traditional" arrangements is being lost. Not only the academic observer but also the ordinary Southeast Asian finds himself in a strange new world, which he must confront with a different range of responses. The current prominence of Southeast Asian domestic business is in this sense the unmasking of capitalism in Southeast Asia, and it is likely to speed the process of transformation by the very fact of its making the new relationships clearer. Already, Southeast Asian capitalism is losing its improbability; it is fast becoming the accepted order, the paradigm of our investigations. As we explore it, we may from time to time note certain blurrings—the coalescence of new social groups, the stirring of aspirant elites—which disturb the clarity of its lineaments. They are the ghosts of further change, of orders yet to come.

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CAPITALIST DEVELOPMENT IN

POSTWAR THAILAND: COMMERCIAL BANKERS, INDUSTRIAL ELITE, AND AGRIBUSINESS GROUPS Akira Suehiro

porting on Thailand's economic situation in 1926, the Ministry of Comnerce concluded that "it cannot be said that Siam is in any sense of the vord developed industrially. It is essentially an agricultural country, and uch it will probably remain/71 Until the early 1960s this pessimistic observation seemed valid, for even then the agricultural sector produced around 40 percent of the total gross domestic product and absorbed over 80 percent of the total population. In the same year, four major traditional export products—rice, teak, tin, and rubber—accounted for 70 percent of total export value. Two decades later, all this had changed. By the end of the 1970s the manufacturing sector had already surpassed agriculture in value added at current prices. In line with this industrial development, the trade structure had also experienced drastic change, with manufactured goods rising to over 30 percent of total export value against a declining share for agricultural products. The fact that textile products, including garment goods, exceeded rice in export value in 1985 symbolized the importance of manufactures and gave credence to the belief of major Thai economists and political leaders that the country was now joining the Asian Newly Industrializing Countries (NICs).2 Thailand's accelerated capitalist development brought with it fundamental political and social changes, expressed most dramatically in the popular uprising of 1973 which overturned a political system dominated by the army and politico-bureaucrats in favor of a pentagonal power structure based on the king, the army, the technocrats,

R

* Ministry of Commerce and Communication, "A Survey of the Resources of Siam with a Review of the Foreign Trade and Commerce of the Country during the Reign of His Majesty Rama VI (1910-25)," The Records: The Board of Commercial Development (Bangkok) no. 20 (1926), p. 284. 2 Since 1987 there has been much discussion among Thai economists as to whether Thailand would become a member of the Asian NICs or not. Representative research work on the subject can be found in Thailand Development Research Institute (TDRI), Thailand's Transformation into a Newly Industrialized Country (Bangkok: TDRI, 1988).

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capitalist groups, and the organized people. While the army is still the most influential of these elements, it no longer has sole control of decision making but requires cooperation from at least some of the other groups. Furthermore, changes brought about by the democratic ferment and the industrial mode of life have undermined the hierarchical social order inherited from Thai "feudalism"—the socalled sakdina system—in favor of a new consciousness.3 Early studies of Thailand's economic take-off, carried out by Western-trained scholars, were statistical and policy-oriented, and did little to relate economic to socio-political affairs or to discover the roots of the country's capitalism. However, in the second half of the 1970s and early 1980s a new group of Thai scholars began the empirical and historical study of Thai capitalism from a political economy standpoint,4 and their works further stimulated empirical studies at the level of major industries, as well as those of specific firms.5 This paper shares the Thai scholars' political economy approach, but will see the evolution of capitalism through the experience of specific business groups. Needless to say, this is not the sole aspect that needs consideration if we are to appreciate the workings of Thai capitalism, but it is fundamental in that these groups are the actual agents of the country's capitalist development.6 For the purposes of our discussion, it is useful to group Thai capitalists into three major categories: commercial bankers, who established their businesses by the early 1950s and developed them into conglomerate giants in the 1970s; industrial groups, which developed on the basis of import substituting industries (ISI) in full collaboration with foreign capital after the 1960s; and the agribusiness group, which emerged in the late 1970s and rapidly expanded by integrating agricultural exports with industrial activity. We will ask how each local capitalist group developed its business 3

See John Girling, Thailand: Society and Politics (Ithaca, NY: Cornell University Press, 1981), chaps. 2-4. * The first joint research works of the Thai political economy group were published as Khrongsang kap kan plianplaeng saetthakit thai (Structure and Change in the Thai Economy) (Bangkok: Chulalongkorn University, 1978) and Chattip Nartsupha, ed., Wiwattanakan thun niyom thai [Development of Thai Capitalism] (Bangkok: Sarasuksakanphim, 1980). The group evolved into an association which since 1981 has published the journal Warasan saetthasat kan muang [Journal of Political Economy]. For other seminal studies of this school, see Chattip Nartsupha and Suthy Prasatset, The Political Economy of Siam 1851-1910 (Bangkok: Social Science Association of Thailand, 1981); Chattip Nartsupha, Saetthakit muban nai adit [Village Economy in Former Times] (Bangkok: Sarngsan, 1984); Krirkkiat Phiphatseritham, Raingan wichai ruang wikhro laksana kan pen chao khong thurakit khanat yai nai prathet thai [Analysis of Ownership in Big Business Groups in Thailand] (Bangkok: Thammasat University Press, 1981, revised in 1982 and published by the Thai Khadi Institute under the title Wikhro laksana kan pen chao khong thurakit khanat yai nai prathet thai); and Sungsidh Phiriyarangsun, Thun niyom khun nang thai 2475-2503 [Thai Bureaucratic Capitalism 1932-1960] (Bangkok: Sarngsan, 1983). 5 Significant studies by graduate students concerning Thai economic history are listed in Akira Suehiro, Capital Accumulation in Thailand, 1855-1985 (Tokyo: UNESCO Centre for East Asian Cultural Studies, 1989), pp. 343-44 (Notes) and 394-411 (Thai Language Sources). Very useful are also the following bibliographical works: Rangsun Thanaphonphan, Raingan kan wichai ruang kan samruat sathana khwam ru waduai pasi akorn nai muang thai [A Report on Studies of Taxation in Thailand] (Bangkok: Thammasat University Press, 1984); and The Foundation for the Promotion of Social Science Textbooks, Bannanukrom saetthakit prathet thai [Bibliography on the Thai Economy] (Bangkok, 1985). 6 For a more general consideration of the rise of Thai capitalism see Akira Suehiro, Capital Accumulation and Industrial Development in Thailand (Bangkok: Chulalongkorn University Social Research Institute [hereafter CUSRI], 1985); and Suehiro, Capital Accumulation.

Capitalist Development in Postwar Thailand

37

and achieved capital accumulation under given conditions—especially those imposed by the existing power structure, the industrial promotion policies of the government, and the influx of foreign capital. Second, we will consider how these capitalist groups adapted and improved their system of business in response to changing conditions and environments. PRINCIPAL CHARACTERISTICS OF BUSINESS ORGANIZATION

Before embarking on an account of Thai business groups we need to have some background against which to understand their experience. To provide this, I shall briefly sketch here some of the main features of present-day Thai business and then outline the historical development of the country's capitalism. Six major characteristics of Thai business organization can be pointed out. First, large firms are highly dominant in both employment and investment. Indeed, it would appear that large firms have played a more significant role in Thailand's economic performance than in that of other industrialized countries.7 Furthermore, in computing the growth rates of total sales of the big firms and comparing them with those of the nominal GNP during the period from 1978 to 1984, we find that the former grew at a much faster pace than the latter. Second, these large firms are not sustained by a single type of capital but (as is common in developing countries) rely on three different capitalist sources: state and other public enterprises, foreign or multinational enterprises, and domestic private enterprises. Table 1 shows that each of these three groups are involved in the 100 largest firms in terms of total sales and assets. As a result, Thailand has what might be called a "tripod structure" of industrial organization.8 Third, it appears that the Thai economy is now dominated not only by large firms but also that these have combined into a smaller number of conglomerate groups, which emerged after the 1960s.9 Fourth, if we classify these businesses in accordance with their major economic base into 1) financial conglomerates, 2) manufacturing groups, 3) merchant groups (including crop exporters and giant wholesalers such as the Central Department Store group), we find that the largest are the financial conglomerates, based on commercial banks. Table 2 indicates the economic 7

In 1984, firms registered with the Factory Division of the Ministry of Industry totaled 39,626, excluding 46,539 rice mills. Of these, large-scale firms (employing 200 persons and over) accounted for 641 or only 1.6 percent of all establishments. These large firms, however, employed 373,000 persons or 41 percent of all employees, and had assets valued at 99 billion baht, 54 percent of all assets. 8 Suehiro, Capital Accumulation, pp. 6-9 and 277-83. 9 A field survey conducted by the author between 1981 and 1983 showed that of the 100 largest firms in terms of total assets among financial institutions, including commercial banks, finance, and insurance companies, 70 belonged to Thai (more precisely Thai-Chinese) capital and the rest to foreign capital. Fifty of these seventy Thai firms in actuality belonged to merely 16 conglomerates, accounting for 90 percent of the total combined assets of all Thai firms. Good examples are the Bangkok Bank group and the Thai Farmers Bank group, which each owned five to eight firms among the 100 largest financial institutions. In surveying the 200 largest firms in the mining/manufacturing sectors in terms of annual sales, a similar pattern could be observed: of the 112 firms belonging to Thai capital, 57 were part of 24 business blocks, representing 82 percent of the total combined sales of all Thai firms. See Table 3 in Akira Suehiro "Thai-kei kigyo-shudan no shihon chikuseki kozo: Seizogyo group wo chusintoshite" [Mode of Capital Accumulation and Thai Big Business Groups, with Special Reference to the Manufacturing Group], Ajiya teizai 25,10 (Oct. 1984): 7.

38

Southeast Asian Capitalists

Table 1. Economic Performance of the Top 100 Firms in Thailand, Classified According to Capital Ownership and Nationality: 1979 and 1984 (Units: million baht, %)

1979 Annual Sales3

Type of Firm State-owned & public enterprises Thai private firms Foreign-owned firmsc

Total

b

1984 Total Assets

Annual Sales Total Assets

[19] 54,271 (22.8) [44] 75,979 (31.9) [37] 107,652 (45.3)

[19] 206,617 (36.3) [52] 304,279 (53.6) [29] 57,261 (10.1)

[19] 177,888 (33.3) [51] 213,453 (40.0) [30] 142,209 (26.7)

[23] 540,771 (38.3) [56] 793,602 (56.2) [21] 76,843 (5.5)

[100] 237,902 (100.0)

[100] 568,157 (100.0)

[100] 533,550 (100.0)

[100] 1,411,216 (100.0)

Source: Survey by the author. Annual sales amount of a financial institution is calculated by its gross revenue. ^Figures in brackets indicate the number of firms. c Foreign-owned firm indicates a firm in which foreigners own 30% or more of its shares. a

Table 2. The 100 Largest Business Groups and Firms in Thailand: Sales (1979) (in million baht) Annual Sales Nationality Thai

Japanese

Western

Type of Groups Financial groups Industrial groups Commercial groups Subtotal Banking corp. Manufacturers Trading companies Subtotal Banking corp. Manufacturers Trading companies Subtotal Grand total

No. of Groups

No. of Involved Firms

Total Sales

(%)

12 24 25 61 — 11 5 16 — 16 7 23

401 424 98 923 — 39 60 99 — 33 28 61

35,208 49,261 27,543 112,012 — 12,631 12,736 25,367 — 71,161 11,107 82,268

(16.0) (22.4) (12.5) (51.0) ( —) (5.8) (5.8) (11.5) —) (32.4) (5.1) (37.5)

100

1,083

219,647

(100.0)

Source: Survey by the author. See Suehiro, Capital Accumulation app. 7 and 8.

Capitalist Development in Postwar Thailand

39

si?e of the 100 largest corporate groups, including the multinational enterprises operating in Thailand, classified by capital ownership and industrial base. The table demonstrates that Thai capital represents only 61 of the top 100 groups and accounts for 51 percent of total combined sales. Hence it can be said that, in spite of its prominent role and high concentration, domestic big capital still does not substantially control the Thai economy. Fifth, domestic large firms and business groups are mostly dominated either by a single family or a group of families. Even in 1986 only 92 firms were listed in the stock market as public limited companies.10 There is no distinction between management and capital ownership in Thai private enterprise, as is demonstrated by the fact that in 1983 around 66,000 out of 109,000 registered private firms at the Ministry of Commerce were limited partnerships. The balance of 38,000 firms were private limited companies, which also have no obligation to offer their stocks on the market.11 It is also usual that the head of a family is the largest shareholder of a company and frequently exerts total power over the company's management. It is true that major shares in large enterprises are being transferred from individual and family ownership to corporate organizations, but examination reveals that these organizations are often wholly owned by a particular family or related families.12 During the 1980s several corporate groups started real management reform by setting up modern holding companies which were expected to centralize decisionmaking on the global strategy, mobilization of investment funds, and personnel management of their associated companies. The Saha Union Corp. of the Saha Union group and the Saha Pathana Inter-Holding Co. of the SPI group are cases in point. Some agribusiness groups and commercial banks also began to modernize their corporate structures and, as we will see, this has been significant in their business expansion. Finally, almost all the owners and controllers of Thai big business are descendants of overseas Chinese. Probably there is only one distinguished "indigenous" capitalist group, the Siam Cement group, which is financially supported by the Crown Property Bureau. Historically, this enterprise came from the combined socioeconomic forces of royalty, old-time aristocrats, ethnic Chinese merchants, and European technical experts, so that it cannot claim to be a purely ethnic Thai endeavor.13 However, although the dominant domestic capitalist groups of Thailand have always been ethnic Chinese, they have mostly been locally born, hold Thai nationality, and use the Thai language; younger business leaders have been educated entirely in Thai 10

Sarup kho sonthet borisat chot thabian borisat rap anuyat 2529 [Summary of Information concerning Public Limited Companies Registered as of 1986] (Bangkok: Securities Exchange of Thailand, 1986), p. 634. 11 The corporate structure of Thai private enterprises is discussed in Pichet Maolanond and Noboyuki Yasuda, Corporation and Law in ASEAN Countries: A Case Study of Thailand (Tokyo: JRP Series 49, Institute of Developing Economies, 1985). 12 Some examples of such family-owned investment companies are the Semeth Investment Co. and Montri and Sons Prt. of the CP group, Taephaisitpong Co. and Liaophairat Co. of the Hong Yiah Seng group, Thai Wuttipat Co. of the Sukree group, and Suvit and Seri Co. of the Osothsapha group. 13 A detailed account of the incorporation of the Siam Cement Co. can be found in its official business history, Phusiment thai 2456-2526 [Siam Cement 1913-1983] (Bangkok: Siam Cement Co., 1983). The post of managing director was occupied exclusively by Europeans for over sixty years from 1913 to 1974.

40

Southeast Asian Capitalists

schools. Unlike in the prewar period, most Chinese business leaders hold their economic stake within the country. For these reasons, I do not define these capitalists as alien but include them as "domestic" or "Thai" businessmen. HISTORICAL CONTEXT

The development of Thai capitalist groups had its origin in Siam's integration with the world capitalist economy, which is usually dated from the signing of the commercial pact with Britain known as the Bo wring Treaty in 1855. By the end of the nineteenth century, three major capitalist groups had emerged. First and most influential were the European trading houses or commission agents, which advanced into Siam shortly after the conclusion of the treaty. European capitalist groups gained substantial control of such major export-oriented industries as the rice industry, teakwood industry, and tin-mining industry, which they dominated until the Second World War.14 Towards the end of the nineteenth century a second source of capitalist association had emerged in the form of Siamese institutional ownership of capital. This involved the king, royal family members, and high-class bureaucrats; their central institution was the Privy Purse Bureau set up by King Rama V (Chulalongkorn) in 1890. The bureau served as a kind of royal investment company, placing funds in real estate, housing, the construction of tramways and railways, shipping, commercial banking, rice milling, and in such manufacturing as the cement industry. It also acted as a primitive industrial bank or credit supplier to European and Chinese merchants in a variety of industries, and was one of the largest investors and proprietors in prewar Thailand.15 The third and ultimately most important source of entrepreneurship consisted of overseas- and locally-born Chinese merchants.16 These followed three main paths into business. The first and largest group began by tax farming, which for much of the nineteenth century was the Siamese government's principal source of revenue. The opium, spirit, lottery, and gambling farms were particularly lucrative, and their holders invested in private business ventures such as the junk trade and rice milling. Among the leading capitalists to emerge via this route were the Phisanbut (Sae Kho), Phisonbut (Sae Loh), Chotikaphuk-kana, and Chotika-sathien families in the reign of King Rama IV (Mongkut, 1850-1868); and the Sophanodon (Kim Seng Lee & Company), Tantasaetthi, and Laohasaetthi families in the reign of Rama V (1868-1910).17 Since these Chinese tax farmers were granted official ranks and titles and were assim14

For the economic dominance of European groups in major Thai export-oriented industries before 1945 see Suehiro, Capital Accumulation, pp. 42-71. 15 See Thawasin Supwattana, "Botbat khong krom phrakhlang khang thi tokan long thun thang saetthakit nai adit: 2433-2475" [The Role of the Privy Purse Bureau in Economic Investment for the Period 1890-1932], Warasan Thammasat 14, 2 (June 1986): 122-59; and Chonlada Wattanasiri, "Phrakhlang khang thi kap kan long thun thurakit nai prathet pho.so. 2433-2475" [The Privy Purse Bureau and its Investment in Businesses in Thailand: 1890-1932] (M.A. thesis, Silpakorn University, 1986). 16 A pioneering work in this field is Sirilak Sakkriangkrai, Tonkamnoet khong chonchan nai thun nai prathet thai pho. so. 2398-2453 [The Birth of the Capitalist Class in Thailand 1855-1910] (Bangkok: Sarngsan, 1981). 17 For the business activities of these Chinese tax farmers in the reigns of kings Rama IV and V see Suehiro, Capital Accumulation, pp. 72-83.

Capitalist Development in Postwar Thailand

41

ilated into the bureaucratic system, they occupied a position that was more part of officialdom than a separate merchant class. Other Chinese capitalists began as compradores mediating between local customers/suppliers and the European trading houses and commercial banks, later setting up their own businesses. They were often highly educated, having obtained schooling from such elite English-language schools of the region as the Raffles School in Singapore and Assumption College in Bangkok.18 Both these types of Chinese capitalists were overshadowed after the First World War by a third group, consisting of overseas Chinese merchants. These independent entrepreneurs established their economic empires mainly in the rice business, knitting together wide networks of trade, finance, and information which encompassed other Asian countries. They included the Kho "Guan Huat Seng/7 led by Kho Hui Chiya,19 and the Lee "Kung Seng," led by Lee Teck Oh, in the 1910s and 1920s;20 the Tan "Wang Lee'7 (the Wanglee family: Teochiu), the Ung "Kwang Kho Long77 (the Lamsam family: Hakka), the Mah "Chin Seng77 (the Bulakun family: Cantonese), and others after the 1920s.21 Two characteristics contributed crucially to the economic growth of all these groups. One was access to national political power and the second was access to the established external trade and finance network of world capitalism. In other words, the outstanding local capitalists who emerged by the early twentieth century were dependent either on local political or foreign business patrons. There was no development of an independent capitalist group as a class against the political powerholders, especially the royal court and the bureaucrats. Rather, dominant capitalist groups grew by adapting to and taking advantage of the established political-social system.22 Most of these businessmen engaged exclusively in merchant activities, for the provisions of the unequal commercial treaties and the government's lack of interest in sponsoring local manufactures meant that they could not compete with goods imported from Europe, India, China, and Japan. Both Chinese and bureaucratic capitalist groups increasingly concentrated on commercial concerns and real estate, or invested overseas. The characteristics of political patronage, external dependency, and merchant capitalist activity already apparent in the late nineteenth century remained true of Thai business groups at least up to the 1973 revolution. Fundamental political 18

Typical cases are Seow Kheng Lian Sribunruang, compradore for Windsor & Co., and the Waet-chachiwa family for the East Asiatic Company. See Suehiro, Capital Accumulation, pp. 8889. For the activities of other compradores, see also Sirilak, Tonkamnoet, and Arnold Wright et al., Twentieth Century Impressions of Siam: Its History, People, Commerce, and Resources (London: Lloyds', 1908), p. 290. Very useful sources for the careers of early Thai capitalists are the nangsue chaek, books distributed on the occasion of religious ordination or cremation. There are good collections of these at Wat Bowoniwet and Prince Damrong Rachanuphap Library. 19 "Kho" refers to the family name, while "Guan Huat Seng" indicates the Chinese symbol for the leading firm that a family operated. For example, Kho Hui Chiya, the first chairman of the Chinese Chamber of Commerce in Siam and owner of Koh Mah Wah & Co. (Guan Huat Seng in Chinese) was frequently referred to in Chinese documents as Kho "Guan Huat Seng" rather than by his individual name. 20 Suehiro, Capital Accumulation, pp. 83-87. 21 For the detailed story of leading Chinese rice business groups in the 1920s and 1930s see ibid., pp. 110-22. 22 This argument is developed by Chatthip Nartsupha, SaethaJdt kap prawatsat thai [Economics and History of Thailand] (Bangkok: Sarngsan, 1981).

42

Southeast Asian Capitalists

changes in the intervening period produced new leading business groups and new patrons but did not alter the pattern. Thus, after the collapse of the absolute monarchy in 1932, leading Chinese capitalists such as the Lamsam, Wanglee, and Bulakun families sought patronage from the revolutionary government; after the military coup in 1947, Chinese merchants and bankers invited military leaders such as Field Marshal Phin Choonhavan, Police General Phao Sriyanon, and Field Marshal Sarit Thanarat onto the boards of directors of their enterprises.23 Similarly, external dependency continued even after the rise of domestic industrial groups, taking the form of joint ventures with foreign capital after the 1960s. In short, the dominant capital of Thailand continued to rest on the three legs of royal (later state) capital, European (later multinational) capital, and Chinese (later local) capital, and the relationships between these elements have determined the developmental pattern of Thai capitalism. It is out of this context that the modern Thai business groups have emerged. COMMERCIAL BANKING GROUPS

Before the outbreak of the Second World War, twenty commercial banks had been established in Thailand, four of them branches of European colonial banks and the other three branches of overseas Chinese banks based in Singapore and Hong Kong. In addition, from the early 1900s Chinese rice millers and exporters in Bangkok entered into banking activities. The first of these, the Chino-Siamese Bank, was set up in 1908 by Seow Joo Seng (banker), Kim Seng Lee (the largest local merchant of this time), Lee Teck Oh (a rice exporter), and Siang Kee Chan (a tax farmer and rice miller).24 After 1930 when the Thai government promulgated the country's first banking act, leading Chinese rice exporters set up commercial banks and insurance companies, mainly to finance their own businesses. All these family-owned and -operated banks except the Wang Lee Chan Bank, which had been founded in 1933 by the Wanglee family, had failed by the end of the decade, for they were unable to compete with European capital. Seven foreign banks controlled 60 percent of Thailand's total deposits as well as loans in 1938, and even in 1948 they absorbed 36 percent of total deposits.25 At the close of the Second World War, the government promulgated new banking regulations aimed at promoting local commercial banks. At this time state control over business activity, which had been initiated with the nationalist economic policy of 1938, was if anything strengthened, especially in the rice trade, and this made it difficult for the Chinese rice millers/exporters to develop their businesses. Commercial banking, together with insurance services, appeared an attractive alternative, the more so because the European-dominated international financial network in Asia had collapsed during the war. Consequently, as many as eight new commercial banks and twenty-five insurance companies were incorporated by 23

See Sungsidh Phiriyarangsun, Thai Bureaucratic Capitalism 1932-1960 (Bangkok: CUSRI, 1984), app. 7 (pp. 245-53) and app. 15 (pp. 262-68). See also Suehiro, Capital Accumulation, pp. 142-43. 24 See Rattanawadi Rattagomon, "Wiwattanakan lae botbat khong thanakhan phanit nai prathet thai" [Development and Role of Commercial Banks in Thailand] (M.A. thesis, Thammasat University, 1981); and Phannee Bualek, Wikhro nai thun thanakhan phanit khong thai pho.so. 24752516 [Analysis of Thai Commercial Bankers 1932-1973] (Bangkok: CUSRI, 1986), pp. 15-31. 25 Kato Osao, ed., Thai no kinyu jijyo [Financial Situation of Thailand] (Tokyo: Institute of Developing Economies, 1962), p. 113.

Table 3. Five Big Commercial Banking Groups in the 1950s Name of Group Asia Trust Group

Thai Hua Group

Ayuhya Group

Thai Farmers Group Union Group

Associated Companies

Bangkok Bank Bangkok Metropolitan Asia Trading Co. Bank Asia Trust Co. Thai Metropole Insurance Bangkok Gold Trading Sri Muang Insurance Bara Windsor & Co.

Bank of Ayudhya Ayudhya Insurance Northeast Jute Mill National Economic Development Corp.

Thai Farmers Bank Muangthai Life Insurance

Union Bank of Bangkok

Promoters/ Directors

Chin Sophonphanich Tae Keng Un Chiu Shiew Bu Kanchon Tangtasawat Lim Pek Kee Lim Kok Chiang

U Chu Liang Uthane Techaphaibun So Khun Kiam Tae Kai Siew Khun Setthaphakdi Kiat Srif uengf ung Tan Geng Chuan Hia Kwang lam

Luan Buasuwan Khun Khunphalin Thien Angsanan

Sahat Mahakhun Kiat Watthanawekin

Speech Group

Teochiu Chao-yang, Chang-hai

Teochiu Chaoping, Chang-hai

Teochiu

Chote Lamsam Chulin Lamsam Lao Han Hua Tan Siew Men Wanglee Tan Siew Chin Wanglee Yip In Soi Chaturakun Hakka, Teochiu

Main Initial Source of Membership

Merchants of Sampheng Street

Anti-Japanese Movement group (1936, 1939)

Northeast Rice Millers' Association

Relatives of Lamsam Family

Collaboration with Military Clique

1950s-Soi Ratchakhru Group (Phin-Phao Clique) 1960s-Praphat Clique

Since End of 1950s Sarit Clique

1950s-Soi Ratchakhru 1950s-Thanom group Group Since End of 1950s Sarit, Thanom, Praphat Group

Note: Survey by the author.

Teochiu

CapitlsDevomnPwrThd43

44

Southeast Asian Capitalists

Chinese businessmen between 1944 and 1951. Unlike in the prewar period, these firms were not one-family operations but recruited their leaders and shareholders from wider circles. More importantly, by the early 1950s their financial activities became the core of conglomerate business groups. Five of these groups succeeded in establishing "business blocks" centering upon banking and insurance. These were the Asia Trust or Bangkok Bank group, ThaiHua, Lamsam-Wanglee, Ayudhya, and Mahaguna (Union Bank of Bangkok) group.26 Table 3 summarizes them in terms of the leading figures of each group, the Chinese speech or dialect group to which they belonged, the Chinese place of origin from which they stemmed, and the major associated firms of the group. Because of their seminal and continuing importance it is worth looking at these financially based blocks in some detail. The Asia Trust or Bangkok Bank group was already Thailand's economically most powerful conglomerate by the early 1950s (see Table 4). It was begun by Teochiu Chinese merchants who were mainly engaged in the import-export and gold trade businesses, and who largely operated their shops along Samphen Street in Bangkok's Chinatown. Leading promoters included Tan Piak Chin (Chin Sophonphanich), Chiu Shiew Bu (Shiubun Chanya-sak), Tae Keng Ung, and Lim Pek Kee. At the heart was the Bangkok Bank (1944), which became the core of the Asia Trust group in 1952 when Chin Sophonphanich, the most active of the entrepreneurial leaders, became its president. Another major firm belonging to the group was the Bangkok Gold Trading Co. (1946), a joint venture between Chin and Chiu Shiew Bu. The Asia Trading Co. (1947), a joint venture by Chin, Lim Pek Kee, and others, originally engaged in international trade and money exchange and later shifted its major business to insurance. The fourth major participant in the conglomerate was the Asia Trust Co. (1949), a joint venture between Chin, Tae Keng Ung, and John Manny of Hong Kong, which engaged in money exchange and remittance services for overseas Chinese; it changed its name to Asia Trust Bank in 1965. Table 4. Development of the Big Four Financial Groups in Thailand. Total Registered Capital During 1948-1973 (in 1,000 baht)

Year 1948/49

1958 1973

Wanglee Family

Lamsam Family

Techaphaibun Family

Sophonphanich Family

[9]a 4,556 [9] 5,589 [29] 81,987

[17] 10,256 [21] 34,086 [47] 251,955

[3] 1,400 [8] 16,060 [44] 637,410

[7] 11,330 [19] 36,377 [61] 665,681

Source: Computed from Phanni Bualek, "Kan Toepto lae phattanakan khong nai thun thanakhan phanit nai prathet thai" (M.A. thesis, Chulalongkorn University, 1985). a Figures in brackets indicate the number of firms. 2° The description of these groups is based on the author's field survey, which encompassed a great number of company documents held in the Ministry of Commerce, various other Thai and Chinese documents, and interviews. For a detailed study of these groups see Suehiro, Capital Accumulation, pp. 154-72.

Capitalist Development in Postwar Thailand

45

In addition to the financial resources which these core businesses provided, their expansion was aided by the broad personal and trade networks that had been developed by Thai Chinese merchants with other major port cities in Asia such as Hong Kong, Swatow, and Singapore. Between 1948 and 1958, the Asia Trust group increased the number of its affiliate firms from seven to nineteen and expanded its combined registered capital from 11.3 to 36.4 million baht (Table 4). The Thai-Hua group was organized by U Chu Liang, who began by importing and distributing dyestuffs in rural areas. He was joined by Tae Ngo Low (Uthane Techaphaibun), Liao Hin Po (Khun Setthaphakdi), and So Khun Kiam, each of whom supplied capital to form the Bangkok Metropolitan Bank in 1950. The core firms of this group consisted of the Sri Muang Insurance Co. (1946), Bara Windsor & Co. (an importing house), Thai Metropole Insurance or Thai-Hua Insurance Co. (1953), Nam Fah Insurance and Warehouse Co. (1956), and the Bangkok Metropolitan Bank. The Thai Farmers or Lamsam-Wanglee group had profited in the 1930s and 1940s from the patronage of Pridi Phanomyong's political group, which led Siam after the fall of the absolute monarchy. In 1944 they set up the Thai Farmers Bank, the first commercial bank run by Hakka Chinese. It played a central role in the group's activities, which varied from shipping, life insurance, and trading to mining and manufacturing. Before the 1950s the combined economic force of the Lamsam and Wanglee families probably constituted the largest Chinese business block. In 1948/49 its affiliate firms numbered 26 and their total registered capital amounted to 14.8 million baht (Table 4). The group is particularly interesting because, of the two families that form its core, Lamsam was Hakka and Wanglee was Teochiu, and both played leading roles in their respective communities. Overcoming the centrifugal pull of community loyalties, they maintained close links to each other through intermarriage and joint activities.27 The Ayudhya group was led by Heng Mo Neng (Luan Buasuwan), a locally born Teochiu Chinese who had previously operated a rice mill in Khorat and then undertook the organizing of rice millers in the northeastern region. After gaining support from generals Phin and Phao, leaders of the "Soi Ratchakhru" military clique which ruled Thailand from 1947 to 1957, he was appointed in 1950 general manager of the Bank of Ayudhya, which the Phin group had taken over from Pridi's political clique, which it had overthrown. At the same time, Luan independently set up two affiliate firms, the Ayudhya Insurance Co. (1950) and Ayudhya Life Assurance Co. (1952); both of them invited General Phao to be their advisory director. The Ayudhya group also had a close relationship with the Taharn Co-operation Co. (Thahan Samakkhi), the business arm of the war veterans' organization sponsored by Field Marshal Phin. During the 1950s the Ayudhya group expanded rapidly into one of the largest military-associated conglomerates.2* 27

For instance, Thongyu, the younger sister of Tan Lip Buai, second-generation head of the Wanglee family, was a wife of Ung Yuk Long (1879-1949), head of the Lamsam family in the second generation. Tan Lip Buai's daughter Sa-nguwan was a wife of Chulin Lamsam (19041965), that family's head in the third generation, while Ung Yuk Long's daughter Thongphun was a wife of Tan Siew Meng Wanglee (1904-1945), family head in the third generation and chairman of the Chinese Chamber of Commerce. 28 See the cremation volume of Luan Buasuan (1956). Business activity of the Taharn Co-operation Co. is described in C. William Skinner, Leadership and Power in the Chinese Community of Thailand (Ithaca, NY: Cornell University Press, 1958), pp. 194-95, 204; Sungsidh, Thun niyom, pp. 172-273; Suehiro, Capital Accumulation, pp. 145-48. See also the company documents compiled by the Commercial Registration Department of the Ministry of Commerce (hereafter

46

Southeast Asian Capitalists

Beside the Ayudhya group, Luan Buasuwan served as promoter, director, and shareholder of military-involved or state-sponsored companies. In this way his Ayudhya group and the military firms led by Field Marshal Phin cooperated to monopolize major lucrative businesses of the country. Important areas that they dominated by the early 1950s included the rice business, hog slaughtering and the pork trade, timber export, the jute and gunny bag business, and the local distribution of liquor and tobacco. Lastly, the Mahaguna (Mahakhun) or Union Bank group was led by Tia Lan Chan (Sahat Mahakhun), who was the most influential leader in the Thai Chinese community from the late 1940s to the early 1960s and was chairman of the Thai Chinese Chamber of Commerce from 1947 to his death in 1961. Sahat had originally been a construction contractor and developed his business through privileged access to the government. He undertook construction of the central post office, Donmuang International Airport, the government-owned tobacco factory, the northeastern railway, and other key projects. In 1949 he and his associates established the Union Bank of Bangkok, in which over 150 leading Chinese merchants held shares. By the early 1950s he had promoted at least three commercial banks and over nine insurance companies, and by the end of his career he played a leading role in over forty major private enterprises and state-sponsored companies.29 His standing was such that the Mahaguna group served as a nucleus about which all other leading Chinese business blocks united, irrespective of dialect group. Table 3 indicates several salient characteristics of the leading five groups' membership and capital ownership. We can see that firms belonging to the same conglomerate were set up not by a single family but by groups of families who shared the same clan association, the same dialect group, and/or the same occupational background. Thus the Asia Trust (Bangkok Bank) group was formed mainly by Teochiu Chinese coming from Chao-yang and Cheng-hai prefectures. In the case of the Ayudhya group, though its leading members were principally Teochiu Chinese from Pu-ning prefecture, occupational association was the more significant link: most leading members belonged to either the Northeastern Rice Millers Association or the Northeastern Sawmillers Association—these being major shareholders in the Taharn Co-operation Co., Marshal Phin's business organization.30 The key element of the Thai-Hua group, which was composed of Teochiu Chinese from several prefectures, was an informal political organization, the Teochiu Rice Industry and Trade Co., which had been established around 1937 to support the resistance movement against the Japanese invasion of China. It was the major backers of this organization who incorporated the Bangkok Metropolitan Bank and other associated firms of the ThaiHua group in the postwar period. CDMC), bo.cho. 2 no.mo. 3 (1947). The military- and state-connected companies with which Luan Buasuan was involved included the Taharn Co-operation Co. and its associated firms, the National Economic Development Corp (NEDC) and affiliate firms such as the Chonburi Sugar Corp., and the Thai Jute Mill Co. and its associated firms. The first two of these were holding companies privately incorporated by the military group in order to control state enterprises and state-sponsored bodies. 29 CDMC, company file for the Mahaguna Co., bo.cho. 590 (1942); and the cremation volume of Sahat Mahakhun (November 22,1961). 30 Taiguo Mishang Gonghui, edv Book for the 43rd Anniversary of the Association (Bangkok: Rice Exporters Association of Thailand, 1962) (in Chinese).

Capitalist Development in Postwar Thailand

47

The rapid development of all these business groups during the 1950s can be attributed to a single common factor, namely collaboration with the military-led Thai ruling elite. This alliance was also promoted by international and internal political developments after the late 1940s. First of all, the success of Communist revolution in mainland China in 1949 had a great impact on the Thai ruling class, leading to more restrictive policies against the Chinese. The arbitrary and frequent accusation of "suspected communism" became a great threat to Chinese businessmen, who sought personal and business security by acquiring political protection from the army and the police. The military leaders themselves also needed the cooperation of the Chinese businessmen. During this period the Phibun government encouraged state and other public enterprises in trade, finance, and manufacturing, and by the mid-1950s there were over 100 state enterprises and public companies engaged in almost all kinds of economic activity. Since the army and the politico-bureaucrats lacked the seed capital, experience, and entrepreneurial skills required to operate such firms, they turned to the Chinese. Thus the two sides built alliances of convenience. For instance, in 1952 Chin Sophonphanit invited Police Director-General Phao to be chairman of the Asia Trust Co. Next year he asked Brigadier-General Siri Siriyothin, who at that time was Deputy Minister of Economic Affairs and a leading member of the Phin-Phao military clique, to be the chairman of the Bangkok Bank, while the government in return provided 30 million baht to increase the bank's capital to 50 million baht. Other major business groups followed this pattern: The Thai-Hua Insurance Co. took on board Brigadier-General Praman Adireksan, son-in-law of Field Marshal Phin, while Capital Insurance Co., an important firm in the Mahaguna group, revised its board in 1953 to include leading military figures such as Praphat Charusatien.31 In addition to this reorganization of the directorship of major Chinese-owned firms, the alliance between the two groups was pursued in the state-sponsored companies and military-involved firms which were set up after 1952. A typical case was the relationship between the Ayudhya and Taharn Co-operation groups noted earlier. Generally speaking, the major new enterprises which were established during the 1950s were Sino-Thai ventures in which the Chinese supplied the capital funds, managerial skill, and commercial acumen, while the Thai officers gave protection and business privileges to their Chinese partners. Through this mutually beneficial association, the military leaders obtained non-budgetary income sources with which to bolster their political power. 31

For these appointments see Kamnoet lae wiwattanakan khong thanakan krungthep [Genesis and Development of the Bangkok Bank] (Bangkok: Bangkok Bank, 1982); Phannee Bualek, "Kan toepto lae phattanakan khong nai thun thankahan phanit nai prathet Thai pho.so. 2475-2516" [The Rise of the Commercial Bankers in Thailand, 1932-1973] (M.A. thesis, Chulalongkorn University, 1985), pp. 158-59; CDMC, company files on the Capital Insurance Co., bo.cho. 2213 (1949) and Thai-Hua Insurance Co., bo.cho. 3784 (1953). For the general relationship between the military, state, and business in this period, see Skinner, Leadership, chaps. 5-9; Fred Riggs, Thailand: The Modernization of a Bureaucratic Polity (Honolulu: University of Hawaii Press, 1966), chap. 9; Sungsit, Thun niyom, chap. 4; Suehiro, Capital Accumulation, chap. 5.2. The alliance between Thai political leaders and Chinese businessmen is exactly the phenomenon that Skinner emphasized as peculiar to Thai Chinese society in the early 1950s and that Riggs insisted was the key element of the "bureaucratic polity." But this alliance is not a product of military rule in Thailand; rather, it can be traced to the development of local Chinese capital during the reign of King Rama V (Chulalongkorn).

48

Southeast Asian Capitalists

With the 1960s, Thai commercial banks started to expand at an unprecedentedly high rate by accepting deposits and providing loans. Total deposits increased 760 percent from 1957 to 1967, compared to 290 percent from 1950 to 1957, although GDP growth rates at current prices in those periods were far lower than those of total deposits (250 percent and 190 percent respectively).32 This expansion of the commercial banking business accrued to the benefit of the ethnic Chinese-controlled banks: their proportion of total deposits increased from one-third in the early 1950s to 68 percent in 1972, while the importance of foreign-controlled banks rapidly declined. During the 1960s and early 1970s two more notable transformations took place in the activity of the leading Thai-Chinese commercial banks. The first was a change in the structure of their capital ownership. As mentioned previously, the major banks began as associations of groups of Chinese businessmen; there may have been a principal leader but they were basically joint efforts, and the inclusion of Thai political powerholders and government institutions increased their collective character. From the 1960s, however, single families came to dominate each eroup, increasing their equity shares by frequent additions to their registered capital.33 For instance, the largest shareholder of the Bangkok Bank in the early 1950s had been the government (the Ministry of Economic Affairs, later the Ministry of Finance), which held 60 percent of total shares. Between 1952 and 1971 the Bangkok Bank increased its registered capital from 20 million baht to 500 million baht, in which process the government's share dropped to merely 15 percent. Instead, Chin Sophonphanich and his family increased their stake to 33 percent and became the bank's largest shareholding group.34 Similar developments occurred with the Techaphaibun family's share in the Bangkok Metropolitan Bank and the Lamsam family stake in the Thai Farmers Bank. The Bank of Ayudhya arrived at a similar pattern by a rather different route. This bank had originally been set up by Louis Phanomyong, the younger brother of the 1932 revolutionary leader Pridi Phanomyong. After the military coups in 1947 and 1951, ownership of the bank was transferred to the Phin-Phao clique and then to the Sarit group. Its board of directors included such leading military figures as Phao Sriyanon, Chatichai Choonhavan, and Sarit Thanarat, with Chinese partners such as Luan Buasuwan having sole charge of its management. But the unexpected death of Luan and the collapse of the Phin-Phao clique in 1957-1958 made possible the entrance of a new group led by Chuan Rattanarak (Lee Bak Chuan), who had formerly engaged in lighterage and transport on the Chao Phraya river. He had participated in the bank's management since around 1958 and held 26 percent of its total shares by 1964, which he increased to 42 percent by 197235 Thus the impressive expansion of commercial banking during the 1960s and the early 1970s resulted in centralization in two ways: first, by concentrating ownership 32

Calculated from the 1962 and 1972 editions of Bangkok Bank Ltd., Statistics on Commercial Banks in Thailand (Bangkok: Bangkok Bank, n.d.). 33 Changes in the ownership structure of leading commercial banks in Thailand are summarized in Suehiro, Capital Accumulation, p. 247 (Table 7.8). 34 For a detailed analysis of the ownership pattern of the Bangkok Bank Ltd. see Akira Suehiro, "Bangkok Bank: Management Reforms of a Thai Commercial Bank/' in East Asian Cultural Studies (Tokyo, 1989), pp. 117-20. 35

CDMC, company file on the Bank of Ayudhya, bo.cho. 7-00 yo. 7 (1945). In the same period, Chuan Rattanarak virtually took over the management of the Siam City Bank, in which he had participated as shareholder from 1963. See "Bank nakhon luang thai: sombat phalat kan chom khong khrai," Dok bia 11 (January 1983): 115-25.

Capitalist Development in Postwar Thailand

49

of the major commercial banks in the hands of four families (Lamsan, Rattanarak, Sophonpanich, and Techaphaibun), and second, through centralizing financial activities—loans and deposits—in the hands of the commercial banks dominated by these same families. Indeed, the market share held by their commercial banks (in terms of total deposits) jumped from 32 percent in 1962 to 57 percent in 1972 (see Table 5). Table 5. Development of Thai Local Commercial Banks, 1962-81: Deposits (in million baht) Name of Bank

1962

1972

1981

Bangkok Bank Bank of Ayudhya Thai Farmers Bank Bangkok Metropolitan Bank Bank of Asia First Bangkok City Bank Siam Commercial Bank Krungthai Bank3 Wang Lee Bank Siam City Bank Bangkok Bank of Commerce Laem Thong Bank Union Bank of Bangkok Thai Danu Bank The Thai Military Bank Asia Trust Bank 14 foreign banks

1,578

16,991 3,288 4,151 2,530 1,365

103,269 14,489 40,912 12,032 6,082 8,532 16,719 40,589 1,067 10,050 14,956 1,779 4,672 2,741 9,226 5,049 6,913

Total Big Four Familiesb

475 431 253 304 248 557

1,723

7 348 494 179 248 154 288 —

1,167 8,454 (100.0) 2,737 (32.4)

648

2,956 8,637

14

2,256 2,077

448

1,182 2,006 1,781

835

3,738 54,903 (100.0) 31,229 (56.9)

299,077 (100.0) 185,316 (62.0)

Source Computed on the basis of data from Bangkok Bank Ltd., "Statistical Data on Commercial Banks in Thailand 1982." a 1962 figure indicates the deposits of Agricultural Bank and Provincial Bank. b The Big Four Families are Sophonphanich (Bangkok Bank), Lamsam (Thai Farmers Bank), Techaphaibun (Bangkok Metropolitan Bank, including the Bank of Asia and the First Bangkok City Bank in both 1972 and 1981), and Rattanarak (Bank of Ayudhya, including Siam City Bank in 1972).

A key element in this concentration of economic power was a close relationship with military leaders. The four families in general, and the Bangkok Bank and the Bank of Ayudhya in particular, relied strongly on political patronage from field marshals Sarit and Praphat, and Police Director-General Prasoet Ruchirawong.36 The bankers provided these patrons with chairmanships and directorships together with 36 According to a survey made by Thamanun Thien-ngoen, a former member of the Thai parliament, 143 government officials or their family members participated as board members in a total of 347 firms in 1969. Among them were: Field Marshal Praphat (44 firms), Police DirectorGeneral Prasoet (33 firms), Thanya Ranaron (Praphat's chief civilian assistant, 31 firms), and Field Marshal Krit Siwara (50 firms). Pasuk Phongpaichit, Economic and Social Transformation of Thailand, 1957-1976 (Bangkok: CUSRI, 1980), p. 68.

50

Southeast Asian Capitalists

free stocks, and in return they secured privileges and security.37 In particular, Field Marshal Praphat Charusatien, who at that time was the deputy prime minister and commander-in-chief of the army, was, together with members of his family, given high posts in the five commercial banks. Through these business involvements they acquired 750,000 shares valued at 318 million baht, equivalent to 6 percent of the banks' total combined registered capital. When, after the 1973 revolution, the new government set up a special committee to investigate the economic involvement of the former military rulers, it discovered that the trio of Thanom, Praphat, and Narong Kittikachorn (who was Thanom's son and Praphat's son-in-law) had, with their families, been involved in 137 private enterprises. In addition, they reportedly possessed deposits in local commercial banks totalling 151 million baht—three percent of the country's total deposits.38 These figures more than anything else indicate the broad involvement of military leaders in business activities before the 1973 revolution. And, although the military leaders concerned were overthrown in 1973, the pattern of powerful, highly concentrated, single-family controlled banks which their influence had helped to establish continues to this day. THE INDUSTRIAL ELITE

After the military coup which brought the Sarit group to power in 1958, the government embarked on a policy of promoting industrialization through private capital from both domestic and foreign sources. This followed the recommendations of an economic research team delegated by the World Bank in 1957-1958, which called for the promotion of private rather than state enterprise, the improvement of infrastructure, and the introduction of a long-term economic plan. The Sarit government's subsequent restriction of the hitherto dominant state enterprises may be seen as part of the effort to promote infant private industry, but probably a more important motive was to destroy the economic base of the Phibun clique which Sarit had overthrown. In any case, the new government strictly regulated the expansion of existing state enterprises and prohibited state participation in commercial and industrial sectors where it might be expected to compete with private capital. The role of the state was now confined principally to providing infrastructure and improving the investment climate in favor of the private sector. In order to promote the private sector, the government promulgated the Industrial Investment Promotion Act B.E. 2503 (1960) and empowered the Board of Investment to deal with all matters relating to industrial promotion.39 Through this and other legislation, the government provided incentives to local and foreign investors, 37

The Bangkok Metropolitan Bank, core firm of the Techaphaibun family, was one of the few banks that did not invite military leaders to join its board of directors. However, the Mahaguna Distillery Co., which monopolized production and distribution of Thai whisky and served as the industrial base for the Techaphaibun family, did do so: in 1967 it appointed field marshals Praphat and Krit Sivara, Police Director-General Prasoet Ruchirawaong, and Air Chief Marshal Thawi Chunlasap to its board. "Mekhong si luat: 20 pi khong thurakit thi chai krabok phun phen sao kham" ['Mekhong' Whisky is the Color of Blood: Twenty Years' History of Gunslinging in Business], Phuchatkan 8 (April 1964): 101-18. 38 Suehiro, Capital Accumulation, pp. 5-71. ™ Two years later, the act was amended, expanding its coverage to include the promotion of 183 types of industries. For details on the industrial promotion policies, see Chaliaw Ngarmwong, "Economic Evaluation of Promoted Industries" (M.A. thesis, Thammasat University, 1971).

Capitalist Development in Postwar Thailand

51

including tax exemption, tax holidays, freedom to remit profits and acquire land, and a ban on the formation of labor unions. To protect domestic manufacturers, import duties relating to promoted industries were raised from between 10 and 30 percent to between 45 and 60 percent. This high-tariff system in turn accelerated the advance of foreign capital into Thailand, as manufacturers switched from export to local production.40 In 1961 the government also introduced the first Six Year (later Five Year) Economic Plan, with the institutional and financial support of the United States. This promotion policy no doubt contributed to the impressive industrial development of the country in the following two decades. The manufacturing sector achieved an annual growth rate of 10.2 percent in the period of the first plan (19611966), and 9.2 percent in the second (1966-1971); this was far greater than the 5.6 percent growth rate experienced between 1950 and 1957. On average, the manufacturing sector enjoyed an annual growth rate of over 9 percent from 1960 to 1980; as it always exceeded annual growth rates of GNP, the proportion of manufacturing to total value added (GDP) increased from 13 percent in 1960 to 20 percent in 1980. Table 6. Profiles of the Thai Industrial Elite

Founder/Leader

Year Born

Birthplace

Dialect Group

Thawon Phornprapha ChiaEkChiu Sawang Laohathai Chaw Chawkwanyu Prachuap Phiromphakdi Phorn Liaophairat Thiam Chokewattana Kamol Sukosol Yongsak Khanathanawanit Suri Asadathon Sukree Phothirattanangkun Damri Darakanon Surat Osathanukhro Juthi Boonsung Phrapha Viriyaphraphaikit Thawat Yip In Soi Chawalit Chinthammit Wibun Phanitwong Kiat Srifuengfung Suphasit Mahakhun Phairot Chaiyaphorn Mewadi Kanchanachari lam Sonphrakit Chawan Nithiwasin

1916 1891 1941 1910 1911 1916 1916 1913 1926 1908 1916 1932 1930 1910 1934 n.a. 1942 1944 1916 1925 1933 1943 n.a. 1912

China China Bangkok China Bangkok Saraburi Bangkok Bangkok Thailand China China Bangkok Bangkok Thailand Thailand Thailand Bangkok Rachaburi Suphanburi Bangkok Samutsongkhram Bangkok n.a. China

Teochiu Teochiu Teochiu Shanghai Thai Teochiu Teochiu Teochiu Teochiu Cantonese Hainanese Teochiu Teochiu Hokkien Teochiu Hakka Hakka Hakka Teochiu Teochiu Hakka n.a. n.a. Teochiu

Name of Group Siam Motors CP Group Metro Group Chawkwanyu Boon Rawd Brewery Hong Yiah Seng SPI Group Kamol Sukosol Laemthong Sahakan Thai Roong Ruang Sukree Group Saha Union Group Osothsapha Boonsung Sahaviriya Yip In Tsoi Kwang Soon Lee Mitr-Pol Cathay Trust Mahakhun Thai Seri Siew BIS Group Bangkok Paper

Source Survey by the author.

40

Author's interviews with representatives of many Japanese firms operating in Thailand.

CJ1 NJ

Table 7. Profiles of Presidents of Thai-owned Commercial Banks (1984) Name of bank

Name of president

Date of birth

Birth place

Speech group

Education

Bangkok Bank Thai Farmers Bank Bank of Ayudhya Bangkok Metropolitan Bank Bank of Asia First Bangkok City Bank Siam Commercial Bank

Chatri Sophonphanich Banyong Lamsam Krit Rattanarak Uthane Techaphaibun

Feb. 28, 1934 May 4, 1933 April 19, 1946 April 8, 1933

Bangkok Bangkok Bangkok Bangkok

Teochiu Hakka Teochiu Teochiu

(H) Kwang Tai High Accountancy (UB) New Mexico Univ. (US) (UM) Economics (US) (U) Gordon Inst. of Technology

Yot Euachukiat Kamrong Techaphaibun Tharin Nimmaheminda

Aug. 15, 1942 — Oct. 29, 1945

Bangkok

Teochiu Teochiu Teochiu

Krungthai Bank Wang Lee Bank Siam City Bank Laemthong Bank Union Bank of Bangkok

Tamchai Kambhato Suvit Wanglee Dilok Mahadamronkun Somboon Nanthabhivat Banchert Chonvichan

Nov. 12, 1936 Dec. 19, 1928 Nov. 22, 1931 Feb. 18, 1922 Feb. 26, 1913

— Bangkok Trat

— Teochiu Hainanese Teochiu Teochiu

— — (U) Harvard Univ. (UM) Stanford Univ. (UM) Tokyo Univ.

Thai Danu Bank

Pakon Thavisin

Sept. 27,1939

Bangkok

—

Thai Military Bank

Thanong Lamyai

Suphanburi

—

Source: Survey by the author. H= high school UB = Bachelor's degree U= university UM= Master's degree

----

— Chiengmai — Bangkok

— (H) Technical School (U) Chulalongkorn Univ. (H) Assumption College (Bangkok) (U) (London?) (H) Assumption College (Bangkok) (U) Institute of Bankers (London) (U) Yokohama Univ. (Japan) (UM) Northwestern Univ. (US)

SoutheasAinCptls

Capitalist Development in Postwar Thailand

53

This remarkable expansion of the manufacturing sector opened the way to the development of new domestic capitalist groups based on manufacturing industries. A survey of the 100 largest corporate groups reveals that of the 61 which were Thaicontrolled, 24 were industrial (see Table 2).41 Table 6 shows profiles of the founders and leaders of these 24 industrial groups. If we compare them to the leaders of the 14 local commercial banks (Table 7), we notice several distinctive features. First, a majority are ethnic Chinese. All 14 bankers and 23 of the 24 industrial leaders can be identified as locally born or overseas Chinese. In terms of dialect group, Teochiu is dominant in both sectors: insofar as affiliation could be identified, 9 of 11 bankers and 13 of 22 industrial leaders had that as their ancestral tongue. Six of the 23 ethnic Chinese industrial leaders were still China-born, whereas all 14 commercial bankers were born locally. However, unlike the Chinese business leaders before the early 1950s, all the leaders in the two tables had Thai nationality and Thai names. Not a few leaders were entirely educated in Thai and English rather than Chinese. Second, most of the present industrial leaders were the founders of their business groups—a measure of the newness of their sector. In contrast, almost all of the leading bankers belong to the second (or even fourth) generation from the founders of their enterprises. In other words, the industrialists are rising capitalists, while the bankers have inherited their roles. Third, most of the industrial leaders attained no higher education, while the leading bankers hold university degrees. Indeed, such leaders as Sukree Phothirattanankun of the Sukree group did not go beyond primary school.42 Educational attainment therefore was not a decisive factor in the growth of local industrial groups. Finally, industrialists have played a less significant role in the present Chinese community than did leaders of previous business groups. Few industrial leaders are included on standing committees or named as honorable members of important communal associations such as the Chinese Chamber of Commerce and the Teochiu Chinese Association of Thailand. Instead, important posts in such organizations are usually occupied by commercial bankers or respected old-time merchants. What, then, is the origin of these industrial leaders, and how did they develop their businesses? Answers to these questions may be gleaned from Table 8, which summarizes the genesis and activity of the 24 industrial groups. The table also demonstrates their mode of capital accumulation in relation to the industrial promotion policies of the government and to foreign capital. Its findings may be summarized as follows: Seventeen of the 24 industrial leaders began as merchants, and most of them were importers of manufactured goods. Few rice exporters turned to industry, while on the other hand very few industrial leaders followed the Japanese pattern of developing from technical experts and factory owners.43 When these importers decided to 41

For a detailed analysis of the industrial groups see Suehiro, "Thai-kei," and Capital Accumulation, pp. 222-44. 42 Exceptions among the major industrial leaders are Surat Osathanukhro of the Osothsapha group, who has a university degree from the United States, and Sawan Laohathai of the Metro group, who studied at university in Japan. 43 For the Japanese experience see Sigeaki Yasuoka, ed., Nihon no zaibatsu [Zaibatsu in Japan] (Tokyo: Nihon Keizai Shinbunsha, 1976).

54

Southeast Asian Capitalists

Table 8. Development Pattern of Thai Industrial Groups Name of Group

Type of Business Initial Status

Commencement of Investment Partner in Joint Venture in Manufacturing2

Siam Motors

Automobiles

Importer

CP Group

Agribusiness

Importer

Metro Group

Agribusiness

Importer

Chawkwanyu

Oil refinery

Importer

Boon Rawd Brewery Hong Yiah Seng

Beer

Transporting

1962: Siam Motors & Nissan (automobiles) 1954: Charoen Phokphand Feed mill 1973: Thai Central Chemical (fertilizer) 1961: Thai CHI Refinery (petroleum) 1933: Boon Rawd Brewery (beer) 1960: Luckytex (Thailand) (spinning/weaving) 1962: Lion Bangkok (soap making) 1974: Sukosol & Mazda Motor Industry (automobiles) 1963: Laemthong Industry (feed mill) 1958: Thai Roong Ruang Industry (sugar) 1963: Thai Blanket Industry (spinning/weaving) 1961: Union Yoshida Industries (metal zippers) 1949: Osothsapha (Tech Heng Yoo) (pharmaceuticals) 1966: Isuzu Motors (Thailand) (automobiles) 1963: Sahaviriya Metal Industry 1964: Sikew Jute Mill (gunny bags) 1946: Kwang Soon Lee (sugar) 1956: Bang Pong Sugar (sugar) 1963: Thai Asahi Glass (glass sheets) 1959: Mahaguna Distillery (liquor) 1932: Thai Seri Coldstorage 1961: National Thai (electrical appliances) 1953: Bangkok Industry Service (steel) 1962: Bangkok Paper Factory (paper)

SPI Group Kamol Sukosol

Textiles, Importer/ petrochemicals exporter Consumer goods Importer Automobiles, hotels Agribusiness

Exporter

Sugar

Manufacturer

Textiles

Importer

Saha Union Group Osothsapha

Textiles

Importer

Pharmaceuticals

Importer

Boonsung

Mining, automobiles Steel

Mining, exporter Importer

Laem thong Sahakan Thai Roong Ruang Sukree Group

Sahaviriya Yip In Tsoi

Importer

Textiles, autos, chemicals Kwang Soon Lee Sugar Mitr-Pol Sugar Cathay Trust Chemicals, finance Mahakhun Sugar, liquor

Contractor

Thai Sen Siew

Cold storage Electricals

n.a. Importer

BIS Group

Steel

n.a.

Bangkok Paper

Paper

Importer

Exporter Repairer Cultivator Banker

Source: Survey t>y the author in Bangkok durincr 1981-1983. Investment in their major manufacturing plant. b Tech signifies technical assistance. a

Japanese

(Techb)

— Japanese British/Dutch German Hong Kong Japanese Japanese

— — Japanese Japanese Japanese (Techb) Japanese

— — — — Japanese

— — Japanese

— —

Capitalist Development in Postwar Thailand

55

move into the manufacturing sector, they selected the same products that they had formerly handled in their import and local distribution business. For instance, Siam Motors had previously handled hardware and used cars, and then in 1952 started importing trucks from the Nissan Motor Co. of Japan. Ten years later it finally decided to assemble Nissan's cars with technical cooperation from the Japanese company. Similarly, Siew Kanchanachari of the Siew group was formerly engaged in importing radio sets from the United States; in 1962 he set up the National Thai Co. together with a Japanese manufacturer, to produce dry cells, radios, and TV sets.44 Major agribusiness interests such as the CP and Metro groups also shifted from importing to manufacturing in the same industry and products. The Thai industrialists moved into the manufacturing sector in the period from the late 1950s to the early 1960s. Only three had invested in manufacturing before World War II: the Boon Rawd Brewery group in the beer industry (1933), the Thai Seri group in the cold storage industry (1932), and the Osothsapha group in the pharmaceutical industry (the 1930s). The manufacturing enterprises that attracted them were principally import-substituting industries. These included textiles, foodprocessing, automobiles, glass, secondary steel products, electrical appliances, and other consumer goods selected by the government for promotion after 1960. They thus were eligible for tax exemption and other privileges from the Board of Investment.45 The major industrial firms of each group depend crucially on financial and technical support by foreign capital, in particular Japanese capital. Seventyseven of 211 manufacturing firms owned by the 24 industrial groups are joint ventures with foreign capital, and of these 62 are with Japanese capital. Even the industrial groups which do not use the joint-venture system frequently depend on foreign technical assistance in expanding their business and production lines. TThese characteristics are closely connected with the industrial promotion policies implemented by the government during the 1960s. Generally speaking, increased import duties on selected goods like textiles seriously damaged the businesses of importers and local distributors, making it difficult to compete with domestic manufacturers. Their alternatives were to move into local production itself or to shift to other business sectors such as financing and real estate. The first choice was impeded by the fact that they had no experience or capability of managing a production line. Foreign manufacturers and exporters, on the other hand, also faced problems from the increasing import duties: if they desired to protect their established market, they had to shift production to Thailand. Both the investment incentives and the joint-venture system served to bring the two sides together. In this sense, integration with foreign capital was a crucial element in the rise of local industrial groups. At the same time this explains why so many industrial leaders had been merchants and especially importers: these were the people who had connections with foreign manufacturers or exporters.46 In addition, government policies discouraged small and medium factory owners from moving into promoted industries, for the Board of Investment policy 44

See the cremation volume for Siew Kanchanacharee (July 22,1970). According to the author's survey, 70 percent of the manufacturing firms belonging to the 24 industrial groups enjoyed tax privileges from the Board of Investment. 46 Commercial bankers also accumulated large capital funds and invested in the manufacturing sector on their own account. However, unlike the industrial groups, they had no strong connection with Japanese and Western manufacturers, excepting the Thai Farmers Bank group.

45

56

Southeast Asian Capitalists

regulating the minimum amount of investment or minimum production capacity of promoted firms intentionally favored large-scale enterprises. Unlike the commercial bankers, the industrial groups expanded their businesses with no strong political patronage from military leaders. Rather, the significant factors were congruence with the industrial promotion policies of the government and connections with foreign capital. We may take the experience of Sukree, known as the "Thai Textile King," as an example of this development pattern.47 Sukree Phothirattanangkun (b.1913), the founder of the group, is a Hainanese Chinese. He started business handling imported cotton fabric at his shop "Kim Yong Nguan" during World War II. He was reportedly given a contract with the army to distribute materials for military uniforms, and on the basis of this he was able to rent one of the spinning mills owned by the Ministry of Defense. In 1957 he reorganized it into a private enterprise, the Thai Cotton Mills Co. (TCM). One year later, he set up another spinning and weaving firm called the Thai Blanket Industry (TBI) on his own account. But in the early 1960s Sukree was by no means a leading figure in the textile business: the largest firms at this time were state-sponsored ones such as the Thai Textile Co. or connected to commercial banks, such as the Thai Durable Textile Co.48 The army connection did not contribute to the Sukree group's further development. It was only after 1963, when Sukree reorganized the former TBI into a new joint venture with Japanese partners, the Shikibo Spinning Co. and Nomura Trading Co., that his business began to grow rapidly. Sukree provided the factory and industrial land equivalent in value to half of the new TBFs registered capital of 63 million baht, while the Japanese partners supplied the balance in the form of machinery and capital funds. The new TBI became the largest and most modern cotton-spinning plant in Southeast Asia, equipped with the newest type of spinning machines, 40,000 of whose 52,000 spindles were provided by the Japanese partners. The success of the joint venture made Sukree decide to set up two other textile firms with the same partners: Thai Tricot Co. (TTC, dyeing and finishing, in 1966) and the Thai Synthetic Textile Co. (TST, spinning and weaving of synthetic yarns, in 1968). By 1975 he had built a vast textile complex, embracing thirteen subsidiaries and achieving a vertically integrated production system which stretched from manufacturing raw materials to the sewing of garments. By the 1980s the Sukree group possessed around 400,000 spindles, one-third of the spinning machines in the whole country. Sukree's business expansion was carried out in two major ways. First, almost all of the manufacturing plants obtained tax exemption from the government and were able to make huge profits through these incentives and through Sukree's virtual monopoly of the domestic textile market. Second, technical and financial support from his foreign partners had been crucial in setting up and initially operating the manufacturing plants, especially in the case of the TBI. Although Sukree had neither an accumulated production technology nor capital funds enough to set up a large4

' A detailed analysis of the Sukree group may be found in Akira Suehiro, Thai no kigyo shudan [Big Business Groups in Thailand] (Bangkok: Japanese Chamber of Commerce, 1986), chap. 2. See also Phairot Chantaranimi, 'TBI Group: King's Textile, nguanphon sutthai thi thathai: Sukree Phothirattanangkun," Phuchatkan 4,44 (May 1987): 33-78. 48 The Thai Textile Co. was incorporated as a state-sponsored company under the leadership of Brig. Gen. Praman Adireksan, Field Marshal Phin's son-in-law. The other two major textile firms—Luckytex (Thailand) and Thai Durable Textile—were established as joint efforts by Chinese commercial bankers such as Chin Sophonphanich, local rice exporters, and textile manufacturers who had fled Shanghai with the Communist takeover.

Capitalist Development in Postwar Thailand

57

scale, modern plant, he was able to form a joint venture by providing land and marketing know-how in exchange for machinery and long-term supplier credits from his foreign partners. A similar pattern to the Sukree experience can be discovered in the development of Siam Motors, the SPI group, the Saha Union group, and others. THE AGRIBUSINESS GROUP

In spite of the advance of manufacturing, the agricultural sector has been one of the largest contributors to Thailand's economic growth for the past three decades. It owes this vitality to two major developments: the diversification of exportable agricultural commodities and the growth of export-oriented agro-industry. In prewar times exports were principally confined to rice, teak, tin, and rubber. The combined percentage of the four commodities in total export value still accounted for 81 percent in 1950, and 70 percent even in 1960. During the 1960s, however, the agricultural export structure began to experience a drastic change: the proportion of the four traditional commodities dropped to 44 percent in 1970 and to 17 percent in 1975. Instead other commercial crops, introduced since the late 1950s, increased their proportion from 11 percent in 1960 to 39 percent in 1975, becoming the largest commodity group in terms of export value. Prominent among these newly introduced agricultural products were kenaf and cassava from eastern and northeastern Thailand, maize from the peripheral areas of the Chao Phraya delta, and sugarcane from the western region.49 The export of agricultural products, including the older crops of rice and rubber, was in itself a great aid to Thailand's industrialization. First, it improved the cash income of farmers and local crop traders and thus indirectly provided an expanding domestic rural market for such import-substituting industries as textiles, automobiles, electrical appliances, and secondary steel products (especially roofing sheets). Second, increasing agricultural exports helped to finance the capital and intermediate goods imports needed to sustain the new industries. If agriculture had not increased its exports from the 1960s it is very doubtful that the industrial sector could have enjoyed the high growth rates it did. Third, increasing exports directly contributed to state revenue in the form of export taxes and the rice premium. Rice export taxes including the rice premium accounted in themselves for no less than 10 to 15 percent of total state revenue throughout the 1960s. In other words, the agricultural sector has been an important fiscal source for industrial development projects. After the mid-1970s new commercial crops gradually declined as a proportion of total export value from 39 percent in 1975 to 17 percent in 1985. However, a growing export-oriented agro-industry replaced them, and exports from this sector made up for the declining share of commercial crops. For instance, the broiler chicken industry found its market in Japan from 1973, and experienced annual export growth rates of 66 percent between 1975 and 1985. Canned fish was exported mainly to the American market from the late 1970s and enjoyed growth rates of 63 percent per annum in the same period.50 49 Calculated from Ministry of Agriculture and Co-operatives, Agricultural Statistics of Thailand, various issues. 50 Akira Suehiro and Osamu Yasuda, edsv NAIC heno chousen: thai no kogyouka [Industrialization of Thailand: NAIC Challenge] (Tokyo: Institute of Developing Economies, 1987), p. 281, Table V-9.

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Such rapid growth naturally attracted the attention of both government and domestic capitalists. From the standpoint of the government, agro-industry generally satisfied its criteria for support, as (1) all the goods produced by agribusiness were exportable, (2) most of the raw material consumed could be domestically produced, (3) the technology employed was largely simple or standardized, (4) it was laborintensive, and (5) it would help increase farmers' cash income.51 These features were welcomed by a government faced with trade deficits, increasing unemployment, and an expanding income gap between rural areas and the metropolis. The government thus started promoting agro-industry under the fourth Five Year Plan (1976-1981), and gave it first priority for support in the sixth Plan (1986-1990). Agro-industry is now expected to form a new driving force propelling Thailand towards NAIC (Newly Agro-Industrializing Country) status rather than the earlier goal of NIC (Newly Industrializing Country). Agro-industry was also very attractive for domestic capitalists. It was an activity in which they could engage without serious competition from foreign investors. After the mid-1970s, both industrial groups and exporters of agricultural products actively moved into agro-industry, forming a new capitalist group based on exportoriented agribusiness. The growth of agribusiness groups is demonstrated in Table 9, which indicates the economic performance of the major 28 non-financial domestic business groups in 1984. As the table shows, 17 of the 28 belong in a broad sense to agribusiness. Apart from traditional exporters and processors of agricultural products such as sugar, they mostly belong to groups which have grown after the 1970s. Notable among these are the Charoen Phokphand (CP) group, in feed milling and broiler chicken raising; the Metro or Srikrungwattana group in chemical fertilizers, wheat flour, and tapioca; the Soon Hua Seng (Kasetrungruang) group in rice and other commercial crops; the Nanaphan group in general crops and castor oil manufacturing; and the Unicord group in tuna canning.52 These new groups share several important characteristics which are distinct from the developmental pattern of the industrial groups that rose from import substitution industries. First of all, agribusinesses without exception vertically integrated the whole process of production, from securing raw materials, processing, providing storage and warehousing, to exporting the manufactured goods. In some cases, they also provided financing, insurance service, and shipping services. In other words, the agribusinesses combine industrial and commercial activity in a single corporate organization. Second, since the major products that agribusinesses handle are exclusively exported to external markets, agro-industry is recognized by the government as part 51

For a discussion of the government's attitude see Utsahakam kan kaset nai phaen phattana chabap thi 5lae6 [Agricultural Enterprises in the Development Plan, Parts 5 and 6] (Bangkok: CUSRI, 1986, mimeo). For an informative and suggestive study of the agro-industry in Thailand, see Somphop Manarangsun, Saetthakit chonnabot thai: withi kan phdit lae kan talat khong phak kasetakam thai pachuban [Thai Rural Economy: Production and Marketing System of the Agricultural Sector in Present-day Thailand] (Bangkok: CUSRI, 1985). 52 See Akira Suehiro, 'Thai niokero agribusiness no tenkai: shiryo broiler sangyo no rokudai group" [Development of Agribusiness in Thailand: Six Major Vertically-integrated Business Groups in the Feed Milling and Broiler Chicken Industry], in Tonanajia no hogyo gijyutu henkaku to noson shakai ed. Tsutomu Takigawa (Tokyo: Institute of Developing Economies, 1987), pp. 275-321.

Capitalist Development in Postwar Thailand

59

Table 9. Economic Performance of the Thai Non-Financial Business Groups: 1984

Group Name

Number of Firms

Siam Cement Group CP Group Metro Group Siam Motors Group Soon Hua Seng Group SPI Group Boon Rawd Group Hong Yiah Seng Saha Union Group Sukree Group Siew Group Cathay Trust Group Central Department Laemthong Group Thai Roong Ruang Kwang Soon Lee Osothsapha Group Mitr-Pol Group Yip In Tsoi Group Nanaphan Group CENTACO Group Thai-Wah Group Unicord Group Mah Boonkrong Kamon Kij Group Kamoi Sukosol Group

21 49 15 34 18 52 9 21 33 14 4 33 27 16 13 17 28 9 12 7 8 12 12 21 7 25

3

Type of Business Cement, steel, pulp, machinery Aa (feed milling, broiler chickens) A (chemical fertilizer, tapioca) Automobiles A (exporter of rice, maize) Consumer goods A (beer, plantations) A (rice export, feed milling, petrochemicals) Textiles, shoes Textiles Elect ricals Chemicals, finance Department stores, garments A (feed milling, wheat flour) A (sugar) A (sugar) Pharmaceuticals A (sugar) Gunny bags, finance A (castor oil, exporter of rice, maize) A (feed milling, broiler chickens) A (tapioca, flour) A (canned seafood) A (rice milling, silo, shipping) A (rice export, pig breeding) Automobiles

Sales (in million baht) 24,809 20,543 19,057 11,821 8,947 8,182 6,496 5,253

4,371 4,362 4,223 3,306 3,212 2,355 2,155 1,388 1,286 1,264 1,183 1,021

742

1,218

—

A=agribusiness

of the export-oriented industries it wishes to promote. Hence, especially since the Investment Promotion Act of 1977, most agribusinesses have been privileged by the Board of Investment in the same way that import substitution industries were in the 1960s. Third, the agro-industrialists were able to develop their business into giant conglomerates in close cooperation with local commercial banks. Unlike domestic industrial groups, which depended decisively on foreign partners in both financing and production technology, agribusinesses have proceeded with their giant projects with the aid of large industrial bank loans. In particular, the Bangkok Bank has played a crucial role as credit supplier, helping the rapid expansion of the CP, Metro, and Hong Hiah Seng groups. This financial linkage suggests a new interaction between the industrial groups and the big commercial bankers in Thai business circles. Fourth, multinational enterprises also play a key role in supplying local agribusiness with high-level production technology. We can see this in the joint ventures undertaken by the CP group with the following foreign partners: Arbor Acres Farm Inc. of the United States, for producing parent stock for chicken breeding; the Mitsu-

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Southeast Asian Capitalists

bishi Corp. of Japan, for breeding large-sized (black tiger) shrimp; and the Dekalb Agresearch Co. of the United States for developing a hybrid variety of maize.53 Apart from assistance in production technology, multinational trading companies also contribute to developing new markets of major products that local agribusiness produces. Broiler chickens provide a good case: both Japanese trading companies and supermarkets contribute by supplying modern technology in the slaughtering process and constructing new channels to the Japanese market.54 Mitsui & Co. of Japan and Krohn & Co. of Germany (one of the largest tapioca merchants and shippers in Europe) played a central role in expanding the tapioca exports of the Metro group.55 In brief, the recent growth of the agribusiness sector is a direct product of cooperation by four major economic forces: local exporters of agricultural products, leading local commercial banks, multinational enterprises, and the government. However, what should not be overlooked is the outstanding entrepreneurship and innovative capability that younger leaders in the sector have shown in introducing new tehcnology, improving management systems, and developing new markets and new products. Without this, Thai agro-industry could not have attained such success. The CP group, for instance, adopted the policy of active recruitment of capable persons from outside the family. Shortly after the death in 1983 of its founder, Chia Ek Chiu Chiarawanon, his son Thanin started reorgnizing CP corporate activities embracing at least fifty firms. These diverse companies were strategically regrouped according to type of business, resulting in seven independent organizations each supervised by salaried managerial experts.56 Management control by the Chiarawanon family was thus confined mainly to decision making concerning the CP group's overall activities and strategy. Furthermore, in 1986 the CP decided to reincorporate one of their subsidiaries as a public limited company listed in the stock market as another step towards overcoming the limitations of traditional family ownership. The Soon Hua Seng (Kasetrungruang) group is also interesting for its robust entrepreneurship. This group originally started business operating a small rice mill outside Bangkok. In 1972 it moved to the capital in order to engage in exporting rice, and in little more than a decade it had become the largest rice exporter in Thailand and also dominated a sizeable portion of other crop exports such as maize and tapioca.57 The Kasetrungruang success was due largely to its leaders' efforts to develop new markets for Thai rice. Traditional exporters had depended heavily on long-time Asian customers such as Hong Kong, Malaysia, and Indonesia. The introduction of high-yielding (HYV) rice varieties, together with government policies in the major Asian countries which promoted self-sufficiency in foodstuffs, meant that these traditional markets no longer sufficed. For instance Indonesia, which used to import a million metric tons of Thai rice per year, achieved self-sufficiency and 53

For the CP group's joint ventures see Prachachat thumkit, February 2 and 4,1987. See JETRO (Bangkok), Thai no broiler [Broiler Chicken in Thailand] (Tokyo: JETRO head office, 1985). 55 Author's interviews with officials of the Metro group, Bangkok, December 1987. 56 "Samphat phiset: Thanin Chiarawanon, kammakan phuchatkan yai khrua borisat charoenphokphan utsahakam," [Interview with Thanin Chiarawanon, President of the CP Group], Prachachat thurakit,]u\y 11,1984. 57 Phuchatkan 3,35 (August 1986): 140-59 (special issue on Soon Hua Seng). 54

Capitalist Development in Postwar Thailand

61

stopped importing entirely. In response to this challenge, younger traders of the Soon Hua Seng group made direct contact with markets in Africa, the EEC, and the Middle East, with no particular help from traditional Chinese and European brokers and shippers.58 As a result, Africa and other new markets now import a larger volume of rice than did Indonesia previously. Thus, creative entrepreneurship in developing new markets became a strong weapon for newcomers competing against established traders. And this factor became increasingly significant in other domestic capitalist groups during the 1980s. RECENT DEVELOPMENT OF DOMESTIC CAPITALIST GROUPS

We have seen that two factors, one internal and the other external, have been historically decisive for the development of domestic capitalist groups in Thailand. The internal factor has been the dependence of the capitalist class on the country's changing political power structure, and the external one its equal dependence on foreign capital and trade/finance networks established outside Thailand. Thus the leading commercial bankers built their businesses in direct connection with political powerholders, and industrial leaders undertook manufacturing development in collaboration with foreign capital. This long-established pattern of dependence does not, however, mean that Thailand is simply a "dependent" capitalist society of the sort posited by dependency theory, for Thai economic dependency has essentially been associated with particular modes of capital accumulation by domestic business groups and does not reflect the nature of the whole economic system at the level of the nation-state. Under historical circumstances where the existence of both strong domestic political power and integration into the world capitalist system sets limits on Thai capitalists, the most practical—and perhaps the only possible—way to achieve growth has been the "dependent" mode of accumulating capital funds. Therefore the politically patronized, externally dependent, and commercially oriented capitalist groups which have dominated the economy thus far should be understood as a historical product of Thai capitalism at a certain stage of its development. Indeed, such characteristics are not unique to Thailand: they can be observed more widely in the initial development of domestic or indigenous business classes in late-starting capitalist societies such as Japan, India, Korea, and major Latin American countries. Insofar as domestic capitalist groups are conditioned by historical factors, changes in such environments as political power structure, international economic relations, and industrial progress will inevitably have a great effect on their mode of capital accumulation. We can see the effect of this process of adjustment, with its sorting-out of winners and losers according to their ability to respond, in the reaction of the Thai banking world to the collapse of army dominance in the 1973 revolution. Since that time, political patronage has become less significant for the growth of commercial banking. A result was a polarization of the "four big families" during the 1980s: the Bangkok Bank and Thai Farmers Bank groups continued to expand, while the Bangkok Metropolitan Bank and Ayudhya Bank groups stagnated. In particular the Bangkok Bank, though deprived of its former close military connection after 1973, has enjoyed constant growth. This was largely due to its leaders' active improvement of their business capabilities through the introduction of new types of deposits, expanding industrial loans to agribusiness groups, modernizing their management systems, 58

Author's interview with Soon Hua Seng Co. officials, Chachoengsao Province, October 1986.

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Southeast Asian Capitalists

recruiting capable non-family managerial staff, computerizing daily operations, and internationalizing their business.59 By 1975 the Bangkok Bank had already established fourteen overseas branches in Asia, Europe, and the United States. Thailand's second largest commercial bank, the Thai Farmers Bank, opened its first overseas branch in London as late as 1977, but thereafter it quickly followed the Bangkok Bank in modernizing its management system and internationalizing its business. In contrast, other banks seem to have been reluctant to introduce reforms in their family-owned management or to shift from dependence on political power. For instance, the Techaphaibun family's Bangkok Metropolitan Bank group still has six of chairman Uthane Techaphaibun's brothers and four of his sons occupying key posts in the group's commercial banks and other major associated firms.60 This consistent reliance on family operation seems to be at least partially responsible for the group's recent economic decline, typically expressed in the 1986 bankruptcy of the First Bangkok City Bank, run by Khamlong (or Colo) Techaphaibun. In addition, the family's involvement with political groups no longer in power brought, among other things, its loss of the Mahaguna Distillery Co.'s monopolistic status in the liquor business at the end of the 1970s.61 Similar environmental challenges have been faced by the industrial groups. After the oil crises of the 1970s, they experienced difficulty in expanding their businesses through their accustomed reliance on foreign capital and on the government's industrial promotion policies. The multinational enterprises that have since entered Thailand prefer wholly-owned subsidiaries undertaking production for their markets throughout the world, or seek local enterprises that will be integrated as part of their world-wide operations, as in the electronics industry. This tendency increased after rapid yen revaluation compelled Japanese multinationals to reorganize their overseas operations.62 There now remains little possibility for local industrial groups to profit from the joint-venture system as before. The promotion of export-oriented industries has also had an impact on Thai industrial groups, for it requires them continuously to introduce new production technology, exert firm quality control, and reform their style of management in order to compete internationally. These requirements are beyond the capability of some industrial groups, which continue to adhere to previous methods of capital accumu59

For a study of the remarkable managerial reforms undertaken by the Bangkok Bank Ltd., see Suehiro, "Bangkok Bank." 60 Intensive family control of the Bangkok Metropolitan Bank (BMB) group by the Techaphaibun family is as follows: Uthane (founder Tae Tsu Ping's eldest son), chairman of BMB; Smeth, (second son), former president of the Mahaguna Distillery Co.; Khamrong, (third son), former president of First Bangkok City Bank (bankruptcy in 1986); Uthai, (fourth son), president of Delta Engineering Co., Uthon, (fifth son), president of BMB; Sathien, (sixth son), former president of the Bank of Asia; Chaiyathat, (seventh son), vice president of BMB; Wichien, (Uthane's eldest son), vice president of BMB; Wirun, (Uthane's second son), president of Metropolitan Trust; Wiramit, (Uthane's third son), managing director of the New York office of BMB; Somphong, (Uthane's eldest daughter's husband), president of Thai Amarit Beer Co. 61 A detailed history of the politics of the Thai liquor industry can be found in "Tamnan lao kan muang: hong krahai luat" [A Chronicle of Local Whisky Politics: White "Hong" [brand name] Longs for Red Blood] Phuchatkan 3,27 (December 1985): 23-46. 62 Akira Suehiro, 'Thailand: 1987 nen iko no gaikokujin toushi rasshu" [Thailand: Foreign Direct Investment Boom after 1987], in Ajia no kogyoka to chokusetsu-toushi ed. Takao Taniura [Industrialization and Foreign Direct Investment in Asia] (Tokyo: Institute of Developing Economies), pp. 189-224.

Capitalist Development in Postwar Thailand

63

lation. The rise of the Saha Union group63 and the Siam Cement group64 are examples of a positive response. Apart from their privileged treatment under the new industrial policies, their success is due mainly to their adoption of more rational methods: a well-organised management, leadership by innovative young entrepreneurs, and the capability to import foreign technology and adapt to local conditions. The development of such new capitalist groups, with their greater independence of patronage and ability to compete on the world market, appears to be gradually changing the mode of Thai capital accumulation, and this in turn makes it imperative that we keep our view of the nature of Thai capitalism open to revision. 63

"Saha Union: buanglang khwam yingyai thi mai khoi mi khrai sap" [Saha Union Group: The Little-known Background to its Expansion], Phuchatkan 9,59 (August 1988): 134-61. 64 For studies of the series of active management reforms undertaken by the Siam Cement group from 1976 see Suehiro, Capital Accumulation, pp. 239-44, and Wirat Saengthongkham, "Pun yai—yut mai dai" [A Cement Giant that Can't Stop Growing], Phuchatkan 4, 46 (July 1087): 32-76.

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INDUSTRIALIZATION AND THE ECONOMIC AND POLITICAL DEVELOPMENT OF CAPITAL: THE CASE OF INDONESIA Richard Robison

By

the late 1980s, the capitalist class in Indonesia had arrived, both economically and politically, at a critical juncture. First, it confronted a faltering of the inward-looking phase of Indonesian industrial development, which for almost forty years had been based upon oil exports and import-substitution manufacture. Second, it faced uncertainty surrounding the future direction of an authoritarian regime, which had been dominated for almost thirty years by state officials, both civilian and military. Other Asian economies found themselves at similar watersheds in the post World War II period: South Korea and Taiwan in the late 1950s and Thailand in the late 1960s. These were the points in their economic history at which flourishing import-substitution regimes began to constrain the continuing development of capitalist industrialization as the domestic market became saturated and balance-of-payments problems began to emerge. Continued capitalist expansion now required the development of an export manufacturing sector to complement the existing import-substitution structures.1 At the same time the political relations between state and capital, which had been built largely upon networks of patronage linking bureaucracts and their corporate clients, began to come in conflict with the needs of capital for effective long-term state coordination of the assault on world markets.2 *For general analyses of the transition from import substitution industrialization (ISI) to export-oriented industrialization (EOI) in the new industrial countries (NICs) of Asia see: Bruce Cumings, 'The Origins and Development of the Northeast Asian Political Economy: Industrial Sectors, Product Cycles and Political Consequences/' in The Political Economy of the New Asian Industrialism, ed. Frederic C. Deyo (Ithaca, NY: Cornell University Press, 1987), pp. 44-83; Alice H. Amsden, 'The State and Taiwan's Economic Development" in Bringing the State Back In, ed. Peter B. Evans, Dietrich Rueschemeyer & Theda Skocpol (Cambridge: Cambridge University Press, 1985), pp. 78-106; Clive Hamilton, "Capitalist Industrialization in East Asia's Four Little Tigers," Journal of Contemporary Asia 13, 1 (1983): 35-73 ; Stephen Haggard, "The Newly Industrializing Countries in the International System," World Politics 38,2 (1986): 343-70. 2 On the transition from so-called "soft states" to hard states and the attendant regularization of the state apparatus see: Chalmers Johnson, "Political Institution and Economic Performance:

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Southeast Asian Capitalists

Three factors appear to have played the central role in the relative success of these economies in transcending ISI and establishing themselves as industrial economies on the world stage. First, transformation coincided with a restructuring of the global economy (the so-called new international division of labor—NIDL) which was conducive to the relocation of some manufacturing industries and the commencement of export-oriented production based upon low wage labor.3 Perhaps the most widely recognized factor has been, in the case of Taiwan and South Korea at least, the development of an autonomous, regularized and highly effective state apparatus with the capacity to coordinate industrial growth through complex strategies of protection, subsidy, credit, marketing, and direct investment.4 Finally, the transformation was characterized by the emergence of strong domestic capitalist classes and domestic corporate groups which provided the focal point for production and export.5 Whereas writers like Cumings, Haggard, Khoo, and Amsden stress the lead taken by the state in framing policies within which corporate capital grew in the cases of Korea and Taiwan, Hewison6 sees the burgeoning domestic capitalist class as the dynamic force in the case of Thailand: the Government-Business Relationship in Japan, South Korea and Taiwan" in Deyo, The Political Economy, pp. 171-76; Leroy Jones and II Sakong, Government Business and Entrepreneurship in Economic Development: the Korean Case (Cambridge: Harvard University Press, 1980). Cumings reports that: 'Taiwan and Korea pushed remarkably similar import substitution politics . . . In both countries capitalist parvenus . . . interpenetrated the state, official monopolies and banks, making windfall profits in import-substitution industries through such connections." He continues later, "In the Korean case the military also played a decisive role in the switch from import substitution to export-led growth. The downfall of Syngman Rhee carried the bureaucratic capitalists with it. After the military coup in 1960 those who had profited from import substitution were marched through the streets carrying sandwich signs with slogans like 1 was a parasite on the people'." See Cumings, 'The Origins," pp. 68, 69. In the early stages of Japanese industrialization, Yoshihara reports the prevalence of "rent seekers" or bureaucratic capitalists, who were referred to as "seisho" in the Meiji era. Yoshihara Kunio, The Rise of Ersatz Capitalism in Southeast Asia (Singapore: Oxford University Press, 1988), p. 88. ^The pioneering work on the new international division of labor is that of Frobel and his associates. See F. Frobel, J. Heinrichs, and O. Kreye, 'The New International Division of Labour," Social Science Information 17 (1978): 123-42. See also Peter Drucker, 'The Changed World Economy," Foreign Affairs 64,4 (Spring 1986): 768-92. 4 See Johnson, "Political Institution," esp. pp. 136-49; Cumings, 'The Origins," p. 72; Amsden, 'The State," pp. 88-90. ^While Singapore has relied heavily upon foreign investment, South Korean and Taiwanese industrial investment has been primarily domestic. In the crucial years of the early 1970s foreign controlled companies accounted for 70 percent of Singapore's manufactured exports but only 10 percent for Hong Kong, 20 percent for Taiwan and 15 percent for South Korea. Although these figures have risen somewhat in the 1970s and the importance of foreign loan capital must be taken into account, domestic capital remains the primary factor. See Hamilton, "Capitalist Industrialization," p. 61. Similar to Japan's zaibatsu, large domestic corporate conglomerates have led the export drive in South Korea, Taiwan, and Thailand. In South Korea, Samsung, Hyundai, and Daewoo are the leading zaibatsu (or chaebol). In Taiwan, Tatung, Formosa Plastics, Yue Loon Motors, Far Eastern Textiles, and Taiwan Cement have been the leading corporate giants. In Thailand the Bangkok Bank group, Chaeroen Pokphand, and Saha Union Textiles played leading roles in the drive to export. 6 Kevin Hewison, "National Interests and Economic Downturn: Thailand," in Southeast Asia in the 1980s: the Politics of Economic Crisis, ed. Richard Robison, Kevin Hewison, and Richard Higgott (Sydney: Allen & Unwin, 1987), p. 57.

Industrialization and the Development of Capital

67

The emergence of a more export-oriented strategy also reflected developments within the capitalist class. Under the insulated condition of ISI, domestic industrial and banking capitals were able to expand to a stage where, in some cases, capital was developing a more international character. These large, highly concentrated corporate groups were demanding a more outward-looking development strategy, they had outgrown the Thai market and were seeking to expand their accumulation on an international scale. Consequently the priority given to EOI may be seen as an indication of the increased influence of big capital within the Thai political economy. The transition from ISI has also been accompanied by changes in the political relations between state and capital, away from those characterized by networks of patronage linking particular firms with particular political factions and leaders, towards relationships which increasingly institutionalized the general interests of capital and its various factions. Just as the LDP in Japan has long been a broking house for the various and often competing elements of Japanese capital in their attempts to influence state policy, so too have the capitalist classes of Taiwan, South Korea, and Thailand begun to focus their energies on state policy, often through political parties.7 There are, however, serious doubts whether either the state or the domestic capitalist class in Indonesia will be able to take the leading role in creating a post-ISI Indonesian economy or in setting the agenda for political and economic change, for in several important respects the Indonesian case differs from those above. A slowing of the world economy, increasing protection in the advanced industrial economies, the emergence of strategic trade regimes, and the retreat from free trade8 have combined with technological developments which have lessened the advantage of lowwage labor and enabled some production processes to be moved back to the industrial centers.9 Indonesia faced a harder task in the 1980s than Taiwan or South Korea had in the 1960s or even Thailand in the 1970s. To this must be added tougher competition from other would-be NICs including China. A second factor influencing Indonesia's ability to respond has been the degree to which it has been able to prolong and entrench import-substituting industrialization and its attendent political and social structures. ISI began to confront its classical limits in Indonesia in the early 1970s, but this coincided with a surge in oil revenues which enabled the government to deepen ISI for a further decade rather than coordinate a redirection of the economy towards external markets. The resulting entrenchment of inefficient and uncompetitive industries within policies of state investment, protection, and subsidy, and networks of patronage, together with the consolidation of the alliance of state officials and client corporate capital, ensured that the dominant ^Harold Crouch, Domestic Political Structures and Regional Economic Cooperation (Singapore: Institute of Southeast Asian Studies, 1984), pp. 67-70; Mark Clifford, "Who's in Charge Here?" Far Eastern Economic Review (hereafter PEER), November 24,1988, pp. 83-86. 8 Paul R. Krugman, "Introduction: New Thinking about Trade Policy," in Strategic Trade Policy and the New International Economics, ed. Paul R. Krugman (Cambridge: MIT Press, 1987), pp. 122. 9 S. K. Cho, 'The Dilemmas of Export-Led Industrialization: South Korea and the World Economy," Berkeley Journal of Sociology, 30 (1985): 65-95; Raphael Kaplinsky, "The International Context for Industrialization in the Coming Decade," Journal of Development Studies 21,1 (October, 1984): 75-97.

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Southeast Asian Capitalists

political and economic interests in Indonesia were more deeply attached to ISI than had been the case in South Korea, Thailand, or Taiwan. Finally, we must consider the limits placed upon the full political and social development of the domestic Indonesian capitalist class by the fact that its dominant element is ethnic Chinese. Most estimates place Chinese ownership of domestic private corporate capital at around 70 percent of the total. More important, Chinese capital dominates the strategic large corporate sector.10 Given the political and social vulnerability of their position there are inbuilt pressures for Chinese businesses to eschew public political stances, to avoid long-term and high risk industrial investments without government guarantees, and to ensure that there is a significant offshore component within their total portfolios of assets and investments. THE EMERGENCE OF THE CAPITALIST CLASS UNDER THE NEW ORDER

Indonesia of the 1950s and 1960s possessed no substantial, cohesive, and conscious domestic capital-owning class. Dutch colonialism produced a merchant capitalism in which the plantation and banking sectors remained the colonial preserve, leaving petty trade and commodity production to domestic forces. For indigenous Indonesians the state bureaucracy remained, as it had been in the precolonial kingdoms, the primary route to power and wealth. The vacuum of socio-economic power which resulted was filled by officials of the state, for the bureaucrats were able—gradually in the period before 1965 and massively under the post-1965 New Order—to establish themselves as a ruling estate free of control by parties or other nonbureaucratic forces. (To be sure, they were very much under the influence of the military, the dominant political element in the New Order, but the military is itself part of officialdom, and since the late 1950s army officers had been widely appointed to civilian administrative posts, so that civilian and military bureacratic interests were closely entwined.) Hence, the emergence of a significant domestic industrial bourgeoisie in the 1970s had great political as well as economic import. It could be imagined that this new class might emerge as a focus of social and political power and ultimately compel a rearrangement of Indonesia's political institutions. Though the domestic bourgeoisie started from a very small base,11 it grew rapidly during the decade. Several major corporate groups were established in a variety of mainly import substitution industries, including metal fabrication and engineering, automobiles, components, tires and batteries, cement, chemicals, foodstuffs and beverages, electronics, and textiles. By 1980, domestic investment had grown to just under 50 percent of the total in a rapidly expanding industrial sector. However, this expansion was closely tied to the surge in oil prices and the influx of oil money which Indonesia enjoyed in the 1970s both in the form of foreign earnings and oil company taxes. The new corporate groups were also heavily dependent on state policies of protection and subsidy as well as on patronage by individual centers of politico-bureaucratic power. Finally, domestic capitalists relied heavily in their relations with foreign capital on state intervention on their behalf. There was consequently good reason to be skeptical of the chances that Indonesia's industrial bourgeoisie could hope to play a leading role in political and economic reform. 10

Richard Robison, Indonesia: The Rise of Capital (Sydney: Allen and Unwin, 1986), chap. 9; Yoshihara, Rise of Ersatz Capitalism, pp. 37-67,93,128,129. 11 Peter McCawley, Industrialization in Indonesia (Canberra: Development Studies Centre, Australian National University, Occasional paper no. 13,1979).

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In 1982 oil prices fell from $36 to $28; in early 1986 they sank precipitously to as low as $10. Under the circumstances of the new decade it was clear that many of the props that had supported the rise of domestic industrial capital in the 1970s could no longer hold. With reduced oil income, the previously hallowed nationalist economic strategy, high levels of state investment, and political patronage all came under threat. Policy makers who favored strategies based on the encouragement of importreplacing domestic industry were forced to cede ground to those who advocated an industrial policy based upon notions of free markets, comparative advantage, and production for export. Backed by the current international economic orthodoxy and such powerful institutions as the World Bank, the new strategists pressed for Indonesia's integration into the NIDL, in which new technologies and rapidly changing factor costs of production were facilitating a global redistribution of production, the most notable feature of which was the growth of manufacturing in the third world. Certainly the new circumstances made life more difficult for the nascent industrialists; but it does not necessarily follow that they would have an entirely negative effect upon the political and economic prospects of the domestic bourgeoisie. On the one hand, the state's reduced capacity for taking the lead in investment meant that the private sector was called on to play a greater role. Indeed, neo-classical economists predicted that the decline of the state involvement—particularly as expressed in a clearing of the jungle of bureaucratic constraint regulation—would unleash the full creative force of private capital. Further, as pressures for integration within the international economy increased, the influence of international capital in Indonesian affairs was likely to grow; and this might as well be to the advantage of the domestic capitalists as to their detriment. Not least, a harsher environment might result in a sturdier and politically more effective breed of entrepreneur. Under the protectionist policies of the 1970s, domestic industrialists were content to confine their political activities to competiton for trading monopolies, state contracts, and credit through their individual contacts in the patronage system. They felt little need to act collectively or even to conceive of themselves as a group with interests of its own. Indeed, the political risks of such action, especially for the Chinese, were great, given their reliance on the state for licenses, contracts, and concessions. But with the crisis of the early 1980s bringing pressure to remove protection and subsidy, dismantle patronage, attract more foreign capital investment, and impose a new tax system, the industrial bourgeoisie and its constituent elements found their interests threatened and for the first time were called on to exhibit political consciousness and cohesion. The relationship between the domestic industrial bourgeoisie and the state was now brought into question, and the realignments which this entailed brought to light contradictions between the larger, better-connected corporate elements and the smaller and weaker capitalist groups. It is the effect and implications of these developments which we shall explore here. THE 1970S: NATIONALIST ECONOMIC POLICY AND THE RISE OF DOMESTIC INDUSTRIAL CAPITALISM

Between 1967 and 1982 the value of Indonesian manufacturing grew from Rp. 62 billion to Rp. 7,681 billion; in terms of Gross Domestic Product it rose from 7.3 percent

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to 12.9 percent, lagging only behind the agricultural and petroleum sectors.12 Huge investments took place in manufacturing in this period; of the investments realized, foreign capital accounted for approximately 55 percent.13 On the domestic side, it is difficult to obtain figures for the relative realized investment by state and private capital. However, Christianto Wibisono's research has indicated that 59 percent of domestic investment in the general non-oil sector was state owned, while the World Bank's gross domestic investment calculations suggest that this figure is a fair assessment of the trend for the decade 1975-1985.14 By the beginning of Repelita IV—the 1984-1989 Five-Year Plan—the government looked to the domestic private sector to provide Rp. 67,500 billion, or around 45 percent of total planned investment.15 This expectation may have been unduly optimistic; nonetheless it is clear that private domestic capital had achieved a position of significance vastly different from that of the 1950s and 1960s. Major domestic corporate groups had now established themselves, with interests in trade, banking, manufacturing, timber, and transportation. Some of the larger groups had expanded internationally, and most had entered into joint ventures with foreign investors in Indonesia. The first decade of the New Order was one of rapid expansion in import-substitution manufacturing and the production of raw materials exports, particularly crude oil, logs, and minerals. In the manufacturing sector foreign companies rushed to invest behind tariff barriers, attracted by the booming oil-fed domestic market in consumer goods and the taxation and import-duty incentives offered by the government. Domestic capital benefitted from these same factors and from the fact that foreign companies were required to take domestic partners, often providing the equity finance. For most domestic corporate groups in this period the springboards to business success were the state-allocated monopolies, which gave access to crucial sectors of economic activity. Forestry concessions, import licenses, distributorships for basic commodities, and contracts for construction and supply were allocated by the state, and the most successful capitalist groups were those that were able to gain access to these. The major domestic business groups inherited from the Sukarno era had also emerged on this basis, banking on their connections with the presidential palace. Many of these business groups—including Aslam, Suwarma, Markham, Dasaad, and Panggabean—were now expropriated or withered away because they had lost the access which was their life's blood. A few with established business interests managed to survive the upheaval either because, with great political agility, they managed to maintain their access to patronage, or because they had a wide range of domestic and foreign partners that could support them in their hour of need, or because they had a broader and more diversified base of business activities They included Hashim Ning, Sudarpo, and Sultan Hamengku Buwono.16 For the most part, the private corporate capitalists who were to emerge and expand in the Suharto era were businessmen who had had no national prominence ^International Bank for Reconstruction and Development (IBRD), Indonesia: Policies for Growth and Employment, (Jakarta, April 1985), Table 2.1, Annex II, p. 185. 13 Robison, Indonesia, pp. 199-201. 14 Christianto Wibisono, "Saham Tri' dan 'non Pri'/' Tempo, March 14,1981, and "Antara Mitos dan Fakta," Prisma, 4,1981. IBRD, Indonesia: Policies, Table 8, Annex I, p. 180. l5 Tempo, March 3,1984, pp. 66,67. 16 Robison, Indonesia, pp. 323-72.

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earlier but who did have long-standing business associations with military officers; either that, or they emerged directly from the bureaucracy. Those with military connections included most notably Liem Sioe Liong, whose relationship with Suharto dated from early in the general's career and who became the most prominent of the New Order cukong (Chinese businessmen linked to prominent officials). He successfully obtained the lucrative clove-importing monopoly, the largest flour-milling license, and generous access to state foreign exchange funds.17 Yap Swie Kie based his success on the acquisition of large forestry concessions, while Go Swie Kie's corporate base was constructed upon licenses from the state logistics command, Bulog, to import and distribute primary products. William Soerjadjaja entered into joint ventures with the state automobile assembler Gaya Motors and with Ibnu Sutowo, head of the state oil company Pertamina, and obtained the lucrative Toyota and Daihatsu sole agencies for import and assembly. Bob Hasan, who had long been associated with Suharto's Diponegoro Division and the Army Strategic Reserve (Kostrad), obtained forestry concessions and state assistance in establishing shipping lines.18 In addition, many of the new political-bureaucratic powerholders and their families moved directly into business. By 1975 Ibnu Sutowo—a general whose appointment as president-director of the state petroleum company gave him enormous economic leverage—had established Indonesia's largest indigenous business group, active in automobile import and assembly, trade, and shipbuilding and repair. The Suharto family also moved into business, establishing shareholdings in flour milling, banking, automobiles, trade, oil exporting, manufacture, agriculture, and property. Other officials to become prominent in business included generals Baramuli, Soemitro, and Sadikin. Surrounding these bureaucratic tycoons were a host of lesser clients who fed off contracts and concessions at a lower level.19 In this period, joint ventures were central to the formation of business groups. In textiles, electronics, glass manufacture, pharmaceuticals, and finance, domestic capital thrived where it entered into joint-venture partnerships with international capital and thus gained access not only to funds but to the technology, corporate networks, and management skills necessary for modern industrial activity. The relationship between capital and the centers of political-bureaucratic power also came to be institutionalized in the form of joint ventures. Thus, almost all the Suharto family holdings were minority shares in mainly Chinese-owned corporate groups, notably that of Liem Sioe Liong but also those of other prominent Chinese capitalists inluding William Soerjadjaja, Agus Nursalim, and Mukmin Ali. In addition to the advantages of joint ventures and individual patronage, capitalists who had gained access to forestry or other state concessions or who were engaged in import substitution manufacturing benefited from tariffs, government subsidies, reduced taxes and import duties, as well as cheap, state-subsidized raw materials, public utilities, energy, and credit. This protection meant their business expanded rapidly, but very soon they ran into the classical problem of import-substi17

Ibid, pp. 297-315; Manggi Habir and Anthony Rowley, 'The Extended Corporate Family of Liem Sioe Liong/' PEER, April 7,1983. 18 For details of the emergence of these Chinese corporate groups in the late 1960s and 1970s see: Harold Crouch, The Army and Politics in Indonesia (Ithaca, NY: Cornell University Press, 1978), chap. 11; Robison, Indonesia, chaps. 7,8, and 9. 19 Robison, Indonesia, chap. 10.

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tution manufacturing, the inability of the domestic economy to absorb the consumer goods they were producing. In response to this impasse, economic nationalists among Indonesia's political-bureaucratic leaders urged a deepening of import substitution and industrialization into capital and intermediate goods and a movement into higher value-added export industries. Early efforts at this were pioneered by Ibnu Sutowo, who used Pertamina as a source of finance for industrial ventures in steel, petrochemicals, and shipping which were outside the plans of the more marketoriented National Economic Planning Board (Bappenas). But the broad strategy of developing an integrated industrial base was crafted by the intellectuals of General Ali Murtopo's Center for Strategic and International Studies, led by Jusuf Panglaykim. In line with the corporatist political objectives of Murtopo, nationalist industrialization called for coordinated action between state and private capital.20 The new economic strategy might have remained a gleam in the nationalists' eye had it not been for the precipitous rise in oil prices which began in 1972. By 1975 oil and liquid natural gas exports were valued at $5,410 million, or 74.3 percent of export earnings, and by 1981/82 this had risen to $18.825 million, 81.9 percent of export earnings. Revenue from oil and gas leapt from Rp. 65.8 billion in 1969/70 to Rp. 8,575 billion in 1981/82, and from 19.6 percent to 61.7 percent of total revenues. In 1969/70 the development budget stood at Rp. 118.2 billion, 77 percent of which was foreign aid; by 1981/82 it had grown to Rp. 6,944 billion, and foreign aid accounted for only 24.6 percent.21 The means thus existed for the proponents of corporatist national industrialization to put their strategy into effect. From the mid-1970s the nationalists, led by Minister of Industry Suhud, achieved ascendancy over the Bappenas officials, who, in an effort to reconcile Indonesian nationalism with the lessons of neo-classical technocratic training, were advocating a curious mixture of import-substitution industrialization and market-oriented approaches. Despite Sutowo's fall in 1975 following the revelation of Pertamina's massive indebtedness, the program of statefinanced industrial projects accelerated. Multi-billion dollar investments included an aluminum refinery, oil refineries, petrochemical plants, fertilizer, pulp, and paper factories, cement plants, basic metal plants, and the long-held dream of Indonesian economic nationalists, the massive Krakatau steel enterprise.22 The goal of all this was the creation of integrated industrial circuits, pulling all sectors of industry into a network of backward and forward linkages. From the viewpoint of domestic capitalists it was a bonanza. Most of the government's investments were spent on the purchase of manufactured inputs or on construction, and the domestic corporate sector boomed on the production of such inputs as cement, metal products, automobiles, trucks, and heavy machinery, as importers of foreign-made inputs, or as construction contractors. Because of the huge inflow of oil money, the government was able not only to resist the pressures of international economic orthodoxy for a shift to an export20

Ali Moertopo, "A Strategic Analysis of Industrialization/' Indonesia Quarterly 11,1 (1983); R. B. Soehartono, Economic Development and National Resilience (Jakarta: CSIS, 1974); A. R. Soehoed, "Industrial Development During Repelita II/' Indonesia Quarterly 10,4 (1982). 21 IBRD, Indonesia: Policies, Table 3.1, Annex II, p. 192, Table 5.2, Annex II, p. 207. Nota Keuangan 1984/85: see Table 9 included in Indonesia Quarterly 12,1 (1984), appendices on 1984 budget data. 22 Clive Gray, "Survey of Recent Developments," Bulletin of Indonesian Economic Studies 18, 3 (1982). (The Bulletin of Indonesian Economic Studies is hereafter referred to as BIES and its "Survey of Recent Developments" feature as "SRD".)

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oriented industrial economy based upon notions of comparative advantage but even to impose increasingly difficult conditions on the entry of foreign capital into Indonesia. Stricter requirements were enforced on the levels of local participation in joint ventures, more investment sectors were closed to foreign capital, and other sectors were subjected to more stringent conditions of entry. Foreign companies could not distribute their own products locally or borrow from domestic banks; they were required to set aside an initial 20 percent of equity share for domestic partners, a figure required to rise to 50 percent within ten years. Various downstream producers were required to use local raw materials, the milk industry being a prominent example.23 Another notable policy introduced protection into the system of tendering for government contracts for supply and construction, especially in medium and smallscale tenders.24 The response of international capital to this pressure was to shift out of direct investment in the non-oil sector and into the provision of finance and the supply of technology for the new industrial projects.2^ Needless to say, domestic businessmen profited from this. THE 1980S: THE OIL PRICE COLLAPSE AND THE PAKEM REGULATIONS OF 1986

From a high of $18,825 million in 1981/82, the value of Indonesia's oil exports fell to $12,718 million in 1985. Oil and liquid natural gas tax revenues were expected to decline 12.6 percent between 1985/86 and 1986/87. Consequently, in the 1986/87 budget development expenditure was projected to decline by 23.7 percent over the previous year and even so a budget deficit of Rp. 3 trillion was expected.26 As a result, the capacity of the state to support an import-substitution industrializing strategy was severely reduced, and, in order to replace lost foreign exchange earnings from oil, the government was forced to turn to export-oriented strategies. In order to ease fiscal pressures on the state, the government canceled or postponed many major industrial and infrastructure projects and sought to increase domestic sources of revenue, notably through value-added, company, and personal taxes.27 In addition, in order to offset its declining capacity to provide investment capital, the government was forced to encourage foreign investment by modifying or removing many of the restrictions it had imposed in the 1970s. In the new circumstances, market-oriented planners in Bappenas and elsewhere regained the initiative. They were able to introduce a broad array of policies and regulations to deregulate the economy, including the removal of a range of subsidies, especially on oil and basic foodstuffs, the lowering of tariffs, and, most important, a reduction of the mass of regulations that sustained officialdom in political and economic power. The fiscal crisis of the 1980s forced the government for the first time to pay serious attention to the non-oil export sector and in particular to consider dismantling the system of monopolies, protection, and subsidy that had underpinned the importsubstitution manufacturing system. Despite the low cost of labor, Indonesian manufacturing was not a low-cost industry, and such important products as cement, elec^Robison, Indonesia, chap. 6. 24 Ruth Daroesman, "SRD," BIES17,2 (1981): 15-20. 25 IBRD, Indonesia: Policies, Table 3.1, Annex II, p. 192. 26 Bruce Glassburner, "SRD," BIES 22,1 (1986): 13,6,1,8. 27 Clive S. Gray, "SRD," BIES 18,3 (1982): 36.

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Ironies, synthetic yarn, motorcycles, automobiles, glass, sugar, and cosmetics were all more expensive than their imported equivalents and received implicit consumer subsidies through protection.28 However, nationalist ideological commitment and the vested interests of the major domestic corporate groups and their political associates made reform difficult. The result was that two major political-economic camps locked forces in a struggle which is still going on. We can distinguish various leading participants in the battle: at the head of those policy makers who are still broadly committed to the nationalist program of creating a broad industrial base are Ginanjar Kartakusuma, chairman of the Investment Coordinating Board (Badan Koordinasi Penanaman Modal), Minister of Research and Technology Habibie, and Minister of Industry Hartato. Against them stand the free-market, export-oriented advocates in Bappenas and the universities, whose most vocal proponent has been influential former Trade and Finance Minister Sumitro. The former are strongly supported by officials who have derived political power and economic advantage from the system of protective regulations, and by the not-inconsiderable influence of those major domestic corporate groups which depended on protection and monopoly. The latter have, in addition to the force of economic circumstances, the backing of the World Bank and the pressure of foreign corporate capital wishing to invest on its own terms and particularly to determine the sectors in which its investment could be directed. Last and very much least, they are supported by those elements of the domestic corporate sector which have more limited access to state patronage and rely heavily upon upstream producers and importers for raw materials and other inputs. The opening rounds of the battle were marked by concessions to economic realities, accepted as necessary which resulted in notable departures from past practice. As we shall see, however, the changes were sometimes cosmetic and rarely thoroughgoing. Some of the important state corporations whose financial resources had been mined privately by their administrators and associated bureaucratic and military groupings were now to be increasingly subject to accountability. In 1986 Pertamina presented its first auditable financial report; and technocrats and supervisory boards replaced politico-bureaucrats in its leadership.29 By Presidential Decision 4 of 1985 (Inpres 4/85) the government transferred the assessment of duty in the Indonesian ports to a Swiss firm, Societe Generate de Surveillance, sacrificing well-entrenched and powerful elements of the Customs and Excise Department in the name of reducing export and import costs. ^ For the corporate sector, the most important policy changes were those introduced by the government on May 6,1986, commonly referred to as Pakem (for Paket Mei Enam, or May 6 Package). Their purpose was to encourage investment in manufacture and in particular to facilitate export-oriented production.31 Pakem enabled producers who exported over 85 percent of their products to avoid sole importers or agents and deal directly with foreign suppliers; it exempted them from paying 28

IBRD, Indonesia: Policies, pp. 66-71; IBRD, Prospects for Economic Growth and Transformation (Jakarta, 1984), p. 101. 29 Susumu Awanohara, "Suharto's Axe Falls/7 FEER, July 5,1984, pp. 41, 42, and "Another New Broom," ibid., July 19,1984, pp. 90,92; Manggi Habir, "Open to Change," ibid., March 28, 1985, pp. 77-81. 30 Howard Dick, "SRD," BIES 21,3 (1985): 10-11; Sjahrir, "Privatisasi Menuju Efisiensi?" Prisma 7 (1985). 31 For general outlines of Pakem see: Asian Wall Street Journal (hereafter A WSJ), May 8,1986; Kompas, May 9,1986; Bisnis Indonesia, May 10,1986; Tempo, May 17,1986.

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import duty on inputs which were used for export production. Producers who exported less than 85 percent were allowed to import when a product could not be bought as cheaply on the home market and to claim back duties paid on such imports. To encourage foreign investment, an export-processing zone was proposed for Jakarta. The number of areas open to foreign investment was increased from 475 out of 1,284 in 1985 to 926 out of 1,354 in 1986.32 Foreign companies which divested themselves within ten years of a 75 percent stake to Indonesian state or private companies or 51 percent to the stockmarket were to enjoy the normal privileges of domestic companies, including access to local currency loans, the right to distribute their own products within Indonesia, and the right to invest in and take over national companies. Were the Pakem provisions to be employed seriously, the most vulnerable corporate groups would have been those which rose in the heydey of import substitution and whose fortunes were closely linked to political patronage. These were the upstream producers and sole importers whose interests the newly liberalized regulations attacked. In many cases, sole importers and sole domestic manufacturers were one and the same. The auto industry was the prime example, companies holding both the sole import license and the sole manufacturing license for the same car.**3 Liem Sioe Liong, one of the private partners with FT Krakatau Steel in Indonesia's only cold rolled steel mill, was also the holder of the sole import license for cold rolled steel products, thus enjoying control over access to potentially competitive foreign goods. Bob Hasan, the private partner in Indonesia's only tin can factory, also held the import monopoly on steel and tin containers. Another arrangement for eliminating foreign competition was for state trading companies to hold sole import licenses for pharmaceutical products which were also manufactured in Indonesia. The domestic manufacturers were sole producers owned by such powerful businessmen as Liem Sioe Liong, Wim Kalona, and General Sumitro.34 All this made it seem as if very powerful interests were being threatened, but the domestic monopoly producers and specially appointed importers were perhaps not so endangered a species as it appears. As the journal Eksekutifput it, Pakem was not so much a liberalization as a post-oil adjustment of state regulations.35 The importer/monopoly producer nexus was only marginally threatened, because the bulk of imports and upstream production was destined for domestic use and therefore did not come under Pakem's aegis. Industry Minister Hartato claimed that upstream producers would not be hurt, because 80 percent of their products were absorbed by the domestic market. This was underscored by an official of Bob Hasan's PT Pelat Timah Nusantara, the tinplate and container producer, who declared he was not worried about foreign competition because 90 percent of his company's products were for domestic use.36 *2Tempo, June 14,1986; Suara Karya, June 3,1986.

^Indonesian Commercial Newsletter, (hereafter ICN), no. 202, July 19,1982. 34

Steven Jones and Raphael Pura, "Suharto-Linked Monopolies Hobble Economy," "Suharto's Kin Linked with Plastics Monopoly," and "Suharto Family Tied to Indonesian Oil Trade," in A WSJ, November 24, 25, and 26,1986, pp. 1 and 8,1 and 9,1 and 6; Sinar Harapan, May 22, 1986. 35 Eksekutif, June 1986. *6Tempo, May 17,1986.

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Nor did Pakem include all areas of export: it appeared that the new regulations did not affect those import monopoly arrangements set out in the trade regulations of 1983, including certain pharmaceuticals, tires, plastics, milk, steel, tinplate, and tire cord.37 The cloves monopoly—held by Liem Sioe Liong and Suharto's step-brother Probosutejo—remained intact despite complaints by cigarette producers that they were forced to buy imported cloves at Rp.l 1,000 per kg in spite of a glut of local cloves available at Rp.5-6,000 per kg.38 Nor did the practice of allocating import monopolies end. Monopoly for cotton importation and distribution was soon after allotted to PT Cerat Bina Tekstil Indonesia, a company formed by one of the business associations representing a section of spinning interests. In a complicated formula designed to protect domestic producers, cotton-consuming domestic textile mills were required to purchase fixed ratios of domestic and imported cotton, channeled through the monopoly importer. In the engineering sector, a spokesman for the Chamber of Commerce's Basic Metal Industries Section complained that only eleven companies were appointed to handle import machine tools, when over three hundred machine tool companies existed and only six of the eleven chosen ones were operating.39 Altogether, the monopolies eliminated by the May regulations and those subsequently introduced in October, 1986, reportedly amounted to only $300-400 million of imports per year. Monopolies still in place at the end of 1986 covered imports to the value of $ 1,500 million per year.40 Ways were found to relieve the impact of the 1986 regulations in order to protect the basic industrial structures in the import-substitution sector. The white elephant of Krakatau Steel continued to attract state support, as did high tech industries in ship building and aerospace which enjoyed the protection of Research Minister Habibie. 1 Government pressure to force Japanese car companies and their local partners into engine and component manufacture continued in spite of their demonstrated negative value added.42 The allocation of licenses for supply and construction remained firmly in the grip of the state secretariat, which heavily protected local producers and contractors.43 And despite the efforts to regularize Pertamina, oil distribution remained in the hands of seven appointed companies, two of which—PT Mindo Citra Upaya Duta and PT Samudra Petrindo—were owned by members of the Suharto family and controlled much of Pertamina-owned oil exports.44 Nor was there an immediate prospect that the 1986 Pakem regulations would, in themselves, bring about a signficant shift in the balance between foreign and domes37

Christianto Wibisono, Director of Data Business Indonesia, cited in Sinar Harapan, May 22, 1986. 38 Kompas, August 9 and 13,1986. 39 Bfsm's Indonesia, May 22,1986. 40 A WS/, November 25,1986. 41 Hal Hill, "SRD," BIES 20, 2 (1984); Susumu Awanohara, "A Costly Status Symbol," FEER, June 3,1983, pp. 60-62, and "Overboard on Ships," ibid., November 8,1984, pp. 66-70. Of particular interest here is the government's requirement that shipping companies replace old vessels. New ones were to be purchased from the state shipyard PT Pal and PT Pelita Bahari (a state joint venture with Ibnu Sutowo's PT Intan Sengkunyit). The scrapped vessels were to be sold to Krakatau Steel at fixed prices. 42 Gray, "SRD," pp. 42-8; Hill, "SRD," pp. 15-18. 43 Daroesman, "SRD,"pp. 15,16. ^Paul Handley, "Coming to the Defence of the Family Business," FEER, May 22,1986, pp. 4042.

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tic capital. Whilst new sectors of investment were opened to foreigners, the right to borrow locally, to distribute their own products, and to enjoy other advantages of national companies were conditional on 51 percent local equity and thus on Indonesian partnerships. Shortages of suitable partners with available investment capital often forced foreign companies to finance their local interlocutors' equity holdings,45 and often local partners and distributors were selected solely on the basis of their potential to gain access to licenses and contracts. The new regulations did not address the problems of poor infrastructure, bureaucratic corruption and inefficiency, high interest rates and input costs, and uncertainty over tax laws that depressed foreign investment in an era when low wage labor by itself no longer constituted sufficient inducement.46 Nonetheless, Pakem did represent a trend away from import-substituting industrialization, from state regulation and protection. As such it threatened the power of politician-bureaucrats and monopolist businessmen, and it looked to Indonesian integration with global economic structures. It is not surprising that so drastic a reorientation, with the old power-holders still in place, resulted initially in little more than scratches on the edifice of privilege. The great weapon which its supporters had in their favor was the prospect of continuing fiscal crisis: so long as the price of oil remained severely depressed, Indonesia's leaders had to contemplate the dismantling of their accustomed system, and indeed, several subsequent pieces of legislation extended the measures begun by Pakem. Import monopolies introduced in 1982 covered 1,484 import categories out of a total of 5,229 and accounted for $2,746 million worth of imports in 1985 out of a total of $7,602 million.47 Since Pakem's introduction further licenses were introduced for tire cord, bearings, newsprint, polyester fiber, and viscose rayon fiber in addition to the cotton monopoly discussed earlier.48 Regulations introduced in October 1986 removed 321 items from the approved importer licensing scheme. In January 1987 further items were removed, including cotton and some types of machinery and motor vehicle components. It is estimated that the October regulations affected $1.2 billion worth of imports and those in January a further $295 million.49 In June 1987 further reforms were introduced, aimed at encouraging foreign investment by reducing the number of sectors of investment subject to restrictions from 2,292 to 342.50 A further 111 categories were removed from the import license scheme, broad reductions were made in tariff regulations and quite substantial concessions were made to foreign investors in the December 1987 "package77 (Pakdes).51 Although several lucrative and strategic monopolies in the hands of politically powerful groups remained intact, including those of the Suharto family, Bob Hasan, and Liem Sioe Liong,52 the process of liberalization of trade and investment pro45

See also the comments of Takeshi Mori of the Institute of Developing Economies, in Direct Investment in Indonesia: A Case Study, (Tokyo: Institute of Developing Economies, 1978), pp. 153-54. 46 Bzsms Indonesia, July 19,1986; A WSJ, May 5,1986. 47 Mari Pangestu, "SRD," BIES 23,1 (1987): 28. 48 Ross Muir, "SRD," BIES 22,2 (1986): 21. 49 Pangestu, "SRD," pp. 29,33. 50 Hal Hill, "SRD," BIES 23,3 (1987): 28. 51 Anne Booth, "SRD," BIES 24,1 (1988): 26,27. 52 See the Jones and Pura articles, in A WS/, November 24,25, and 26,1986.

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ceeded apace, revealing a determination which surprised most observers. The question was whether these removals of control and regulation would unleash domestic private capital, leading to a boom in investment and production as well as a substantial increase in the economic and social power of the domestic capitalist class. DOMESTIC CAPITAL AND POST-OIL INDUSTRY RESTRUCTURING

It must be stressed that the Indonesian economy is large in comparison to its Asian neighbours. This is not solely the consequence of its massive oil production but applies even in terms of investment and production in the manufacturing sector. In 1984, manufacturing output in Indonesia stood at $11.155 billion, compared to $5.75 billion for Malaysia, $8.8 billion for the Philippines, $3.99 billion for Singapore, and $8.2 billion for Thailand. Not only is Indonesian manufacturing output larger in absolute size, but the rate of growth in the period 1973-1984 at 14.9 percent was higher than any other Asian nation, the closest being Korea at 11.5 percent and Thailand at 10 percent.53 However, this absolute size does not automatically imply the existence of a domestic capitalist class with the capacity to take the leading role in the transition from import substitution to export oriented industrialization. In fact, domestic capital was constrained by several factors: a reliance on state-protected and subsidized import-substitution strategies, on the investment generated by the state and foreign corporate investors, and by its own division into Chinese and indigenous sectors and into large corporate groups on the one hand, and, on the other, a greater mass of medium and small-scale enterprises ill-fitted to compete internationally. The impressive statistics on industrial growth mask a vulnerable industrial sector driven by the state's willingness to channel oil money in the import-substitution sector, notably in upstream industries geared to the domestic market: steel, petrochemicals, fertilizers, etc. As a percentage of total merchandise exports, manufactures constituted only 1 percent in 1970, rising to 10 percent in 1984 and 21 percent in 1987.54 In contrast, the figures for Malaysia, the Philippines, Singapore, and Thailand for 1983 stood at 22 percent, 50 percent, 57 percent, and 32 percent respectively,55 meaning that, despite the relatively smaller overall size of their manufacturing sectors, they were much larger exporters of manufactures than Indonesia.56 It is difficult to estimate the relative size of private domestic capital in the Indonesian economy. Taking into account many of these problems, Hill has estimated that private domestic capital ownership in the manufacturing sector, based upon the percentage of value added, rose from 51 percent in 1975 to 57 percent in 1983. This compares with a fall from 26 percent to 15 percent for state-owned enterprises.57 Even this figure tends to underestimate the contribution of the state, because it necessarily excludes the state's function as source of finance capital, investor in infrastructure, and source of various forms of subsidy and protection. Nor can it take into account "Hall Hill, Foreign Investment and Industrialization in Indonesia, (Singapore: Oxford University Press, 1988), table 2.1, p. 10. 54 Ibid, p. 18. 55 Ibid, p. 10. 56 Hill, "SRD," 1987, p. 32. For example, the value of exports of five key labor-intensive manufactured products in 1986 (textiles, electrical machinery, furniture, clothing, and footwear) was: Indonesia $533 million, Malaysia $2,573 million, Philippines $1,619 million, and Thailand $1,272 million. 57 Hill, foreign Investment, p. 24.

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the hegemony of foreign capital deriving from provision of loan capital, control of technology, and general dominance in management. The expectation of the state was that private domestic capital would be able to move into the gap left by its declining investment capacity, and the fourth Five-Year Plan (Repelita IV) was predicated on a strong growth in private domestic savings and investment. But domestic business was itself in difficulty. Moreover, far from being liberated by the deregulating measures, the reformists found that Indonesia too was subject to the pressures of world recession; markets for products both within the country and abroad had shrunk. Capitalist growth had been so heavily dependent on state investment, purchasing, and subsidy that when the state engine slowed so too did the private corporate sector. The difficulties of the private sector since 1981/82 are well documented, and data on private investment indicate that it continued to fall well behind the Repelita IV targets.58 Capacity utilization in the automobile industry stood at 46 percent in 1987.59 In the cement industry only 11.3 million tons were produced in 1986, around 65 percent of the industry's capacity. In the textile industry half a billion meters were estimated to lie in stock due to weak domestic demand. The industry was running at only 65 percent of capacity, and only 450 million of a budgeted 740 million meters were expected to be exported in 1987 due to the elimination of export certificates. Understandably, industry spokesmen were gloomy about the future.60 Similar cries of doom were heard in banking and in the auto and heavy machine tool industries.61 Those domestic capitalists who had high levels of overseas borrowing were particularly hard-hit, especially in the automobile industry, where Indonesian producers had high debt-to-equity ratios in yen borrowings. Bisnis Indonesia reported one instance of a company which lost $15 million in this way in the first half of 1986.62 The problems of private business at this time are perhaps most graphically illustrated by the case of Indocement. Owned by Indonesia's largest capitalist, Liem Sioe Liong, Indocement produces around two thirds of Indonesia's cement and is part of an international corporate empire that stretches from trade to banking and manufacture. Yet in the mid-1980s, Indocement was hard pressed by declining markets and by the rising burden of servicing debts which Liem had amassed since the beginning of the decade through loans he had contracted overseas. The upshot—influenced no doubt by the Suharto family holdings in Indocement—was that the government came to the corporation's rescue by purchasing 35 percent of Indocement shares at a cost of $350 million, reversing earlier moves to divest itself of holdings in the cement industry.63 Thus it was not private capital which rescued the state in the shock which followed the collapse of oil prices, but the state which was forced to bail out private capital. 58

World Bank, Indonesia: Policies for Growth and Employment, April 23,1985, pp. 4,5.

59

Hill, "1987," p. 28.

^Suara Karya, May 15,1986. 61 62

Bisnis Indonesia, July 17,1986; Suara Karya, July 12,1986; PEER, January 20,1983, p. 40.

Bisnis Indonesia, July 19,1986. The injection of funds was used to reduce Indocement's expensive dollar loans, its finance needs being met by a $120 million low-cost loan in rupiah from state banks. Kompas, August 14,1986, Sinar Harapan, August 22,1985; Robison, "After the Goldrush," in Southeast Asia in the 1980s, p. 48. It is interesting to note that only three years previously Liem had made a highly publicized takeover of the government's Semen Madura, a large cement corporation. 63

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Nevertheless, there were important indications that both domestic investment in manufacture and the rate of non-oil exports were increasing again. Domestic investment approvals in the same sector dropped to Rp. 1,440 billion in 1984 but rose sharply to Rp. 6,328 billion in 1987, reflecting a healthy surge.64 Manufactured exports climbed from $500 million in 1980 to $2,639 million in 1986,65 although this includes a worrying reliance on plywood, a commodity which cannot continue as the basis of the export industry in the long term given the rapid degradation of forest resources. The closure of two foreign-owned electronics firms was also a major blow to export prospects in a sector normally important to emerging manufacturing exporters. Although domestic recession and the sudden decline in the major source of economic growth, oil, caused the Indonesian economy to falter and have confronted individual companies with major problems in terms of debt, stagnant domestic markets, and reduced state support, the evidence suggests that the domestic capitalist class has been able to increase its relative position in the manufacturing sector. This partly reflects a declining state share, but it is also a consequence of rising absolute investment and production by the domestic capitalist class. In the late 1980s, reforms in banking and trade loosened the grip of state enterprise in these sectors, leaving a way ahead for those private companies which were able to respond.66 POLITICS, CAPITAL, AND THE STATE

The shifts in policy, together with the upheavals caused by the urgent need for restructuring, created a fluid situation which revealed tensions between the various competing elements within business and within the state apparatus, outlined earlier. Debate over economic policy and business practice moved into the public arena in a way not seen since the heady days of 1973, when students and leaders of the right wing of the indigenous community berated the government for its surrender to foreign economic interests, its collusion with Chinese business cronies, and its corruption. Yet in this later debate the government, and those who stood at the apex of the networks of patronage, were less able to maintain the policy and political environment within which they had so successfully nurtured the major business groups in the 1970s. The question which must be asked is: to what extent did this changed circumstance reflect a shift in power among the elements which comprise the capitalist class in Indonesia, and to what extent did it foreshadow the beginnings of a transformation in the relationship between business and the state? Both the balance of power within the domestic business community and that group's relationship with the state are changing. With a continuing flow of policy reforms progressively dismantling important components of the edifice of privilege and protection, and with the ambitious policies of industrial deepening in retreat, the position of the major client corporate groups is increasingly less secure. Businessmen with real capital to invest and a real capacity to produce goods which will be competitive on export markets have now become critical for Indonesia's economic survival. Consequently, there are pressures for a move away from the instrumentalist control over resources and policy by a coalition of bureaucrat capitalists and their ^David Evans, "SRD," BIES 24,3 (1988): 16. 65 Hill,"SRD,"1987,p.29. ^Jonathan Friedland, "No More Coddling/' PEER, November 10,1988, pp. 68-70.

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corporate clients towards a more structural relationship between "state" and "capital/7 in which the power of capital lies in its own dominance of investment and production. But what does this mean for the bulk of domestic capitalists on the fringes of, or entirely outside, the charmed circles of patronage? Following the announcement of the reforms, their views were widely disseminated in the media. The most vocal elements were the predominantly indigenous downstream manufacturers, traders, and contractors, whose spokesmen usually work out of industry-level associations, and broader groups such as the Indonesian Chamber of Commerce and Industry (Kamar Dagang Indonesia/Kadin), the Young Indonesian Businessmen's Association (Himpunan Pengusaha Muda Indonesia/Hipmi), and the more nationalistic and anti-Chinese Indigenous Indonesian Entrepreneurs Organization (Hippi). While these organizations clearly include quite a range of groups, from small-scale manufacturers and traders to well-connected corporate capitalists such as Sukamdani Gitarsarjono of the Sahid group, the President's step-brother Probosutejo, Eddy Kowara, Hashim Ning and the "yuppies" of Hipmi, there is a large constituency of medium and small-scale indigenous entrepreneurs whose interests the leaders must at least purport to represent. Hence they must operate within a discourse in which economic populism and anti-foreign, anti-Chinese chauvinism is always close to the surface: a set of themes which has threaded through the politics of indigenous capitalism from the Sarekat Islam in the early part of the century to the All-Indonesia National Economic Congress of the 1950s (Kensi) and the campaigns of the newspaper Nusantara in the early 1970s. The enthusiastic entry of such spokesmen into the public debates following the Pakem and successive economic reforms has provided us with an insight into the common interests of this broad category of capitalists, as well as the nature of their internal divisions and conflicts. For example, the reforms which dismantled import monopolies were particularly welcomed by downstream manufacturers, who greatly resented the import monopolists and the protected upstream producers on whom they were forced to rely for overpriced and often poor quality inputs.67 However, because the reforms only applied to manufacturers purchasing inputs for products to be exported, most domestic manufacturers did not expect to benefit, clearly considering themselves producers exclusively for the domestic market and not regarding Pakem as an opportunity to move into export production. Nor did they expect Pakem and the subsequent reforms to succeed in the long run, because of undermining and manipulation by corrupt officials.68 On the other hand, the indigenous manufacturers and traders, together with spokespersons from Hipmi and the conservative "think tank," the Center for Strategic and International Studies, vigorously questioned those aspects of the reforms opening the economy to foreign investors at a time of domestic overcapacity.69 67

Suflra Karya, August 17,1986; Buletin Kadin Indonesia, August 30,1986. An interesting example of conflict between export producers taking advantage of Pakem provisions to import polyester filament, and upstream producers demanding tariff protection to cover this growing gap, is reported by Booth ("SRD," BIES 22, 3 [1986]: 11). Given that the selling price was 40 percent above that of imports and the domestic upstream producers got their main input at prevailing international prices from the Pertamina aromatic plant at Plaju, the downstream producers naturally alleged inefficency. ^Kompas, June 26,1986. 69 Bisnis Indonesia, July 19,1986 and August 4,1986. Merdeka, May 15,1986.

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At a more general level, apart from the usual complaints regarding high interest rates, utility and energy costs, government red tape and regulation, typical of businessmen the world over,70 their focus was firmly upon the reform of the state apparatus. Excluded from the major alliances of capitalist and bureaucrat and the more lucrative monopolies and contracts which flowed from them, most businessmen and women clearly found their relationships with state officials exploitative and onerous, the power resting clearly with the official. Taking advantage of the momentum of reform and the retreat of the government on several important fronts over the issue of regularization, spokespersons for business associations pressed home a widespread attack on corrupt officials in a press eager to carry the stories.71 However, the capacity of these predominantly medium and smaller-scale capitalists to secure their interests is limited by several factors: notably the continuing (though fraying) strength of the central alliance of bureaucrats and the major corporate groups; the important divisions between the indigenous and the more numerous and economically powerful Chinese-Indonesian capitalists; and the economic weakness of small and medium-scale private domestic capital as a whole in relation to investment by the state, foreign investment, and the investment of the large client corporate groups and monopolists. Perhaps most important is the fact that, while their support for reforms to the structures of patronage, monopoly, and corruption coincides with the position of international corporate and financial forces, whose views are manifest in the approaches taken by the World Bank and in the Economic Planning Board, Bappenas, they confront the tide when it comes to questions of opening Indonesia to the international economy. Thus, far from constituting the leading edge of a capitalist class seeking to break out of the constraints of ISI in order to assault world markets, they are inward-looking, dependent upon protection, nationalist in their policy perspectives, and therefore resistant to the movement of capital accumulation to a higher stage. Nevertheless, they cannot be discounted as simply a declining and increasingly irrelevant relic of an earlier stage of capitalist development. The weakening of the state's capacity to maintain networks of patronage and policies of nationalist industrial deepening facilitated by monopolies and protection has created opportunities for elements of the domestic capitalist class located in the downstream sector to secure more precisely their interests via political organization and action. Andrew Maclntyre's study of the political activities of industry associations provides an excellent illustration of this process.72 In the case of the textile industry he shows how a coalition of associations of spinners organized themselves and brought pressure to bear on the government to rescind a decision to allocate a monopoly on cotton imports and distribution to CBTT (the Indonesia Textile Fiber Development Company), a group controlled by the leadership of rival associations of spinners with influential political connections. The success of the anti-monopolists was due in no small part to their ability to exploit divisions within the bureaucracy over questions of economic policy, pitting supporters of the push for a "low cost 7Q

Bisnis Indonesia June 26,1986; Buletin Kadin Indonesia, May 15,1986; Suara Karya, May 22 and July 26,1986; Pelita, July 28,1986; Tempo, February 25,1986; and Kompas, June 26,1986. 71 Kompas, January 20,1986; Tempo, February 25,1986; Bisnis Indonesia, July 19,1986; Buletin Kadin Indonesia, June 15,1986 and June 30,1986. 72 Andrew Maclntyre, "Politics, Policy and Participation: Business-Government Relations in Indonesia," (Ph.D diss., Australian National University, 1988). See especially chap. 4.

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economy" in the Department of Industry against supporters of the cotton monopoly in the Department of Trade. Several significant points were demonstrated by this struggle. First, an environment conducive to organized resistance to monopolies and political control of the market on the part of business organizations clearly exists. This has developed because balance of payments problems and the fiscal difficulties of the state place a priority upon such factors as maximizing private sector investment and encouraging high levels of productivity and international competitiveness. Therefore, the protesting coalition was able to appeal to elements within the bureaucracy whose position was defined by commitment to a specific policy agenda. As in the case of the Tanjung Priok reforms, the prospect of increasing manufacturing competitiveness outweighed the political loyalties of patronage networks, and this reflected a move from relations binding officials of the state to particular business groups towards more generalized and abstracted relationships between "state'7 and "capital." It is also significant that a broad range of spinners, despite their anxieties at the prospect of confronting powerful centers of political patronage, eventually organized on the basis of their class interests as capitalists, albeit restricting themselves to a particular sphere of industry. Importantly, these spinners included a number of Chinese capitalists; and indeed, in another case examined by Maclntyre, involving conflict in the pharmaceutical industry, a Chinese businesmaii actually led the manufacturers' association in its conflict with the government.73 This last development, however fragmentary, is significant given the fact that perhaps the central obstacle to the political cohesion of the capitalist class in Indonesia has been its internal racial divisions. Industry associations are limited in their capacity to confront the state with the general interests of the capitalist class, as opposed to the more specific demands of very particular sections of the business community in certain industries. Is there any evidence of business organization sufficiently broad to constitute a potential base for more general class interests? Early in the 1980s, Kadin, the Chamber of Commerce, began to intensify its claims to being the voice of the business community and the institutional channel for business aspirations within the New Order's constellation of corporatist structures. The passing of legislation in 1987 granting Kadin formal recognition as the sole organization representing business was highly important for this. It was widely interpreted as both a consolidation of government control over business through the refinement of corporatist structures, and as a move by a leading and well-connected clique of businessmen to build a base for patronage and control within the business community. Indeed, there is considerable evidence to support this view. Since the 1950s, governments have attempted to concentrate business organizations into a single structure intended to function as a mechanism for state control rather than a channel of representation by business. Kadin itself was only able to emerge triumphant from a scramble for influence between fragmented business associations in the confusion following the fall of Sukarno because it had been expropriated by powerful "entrepreneurial" generals, notably Sofjar and Sukendar, and thus had the backing of the regime. Subsequent leaders of Kadin have also been businessmen with close connections to the centers of patronage, among them Eddy Kowara, Sukamdani Gitasarjono, Hashim Ning, and Probosutejo.74 73

Ibid, chap. 5. Robison, Indonesia, pp. 324-25. Kadin's monopoly position was to some degree institutionalized in Presidential Decision (Kepres) 49/1973. 74

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Under this leadership, Kadin was widely criticized not only as being an arm of the state, but as a club dominated by self-seeking and well-connected businessmen dealing in government facilities and of little practical or political value to its business constituents. Its potential for concerted action seemed to be further constrained by the diversity of interests it claimed to represent and its failure to harness the power and influence of the most powerful element of domestic capital, the Chinese.75 Nevertheless, Kadin should not be so easily dismissed. It cannot be simply equated with a chamber of commerce or business association of the industrial West, for there such organizations have clearly not been the primary institutional bearers of the power of the capitalist class. In a situation where a quite critical transition of political power is imminent—the end of Suharto's rule and the ties on which this was based—families who have established a base of social and economic power over twenty years and more must contemplate the prospects of survival without the patronage of the military and the presidential palace. Hence, the creation of potential power bases and centers of patronage outside the existing state apparatus assumes a significance well appreciated by both the leadership of Kadin and the officials of the state apparatus. The tension between these conflicting interests is reflected in the legislation creating Kadin's monopoly. Whereas Kadin's leadership wanted compulsory membership for all business people, recognition as the sole representative of business, and authority to collect company registration fees76 (thus giving it an independent financial base), it was given neither the financial autonomy nor the authority it sought. The government was to retain the authority to "supervise" Kadin, while the association itself was to be responsible for such vague tasks as the development of a "sound business climate" and "professionalism," as well as providing a channel for the "aspirations of businessmen" and the dissemination of "information on government policy."77 Despite its vagueness, the legislation provoked considerable bureaucratic anxiety, on the grounds that it set a precedent for the politicization of professional bodies and might provoke similar demands for monopoly status by religious and other politically sensitive organizations. When Kadin leaders announced that their association would take up membership in the state political organization, Golkar (Golongan Karya), they earned a strong rebuke from State Secretary Sudharmono.78 It must also be recognized that since the 1980s the Kadin leadership has demanded a formal role in the policy-making process and has made numerous critiques and proposals concerning economic and business policy.79 It would appear, therefore, that it sees general policy as a factor in determining its interests, however narrowly these may be conceived and defined, and the association must therefore be seen to be in the business of organizing for the purpose of securing policy objectives. 75

Bzsm's Indonesia, June 11 and June 26,1986; Suara Karya, July 12,1986; Angkatan Bersenjata, July 15,1986; Neraca, September 15,1986; Bisnis Indonesia, June 24,1986; Maclntyre, "Politics," pp. 52-58. It is interesting to note that the Secretary General of Kadin, Moh. Sadli, felt able to issue a statement welcoming government measures to increase foreign investment, a position clearly unpalatable to the bulk of the membership. (Anne Booth, "SRD," BIES 24,1 [1988]: 30.) 76 Bfsnfs Indonesia, June 25,1986; Buletin Kadin Indonesia, August 15,1986; Neraca, August 22, 1986. 77 Buletin Kadin Indonesia, August 15,1986; Kompas, August 22,1986. 7S Kompas, August 15, September 9 and 15,1986. 79 Eksekutif, August 1980; Kompas, May 14,1982 and September 9,1983; Bisnis Indonesia, August 5,1986; June 20,1986, July 19,1986; Kompas, July 15,1986.

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This does not imply that Kadin is intent on establishing itself, in any liberal, pluralist sense, as an institutional focus of countervailing power. Rather, its objective has been to strengthen its position within existing corporatist structures by becoming a virtual part of the state apparatus, gathering to itself the only power it perceives as being available: that which comes out of the state. The intention of its leadership was to make Kadin, in effect, that arm of the government which held authority over the business community. They saw Kadin as "a partner in development*' and a "co-ordinator of business."80 The struggles now taking place will determine whether its role will be as a more highly controlled instrument of the state, an apparatus within which the interests of a broad range of domestic capital are organized, or whether it will be a new site for the development of the economic and political power of an elite group of capitalists. It is, however, within the mainstream of the existing networks of patronage and the major corporate-political alliances that the most dynamic and powerful domestic business groups are to be found, and it is here that we see the greatest potential for private capital to fill the increasing investment void left by the state. Within this category several different factions may be identified. First, those whose interests are primarily import monopolies and joint ventures with foreign companies and the state in major industrial projects; they are unlikely to be genuine participants as either investors or managers. A prominent example is the Bimantara group, dominated by the President's family and Bob Hasan.81 Although their import monopolies remain intact while others fall around them, they are thoroughly dependent upon the monopolies and continued protection of the upstream manufacturing sector. While most threatened by structural changes in the economy, they at present have the greatest political resources. A second faction includes such corporate groups as William Soerjadjaja, Tan Siong Kie, Tegoeh Soesantyo, and others involved primarily in downstream manufacture for the domestic, and potentially the external market. Naturally, these groups have welcomed the trade reforms and stressed the need to look for foreign markets.82 Reforms in the financial sector have also produced a phenomenal growth in the banking industry, particularly among the private domestic banks, for which we may also expect to find that the greatest profits now lie in the normal processes of capital accumulation rather than the political expropriation of markets. Many of the major client groups—notably that of Liem Sioe Liong, whose interests span downstream and upstream manufacture, import monopolies, banking, property and construction, forestry, and mining—embody important contradictions within a single corporate ^Bisnis Indonesia, July 19,1986; Buletin Kadin Indonesia, August 15,1986; Suara Karya, August 18,1986. 81 For details of the major groups see: Robison, Indonesia, chaps. 9 and 10; Anthony Rowley and Manggi Habir, "Birth of a Multinational/' PEER, April 7, 1983, pp. 44-54; Paul Hindley, "Coming to the Defence of the Family Business," ibid., May 22, 1986, pp. 40-42; Jonathan Friedland, "Jakarta's Rockefellers," ibid., November 24,1988, pp. 8(^81. 82 See Edwin Soerjadjaja's comments on the need to look outward in: Jonathan Friedland, "An Engine of Growth," ibid., November 17, 1988, p. 100. Ironically, Astra, Indonesia's largest automobile producer, has so far had limited success in the export of industrial manufactures, exporting mainly plywood and crude rubber. Tegoeh Soesantyo of Mantrust and Multi Bintang welcomed the reforms as enabling him to benefit from lower costs for cans and tin plate (Tempo, May 17,1986). For details of Mantrust's moves into the US market for canned foods see: Carl Goldstein, "A Bumper Catch," PEER, December 29,1988, p. 50.

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organization, some elements being reliant on monopolies, others increasingly disadvantaged by them. The relationships between the state and these major corporate groups are in a process of transition. On the one hand, there has been a severe weakening of the capacity of the state and the dominant bureaucrat coalitions to sustain systems of monopolies and policies of protection, within which the client corporate groups were nurtured. For the largest groups, and those who have used patronage to build a substantial capital base and corporate organization, the time for regularization may now be ripe. With established assets they may be in a better position to survive the hurlyburly of normal capitalist accumulation than to renegotiate or defend their political access and monopolies in the political reshuffling which must follow the generational changes at the top. However, a fatal flaw in their position is that, outside the structures of ISI and the accompanying policies of protection, they are unlikely to be competitive, either in the domestic or world markets. As we have seen, Indonesian manufactures have yet to make an impact on world markets: non-oil exports continue to be dominated by plywood, processed raw materials, and agricultural products. Nor do these domestic corporate groups have the capital resources necessary to take up the investment function being vacated by the state. With the decline of the state as the engine of economic growth, this role can only be taken up by international capital, and the future of domestic capital becomes enmeshed with the way in which local business leaders are able to integrate themselves with, or feed off, international investors.83 We have seen that the forces driving the restructuring process have worked to the advantage of international capital. Changes to foreign investment laws introduced in 1987 and 1988 have substantially reduced the number of areas closed to foreign investors, modified the requirements for domestic equity, liberalized access for foreign banks, and given foreign companies greater freedom in marketing and distributing their products domestically. After a slow initial response, foreign investment began to surge in 1988 and 1989, partly driven by Japan's increasing need to internationalize its capital base in the wake of persistent upward pressure on the yen. There were several reasons for these changes in policy towards international capital, not the least of which was the growing dependence on foreign loans and aid since the fall in oil income, giving greater leverage over policy to the World Bank, the IMF, and international corporate capital in general, and making it increasingly difficult for the Indonesian government to maintain nationalist policies.84 However, the changes were also the consequence of domestic capital's inability to mobilize sufficient investment to maintain levels of growth and to finance the hoped-for export drive as the state's capacity to fill this role declined. Indeed, the chairman of the 83

Willem Soerjadjaja's Astra group provides an excellent example of these pressures at work. As a downstream manufacturer, the group faced strong pressure to seek export markets. Recently it has made investments in pulp and woodchips, food additives, and windscreen and industrial glass manufacture, all of them oriented to the export market, and all as minority shareholdings with established international corporations (Friedland, "An Engine of Growth," pp. 100-102). 84 After the collapse of oil prices, aid and loans as a percentage of central government receipts rose from 12.3 percent in 1981/82 to 21.5 percent in 1984/85. After dropping to $ 0.59 billion in 1984, foreign investment approvals in manufacture rose to $ 0.7 billion in 1987. (David Evans, "SRD," p. 16).

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Capital Investment Board, Ginanjar Kartasasmita, explicitly attributed the changes in foreign investment laws to the failure of domestic business to invest in export-producing sectors and to produce export-quality goods.85 Despite the fears expressed by medium and smaller-scale Indonesian manufacturers, particularly in textiles, footwear, metal engineering, and construction,86 the potential impact of foreign investment upon domestic business is not clearcut, especially if investment moves into export manufacturing sectors rather than remaining behind the tariff barriers of a protected, domestic-oriented economy. The important role played by foreign investment in Thailand's strong move into export-oriented manufacture, for example, did not diminish the overall strength of Thai domestic capital in the process, although, in an export-oriented environment, those with the greatest potential to integrate successfully with foreign manufacturers and bankers will be those with developed resources in production, finance, and marketing. Both smaller manufacturers with limited technical and capital resources and monopoly holders with diminishing political resources may have reason for concern. Of crucial importance is the impact of the progressive integration of the Indonesian economy into the international division of labor upon the relationships between state and capital. In the 1970s, these relationships in Indonesia were characterized by the instrumental dominance of an alliance of bureaucratic families, increasingly enmeshed in capitalist investment, and their corporate clients. But in the advanced industrial economies it is the need to maintain the general process of capital accumulation itself that determines the relationship between state and capital. How is this more abstract power of capital politically manifested? Instrumentalist interpretations, such as those of C. Wright Mills and Ralph Miliband, springing from quite different ideological positions, emphasize the power of complex and interlocking elites whose interests are embedded in the capitalist system and who dominate the state and its ideological apparatus as well as the strategic social institutions.88 On the other hand, structuralist approaches emphasize capitalist power stemming from the very indispensability of the capitalist class as the machine that drives the economy. In this sense the capitalists exert a veto power over the state, whose leaders, although exercising a degree of autonomy, must always consider the consequences of policies which threaten the flow of investment.89 Many of the recent developments in Indonesia demonstrate the emergence of such structural relationships. For example, the trade reforms and the liberalization of policies governing the entry of foreign capital clearly contravened the short-term interests of business groups with influence over the centers of power, but at the same time they were not imposed, in an instrumental fashion, by political groups representing the interests of potential foreign investors or downstream manufacturers. These policies were instead a response by the government to an economic crisis, driven by the need to create conditions conducive to low-cost production for export 85

Suara Karya, June 3,1986; Tempo, June 14,1986. Tempo, June 14,1986; Kompas, August 4,1986; Bisnis Indonesia, August 4,1986. 87 Hewison, "National Interests." 88 Ralph Miliband, The State in Capitalist Society (London: Weidenfeld and Nicolson, 1969); C. Wright Mills, The Power Elite (London: Oxford University Press, 1956). 89 Fred Block, "The Ruling Class Does Not Rule: Notes on the Marxist Theory of the State," Socialist Revolution, 33, (May-June, 1977): 6-28. 86

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and an increased volume of foreign investment; hence, the ascendancy within the state, for the time being at least, of the "technocrats" over the major patrons. The political significance of the shift from an inward-looking to an exportoriented economy cannot be overstated. As long as the state was able to underwrite a chronically inefficient, import substitution manufacturing regime, investors, both domestic and foreign, gained access to the market by securing a niche in the stateorganized system of markets, monopolies, subsidies, tariffs, contracts, and concessions. Once the state found itself less able to maintain these structures, it not only began to lose the leverage and resources which derived from control of the (now disintegrating) networks of patronage within which capitalists previously worked, but was increasingly forced to seek the investment of capitalists on their own terms in order to maintain economic growth. These terms are clearly set out in successive World Bank reports and the statements of international business leaders, and are manifest in recent Indonesian policy changes.90 Essentially they revolve around the opening of the Indonesian economy to international investment and trade. As this process of integration into the new international division of labor develops, success in attracting investment will depend largely upon the existence of conditions attractive to international investors (which may include Indonesian capitalists themselves).91 The state, and its increasingly professionalized bureaucracy, is already finding itself heavily involved in ensuring these conditions: low wages and a disciplined and appropriately skilled workforce, an attractive and predictable taxation regime, an efficient infrastructure, acceptable laws relating to investment and repatriation of profits, political stability, and an effective and regularized bureaucracy. As international capital reasserts itself as the leading fraction (and again it must be stressed that this may include Indonesian capitalists), the power of capital generally to set the agenda for state policy will increase at the same time as it consolidates its base of social and political power outside the state apparatus. 90

IBRD, Indonesia: Adjustment, Growth and Sustainable Development, (Jakarta, May 2,1988), pp. v-xxi. 91 Major third-world companies, no less than established US or Japanese-based corporations, are increasingly forced to make investment decisions on the basis of profitability and market access in a global arena. Hence, it is no longer automatic that they will make all, or even a majority of their investments at home. In the region, Thailand's Charoen Pokphand group is an excellent example of the internationalization of a domestic corporation (Paisai Sricharatchanya, "Not Just Chicken Feed," PEER, March 3,1988, pp. 58-59). So far, the international expansion of Indonesian capital has been primarily in the field of banking and property.

ENTREPRENEURSHIP AND PROTECTION IN THE INDONESIAN OIL SERVICE INDUSTRY Jean Aden

E

ach year the Indonesian state oil company, Pertamina, and its foreign contractors1 spend more than US$ 2.5 billion on exploration and development of oilfields in the Indonesian archipelago.2 Over half that amount is paid to oil service subcontractors, who provide a range of services—including construction of exploration, production, storage and trans-shipment facilities, and the provision of technology, equipment, materials, skilled manpower, and tanker chartering—that the oil companies cannot or choose not to provide themselves.3 Until the early 1970s all oil service companies operating in Indonesia were foreign owned and managed. Indonesian government policies that restricted foreign oil service companies' share of the market and encouraged the growth of Indonesian owned and managed oil service companies brought Indonesian companies into the oil services market for the first time in the mid- and late-1970s. By 1987, there were up to ten Indonesian firms in the drilling subsector, the most capital-intensive of the oil service subsectors, with large active drilling contracts. The Asosiasi Pemboran Minyak Indonesia (APMI, Indonesian Oil-Drilling Association), a trade association for Indonesian-owned drilling firms, had seventy-eight members.4 In addition, 1 As of 1985, Pertamina and 45 foreign oil companies operated 71 contract areas in the Indonesian archipelago, of which 21 were in commercial production. The largest foreign contractors were Caltex, Mobil, Huffco, Total, and Arco, all of which were American except Total. Other nationalities represented among the contractors were Japanese, British, Australian, Dutch, German, and Korean. 2 US Embassy, Jakarta, "Indonesia's Petroleum Sector/' 1986, Table 7, p. 29. ^ Oil service companies in Indonesia and throughout the international oil industry are largely private. Among the technologies, equipment, materials, and specialized skills provided by oil service companies are seismic sounding, well logging services, drilling rigs, drilling mud, drilling crews, pipeline fabrication and installation, and fabricated parts. Some of the foreign oil service companies that have operated in Indonesia, such as Schlumberger, Bechtel, Fluor, and Brown and Root, are multinationals whose global reach rivals that of the multinational oil companies. 4 Another measure of the size of the Indonesian oil service sector is the number of domestic companies which, by virtue of being registered with the Directorate of Oil and Gas (Migas), are

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Indonesian firms commanded substantial shares of other oil service subsectors, such as materials and equipment supply and offshore marine services. This article poses the question whether, given the essential role of government protection in the entry of Indonesian companies into the oil service market, the owners and managers of those companies can evolve into an independent business elite. By "protection" is meant policies that shift part of the higher costs of infant industries onto the government and/or those industries' clients—in this case, Pertamina, the Indonesian treasury, and foreign oil producers. By "independence" is meant a capacity to survive changes in regime by finding new sources of support within the government.5 In other words, can a business elite that has depended on one set of political sponsors outlast those patrons? The historical absence of an indigenous entrepreneurial class in Indonesia, the massiveness of public spending relative to Indonesia's gross national product, and infant pribumi (indigenous Indonesian) industries' tendency to depend on government contracts make the prospects for the emergence of an independent business elite in a protectionist context an important issue for Indonesia. TTie size and technological sophistication of the oil service sector and its leaders' prominence in such influential business organizations as Kadin (Kamar Dagang Indonesia/Indonesian Chamber of Commerce) make the prospects for independence in this sector significant for other high technology, capital intensive manufacturing and service sectors of the Indonesian economy, as well. This article is based on interviews with owners and managers of five of the largest Indonesian oil-drilling companies, all of which belonged to groups of companies with 800 or more employees that by the mid-1980s had fifteen to twenty years' operating experience. It describes the origins of the companies, their structures, the structure of the Indonesian oil service sector as a whole, and the assistance they have received from the government. The second part examines the companies' responses to economic retrenchment and partial withdrawal of protection after 1982, and evaluates the extent to which those responses indicate an emerging independence. ORIGINS

The essential precondition for the establishment of Indonesian oil service companies was the rapid expansion of the oil industry during the first decade of the New Order, which significantly enlarged Indonesia's market for oil services. The dramatic turnaround of the anti-Western, anti-investment environment of Sukarno's last years in power, the opening of the archipelago to foreign investment by the Suharto government, and, in particular, the cultivation of foreign oilmen by Pertamina PresidentDirector General Ibnu Sutowo attracted to Indonesia a substantial share of the capital that was globally available for petroleum exploration and development in the latter half of the 1960s and early 1970s. A post-Sukarno infusion of development capital by Caltex, the archipelago's largest producer, and the entry of twenty-one new foreign oil companies into Indonesia between 1966 and 1971 vastly increased annual exploration and development expenditures. Virtually all the new production-sharing contracts went to "independent"—that is, non-major oil companies. These had less eligible for service contracts. Many of the companies on the Migas register and in APMI's membership are shell companies that have never won a contract, however. 5 That is, "independence" does not imply non-involvement with the Indonesian bureaucracy, which is not possible in Indonesia's state-run oil industry; nor does it mean ability to compete with foreign oil service companies without government protection.

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access to capital and technology and therefore tended to contract out for oil services, which meant extensive new opportunities for Indonesians to go into business and compete for shares of the oil service market. The Indonesians that responded most effectively to these opportunities and formed the companies that are the subject of this article were members of an age cohort between the Generation of 1945—the generation that had fought the revolution of 1945-1949 and now commanded the military and civilian bureaucracies—and that of the children of the Generation of 1945. Born between 1940 and 1949, this new business generation was at least twelve years younger than the youngest of the Generation of 1945. All in this group had elite educational backgrounds, having either attended the University of Indonesia (UI) or the Institut Teknologi Bandung (ITB), or studied abroad. Several had been leaders of the Generation of 1966, the student movement led from UI and ITB whose support had been critical to the military's ouster of Soekarno in 1966/67. By 1970, this group's currency as student organizers having been largely exhausted, its leaders were looking for careers. Trade had traditionally been viewed as an inferior calling in Java. The overwhelming career preference among the leaders of the nationalist movement of the 1920s and 1930s and the revolution of 1945-1949 had been the civil service or military officer corps. Few, if any, of the student leaders of the mid-1960s had anticipated or prepared for business careers. In the late 1960s and early 1970s, however, attractive offers of construction and light engineering subcontracts with large army-run state enterprises such as Bulog (Badan Urusan Logistik, the rice procurement agency), Pertamina, and Bimas (Bimbingan Massal, the massive government rice intensification program), became available to them, generally via their student movement contacts with the top military leadership. One of the largest drilling company groups interviewed for this article began with a contract offered via Siliwangi (West Java Division) officers to a group of ITB student leaders to manufacture motorized pedicabs to replace the becak (pedicabs) of Jakarta in 1968/69. Another company group was formed in 1969, when former student leaders, aware that their political influence was waning, chose business as an avenue along which to redirect their ambitions, and accepted a construction contract from a government bank. Three of the other company groups were founded by Indonesians of the same age set on their return from studies abroad. One company group was founded by a holder of a US petroleum engineering degree who, with an ITB graduate as a partner, specifically chose the oil sector. For all the others, oil was only one of several sectors in which they formed companies. They chose their businesses not by design but because they became aware of opportunities made available by the government and their timing happened to be right. All the drilling companies whose owners and managers were interviewed for this article belonged to corporate groups consisting of a holding company, closely held by a few original founders, and several other firms operating in non-oil sectors. All the groups studied grew by forming subsidiaries with a loose relationship to the main holding company. All assigned management of the subsidiaries to new Indonesian partners, who were brought into the management team for the company group but not into the original holding company, which remained closely held. All counted agencies, distributorships, and manufacturing-licensing arrangements with foreign companies among their subsidiaries. The possibilities suggested and contracts made available by the president-director of Pertamina and chief negotiator with the foreign oil companies, General Ibnu

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Sutowo, were an important factor drawing the company groups into the oil service sector.6 Ibnu was the most visible of the "financial generals," the group of senior military officers who were close to Suharto and to whom the new president gave a great deal of latitude to build state- and army-owned enterprises into personal business empires and to generate extrabudgetary revenues in the latter half of the 1960s.7 Ibnu projected an aura of dynamism and a promise of limitless possibilities for growth that seemed to transcend the socio-economic barriers that had confounded previous generations of entrepreneurs. Though a Muslim and a pribumi he had escaped the smallness of scale, the incapacity to form enduring partnerships outside the family or to amass capital on a large scale, that had hitherto rendered Java's petty Muslim merchants unable to compete effectively with overseas Chinese merchants and traders, let alone foreign capital. Ibnu cultivated foreign oil producers, oil consumers, and sources of oil-secured capital, and he formed private partnerships with leading Indonesian Chinese business families; but at the same time he was an articulate nationalist, adept at appealing to the economic nationalism that is never far from the surface in Indonesia.8 The electric vision of the businessman's role projected by Ibnu in the early 1970s had immense appeal for many of the generation born during the 1940s. During his tenure as president-director of Pertamina from 1968 to 1976, Ibnu underwrote the growth of an Indonesian oil service sector in two ways. One was by setting up joint partnerships between Pertamina and foreign producers of exploration and production equipment, which he encouraged to locate in the industrial park he was developing on the island of Batam, twelve miles southeast of Singapore. In other words, a joint venture with Pertamina was part of the price of admission to Indonesia for foreign drilling-rig fabricators and other oil service manufacturers seeking access to the Indonesian market after about 1972. Among the Batam-based joint ventures were PT Dresser Magcobar, PT Brown and Root Indonesia, PT Patra Vickers Batam, and PT Chicago Bridge and Iron. Five Pertamina-Japanese joint ventures—PT Nippon Steel Construction/Nisconi, PT Permiko Engineering and Construction, PT 6

One of the tiny elite of Dutch-educated medical doctors before the Second World War, Ibnu Sutowo became an army officer in South Sumatra during the revolution, rose to deputy chief of staff in the central army leadership in the mid-1950s and, on behalf of the central army command, appropriated a previously foreign-owned oil concession and formed the first Indonesian-run oil company in 1957. In the first three years after Suharto came to power, Ibnu merged the multiple Indonesian state oil companies that had been inherited from the Sukarno years into a single company, Pertamina, and brought more than a dozen new foreign oil companies into Indonesia under Pertamina's aegis, thereby establishing himself as sole arbiter of Indonesia's dealings with the international oil industry and generator of oil-secured foreign loans. Anderson G. Bartlett HI, et al., Pertamina: Indonesian National Oil (Jakarta: Amerasian, 1972) is an Ibnu-approved version of the history of the Indonesian state oil companies through 1972. Mara Karma, Ibnu Sutowo (Jakarta: Gunung Agung, 1978) is an apologia for Ibnu's policies written by a former public relations officer for Pertamina and member of Ibnu's circle after his exit from the oil sector. See also Jean Bush Aden, "Oil and Politics in Indonesia, 1945-1980" (Ph.D. diss., Cornell University, 1988), chaps. 3 and 4. 7 On the other "financial generals" and their fund-raising activities, see Harold Crouch, The Army and Politics in Indonesia (Ithaca, NY: Cornell University Press, 1978), chap. 11. ° For foreign business' view on Ibnu's ability to accommodate both economic nationalist and foreign investment concerns, see Louis Kraar, "Oil and Nationalism Mix Beautifully in Indonesia," Fortune (July 1973), pp. 99ff. Ibnu pitched many of his economic nationalist appeals to technical graduates, among whom economic nationalist sentiments were generally stronger than among the "technocrats" in charge of Indonesian economic policy.

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Pertafenikki, PT Sankyu International, and PT Toyo Kanetsu—offered equipment, construction, and consulting services to Pertamina and its contractors. Retiring Pertamina officials were frequently given comfortable positions in these largely foreignmanaged companies. An essential quid pro quo for these companies' participation was Ibnu's assurances that the Pertamina-foreign joint ventures would be protected from outside competition. Beginning in 1974, designated oil service subsectors were declared closed to foreign companies not already registered with the Directorate of Oil and Gas (Direktorat Minyak dan Gas Bumi/Migas), the agency within the Department of Mines and Energy that had technical oversight of the oil sector. The closures were important because Pertamina and the foreign oil contractors had been required since 1972 to choose their subcontractors from among the oil service companies registered with Migas. The closure of Migas' lists did not apply, however, to Indonesian oil service companies seeking admission to a Migas list for the first time. Commodities supply and catering were closed to new foreign service companies in 1974, manufacturing of steel pipes and girders for use in exploration and production in 1975. Light construction and drilling mud manufacturing followed in 1976, materials and equipment supply and offshore marine services in 1978. Ibnu's other contribution to the growth of an Indonesian oil service sector was his award of Pertamina contracts, mainly for non-oil-specific construction, to young would-be businessmen in their twenties and early thirties. All the company groups interviewed for this article had early contracts with Pertamina. Among the projects awarded to these newly minted contractors were an international school, the most up-to-date hospital in the country, and luxury housing, all in the capital, as well as hotels in Bali, Central Java, and Irian Jaya, and sports stadiums in West Java and South Sumatra. A few other young businessmen in Ibnu's circle went into the less technology- and capital-intensive oil services such as catering and smallscale shipbuilding and repair. In line with his philosophy of seizing opportunities and working with the resources at hand, Ibnu did not complain of or apologize for the inexperience of most of his Indonesian contractors, but made clear that he expected them to capitalize on the opportunity he was giving them to belajar sambil bekerja (learn by doing), a favorite and often-repeated maxim of his. Among the former student activists and sons of prominent fathers that received contracts from Pertamina were Ir. Siswono Judo Husodo, son of a former governor of Jakarta, whose Bangun Cipta Sarana group of companies was entirely dependent on Pertamina construction contracts and received project financing from the Sutowo family bank, Bank Pasifik; Ibnu's own son, Pontjo Nugro Susilo, who managed a family-owned shipbuilding concern, Adiguna Shipyard, and Nugra Santana, a management firm, and sat on the boards of several other family businesses in the oil service sector; Sukarno's eldest son Guntur, also a contractor; and former University of Indonesia student leader Fahmi Idris, who directed a construction company.9 Ibnu's promotion of Indonesian participation in the oil service market stopped short, however, of direct intervention in foreign contractors' choices of suppliers of 9

"Ir. Siswono Judo Husodo: Tengusaha Adalah Angkatan Kerja'" [Ir. Siswono Judo Husodo: "Businessmen are a Work Force"], Eksekutif (September 1980), pp. 8ff. "Pontjo Nugro Susilo: Tengusaha Bukan Warga Kelas Dua'" [Pontjo Nugro Susilo: "Businessmen Are Not Second Class Citizens"], Eksekutif (November 1981), pp. 8ff. See also Toeti Adhitama, "Wiwoho Basuki: Selalu di Arena Baru" [Wiwoho Basuki: Always in a New Arena], Eksekutif (October 1986), pp. 16ff.

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oil services.10 Ibnu would not go beyond Migas' exclusion of foreign oil service companies not already operating in Indonesia by specified dates, which restricted foreign oil companies' choice of subcontractors or suppliers only marginally. This was because one of the unspoken but essential terms of the foreign oil companies' entry into Indonesia in the late 1960s and early 1970s was Ibnu's guarantee of minimal Indonesian interference in the contractors' exploration and production activities, including their procurement of supplies and services. Pertamina's foreign contractors expected to be able to bring into Indonesia any foreign subcontractor, equipment or supply source, or technician they wished, without consulting with the Indonesian government. Foreign oil service company personnel's movements in the early 1970s were unrestricted to the point that some did not even get Indonesian work permits or report to Indonesian immigration authorities. Throughout Ibnu's tenure with Pertamina, foreign oil service companies paid neither import duties nor Indonesian corporate taxes. Ibnu's intervention in his contractors' choice of service providers would have risked compromising the contractors' trust in him as their sole mediator with Suharto and the Indonesian government—a risk he could not afford. GOVERNMENT ASSISTANCE AFTER 1976

In 1975/76, it was disclosed that Pertamina had contracted $10 billion in foreign debts. Ibnu's subsequent dismissal from the firm, the Indonesian government's renegotiation of its contracts with the foreign oil companies, and a shrinking international oil market caused the petroleum companies to curtail their Indonesian operations sharply, resulting in a contraction of the Indonesian oil services market in the latter half of the 1970s. Going along with austerity measures insisted upon by the Ministry of Finance, Ibnu's successor as president-director at Pertamina, Piet Haryono, closed down or spun off all but six of the corporation's oil service sector subsidiaries. From 1976 onward, creation of subsidiaries by Pertamina was no longer an avenue for expansion of the Indonesian role in the oil service sector.11 In 1979/80, the Iranian revolution precipitated a readjustment of global oil supply patterns and renewed growth in Indonesian exploration and production. The Indonesian oil services market entered another period of expansion, during which the government enacted two key measures to stimulate growth of the domestic private sector. One was a new "buy Indonesian" procurement system for government agencies and their contractors, personally sponsored by Suharto; this went into effect in mid-1980 and applied to all government agencies, including Pertamina and its foreign oil contractors. Presidential Decision (Keputusan Presiden/Keppres) 14a, dated April 1980, required that domestic suppliers and contractors—in particular, companies owned by "economically less advantaged groups" (that is, non-Chinese/pribwwi) and domiciled in the region where the purchase was made—be given preference in purchases and contracts by government agencies and their contractors, including foreign oil contractors. Where goods and services required by government agencies and their contractors were not locally produced, foreign suppliers could either form a 10

The foreign contractors' choice of insurers was a partial exception. During Ibnu's tenure as president-director of Pertamina, foreign oil companies operating in Indonesia were "encouraged" by Pertamina to buy part of their marine insurance from Tugu Insurance, a Hong Kong-based joint venture which was formed in 1965, half owned by Pertamina and half by a group of private investors, including Caltex Pacific Indonesia general manager Julius Tahija. Interview, Jakarta, July 1980. 11 See Aden, "Oil and Politics," chap. 7.

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joint-venture company with an Indonesian partner and agree to transfer to Indonesian shareholders their controlling interests in the company within a given period or sell through Indonesian agents. Later guidelines issued by the Investment Coordinating Board (Badan Koordinasi Penanaman Modal/BKPM) tightened Indonesian ownership requirements and forbade foreign companies to operate independently, maintain representative offices, or operate through agency agreements in Indonesia. BKPM also required that Indonesian joint venture partners start out with at least 20 percent equity and build up to 51 percent within a specified period. Moreover, new procurement review procedures established by Keppres 10, companion measure to 14a, meant that the foreign contractors would now have to obtain up to three approvals for each contract or purchase for more than a minimal amount.1* Keppres 14a offered the Suharto government immediate political benefits. Not only did it help assuage pribumi resentment of overseas Chinese and foreign dominance of the Indonesian economy, but it centralized control of public sector spending in the executive and created a potentially powerful lever for shaping the growth of the private sector in Indonesia. Moreover, Suharto's timing was excellent—promulgation of the new arrangements in the midst of the oil-generated economic expansion of 1980 maximized their chances of success. In practice, the speed and timing with which the Indonesian share of the market increased relative to the foreign oil service companies' share depended on the implementing regulations for Keppres 14a enacted by Migas. The director general of Oil and Gas, Ir. Wijarso, had authority to determine when Indonesian companies were ready to perform a given oil service function themselves, to establish timetables for phasing out foreign oil service companies from the list of approved bidders for that function, and, once the deadlines passed, to rule on requests for exemptions. Migas, Pertamina, the oil drillers' association APMI, and Indonesian trade associations such as Hipmi (Himpunan Pengusaha Muda Indonesia/Young Indonesian Businessmen's Association) consulted closely on these decisions. Hipmi, whose leaders included Ibnu Sutowo's son Pontjo and other young oil service businessmen, had frequent meetings with leading Pertamina and Migas officials and top private businessmen of the older generation, at which plans for oil sector development and prospects for Indonesian oil service companies were discussed. The decision to reserve the first Pertamina onshore drilling contract for an Indonesian company, which made possible the Indonesians' first entry into the drilling sector, was made collegially among Migas officials and APMI members in 1980. Thereafter, once Migas officials judged that an oil service subsector was saturated, they informally withheld approval from any future applicants, foreign or Indonesian, thereby effectively closing the subsector. 12

After first receiving authorization from BKKA (Biro Koordinasi Kontraktor Asing, Pertamina's Foreign Contractor Coordination Office) to call for tenders, the contractor was to choose among the tenders received, taking into account their domestic content, and to forward his choice, together with all the other tenders received, to BKKA. BKKA was to do its own evaluation of the bids according to price and domestic content, and then could either accept the contractor's choice, persuade him to change his choice, or require a rebid. Where the value of the contract was less than Rp. 100 million, BKKA was to have the last word. Where the contract was valued at Rp. 500 million or more, BKKA was to forward its recommendation to a "supply coordinating team" in the Sekretariat Negara (Sekneg). The Sekneg team did yet another evaluation of the tenders and could either accept BKKA's recommendation or seek changes. Until the most recent devaluation of the rupiah, the dollar limit for BKKA-only approvals was $90,000; the Rp.500 million cut point for Sekneg approvals was equivalent to US$750,000.

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The new arrangements introduced considerable delays into the Pertamina's and the foreign contractors' day-to-day operations, and created uncertainties in their medium and long-range planning. The contractors' costs were increased as a result of the delays, the fact that pribumi tenders were to be given parity with non-pribumi offers even if they exceeded them by up to 10 percent, and, in some cases, the extra cash required to lobby reviewers of procurement decisions.13 Although the foreign oil contractors that came under pressure to hire Indonesian or joint-venture oil service companies frequently complained of political interference and delays in the procurement review process, of the inexperience of some of the Indonesian companies, of the frequently higher costs of Indonesian subcontractors relative to their foreign competitors, and of government pressure to reduce their bids,14 the new procurement procedures were nevertheless palatable to most of them for the first few years after they came into effect. One mitigating factor was the expanding oil market of the early 1980s, which allowed contractors to compensate for cost increases by redoubling their exploration and production activities. A second factor making the arrangements acceptable was the knowledgeability and judgment shown by Ir. Wijarso, Migas' man in charge of the scheduling and implementing decisions, who had the trust of both the Indonesian companies and the foreign oil companies. A third mitigating factor was that the terms of their production-sharing contracts with Pertamina allowed the contractors full recovery of any increases in operating costs and limited their losses to 15 percent of net income after recovery of costs. Thus the 85-15 production split meant that 85 percent of any increased costs resulting from the hiring of Indonesian subcontractors would be absorbed by Pertamina, and ultimately the Indonesian treasury, and only 15 percent by the foreign contractor. The second government measure that stimulated the growth of Indonesian firms in the early 1980s was the earmarking of low-interest state bank loans for pribumi businesses, which became an important source of financing for most of the company groups interviewed for this article. Potential sources of start-up capital and project financing that were available to would-be Indonesian entrepreneurs were few. Virtually none of them, with the possible exception of Pontjo Sutowo, could supply more than a nominal share of the required capital themselves. Large-scale Indonesian investors generally were not interested in oil service ventures, preferring instead to put their money into safer, more conventional investments, such as hotels.15 There being only one small-venture capital firm in Indonesia, government-owned PT Bahana, venture capital was not a likely source of financing for new Indonesian oil service companies. Three of the five firms whose officers were interviewed for this article relied for financing mainly on a long-standing relationship with a single state bank (Bank Negara Indonesia 1946, Bank Dagang Negara, Bank Pembangunan Indo13

Subsequent presidential decisions further elaborated and tightened procurement review procedures. Keppres 29, enacted in April 1984, brought a third party into the review process by assigning a panel within the Ministry of Mines and Energy, the Team Pengendalian Pembelian Departemen Pertambangan dan Energi, to review contracts valued between Rp. 200 million and Rp. 500 million. Keppres 30, also dated April 1984, made it more difficult for Indonesian companies to function simply as fronts for passing orders through to foreign suppliers. 14 The staff of the Junior Minister for Promotion of Domestic Products in Sekneg reportedly made a practice of calling in the "winning" contractor in order to negotiate a lower bid with him. 15 Speech, Indonesian oil service company owner, San Francisco, April 30,1986.

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nesia). Another oil service group16 depended on financing by a family-held private bank. Only one of the five, the company group that had specialized in oil services, limited its dependence on bank credit in general, and state banks in particular. Once a state bank undertook to provide part of the required financing, the would-be entrepreneur frequently used that commitment to attract foreign partners or suppliers to put up the rest of the start-up capital or project financing.17 Supplying loans to Indonesian partners that would be payable from the partner's profits was one of the few options remaining to foreign investors and suppliers still desiring to operate in the Indonesian oil service sector; Indonesian state bank loans to those Indonesian partners sweetened that option by making it appear less risky. A large cohort of new pribumi companies that had not previously been active in the oil service sector entered Migas' list of approved bidders for oil service contracts for the first time after, and as a direct result of, the enactment of Keppres 14a.18 Already established pribumi companies took advantage of the new protective measures to expand their operations and move into more technically and financially demanding subsectors that had previously been beyond Indonesian companies' ken, such as drilling (1980) and heavy construction of oil installations (1981). Whether the larger number of contracts awarded to pribumi and joint-venture oil service companies in the early 1980s represented simply an increase in the absolute number of contracts going to Indonesians or whether a shift in the relative foreign and Indonesian market shares had occurred is, however, difficult to document. It is evident, though, that Indonesian companies did not penetrate beyond the more visible, more capitalintensive parts of the oil service sector that readily lent themselves to protection. The smaller-scale high-volume trade in smaller oil service parts, for example, remained the province of non-pribumi companies whose comparative advantage was their extensive trade financing networks and business experience. RESPONSES TO ECONOMIC RETRENCHMENT AND WITHDRAWAL OF PROTECTION

The expanding market that had buoyed the growth of individual Indonesian oil service companies and of Indonesians' aggregate share of the oil service market in the early 1980s began weakening in 1983. By that year, the long-term decline in global demand for oil that had begun in the latter half of the 1970s produced a glut of oil on the international market. The weakened demand and OPEC's impaired ability to defend its share of the market caused painful contractions in Indonesia's outlets for its oil and oil revenues. The value of Indonesia's oil exports dropped 3.1 percent from 1983 to 1984, and another 12.5 percent from 1984 to 1985.19 Aggregate exploration and development expenditures by Pertamina and its contractors dropped 24.3 percent from 1983 to 1984, and another 8.5 percent from 1984 to 1985. Global oil prices weakened throughout 1985, collapsing in the first half of 1986 to a twelve-year low of 16

Not interviewed for this article. Interview, Indonesian oil service company owner, San Francisco, May 2,1986. ^ The number of Indonesian oil service companies registered with Migas had already grown from 27 in 1974 to more than 800 in 1979. During the same period, the number of foreign oil service companies registered with Migas declined by 50 percent, from 243 in 1974 to approximately 120 in 1979. For a description of the "explosion of contractors" that followed issuance of Keppres 14a, see "Hari-Hari Terakhir Keppres 14A" [The Last Days of Keppres 14A], Tempo, March 21,1981, pp. 12-17. 19 US Embassy, Jakarta/Indonesia's Petroleum Sector," July 1986, app. 2, p. 72. 17

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less than $10 per barrel. Despite Indonesia's lifting of its production ceiling to 1.6 million barrels per day, the effects of the price collapse overran those of the production increase, causing actual FY1985/86 oil revenues to fall 7 percent short of the projections that had shaped the government's budget at the beginning of the fiscal year.20 These contractions in the Indonesian oil sector placed pressure on the government and the foreign contractors, who earlier had absorbed part of the costs of the fledgling companies' inefficiencies, to begin withdrawing some of the protection that had speeded the pribumi companies' growth. Migas postponed the enforcement of timetables for phasing out foreign oil service providers from some subsectors, such as its January 1987 deadline for offshore drilling services.21 In order to compensate for flagging oil revenues, BKPM sought to attract new capital by removing prohibitions against investment in oil service subsectors from which foreign companies had already been phased out, including seismic, geological and related services, and manufacturing and assembling of field and plant equipment.22 The foreign contractors, chary of undertaking new exploration at a time when severe price declines threatened forced production cutbacks, scaled down their exploration programs. Where the foreign contractors had accepted their 15 percent share of cost increases due to subcontractor inefficiency as one of the costs of doing business in Indonesia as long as the market expanded, they were no longer willing to tolerate such losses in a contracting market. In the process of cutting back, they became more selective in their choice of oil service subcontractors, less tolerant of inexperience, inefficiency, or cost overruns on the part of the subcontractors, and more inclined to resist when supervising bodies would try to impose a choice of subcontractors with which they disagreed.3 All subcontractors, Indonesian and foreign alike, came under pressure either to prove their efficiency and professionalism or risk losing out to more professional competitors. How did Indonesian oil service companies respond to these pressures? Many of the less established ones that had been formed after the enactment of Keppres 14a stopped competing for contracts and became inactive.24 In the drilling subsector, no more than fifteen APMI members were reported still to be active as of 1986.25 The larger, more established companies adopted several strategies for surviving the downturn and keeping up minimum interest and other unpostponable payments in order to continue operating. Their financial strategy was, first, cross-subsidization 20

Ibid., pp. 1,3. Interview, Jakarta, October 1986. 22 The other fields that were reopened to foreign investment in May 1986 were underwater work and testing, offshore oil and gas drilling, design, engineering and consultancy for oil and gas production, and floating production and processing, storage and off-loading facilities, manufacturing and assembling of field and plant equipment, and temporary production systems. US Embassy, Jakarta, "Indonesia's Petroleum Sector," July 1986, p. 61. 23 Interview, Jakarta, October 1986. 24 Formal bankruptcy proceedings being almost unknown in Indonesia, companies that go out of business tend to stay on as shells that can possibly be reactivated at some later date. Why this is so—whether Indonesian or Dutch law does not offer bankruptcy as an alternative, whether bankruptcy proceedings would not make social or economic sense in the case of small, undercapitalized family businesses, or whether Indonesians avoid it for reasons of gengsi (saving face)—is not clear. 25 Fifteen out of seventy-eight nominal members of APMI. Interview, Jakarta, October 1986. 21

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of currently weaker oil service sector firms by currently stronger (non-oil) members of the company groups. Cross-subsidization provided the most relief where the company groups could persuade foreign partners able to draw on financial resources outside Indonesia to supply the subsidy. Another financial strategy was for the companies to request that the state banks with which they already had long-standing credjt relationships help them through hard times by relaxing repayment requirements. The state banks had little option but to accept delayed repayment, since the survival of a dynamic Indonesian oil service sector was in their long-term best interest. One means by which some companies got low-interest state bank loans to subsidize the survival of their oil sector operations was to apply for loans in non-oil sectors, such as low-income housing construction and interisland ferry operations. Their strategy, that is, was to spread risk across multiple sectors and keep afloat through further diversification. Only one of the company groups, the one whose owners had originally specifically chosen the oil sector and avoided dependence on state banks, chose to diversify mainly within the oil service sector, by expanding into complementary services. All the other company groups chose to spread their risk more broadly through diversification beyond oil services. Their rationale, according to one company owner, was the limited size of the Indonesian market. Only about 100 drilling rigs were active in Indonesia at any given time, he noted, as opposed to more than 4,000 in and another 4,000 outside the U.S. That being the case, in his view, diversification rather than deepening of technological capacity in a single sector was a rational strategy for most of them. To transcend the limitations created by the small size and uncertainties of the Indonesian market, Indonesian companies must consider competing abroad. Their lack of experience in unprotected markets, an artifact of the protection that brought them into the oil sector in the first place, inhibited them, however, from considering expansion outside Indonesia. Another strategy followed by the oil service companies was to improve their managerial and/or technical capabilities by bringing in foreign expertise. One company hired an expatriate (Western) general manager who could enforce the sort of tough managerial decisions that its owners found difficult to carry out against fellow pribumi. This company hired foreign and pribumi managers only; all the others hired Chinese managers, though ownership remained pribumi and closely held. In no case among the companies interviewed did a foreign or Chinese manager or an older generation Indonesian political sponsor acquire ownership shares. Another strategy of the larger and more established companies was intensive cultivation of their connections in the government—in particular, connections in Kadin, the principal government channel for communication with Indonesian business. A principal shareholder in one of the companies, for example, became chairman of Kadin's petroleum sector committee. Other channels used by some oil service executives were informal contacts with former schoolmates now working for the government and membership in the government-sponsored political organization Golkar (Golongan Karya). By cultivating age-mates and emphasizing professionalism, the company groups that are the subject of this article sought to distinguish themselves from a new group of younger Indonesian competitors, children of some of the most powerful families in the Generation of 1945, that began entering business

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and rapidly established important positions in oil and other sectors after the market contraction of 1983.26 PROTECTION AND INDEPENDENCE

By the mid-1980s, several of the company groups of which the principal Indonesian drilling firms were part had been in business for fifteen years or more, and had longstanding relationships with state banks, multiple joint ventures with foreign companies, seasoned managers (some of whom were foreign or non-pribumi), and workforces of 1,000 or more.27 Whereas their predecessors, the Benteng and palace entrepreneurs of the 1950s and 1960s, had looked to personal patrons to enable them to survive business downturns,28 the current entrepreneurs were more inclined to manipulate institutional connections and policies than personal relationships. The present business generation, born in the 1940s, tends to have less recourse to particular patrons for two reasons. First, one of its members' comparative advantages in the Indonesian economic context is their professional competence. They won their first government contracts in the late 1960s not only because of their student leadership status and contacts with the military, but also because they were among the few technically trained graduates of Indonesia's best universities or held foreign degrees. By bringing foreign technology and outside managerial expertise into their company groups through the formation of subsidiaries, they have built up this initial comparative advantage. By the mid-1980s, the largest and most established of the Indonesian oil service companies had sufficient access to domestic and foreign financing, technical and managerial expertise, and had amassed enough experience and reputation that they needed personal patronage less than their predecessors. Another factor hindering continuing reliance on a single patron by the generation born in the 1940s was that the amount and individual sources of protection varied with changes in the Indonesian government personnel responsible for the oil sector and in demand by the international oil market. The leadership of the oil procurement decision-making bodies—Pertamina, Migas, BKPM, and Sekneg—have changed several times since the 1970s. Shrinking demand in the international market caused partial withdrawal of protection in the later 1970s and 1983/84. When protection again increased in 1985/86, members of the generation born in the 1940s were not the principal recipients. The younger age cohort of businessmen born after 1949, who entered the market after 1983 with the assistance of import monopolies and their fathers' influence, forced the 1940s generation to develop and rely on non-patronage resources to insure survival. 2

° See the series of articles on this new cohort of younger businessmen in Asian Wall Street Journal, November 24-26,1986. 27 The Tri Patra group, founded in 1973, had 1,000 employees; the Meta Epsi group, founded in 1970, had 800; the Satmarindo group had 1,200 employees, about 60 of whom were expatriates; the group of companies managed by Pontjo Sutowo, which dated from the early 1970s and included Nugra Santana, Adiguna Shipyard, and a large contingent of Handara Graha employees working in Saudi Arabia, was the largest, with up to 6,000. Note that the Satmarindo group has thirty vessels—quite a large number in the context of the tendency for Indonesian shipping companies of the 1960s to own no more than a handful of vessels (see Howard W. Dick, 'The Indonesian Interisland Shipping Industry: A Case Study in Competition and Regulation" [Ph.D. diss., Australian National University, 1977]). 28 See Richard Robison, Indonesia: The Rise of Capital (Sydney: Allen & Unwin, 1986), chaps. 2 and 3.

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The larger oil service companies' survival strategies in a time of contraction in the oil sector as outlined here—cross-subsidization, relaxation of repayment requirements, broader diversification, bringing in outside managerial expertise, and cultivation of connections with Kadin, Golkar, and other channels of influence with the government—do suggest movement toward "independence" and a capacity to survive future changes in regime on the part of Indonesian owners and managers of companies in the oil service sector. The firms that appear most likely to survive through the 1990s are those that present themselves to procurement decision makers as professionals, capable of competing and being judged by professional standards of efficiency and reliability rather than by family or patronage. This is not to say that oil procurement decision makers within the government always responded to professional criteria. Personalistic political connections presented as such, with no accompanying professional rationale, continue to loom large in many government-policy and procurement decisions affecting the oil service sector. However, hard times, the attrition within the Indonesian oil service sector that followed the forced withdrawal of protective measures in the mid-1980s, and the frequently lesser technical and managerial expertise of some of the newest competitors in the oil service sector have increased the appreciation of many within the government for efficiency and reliability within the indigenous oil service business elite. The government's growing appreciation of the political and economic utility of such an indigenous elite, both to meet its continuing need to defuse nationalist impatience with the role of foreign and Chinese capital in the Indonesian economy in the short run, and to seed the growth of an indigenous business elite capable of leading Indonesia's economic growth over the longer run, is likely to be shared by Suharto's successor. Increasing professionalism among Indonesian oil service entrepreneurs and a growing appreciation of it within the government have set the stage for Indonesian-owned and managed oil service companies to survive future changes in regime. In the longer run, because of the small size of the Indonesian oil service market, the Indonesian companies' principal challenge will be to confront the hurdles to international competitiveness that are associated with their protectionist origins.

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THE TRANSFORMATION OF MALAYSIAN BUSINESS GROUPS Sieh Lee Mei Ling

alaysia's New Economic Policy (NEP), introduced in 1971, has been widely regarded as a unique and bold attempt in social engineering by a young developing country. Prompted by the racial riots of 1969, which marked a watershed for the country's social and economic development, the NEP replaced policies which since independence in 1957 had emphasized growth from private sector investment, supplied primarily by foreigners and non-indigenous races. Despite early attempts to promote Bumiputera (Malays and other indigenous) participation in commerce and industry through opening up new land for rubber and oil palm, and through education, financial assistance, and business projects, it was evident that the Bumiputera, who were concentrated in the backward rural economy, needed far more stimulus if they were to play a substantial part in the modern sectors thus far dominated by non-Bumiputera. The NEP, as set down in the Second Malaysia Plan (1971-1975), had two main objectives. First, it aimed to eradicate poverty irrespective of race; second, it intended to restructure Malaysian society so as to reduce and eventually eliminate the identification of race with economic function. Occupational division along racial lines was believed to be a root cause of economic inequality and social discontent, and the ultimate goal was to foster national unity through economic redistribution so as to reduce inter-racial imbalances in all spheres including income and wealth.1 As a prime means to this end, the policy makers sought to develop a Bumiputera business middle class over a twenty-year period. One clear result of the NEP's implementation is that the free enterprise philosophy which Malaysian governments had previously endorsed was discarded in favor of massive direct state intervention aimed at creating a Malay capitalist class. In the early 1970s numerous and diverse public enterprises were established in pursuit of the grand goals of restructuring society, correcting economic imbalances, bridging disparities between Bumiputera and non-Bumiputera, developing and providing employment in rural areas, decentralizing industrial growth, eliminating poverty, and creating far more opportunities for Malays in the commercial and industrial sectors.

M

1

Federation of Malaysia, Second Malaysia Plan 1971-1975 (Kuala Lumpur: Government Printer, 1971).

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Fueled by the high rates of growth of the 1970s, the NEP booked considerable success in its first decade. Poverty eradication efforts such as new land schemes, education and training institutions, and loan facilities for housing and small businesses benefitted the Bumiputera population to such an extent that non-Malays felt hard done by. The NEP demanded that by 1990 Bumiputera own and manage at least 30 percent of the country's commerce and industry in all sectors, and that employment by occupational categories should reflect the country's racial composition. Efforts to document the achievement of these goals have been hampered by such problems as inconsistent definitions for classifying statistics and the use of nominees in stock ownership; but data by sectors from the Fifth Malaysia Plan (1986-1990) indicate that already by mid-1985 Bumiputera owned 69 percent of domestic banking and financial institutions and at least 32 percent of the plantations. Undoubtedly, then, the NEP brought about major structural changes that affect the way Malaysians live, and the consequences of this have already been the subject of much study.2 Some of the intentional results of these changes, such as the rise of a new breed of business elite with close state and political connections, have had other and unforeseen socio-economic consequences. This article will focus on the major socio-economic and political changes that have begun since the NEP's inauguration and will look in particular at the evolution of Malaysia's business elites. It will attempt to analyze the trends underlying corporate transformation by comparing the relatively new business groups formed after the NEP with the ones that existed before. These changes will then be illuminated by examining the bases on which the entrepreneurs formed their initial ties as well as the manner in which their affiliations have given rise to present business networks. Finally, the implications of these findings will be explored, with an eye to their socio-political relevance. IMPORTANT CHANGES IN BUSINESS CHARACTERISTICS

It is already possible to see major transformations which the NEP has brought about in the way in which Malaysian business is carried on. Among these are: changes in the social sources of entrepreneurship, a shift in emphasis from single line of business to multi-industry conglomerates, a tendency for leadership to move from individual tycoons to professional management teams, a decline in growth through greenfield investment in favor of growth through acquisitions, a movement from reliance on internally generated funds to external borrowings or sale of shares, increasing dependence on public or state funds rather than private sources, a growing involvement of bureaucrats as businessmen, and the emergence of corporations whose goals are socio-political rather than purely a matter of business. In this section, we will give a brief description of these developments. To consider first the changing character of the Malaysian business elite, we should note that prior to NEP the Malaysian economy was largely controlled by two main categories of businessmen, primarily foreigners (mainly European) and secondarily Chinese Malaysians. For a decade or so after independence in 1957, foreign investors maintained extensive control over a large part of the production of primary commodities, especially rubber and tin, as well as commerce through agency houses. 2 See, for example, Sieh Lee Mei Ling, Ownership and Control of Malaysian Manufacturing Corporations (Kuala Lumpur: UMCB Publications, 1982); Tan Tat Wai, Income Distribution and Determination in West Malaysia (Kuala Lumpur: Oxford University Press, 1982); Lim Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (Singapore: Oxford University Press, 1981).

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The latter were large firms that specialized either in managing rubber or tin companies belonging to foreign investors or in acting as import-selling or export-purchasing agents for foreign manufacturers, or both—that is, being full-service agents that managed estates or mines and simultaneously acted as merchants. Among the wellknown agency houses were Boustead & Company, Harrison and Crosfield, Sime Darby, Guthrie, and Harper Gilfillan. Agency houses constituted the major link between local raw material producers and Western markets for commodities on the one hand, and between Western manufactureres and the domestic market for manufactured imports on the other. This was made possible by factors that included the availability of a large supply of European capital, political control which facilitated the virtually unconditional entry of foreign investment, ease of contact with Western buyers of primary produce and with domestic buyers of finished goods, and knowledge-cum-technical expertise for managing large plantation and mining enterprises. Local Chinese entrepreneurs also featured importantly as owners of rubber estates and tin mines, either as wealthy individuals, as partners, or as families or clans. Good examples of tycoons in the earlier part of the century were Tan Cheng Lock for rubber and Eu Tong Sen for tin. Around the time of independence prominent Chinese business family groups included those of Lee Kong Chian of Lee Rubber, and Heah Joo Siang of Heah Estate Ltd. But the more visible role of Chinese businessmen was that of intermediary at all levels between the producer and exporter for primary commodities and between the importer and consumer for manufactured goods. Chinese merchants operating as middlemen, wholesalers, and shopkeepers formed a substantial part of the economy's collection and distribution network. However, despite the Chinese1 apparent dominance over domestic trade, it was foreign interests which held the real grip over the economy. After the launch of the NEP in 1971, this dichotomy of foreign versus Malaysian business became less central than one involving Bumiputera interests on the one hand and non-Bumiputera, mainly Malaysians of Chinese and Indian origin, on the other. (Recent studies have concentrated on this latter contrast, foreign interests receiving relatively little attention despite their changing manner of involvement. We will deal here with all three major business categories—foreign, Bumiputera, and non-Bumiputera—but will give more attention to Malaysian groups.) Business leaders before the NEP were easily identified with particular industries as their core economic activity. For example, individuals were labelled "sugar king" or "rice king" for their close association with those commodities and their leading position in the respective industries. Business expansion was usually within related industries, through either forward or backward linkages with the mother firm. Investment across sectors occurred, but it was not common or sizeable. Under the NEP, business groups may not be readily identified with any specific industrial focus. Instead of a high degree of concentration within a particular sector, recent business leaders invest in divergent fields, priding themselves as builders of conglomerates with interests in a number of industries that may not be closely related. The Antah group and the Pernas group are examples of this tendency, which implies that the analysis of business groups can no longer be confined to a single sector. The manner in which emerging corporate groups have accumulated wealth and economic power also appears different from that of older business groups. Although documentation of such processes is difficult, inferences can be drawn from media reports and general observation. It appears that whereas businesses previously tended

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to develop around a highly motivated entrepreneur, who built with pioneering and authoritarian leadership, this pattern is being replaced by investment-oriented management groups or cliques who rely on teams of professional, knowledgeable subordinates to suggest new directions. Under the NEP, the manner of business expansion is also different. Former growth through real investment ventures into new industries, opening of markets, and expansion into vertically related fields at a relatively slow pace to allow steady consolidation is being replaced by financial takeovers, shifts into established and proven industries, rapid acquisition of franchise and marketing systems, and fast growth not only vertically or horizontally but also crosswise into totally unrelated areas of business. In other words, greenfield entrepreneurship has been virtually replaced by the acquisition of proven businesses. Business groups in the earlier period depended heavily on funds generated internally for reinvestment and growth whilst striving for larger-scale operations which would improve efficiency and profitability. New business groups, however, turn to external sources of finance, either through borrowing or through stock floatation to the investing public. It is not uncommon to find takeovers of substantial corporate equity financed by loans advanced to businessmen. In fact, budding groups place particular emphasis on gaining control of a "listed vehicle/' which will attract funds from small investors and thus enrich those at the center of the group. It is clear that, as far as finance is concerned, the older groups were more risk-averse than the newer ones. The latter, however, rely on business heterogeneity through diversified lines to dilute the financial risks they bear. Another crucial difference between pre-NEP and post-NEP business lies in the source of their funds. Prior to the NEP, business capital had nearly always originated in the private sector, irrespective of whether it was foreign or local. Under the NEP, however, the scope of sourcing widened to include substantial public-sector funds as well as investment from cooperatives and such traditionally non-profit organizations as religious institutions. State enteprises have existed since colonial days, when enterprises in the form of statutory corporations were employed to perform special activities thought best handled by organizations that were independent of the regular bureaucracy, for such reasons as administrative flexibility and economic expediency. For example, the Malayan Railway and the Central Electricity Board (now National Electricity Board), both established in 1949, supplanted government departments in control of the country's rail and power networks. In this period, negligible use was made of public enterprises for achieving economic development, a role left mainly to the private sector. Two notable exceptions were RIDA (Rural and Industrial Development Authority), established in 1953 and later replaced by MARA (Majlis Amanah Rakyat), and Felda (Federal Land Development Authority), which was started in 1956 to benefit the poorer peasantry. In the period after independence but before the NEP (1957-1971), public enterprises were still seldom used as tools for national development, investment, and industrialization. Reliance continued to be placed on private-sector investment to mobilize resources for growth. New public enterprises set up in the period, such as MIDF (Malaysian Industrial Development Finance), NISIR (National Institute of Scientific and Industrial Research), FIDA (Federal Industrial Development Authority), Bank Bumiputera, and FAMA (Federal Agricultural Marketing Authority), were engaged in facilitative activities such as providing credit, coordinating, promoting,

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and advising industrial projects, as well as in regulatory tasks. Again, Felda and MARA were exceptions in being directly involved in business enterprises. The former provided capital for opening up new land for rubber and oil palm estates, while the latter, besides promoting Malay participation in commerce and industry via education, training, and financial assistance, ventured directly into such business enterprises as running a bus service and printing and selling batik. Under the NEP, however, public sector or state capital has been liberally utilized to achieve the goals of redressing economic imbalances among the races and regions and of eradicating poverty. The Second Malaysia Plan categorically stated that the public sector "would participate more directly in the establishment and operation of a wide range of productive enterprises," admitting that "direct participation by the Government in commercial and industrial undertaking represents a significant departure from past practice."^ It is not uncommon to find such publicly funded business enterprises incorporated under the Companies Act and operating along the usual commercial lines, thus giving rise to state capitalism. This takes us to another fundamental difference before and after NEP, the involvement of bureaucrats as businessmen. It is clear that the Malaysian government assumed a radically different economic role with the takeoff of the NEP. Between 1969 and 1972, no fewer than sixty-seven new public enterprises were created, the majority of them concerned with the NEP, and in the next few years the number increased to well over a hundred. Such "departmental enterprises" of "public corporations" served a host of socio-economic objectives, including the almost sacrosanct target that by 1990 "the Malays and other indigenous people will manage and own at least 30% of the total commercial and industrial activities in all categories and scales of operation." Following from this new approach of direct involvement in business, either in the name of the government itself or in trust for the Bumiputera, the role of bureaucrats was dramatically widened to include the management of capital, investment, production, marketing, and so on. Civil servants are no longer confined to administration concerning public services, provision of general infrastructural facilities, and planning and enforcing regulatory activities. Bureaucrats not only deal with businessmen and their problems across the counter but experience business problems themselves in running state enterprises. At the same time, with their established contacts within, and knowledge of the government machinery, many have become very successful businessmen upon their departure from the civil service, as we shall see later. We have noted that the new, state-generated enterprises were largely created to serve the NEPs socio-political goals. This involvement of noneconomic purposes has been true also of nongovernmental business enterprise set up since the NEP began. Of course, business groups still seek to amass wealth and generate income, but there exists a distinction between older Malaysian business leaders and emerging ones in their motivation for coming together to undertake profit-making enterprises. Partly as a response to the NEP's effort to restructure society and create a Bumiputera business community, other groups (organized as political parties, cooperatives, or pressure groups for specific social causes such as education) have pulled together resources as capital for business ventures, the gains from which are to be channeled ultimately toward nonbusiness goals. In short, businesses are employed to champion social and even political causes rather than for the sole purpose of economic gain. ^Second Malaysia Plan, p. 7.

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The very existence of the large number of criteria for business association which we shall find in the next section, particularly those unrelated to traditional linkages such as family, clan, friendship, or fraternity, testifies to the prevalence of nonbusiness objectives. THE EVOLUTION OF CORPORATE GROUPS

A close examination of secondary data, company reports, and newspaper accounts of business and corporate developments, together with discussions with relevant authorities and knowledgeable individuals, has revealed that dramatic changes have begun to take place in the linkages that give rise to business ties and affiliations and the motivations for the growth of strong business networks. At the risk of artifical segregation, this section attempts to discuss the transformation process under categories that range the historical forms of big foreign business and Chinese family enterprises through the new politically driven and state-backed businesses of the Malay elite, to recent business groups spawned as a response to the changing political-economic situation. FOREIGN-OWNED ENTERPRISES

In spite of successful attempts to Malaysianize foreign holdings since the NEP, foreigners have continued to form business ties on the basis of their historical role and linkages. In the modern agricultural sector they have remained important as managers of rubber and oil palm estates and as large trading agents. In the manufacturing sector, companies established by foreign direct investment before and after independence persist, although many are increasingly sharing management control with Malaysians who have taken up equity and board positions. We should bear in mind that the influence of the older foreign-owned companies is not restricted to the continuing presence of non-Malaysian personnel. The contribution of prominent pre-NEP business groups, most of which were composed of foreigners, lies not only in the capital that is still retained in the economy, but more importantly in the management systems, organizational skills, corporate behavior, and philosophies that they implanted as models for big business. For example, despite Sime Darby's "bringing home to Malaysia" its headquarters, Guthrie's wellknown "dawn raid" at the London Stock Exchange to ensure Malaysian command, and Harrisons and Crosfield's major restructuring to transfer control of large tracts of rubber estates into the hands of locals, their new managements have built on the foundations and traditions that each corporation already possessed. After substantial equity control over such large, long-established business groups (largely British and in plantations or mining) had passed into Malaysian hands, often in the form of state agencies in trust for Bumiputera, the Malaysian government directly or indirectly played a major role in guiding them. This oversight has often been achieved by placing a prominent political or bureaucratic figure in a commanding position in the company. It is not by accident that from the 1970s the chairmanship of the Sime Darby conglomerate was held by Tun Tan Siew Sin, a former minister of finance who remained a financial consultant to the government. (Tun Tan was simultaneously the chairman of ten other companies and a director of another six.) Also on the board of Sime Darby is Tun Ismail bin Mohamad Ali, who has impeccable civil service credentials, topped by being governor of the Bank Negara, Malaysia's central bank. Tun Ismail is also close to the center of political power, since he is a brother-in-law of the prime minister. The chief executive of Sime Darby, Tunku Dato'

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Ahmad bin Tunku Yahya, a prominent Malay executive of aristocratic descent, is also a director of the Bank Negara. But apart from the older pattern of foreign direct investment, many new forms of foreign involvement appeared not long after independence. Foreigners, particularly American and Japanese multinationals, responded well to the government's drive towards industrialization. Japanese subsidiaries have been active in a range of manufacturing industries: iron and steel (Malayawata, Federal Iron Works), car assembly, and electrical appliances (Sanyo, Matsushita, Toshiba). American investments tended to be concentrated in petroleum and chemicals (Esso Malaysia) and later in the electronics industry. Japanese firms have been mostly joint ventures with local Malay, non-Malay, or government partners, while the Americans have by and large preferred to keep their companies wholly owned. Even so, many US companies have been allowed the advantages of pioneer status, preferential equity ratios, and benefits of locating in free trade zones. Foreign investors have not relied wholly on this tolerance for non-Malaysian ownership, however. Partly in response to more stringent equity conditions under the NEP, especially after the Industrial Coordination Act of 1975, foreign investors, including transnational corporations, began to employ other devices for exerting control over their business interests. Management contracts, licensing agreements, royalty payments, and contracts for technology are particularly widely used. A good example is the set of agreements drawn up between Heavy Industries Corporation (Hicom), a Malaysian government company, and Mitsubishi Motor Corporation of Japan for the national car and other industrial projects.4 We can see in Hicom's leadership a pattern of political-bureaucratic involvement similar to that marking the indigenization of the older foreign-owned companies. The corporation is currently under the chairmanship of Tan Sri Jamil Mohamad Jan, who is the former chairman of the Malaysian Industrial Development Authority (MIDA).5 He is also involved in the management of other business organizations with state interests, such as Kontena Nasional and the Armed Forces Fund. A number of other individuals close to political and government leaders are in direct control over growing corporations, the majority of them acting as directors in several companies. They thus not only interlock firm to firm but also link economic power in the private sector, including foreign sources, with political power in the public sector. CHINESE FAMILY BUSINESS

The other major source of pre-NEP entrepreneurship were Chinese tycoons and family businesses. Family has traditionally been a significant force that spurred Chinese entrepreneurs and united them around common business goals; even before Malaysian independence there were large enterprises that originated in a Chinese family or group of closely related families. Among the well known longer-established groups are those of the Lee family (Lee Rubber, Lee Pineapple, Lee Biscuit, and the Lee Foundation); the family of Tan Chin Tuan (Overseas Chinese Banking Corporation), which works closely with the Lee family in Singapore and in Malaysia; the Yeo family (Yeo Hiap Seng); and the Kwek family (the Hong Leong Group). There are also less widely publicized families with substantial business interests, such as the 4

Jomo Kwame Sundaram, ed., The Sun Also Sets (Petaling Jaya: INSAN Publications, 1983). Who's Who in Malaysia and Singapore 1983-84 15th ed., vol. 1 (Kuala Lumpur: Who's Who Publications Sdn. Bhd., 1983). 5

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Teo family of Paramount Malaysia, which developed the large housing estates of Paramount Garden, Damansara Utama, and Damansara Jaya; the Teh family of Malayan Flour Mills; the Kuok family of Kuok Brothers and the Kuok Foundation; and the Lim family of the Genting group. The equity requirements of the NEP have meant that family business control, which was for so long jealously guarded through marriages, adoption, and other means, has had to adapt to the new socio-political environment. We can see the results of this in the business networks of the Kuok brothers, who rose meteorically to become owners of one of the largest and richest plantation, mining, and hotel conglomerates in the region. They have gone into joint ventures with other Chinese families, such as the Chan and Teh families in Selangor Dredging Bhd., and also with non-Chinese businessmen such as Datuk Ibrahim of Associated Plastic Industries, with state governments such as Selangor SEDC and Johore SEDC in property development projects, and with foreign groups in shipping and hotel ventures.6 The need to rely on non-family linkages is also illustrated in a venture of recent vintage that is becoming one of Malaysia's largest corporations, Genting Bhd. Incorporated in 1968 with an authorized capital of M$800 million, of which slightly over a quarter is paid-up,7 the company operates a tourist resort at Genting Highlands along with land and real-estate development, transportation services, tour promotion, recreation and amusement services, and recently agricultural activities. Genting Bhd.'s chairman and managing director is Tan Sri Lim Goh Tong, and the business centers on his family. However, it is important to observe that the management includes highly influential political-bureaucratic figures. On the board of directors are Tan Sri Haji Mohamad Noah bin Omar, the former speaker of the lower house of parliament (he is also the father-in-law of two former prime ministers, the late Tun Razak and Tun Datuk Hussein Onn); Tan Sri Haji Abdul Kadir bin Yusof, a former minister of law and attorney general; Nik Hashim bin Nik Yusof, a prominent lawyer-banker; and Tan Sri Chong Hon Yan, a former minister of health and secretary-general of the Malayan Chinese Association (MCA). POLITICALLY CONNECTED NON-BUMIPUTERA ENTERPRISES

The adaptability of Chinese businessmen has been demonstrated not only by this opening up of family-controlled companies but also by the parallel emergence of entrepreneurs who have specifically concentrated on exploiting political connections to achieve business objectives. Under the NEP many Malaysians, including those of Chinese descent, have recognized that wealth may come from the pursuit of political positions as well as through the more orthodox capitalist pattern of political power proceeding from the acquisition of wealth. Amongst the Chinese, the most visible expression of politically based entrepreneurship was Multi-Purpose Holdings Bhd., a public listed company incorporated in 1975 with a paid-up capital of M$450,616,949.8 Its largest shareholder, owning 40.9 percent of the equity, was the Koperatif Serbaguna Malaysia (KSM), one of the country's biggest cooperatives with membership approaching a quarter of a million individuals. (Subsequently, the KSM was among twenty-three cooperatives whose 6

Kuala Lumpur Stock Exchange Annual Companies Handbook, vol. 10 (Kuala Lumpur: Kuala Lumpur Stock Exchange Press, 1984). 7 New Straits Times, February 14,1986.

8

Kuala Lumpur Stock Exchange Annual Companies Handbook, vol. 10 (1984).

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activities were frozen by the Bank Negara for dubious collection of deposits from the public.) Commonly referred to as the "business arm" of the MCA, Multi-Purpose was supported by a host of Chinese guilds and associations. Initially, its numerous subsidiaries operated under the chairmanship of Datuk Lee San Choon, a past president of the party, and its managing directorship was held by Tan Koon Swan during the time he was MCA president. The nearly forty companies in the MPH group have engaged in the cultivation of oil palm, rubber, and cocoa; in processing and marketing these and other crops; importing and distributing consumer goods, fertilizers, chemicals, building materials, and engineering equipment; general engineering and contracting; manufacture of scientific instruments and electrical goods; general insurance; and shipping. The most well-known subsidiary, listed on the Kuala Lumpur Stock Exchange, is Mulpha International Trading Corporation Bhd. As we might expect, both Multi-Purpose and Mulpha share several common board members drawn from the upper echelons of the MCA party hierarchy. Until 1988, boards of the two conglomerates included Senator Kee Yong Wee, Senator Datuk Loh Fook Yen, Senator Datuk Choo Ching Hwa, and several other prominent politico-businessmen. The entrepreneurial genius of Multi-Purpose Holdings, Tan Koon Swan, had been actively involved in the corporate scene since the early 1970s, controlling several large companies under the Supreme Corporation (former Sungei Way Dredging) group.Through an intricate merger scheme with Textile Corporation and Grand Ocean Development, the former became the controlling shareholder of Supreme, with 49.8 percent of the equity, and was renamed Grand United Holdings (GUH).9 Subsidiaries of the group engaged in licensed finance operations, credit and leasing, general insurance, property development, property investment, and agro-based industries. Tan Koon Swan had a personal stake of 30.6 percent in GUH, while his family-owned companies held an additional 29.6 percent.10 In 1985, GUH acquired 22.3 percent in Pan-Electric Industries (Pan-El) and subsequently became entangled in that firm's financial disaster.11 As part of a rescue scheme, shares in GUH were bought up by UNICO Holdings Bhd., whose directors were prominent Chinese businessmen involved in both Multi-Purpose and Mulpha, among them Senator Kee Yong Wee; Tan Sri Wee Boon Ping (acting as chairman), who is the president of the Associated Chinese Chamber of Commerce and Industry; Datuk Wong Tok Chai, business advisor to the Standard Chartered Bank and managing director of the Amoy Canning Corporation;12 and Datuk Koh Pen Ting, chairman of Allied Malayan Development.13 As we can see, the wielding of political influence for business opportunities, profits, and as a defense against business failure is not confined to Bumiputera. Political connection is not a guarantee of success, however. In 1986 Multi-Purpose reported a loss of nearly M$200 million, of which M$131 million was attributed 9

The Star, January 25,1986. Ibidv February 18,1986. 11 New Straits Times, January 18,1986. The Pan-El crisis brought about a historic closure of both the Singapore and Kuala Lumpur stock exchanges for two days, resulting in a loss of confidence by bankers and investors. Pan-El was reported to be struggling with a debt of nearly 400 million Singapore dollars. 10

12

Business Times, July 15,1985.

13

Ibid., December 6,1985.

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to Promptship Holdings, a shipbuilding subsidiary.14 Tan Koon Swan found himself convicted of Criminal Breach of Trust (CBT) by a Singapore court, several other politico-entrepreneurs found it necessary to depart the leadership of Multi-Purpose, and, to ensure the conglomerate's survival, it was placed under the management of a new board headed by a non-politician, Robert Kuok Hock Nien (of the Kuok Brothers). The Indian community has produced an equivalent political-business organization, Maika Holdings Bhd. This is the chief corporate vehicle of the Malaysian Indian Congress (MIC), the Indian faction of the ruling Barisan Nasional government, and is under the chairmanship of Senator D.P. Vijandran, a lawyer who is the vice-president of the MIC and chairman of MIC Youth.15 Also on its board are such prominent Indian political figures as Tan Sri G.K. Rama Iyer, secretary-general of the Ministry of Primary Industries. Maika is envisaged as a symbol of Indian socio-economic progress and a means of developing Indian corporate management personnel and entrepreneurs. An example of this ambition is its attempt to establish itself in the banking industry. The president of the MIC, Datuk Samy Velu, tried—unsuccessfully—to negotiate on its behalf the purchase of the Indian government's one-third stake in the United Asian Bank (UAB).16 In the plantation sector Maika was more successful, expanding by acquiring Tumbuk Estates, a 386-hectare oil palm estate, for M$13 million.17 As it had become "fashionable" to dabble in property development, Maika participated in a low-cost housing project, and it owns a 10 percent interest in the Fleet Group's Sistem Televisyen Malaysia Bhd.(STMB). MALAY FAMILY BUSINESSES

The most interesting of the new sources of entrepreneurial activity are perhaps those which have emerged among the Bumiputera. Here family businesses have been much less important than among the Chinese; they have mostly developed under the NEP and have centered on that segment of the indigenous population with greatest access to resources: the royal families. In the post-independence period the sultans of Malaysia's nine royally ruled states have been sufficiently powerful to affect decisions in their territories, especially those pertaining to land. Moreover, the royal privilege of awarding highly valued titles, such as datwfcships, to deserving subjects— including successful businessmen—ensures the perpetuation of a patronage system centering on the royal households. The prestige conferred by a title is much sought after as a source of influence, connections, privileged access to information, and advantage in obtaining permits and licenses and winning government contracts. Moreover, some corporations use the appointment of royalty to their boards as a token of compliance with the NEP desideratum of Malay participation—after all, members of the ruling families are no less Bumiputera than their subjects. Under these social and political circumstances, high-born Malays can profit greatly by playing the role of businessmen. Several corporate groups based on royal families have been founded, and more will doubtless evolve. Time will be the best test of their viability, but we 14

Ibid., June 13,1986. Ibid., July 16,1986. 16 New Straits Times, August 14,1985. The attempt failed due to strong objections by the UAB's then chairman, Tengku Ariff Bendahara. 17 Business Times, July 30,1985. 15

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might look at a few of the more prominent in order to get an idea of their character and substance. Among the best known is Antah Holdings, an investment holding and management company belonging to the royal family of Negri Sembilan. It was first incorporated in 1976 as a joint venture between Syarikat Pesaka Antah, the family's investment company, and the Hong Kong firm, Jardine Matheson. From the start the royal participants ensured their domination, first by owning 54 percent of the equity through Pesaka Antah, and secondly by placing immediate family members in major board and management positions—all this despite the fact that Jardine Matheson, with 46 percent of equity, provided the capital, technical know-how, and executive input for actual operation. Antah Holdings turned public in 1983 and obtained listing on the Kuala Lumpur Stock Exchange three months later, thus gaining access to external funds. With Tuanku Naquiyuddin ibni Tuanku Ja'afar, eldest son of the current ruler, as chairman, the company expanded rapidly into many fields, with thirty subsidiaries and associate companies. The managing director of Antah Holdings, Tuanku Imran, is a brother of Tuanku Naquiyuddin; also active in the business is Tuanku Dara Naquirah, the sultan's daughter.18 The business activities of its subsidiaries include the marketing and distribution of consumer products, building materials, hardware, technical products, electrical and office equipment, computer services and equipment, engineering contracting and equipment, aircraft and aviation equipment, medical supplies and equipment, industrial security, publication of telephone directories, oilfield equipment supplies and services, dental supplies, water-treatment engineering, advertising agency, insurance claims and settlements, shipping agency, equipment leasing, safes and security-equipment manufacturing, travel and tourism, car-park management, reinsurance brokerage, air freight forwarders, color television rental, and engineering design and project management. Antah Holdings is not the only corporate group to have been spawned by Negri Sembilan royalty. Another fast emerging force is the Melewar group, controlled by Tunku Abdullah ibni Almarhum Tuanku Abdul Rahman (Tunku Panglima Besar), brother of the state ruler. Although some of the businesses in the group commenced more than twenty years ago, Melewar Corporation Sdn. Bhd. was incorporated only in November 1981, with a paid-up capital of M$35 million. Day-to-day decisions are made by the group's managing director, Tunku Iskandar, son of Tunku Abdullah. Its subsidiaries are engaged in investment, general trading, design engineering, realproperty development, manufacturing, and services, particularly transport and tourism. In 1986 Melewar expanded into insurance, acquiring a stake of 60 percent in the Malaysian American Assurance Bhd. (now known as Malaysian Assurance Alliance Bhd.),19 and plans were made to inject Melewar's holding of 20 percent of MBF Finance Bhd., a public listed finance company, into the new venture. In general, Melewar seems to adopt a consolidating approach, strengthening existing businesses rather than moving into new areas.20 For instance, the group's 32 percent interest in 18

Business Times, August 14,1985. By 1985 members of the Negri Sembilan royal family directly commanded at least 31 percent of Antah's M$25 million paid-up capital, Jardine Matheson controlled 15 percent, Merchant Nominees 7.3 percent, Bapema Corporation 2.6 percent (Bapema is a subsidiary of the state investment corporation PNB; thus this links royal and government enterprises), and the Negri Sembilan Foundation 2 percent. 19 Ibid., March 5,1986. 20 Ibid.

114 Southeast Asian Capitalists TDM Bhd., a public listed company involved in the cultivation, processing, and trading of palm oil and rubber, was sold off in 1986 to Terengganu state agencies.21 Its purchase of 10 percent of Sports Toto, a betting company, is another example of the formation of royalty-bureaucratic-political business linkages, as 30 percent of Sports Toto is held by Makuwasa Securities, a company owned by the Ministry of Finance.22 Another well-known royally sponsored group, TAB Holdings Sdn. Bhd., was established in 1978 under the chairmanship of Tengku Tan Sri Ibrahim ibni Almarhum Sultan Sir Abu Bakar, better known as Tengku Ariff Bendahara of Pahang, brother of the sultan of that state.23 The TAB group got started when Tengku Ariff Bendahara secured a large timber concession—not a difficult acquisition given royalty's authority over state lands. It grew rapidly on log extraction, sawmilling, timber impregnation, and the import and export of timber and wood-based products, carried out by TAB Timber Traders and Mentiga Forest Products. In addition, TAB Holdings moved into the construction industry with the formation of TAB FAIYIN Construction Sdn. Bhd., and diversified through joint ventures into related industries such as drilling and engineering. In the industrial sector, TAB controls 70 percent of TATAB Industries Sdn. Bhd. through its subsidiary TAB General Agencies Sdn. Bhd. The remaining 30 percent is held by TATA Industries of India. TAB is also making inroads into the services sector, as exemplified by its control of the Kuantan Beach Hotel and its interest in United Asian Bank Bhd.24 Nonetheless, since the death of its founding chairman in June 1987, the group's future appears uncertain. Malay family participation in business has not been limited to royalty. There have long been smaller-scale family enterprises organized around a key proprietor or several partners, but large Malay family-based business groups organized along modern corporate lines are something new. Given the NEP's incentives for Malays to involve themselves in business, one would expect many families to take advantage of the opportunities available, but it is not as easy to find good examples of Malay family business as it is to find Malay directors, executives, and managers in groups based on other kinds of association—particularly those connected with military, government, and government-related corporations. Nevertheless, two family companies deserve mention. Unsurprisingly, they have strong political connections. One is Bidara Holdings, 51 percent owned by Mazlan Harun, son of Datuk Harun Idris, former chief minister of Selangor. His younger sons, Ramlan Harun and Azman Harun, have 20 percent each, while Mazlan's wife accounts for the remaining 9 percent. With a paid-up capital of M$l million, Bidara has interests in electrical goods assembly and retailing, brickmaking, property development, and motorcycle servicing, carried out by a battery of twenty-four companies.25 In the mid-1980s Bidara diversified into feedmilling and soon appeared likely to emerge as the country's largest operator in that sector. Another prominent Malay family-based corporate body is the Safuan Group. Its chief executive, Haji Mat Shah Safuan,26 is also the executive of Konsortium Putra 21

The Star, July 1,1986. Ibid., August 23,1986. 23 Kompass Buku Merah 1984^5 (Kuala Lumpur: Berita Kompass Sdn. Bhd., 1984). 22

24

Tan Tat Wai, Income Distribution, p. 189.

25

Business Times, July 24,1985.

26

Who's Who in Malaysia and Singapore 1983-84.

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(M) Sdn. Bhd, and chairman of the Malay Housing Developers Association. A businessman in his own right, he is also a member of the UMNO Setapak division and chairman of UMNO Kampung Pindah division,27 and hence he enjoys the advantages of political connection. The Safuan group has done well in property and housing development, with projects implemented through four main subsidiaries. MALAY POLITICO-ENTREPRENEURS

As we have seen, politically connected business groups have sprung up rapidly in the NEP period, resulting in large conglomerates which blur the distinction between business and politics. They are visible as Bumiputera-based or non-Bumiputera based companies, under the patronage of political parties organized primarily along racial lines. The Malays have been uniquely well placed to take advantage of political connections, and it is this kind of business that has been the main fount of Malay entrepreneurship under the NEP. Perhaps the most notable example of Malay politico-business enterprise is the Fleet Group Sdn. Bhd., established in 1976 with a paid-up capital of M$55,699,805 28 Representing the interests of the ruling Malay component of the National Front government, the UMNO party, the Fleet Group acquired control of the country's major newspaper-publishing company, the New Straits Times (M) Bhd. But UMNO did not stop with this politically important asset, for the group has moved into several service industries, especially within the financial sector. It participates in insurance, commercial banking, leasing, car rental, and travel,29 and, under the leadership of its former chairman, Daim Zainuddin (minister of finance until 1991 and a close friend of the prime minister), it also bought up shares in the corporate sector. In 1983, the Fleet Group ventured into an entirely new business through the formation of Sistem Televisyen Malaysia Bhd. (STMB, widely known as TVS), with an issued share capital of M$10 million.30 As with other companies in the group, the STMB'S board comprises UMNO politicians and persons close to those at the pinnacle of political power. One is Datuk Syed Kechik, a lawyer turned businessman whose career started in the Kedah UMNO with the first prime minister, Tengku Abdul Rahman Putra AlHaj, and who later became the right-hand man of Tun Mustapha, former chief minister of Sabah, heading the resource-rich Sabah Foundation.31 Another distinguished STMB director—and its current chairman, replacing Daim Zainuddin—is Mohamad Taufik bin Tun Dr. Ismail, son of the late, highly regarded deputy prime minister. Daim Zainuddin's astounding business success has been widely attributed to his close association with the prime minister. He conducts his businesses through two family-owned companies, Daan Sdn. Bhd. and Dani Sdn. Bhd., both of which are under the management of Daza Holdings. Until the mid-1980s both these companies were controlled by Daim's brother, Abdul Hamid Zainuddin, together with close business associates such as Low Chan Tian, Zain Azhari (the present secretary-general of the Ministry of Finance), and Azmi Wan Hamzah (who was later appointed chief executive of Malayan Banking Bhd.). Daan and Dani also successfully acquired a 40.7 percent stake in UMBC (United Malayan Banking Corporation) in exchange for 27

Kuala Lumpur Stock Exchange Annual Companies Handbook, 1985, vol. 2. Kompass Buku Merah 1985-86, p. 182.

28 29

30

31

Ibid. Ibid.

Who's Who in Malaysia and Singapore 1983-84, p. 309.

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Daim's 51 percent interest in Malaysian French Bank Bhd.32—a deal finalized just a week before Daim was appointed finance minister and before the Bank Negara announced a policy forbidding individuals or family-owned companies from owning more than 10 percent of the equity in a local bank or finance company. Another Malay, politically based business group is Syarikat Permodalan Kebangsaan (SPK), sometimes referred to as the "private sector investment arm" of the government. SPK has diversified into various business activities, such as transport (S.J. Kumpulan Bhd., Nakufreight (M) Sdn. Bhd.), property (Bandar Raya Development Bhd.), manufacturing, finance, plantations, and mining. Under the leadership of its current chairman, Datuk Abdullah Ahmad, a politician turned businessman, SPK has succeeded in acquiring large shareholdings in several financial institutions. Datuk Abdullah, the current chairman of UMNO's Kok Lanas division in Kelantan, was a deputy minister in the Prime Minister's Department in the 1970s, but then served five years as a political detainee under the Internal Security Act. Other members of the SPK board include Tuan Haji Annuar bin Jaffar, a director of Bank Rakyat First Merchant Bankers and former financial controller of Kumpulan Perangsang Selangor Bhd.; Tuan Haji Mat Sari bin Haji Hamin, managing director of Sarikon Sdn. Bhd., Dato' Mohamad Tahir bin Haji Abdul Rahim, and Ahmad bin Abdul Rahman.33 BUREAUCRATIC ENTREPRENEURS

In addition to politicians who have used their connections as a basis for business enterprises, Malays have become businessmen by virtue of their role as civil servants. The entry of bureaucrats onto the Malaysian business and commercial scene was not entirely unknown before the NEP, for even prior to independence government funds had been utilized for operating commercial enterprises, with the ultimate objective of achieving social goals. For instance, the Malaysian Building Society Ltd. and its predecessor, the Malaya Borneo Building Society Ltd., was an important financier of housing projects and rental schemes, particularly for much-needed low-cost housing. In 1953, the Majlis Amanah Rakyat (MARA) was established, initially as the Rural Industrial Development Authority (RIDA), to assist the economic development of the Malay community in diverse fields, including the nurturing of small Malay entrepreneurs. Thus the way was paved for public enterprises to enter into what was otherwise seen as the private sector. Despite the overall success of MARA in the economic uplift of the Malays, certain MARA businesses have tended to operate like government departments—not a surprising outcome when business' financial objectives are tempered with social goals, when executives are bent towards public administration procedures rather than normal business practices, and when managers tend to be plucked off the senior ranks of the civil service rather than recruited from the relevant market. It is therefore not difficult to understand how the MARA group of companies suffered a loss of M$8 million in 1982.34 Examples of the infusion of bureaucrats may be seen from the leadership of MARA: Tan Sri Abdul Aziz bin Yeop, MARA's chairman in 1976/77, boasted an impressive string of political and civil-service credentials, having been a member of Parliament for Padang Rengas, served as high commissioner to the United Kingdom, 32

Asian Wall Street Journal, July 10,1986. New Straits Times, March 1,1986. 34 Business Times, June 17,1986. 33

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and was permanent secretary to the Ministry of Agriculture.35 Similarly, MARA's current chairman, Datuk Abdul Rahim bin Abu Dakar, is a former Menteri Besar (state chief minister) of Pahang and deputy chairman of the state UMNO liaison committee. As Pahang's chief minister, Datuk Rahim also headed its State Economic Development Corporation (SEDC), a state-owned enterprise. Two other pre-NEP groups of state companies should be mentioned, for they were of immense significance in introducing bureaucrats into powerful corporate circles. Both the Bank Bumiputera and Pernas (Permodalan Nasional, National Corporation) were founded much later than the MARA and have differed from it in that, notwithstanding their origin and connections, their executives and managers strive towards financial objectives, with economic efficiency as a major (though not sole) consideration. They employ modern business methods for analysis and decision making, and are oriented towards market competition. As players in the private sector, they are subject to fewer bureaucratic constraints, to the extent that their power has been abused—notoriously so in the corruption-ridden Bumiputera Malaysian Finance (BMP) scandal in Hong Kong, which underlined the need to temper the management power of such enterprises with public accountability.36 Bank Bumiputera was established in October 1965 as a wholly governmentowned bank; within ten years it had become the second largest bank in the country. Its first chairman was Tengku Razaleigh Hamzah, then a rising star in UMNO and highly favored for the top political leadership; subsequently, he became the first Malay finance minister and then minister of trade and industry. His successor at Bank Bumiputera, Senator Tan Sri Kamarul Ariffin, was simultaneously president of the National Chamber of Commerce and Industry of Malaysia. The third chairman, Dr. Nawawi bin Mat Awin, a former chairman of MARA, was appointed amidst the BMP crisis in mid-1982; he has since become chairman of the Malaysian Chamber of Commerce. With well over 5,000 employees in the bank, not counting those engaged in its many subsidiaries, the Bank Bumiputera certainly provided an opportunity for Malays to gain business experience. But the lack of effective control over the way it handled its government capital, aggravated by opportunities arising from access to information and to networks created by the presence of multiple directorships within the group of companies, gave rise to unethical practices which culminated in a crisis within its Hong Kong subsidiary, Bumiputera Malaysia Finance. With losses amounting to M$25 billion, the government was forced to intervene, replacing the BMP board with a new one headed by Tan Sri Basir bin Ismail.37 The bank was bailed out by Petronas, the state oil company, which took over the entire equity of the PNB (the national investment company, of which more later). The Pernas (National Corporation) group has had a less chequered career. Established in late 1969, it deals with direct and indirect investment in general trading, plantations, shipping, hotels, real estate, engineering, construction, manufacturing, and financial services. Heading the group is Tunku Dato1 Shahriman, a former chairman of United Malayan Banking Corporation (UMBC).38 Its managing director, Datuk Abdul Rahman bin Hamidon, was an assistant district officer of Kota Tinggi, 35

Who's Who in Malaysia and Singapore 1978-79, p. 4.

36

See Jomo Kwame Sundaram, BMP: The People's Black Paper (Petaling Jaya: Insan Publication, 1986). 37 Business Times, February 19,1986. 38

Kompass Buku Merah 1985-86, p. 288.

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then an assistant secretary in the Ministry of Commerce and Industry, and finally served in the Ministry of Agriculture prior to his appointment with Pernas. The degree to which Pernas has been successul in the development of entrepreneurship, investment, and management skills is discernible from its positive public image, attributable to the professionalism and integrity of those at its helm. However, its financial performance cannot be meaningfully gauged, due to the fact that there has been an intermittent equity transfer of its subsidiaries to other government investment corporations such as the PNB. What is perhaps most important to bear in mind from the viewpoint of this paper is the great power which Pernas and other state enterprises have given to their "new princes," officials who control vast assets although they own no shares in the group. Many of these bureaucatic entrepreneurs obtained their formative business experience in the boom period of the 1970s, and it has not always been easy for them to adapt to less expansive times. These examples notwithstanding, direct government participation in business before the NEP was limited in scope if not in depth. The new policy changed this, bringing a proliferation of government-owned and -controlled private limited companies. For instance, under the Ministry of Land and Regional Development alone, eighty-one subsidiaries, corporations, and joint ventures have been set up by the ministry's eleven agencies.^9 Although the exact number of government-owned companies is not easy to ascertain via public records, Minister of Finance Daim Zainuddin gave an idea of their significance when, admonishing ineffective directors serving on their boards, he referred to the existence of more than 900 government companies and statutory organizations involved in business activities. The government has provided loans worth M$2.5 billion to goverment-owned companies and M$14 billion to statutory organizations; in addition, it has stood guarantee for loans amounting to M$12 billion taken out by such bodies.40 Despite the fact that many of these companies are far from doing well—a statement by former Auditor-General Tan Sri Ahmad Noordin bin Zakaria revealed that 350 of them were suffering continuous losses41—many of Malaysia's top firms are government controlled. They include six out of the top ten tax-paying companies and seven out of the top ten employers; among them are Petronas, Harrison Malaysia Plantation Bhd., Malaysian Airlines System (MAS), and Malayan Banking Bhd. Through these, too, a new business elite is being spawned from among the bureaucrats. The common practice of secondment or transfer of civil servants to government-owned companies appears likely to accelerate the intermingling of bureaucrats and business. Let us look somewhat more closely at two instances of this, the wellknown National Equity Corporation or Permodalan Nasional Berhad (PNB) and the rather more mysterious investment arm of the government, Makuwasa Securities Sdn. Bhd. The PNB was incorporated in 1978 with an authorized capital of M$200 million, of which half was paid up two months later. Its main function was to acquire a portfolio of shares in limited companies to be held in trust for subsequent sale to individual Bumiputera investors through Amanah Saham Nasional (ASN), the national unit 39

77* Star, July 2,1986. Business Times, July 25,1986. 41 The Star, July 2,1986. 40

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trust scheme.42 Although the PNB is intended to be totally commercial in its manner of operation, its leadership is saturated with staunch government loyalists who are powerful, well-connected senior bureaucrats, military, and political veterans. The chairman of PNB's seven-man board, Tun Ismail bin Mohamad Ali, brother-in-law of the current prime minister, is the former governor of the Bank Negara and the strongman of the country's banking and financial system. Unsurprisingly, Tun Ismail also presides over the boards of other large companies controlled by the PNB, such as the ASN (the national trust, mentioned above) and Harrison Malaysia Plantation Bhd. Also on the PNB board is Dato Jaffar bin Hussain, the chairman of the Malayan Banking Corporation, the largest, government-owned local bank. So, too, is the former chief of staff of the armed forces, General Tan Sri Ibrahim bin Ismail—an example of the evolving close affiliation between military and bureaucratic managerial elites, of which more later. Needless to say, the presence of the secretary-general of the Ministry of Trade and Industry and the governor of the Bank Negara on the PNB board facilitates the allotment of new company shares and the provision of financial resources to acquire them. The immense economic power vested in these few men is best measured by the assets accumulated by the PNB and ASN. In the first quarter of 1986 their total investments in the corporate sector amounted to over M$6 billion at cost.43 Of this, M$2.8 billion was transferred to the ASN to be distributed as trust units for ASN investors, who have virtually no control over the assets they own. As a group, PNBASN holdings represent approximately 45 percent of the M$13.5 billion worth of Bumiputera shares in the corporate sector. The intense concentration of power is further seen in the fact that decisions by the few persons constituting the board are made on behalf of over two million Bumiputera (representing about 43 percent of eligible investors), whose interests they are supposed to safeguard.44 Further, policy directions set by the board members influence not only subsidiaries where the PNBASN hold a controlling interest but all the 140-odd companies whose stocks appear in their portfolios. With such vast financial resources firmly held in the hands of a government-backed elite, it is no wonder that PNB investments have grown at such a phenomenal pace as to enable its wholly owned subsidiary ASN to boast of being the largest unit trust scheme in the world.4^ A closer examination of the relationship between the PNB and ASN shows that the latter is buffered from poor results or losses by the policy of having only good performers transferred to it. In turn, political interests protect the PNB's viability. This was demonstrated by the scheme whereby the Bank Bumiputera was saved from the BMP loans scandal in Hong Kong. As we have seen, the state oil company Petronas had to put out M$2.2 billion46 in a rescue package which effectively transferred ownership of Bank Bumiputera from PNB to the resource-rich Petronas. The bail-out met with strong criticisms, including those from the then auditor-general, 42

Sieh Lee Mei Ling and Chew Kwee Lyn, "Redistribution of Malaysia's Corporate Ownership in the New Economic Policy/' in Southeast Asian Affairs 1985, ed., Lim Joo Jock (Singapore: Institute of Southeast Asian Studies, 1985), p. 236. 43 New Straits Times June 17,1986. 44 Business Times, August 8,1985. 45 Ibid., May 14,1985. 46 New Straits Times, May 8,1985.

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Tan Sri Ahmad Noordin bin Haji Zakaria.47 The affair clearly showed that the basis of power for bureaucratic business groups (and this is true of all vintages and types) rests ultimately with their political masters. The vital question, therefore, is the effect political changes may have on the strength and continuity of such business leadership. If the PNB illustrates the vast scope and resources of bureaucratic capitalism, Makuwasa demonstrates the opportunity for anonymous activity that the bureaucratic-political business network provides. Makuwasa Securities Sdn. Bhd., a wholly government-owned private limited company,48 was incorporated in June 1984 with an initial paid-up capital of M$2 increased to M$10 million two months later.49 The company aroused curiosity because it used Ministry of Finance officials as nominees, called on the funds of the National Employees Provident Fund (EPF) to finance its stock-purchasing activities, and most of all because the reason for its existence was far from clear. Shares in thirteen companies that made new issues between June 1984 and April 1985 were acquired by the EPF; 70 percent of these were transferred to Makuwasa at the subscription price—below the market price—thus enabling Makuwasa to reap almost immediate gains by trading on the open market. In return, the EPF was to receive 10 percent per annum interest and handling costs when the advances were reimbursed and the right to 30 percent of its original investment. Trade unions were especially upset to discover the M$141 million paper loss suffered by the EPF in stock transactions over the one and a half years since the beginning of 1985. Reportedly Tan Sri Thong Yaw Hong, who had recently retired as chairman of EPF and secretary-general of the Ministry of Finance, was the head of Makuwasa. His position as the chairman of the Capital Issues Committee, which approves all new issues, is another illustration of the manner in which multiple appointments of certain individuals to key government positions concentrate power in the hands of a few. It is evident that government-sponsored companies and public enterprises have succeeded in creating an elite that straddles business and government. This is true at the state as well as the federal level. The State Development Corporations (SEDCs) engage in a wide range of business enterprises. For example, the Selangor SEDC has extensive investment ventures in the field of mining, shipping, banking and finance, construction and engineering, transport, and property development. These activities are carried out through numerous subsidiaries, such as Kumpulan Perangsang Selangor Bhd. and Shah Alam Properties Sdn. Bhd. SEDCs are usually managed by highly experienced civil servants, who serve on boards chaired by the chief ministers themselves. Board members are often drawn from various federal government departments, thus forging extremely close ties between state and central administrators. Clearly, the involvement of numerous—mostly Malay—civil servants in business through state-sponsored corporations, the government's encouragement of Malays to develop themselves as entrepreneurs, and the shortage of Bumiputera qualified for management positions in private corporations have placed civil servants at an advantage for entry into the business community upon retirement. Indeed, many resign prematurely from government service to benefit from more lucrative job offers in the private sector. From the viewpoint of the firms they join, their intimate knowledge of 47

Business Times, January 1,1986. The Star, July 29,1986. 49 Asian Wall Street Journal, July 10,1986. 48

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government machinery and close personal contacts with officials are valuable assets for winning public-sector contracts and avoiding red tape. Let us illustrate this by tracing the career of one official who became a leading Malay businessman. Datuk Azman Hashim began his career as a chartered accountant with the Bank Negara in 1960. Six years later, he was appointed to the board of Malayan Banking, becoming its full-time executive director in 1971. He also started one of the first Bumiputera-owned audit firms, Azman and Company (subsequently renamed Azman, Wong, Salleh and Co.), which has a staff of about one hundred. Besides serving in various corporations in the public and private sectors, such as Pernas Securities, Malaysian Airlines System, Credit Guarantee Corporation, Tabung Haji Investment Panel, Malayawata Steel, Kompleks Kewangan Malaysia, and the Advisory Council of Bandaraya, Datuk Azman is active in professional bodies. He chaired the Malaysian Institute of Chartered Administrators and Secretaries and the Association of Borrowing Companies. In the banking sphere he also once headed Kwong Yik Bank and Finance, besides being a director of Malayan Finance, MaybanPhoenix Insurance, and Aseambankers. Datuk Azman is currently the chairman and largest shareholder of Arab Malaysian Development Bhd., with a holding of 22.8 percent. His subsidiaries are engaged in merchant banking, finance, credit, and insurance in the financial sector; in property development in the construction sector; and in the production and export of cotton, polyester, viscose yarn, and finished fabrics in the manufacturing sector. OTHER BASES FOR ASSOCIATION

The NEP-inspired businesses which we have so far considered have been based on the family, politics, or the state (and frequently all three). However, we must bear in mind that this is not the only source of local entrepreneurship, and we should consider some of the other bases for business association before we conclude. Most of them involve groups brought together by some perceived common interest. Such associations existed before the NEP, primarily in the Chinese community, where they were mostly oriented around clan and dialect groups, common trading interests, and school ties. The clan and dialect networks central to the Malaysian Chinese cultural heritage are often the nuclei from which other social, professional, and economic activities grow. Only since the NEP, however, have they been used for large-scale business purposes. This may be seen as part of the Chinese reaction to the threat which the NEP is perceived as posing to traditional businesses, a strategy to overcome government-sponsored business restrictions and communal discrimination. It also appears as part of a general trend towards the "corporatization" of Chinese business, for which an example was set by the MCA with its Multi-Purpose Holdings endeavor. Most of the corporations based on clan and dialect ties are involved in property development, credit, lending, finance, and trading; they prefer low-risk projects that bring fast payback and constant profit. For example, Hok Lian Holdings Bhd, a company of the Hokkien community incorporated in 1981 with an authorized capital of M$100 million, of which M$12.5 million was paid-up, is engaged in housing development, plantations, credit, and leasing. Similarly, the Hakkas1 Ka Yin Association established Ka Yin Holdings Bhd. in 1980 with M$10 million paid-up capital for ventures in property development and hire purchase. Fui Lian Holdings Bhd., started in 1982 with over $411 million capital paid in by members of the Fui Chew Association, is involved in credit and leasing, jewelry trading, and housing development. The

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Hainanese community's Kheng Chew Association launched Koperasi Mewah in 1978, a cooperative with total assets amounting to M$25 million and investments mainly related to housing development, credit, leasing, and insurance. Similar companies include Heng Ann Enterprise (M) Bhd. of the Heng Ann Association, Taipu Holdings Bhd. of the Taipu (Cha Yong) Association, the Holian Holdings Bhd. of the Hopo Association, and Koperasi Jasa Rakyat Bhd., a cooperative movement started by the Hokkien Association. Another basis for Chinese entrepreneurial association has been common trade, both for the purpose of furthering the business sector concerned and for spreading members' risks through investment in other fields. Many small businessmen, believing that they have no access to official help, are very conscious of the need to make provisions of their own. Thus car dealers and car-financing companies, acting through their trade association, set up the Cafina Corporation Bhd. in 1978, with M$1.4 million paid-up capital; it is active in automobile insurance and related businesses, and also has property development as one of its objectives. It is common for such groups to have investments managed by a board comprising prominent businessmen, not necessarily in the same field and sometimes including politically connected Malays. Thus the Selangor Hawkers and Petty Traders Cooperative Society Ltd. (Sakkap) has a strong team to oversee its members' funds of M$30 to M$40 million: its chairman is Tan Sri Wee Boon Ping, a timber tycoon and president of the Associated Chinese Chambers of Commerce and Industry of Malaysia; and Haji Mat Shah Safuan, chairman of the Malay Housing Developers Association, is deputy chairman. Other prominent directors include Datuk Loy Hean Heang, the chief executive of the Malaysia Borneo Finance group, and the lawyer Joseph Tan Boon Heng.50 Chinese chambers of commerce have long been focal points for Chinese businesses, but they have not usually gone directly into business themselves. Under the NEP they have begun to do so, however. The most prominent of these enterprises is Unico Holdings Bhd., a project of the Associated Chinese Chambers of Commerce and Industry of Malaysia. Formed in 1981, Unico has an authorized capital of M$100 million, of which half is paid-up. The company is in plantation, property, credit, leasing, and other minor lines. Business association based on the "old school tie" is common to many countries, but in terms of Malaysian entrepreneurial development it is primarily a post-NEP development. Such groups provide a broader basis than the family in terms of resources and talent, and sometimes they also provide an opportunity for inter-racial participation. A notable example is Pilecon Engineering Bhd., which was formed by several engineering graduates of the University of Malaya and soon grew from a small bored-piling firm into a well-known construction company, undertaking major building and civil engineering projects in Malaysia, Singapore, and Brunei. With Datuk Abdul Rahim bin Haji Abdul Rahman as chairman of the board and Chong Kok Keong and Dr. Lim Yit Chow as directors, the company has ventured into condominium development projects, computer consultance for building-maintenance services (through a later-acquired subsidiary), and, with French collaboration, into international markets. A more modest specimen is Chung Ling Holdings Bhd., 50

77* Ster, July 29,1986.

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founded by the Chung Ling Old Boys Association of Penang to invest in credit, leasing, property, and housing-development businesses.51 Malay business associations based on group interests are new, linked to politics and the state, and highly geared to the NEP. Let us look briefly at two of the most interesting, identified with the military and religion. While these could be seen simply as part of the state capitalist apparatus, the fact that they represent groups which are highly conscious of their special interests, and that they dispose of considerable funds and political influence, makes it worth noting them separately. The Armed Forces Provident Fund (Lembaga Tabung Angkatan Tentera or LTAT), established under the Tabung Angkatan Tentera Act 1973, is a source of great economic power for the military elite. Servicemen contribute 10 percent of their monthly wage, to which the government adds another 15 percent, for the purpose of providing superannuation benefits. The fund's portfolio of assets is distributed as follows: Assets of the Armed Forces Provident Fund Amount Invested (Million Ringgit) Corporate Securities Loans to Private Sector Federal Government Securities Cash and Fixed Deposit with Domestic Financial Institutions Other Liquid and Fixed Assets Total

Percentage

416.7 29.6 34.6 328.2

45.1 3.1 3.7 35.5

115.9 924.4

12.6 100.0

Source: Bank Negara Malaysia, Money and Banking (Kuala Lumpur: Economics Department, Bank Negara Malaysia, 1984).

It is interesting that as much as 45 percent is invested in corporate securities, while another 3 percent is extended as loans to the private sector. Obviously, this gives the fund's leadership considerable influence in the business world. An examination of LTAT's portfolio reveals that the fund managers have been investing in the plantation sector (Boustead Holdings), in manufacturing industries (Ericsson Telecommunications and Perwira Ericsson), and in banking and other service activities (Perwira Habib Bank, Chartered Merchant Bankers). Until the mid-1980s LTAT board members were often related to the national political leadership, but later appointments have favored retired generals and other senior military or military-related officials. Chairman Tan Sri Zain Mahmud Hashim and his predecessor, Tan Sri Ibrahim Ismail, are retired generals,52 while the earlier chairman (and still executive director) Datuk Salleh bin Yusof is a former director of Bank Rakyat and a partner of Azman, Wong, Salleh, and Co. Similarly, Tan Sri Abu Bakar Samad, the former secretary-general of the Ministry of Defense and later treasurer of the Ministry of Finance, was given a board position in Boustead and Ericsson upon his retirement in 1977. 51

Chung Ling Holdings Bhd. was registered in 1974 with authorized capital of M$10 million, of which over $3 million is paid-up. 52 The Star, July 17,1985.

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Through its provident investment fund, the military leadership not only marshals considerable financial power but provides senior officers with the opportunity to gain expertise that will enable them to move rapidly into the business world upon retirement. It is therefore not suprising to find that business leaders derived from the military elite have been making an impact on the Malaysian business scene. The other interesting category of Malay interest-based business association, religion, may seem incongruous given Islam's restriction of interest and profit making, but the Lembaga Urusan dan Tabung Haji (LUTH) has had some prominence as an investor on the corporate scene. A statutory body established by an Act of Parliament, LUTH is basically a trust fund for collecting and managing Malay savings to facilitate the pilgrimage to Mecca. Deposits in the fund, amounting to nearly M$200 million from well over 609 thousand savers,53 have been invested in corporate securities. As an institutional investor, LUTH participates in the equity of no less than twenty-seven public companies listed on the Kuala Lumpur Stock Exchange.54 An example is LUTH's share of Nestle Malaysia Holdings Sdn. Bhd.'s issued capital allocated to Bumiputera after Nestle's restructuring. To show how this feeds into and confirms the political-bureaucratic nexus, we might note that another 3 percent is owned by Toh Puan Norashikin, widow of the late deputy prime minister, Tun Dr. Ismail.55 Her son, Taufik bin Tun Dr. Ismail, is one of the company's directors, thus forming a link with the UMNO-controlled Fleet Group, on whose board he sits. IMPLICATIONS AND CONCLUSIONS

We have seen that the corporate vehicle has been used extensively under the NEP as a tool for social restructuring. The corporation as an institution has played a role in propelling Malays into the business world. Directors of different races do sit on the same corporate boards, and most large industries have workers of various races working side by side. At the same time, it is also clear that Bumiputera business endeavor remains heavily dependent on the government, and it would appear that considerably more business training and management skills are needed if Malays are to compete on their own. Although the NEP has brought a narrowing of economic differences between races, it is no secret that there has been a significant increase in intra-racial inequality, as evidenced in income levels and asset ownership. Moreover, as a reaction to the NEPs emphasis on Malay welfare, non-Bumiputera have formed a large number of self-help institutions in the form of cooperatives, education funds, and communitybased corporations. These have been on a much smaller scale than the governmentbacked Bumiputera institutions, and they have been notably unstable. In the mid1980s the financial insolvency of many deposit-taking businesses, including cooperatives, further shook the confidence of non-Bumiputera in their ability to withstand the presures of the NEP. This, together with capital flight by better-off Chinese, was an expensive lesson in the limits of employing the corporate form for social objectives. We have seen that, rather than rely on nationalization to secure local command of resources, Malaysia has taken the more acceptable path of public issues of stocks 53

Information Malaysia 1986 Year Book (Kuala Lumpur: Berita Publishing Sdn. Bhd., 1986). Ozay Mehmet, Development in Malaysia: Poverty, Wealth and Trusteeship (London: Croom Helm, 1986), p. 108. 55 New Straits Times, September 23,1983. 54

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and the acquisiton of corporate control, as exemplified in its buying-up of Guthrie stocks in the London markets. Such massive purchases cannot be conducted without full government support, and the consequence has been companies with substantial bureaucratic connections. Indeed, we have observed throughout this article the strong linkage of politics with business in Malaysia. This in itself casts doubt on the stability, performance, and future of the many new, politically connected business groups. We will only really be able to judge their viability when, over time, their particular political shelters are removed. Perhaps the single most critical issue in the present-day corporate sector of Malaysia is that of control: internal business control over the deployment of assets by management, internal corporate control of management by shareholders, and external control by relevant sectors and authorities to ensure the acceptability of enterprises within the larger socio-economic system. We have seen that enormous economic power is wielded by corporate heads, regardless of the basis on which they first grouped together. To what extent does this power meet the essential criterion of being seen as legitimate, responsible, and accountable? Speculation and peculation marked Malaysian corporate development in the 1980s and have done much to discredit the corporation as an institution in the public's eye. A remedy is the more elusive because the government itself has become a business partner rather than keeping to its earlier claims to be impartial guardian of social equity and justice. What are the reins available to check the phenomenal economic power concentrated in the hands of corporate leadership? Market forces, which are inextricably related to technological and organizational capabilities, do serve to check on efficiency and the achievement of corporate goals. But they usually come into play only when it is too late for them to be a means of controlling corporate behavior. Besides, there exist too many artificial obstacles, such as government intervention, for them to function effectively for this purpose. Nor does legal regulation offer great promise, however well it may serve elsewhere. In Malaysia the lawmakers have gotten too involved in the game themselves, and few officials have the courage and independence to enforce the controls that do exist. This is particularly so because the government has utilized corporations not only as a means of getting things done but also as an extended arm of bureaucratic power. Officials thus have an institutional interest in preserving corporate freedom from public scrutiny. Self-regulation, widely employed in developed economies, has been attempted in Malaysia, for example in the early days of the securities industry. However, its success is highly dependent on the values of big-business leaders, and we find little consensus on standards of behavior among Malaysian entrepreneurs, or indeed within the society as a whole. So far, relevant business knowledge has been seen in terms of command over information and the ability to turn a profit, to the exclusion of ethics, social obligation, and responsible administration. Social control of business behavior did not seem a critical issue as long as Malaysia's economic growth rate remained high. For one thing, the NEP was based on the assumption of a continually expanding economy. This depended on increased productivity and the efficient allocation and utilization of resources, hence on buoyant business activity. Besides, in a developing economy incentives for new industries and entrepreneurial endeavor generally were perceived as essential, and not too many questions were asked about how success was achieved. But, as we have seen, the bases for new business ventures in Malaysia have tended to be political and speculative rather than economically rational and productive. Can corporations

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based on elite political connections be useful for the reduction of poverty, income redistribution, and economic prosperity at large? The prolonged recession of the 1980s, which witnessed heavy business losses, retrenchments, and failures, contraction of productive capacity, and a high rate of bankruptcies, resulted in a shrinkage of the economic pie. Even state and politically backed enterprises were not spared. The result was to expose some of the weaknesses of corporate development under the NEP, for the government could no longer ignore economic realities in favor of political connections. The misadventures of Tan Koon Swan and his stable of companies in the Pan-Electric group, the Makuwasa furore, the Multi-Purpose shakeout, the Bumiputera Malaysian Finance scandal (triggered by the collapse of the property market in Hong Kong), and the woes of many stateowned companies were all products not simply of hard times but of the inability of the government to camouflage the problems. Compared to the family-owned businesses and partnerships of earlier years, the corporate form is a particularly powerful way of pooling capital and other resources. It offers greater scope for vision, the possiblity of overcoming communal demarcations, and a way of integrating state and business interests. But if the interests of corporate profit are allowed to reign unchecked, without reference to social values, and if cooperation between government and business serves not to facilitate genuine enterprise but to shield the privileged from the consequences of mismanagement, then the ultimate consequences of the new form will be negative and divisive. As Adolf A. Berle Jr. aptly described, the corporation is "a commercial instrument of formidable effectiveness, feared because of its power, hated because of the excesses with which that power was used, suspect because of the extent of its political manipulations within the political state, admired because of its capacity to get things done/'56 56

A. A. Berle Jr., foreword in The Corporation in Modern Society, ed. Edward Mason (Cambridge, Massachusetts: Harvard University Press, 1961), p. x.

THE CHINESE BUSINESS ELITE OF MALAYSIA Heng Pek Koon

T

he Chinese business community in Peninsular Malaysia has often been described as pessimistic about its future in the country, particularly in view of the prospect that the New Economic Policy (NEP), first established in 1970 as a 20-year program aimed at uplifting the economic position of the Malays, will be continued into the indefinite future.1 However, despite anxieties on this score, Chinese business activities in Malaysia have in many respects held their own, and some businessmen have vastly expanded their fortunes. This paper examines how certain members of the Chinese elite have prospered under the NEP. It focuses on the two major expressions of large-scale Chinese business activity—the most successful individual entrepreneurs and the pooled-resource corporations. The latter have been established by key institutions of the Chinese community, particularly the Malaysian Chinese Association (MCA), the largest Chinese political party and a member of the ruling Barisan Nasional (National Front) coalition, and the Associated Chinese Chambers of Commerce (ACCC), a coordinating body of some several hundred medium to large Chinese businesses. In examining the resilience and success of some leading members of the Chinese business community in Malaysia, we find an apparent paradox: while the Chinese family-oriented closed corporation, based on an individual tycoon and his family, has heretofore often been thought to limit Chinese capacity for capital mobilization and organizational expansion, it is precisely such firms which, in alliance with powerful Malay patrons, have prospered the most. However, such business activities appear inherently fragile, for, whatever security successful Chinese tycoons may feel as a result of the present prosperity and their own powerful connections, they realize their fortunes could be severely affected by changes within the Malay power structure. In addition, they know they always have the alternative of relocating their capital (and themselves) overseas, and many appear to be hedging their bets and following this course. Thus, the "success stories" described in this paper may merely reflect a transitional phase, or (from the perspective of the Malay power structure) a temporary "alliance of convenience" which serves as a necessary half-way station enroute 1

Malaysian Prime Minister Mahathir Mohamad stated that the NEP will be maintained until the Malay community, which presently holds 18 percent of the country's corporate wealth, attains its target level of 30 percent. The Nation (Bangkok), November 10,1987.

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to complete Malay and foreign dominance of the major economic institutions of the country. In describing the patterns of Chinese big business and its relationship to the Malay national power elite (represented by aristocrats, politicians, bureaucrats, and military leaders), as well as foreign interests, I will concentrate on those individuals, families, and groups that are considered to have provided dynamic, innovative leadership in the development of the Malaysian economy in recent years. Typically, they control the businesses they manage through ownership of large blocks of shares sufficient to dominate company policy and most decision making. The eleven individuals treated as case studies here include all of the seven Chinese businessmen who received "Entrepreneurs of the Year" awards in 1985 (the last time such awards were given) for outstanding performance and contributions to the Malaysian economy: Tan Sri Chong Kok Lim, Tan Sri Khoo Kay Peng, Tan Sri Lee Loy Seng, Tan Sri Lim Goh Tong, Datuk Loh Boon Siew, Datuk Loy Hean Heong, and Robert Kuok Hock Nien.2 In addition, I have selected four other individuals who by virtue of leadership of top-ranking public companies have been among the most prominent business leaders in the country: William Cheng Heng Jem, Quek Leng Chan, Tun H. S. Lee and family (in particular, his son Alex Lee), and Datuk Teo Soo Cheng and family.3 The individuals on the one hand and the institutions on the other reflect quite different strategies and approaches to the survival and advancement of Chinese economic interests under the NEP. The individuals follow an integrationist, multiracial approach through the cooption of influential Malay partners as company directors and shareholders. The institutions, in contrast, view Malay business interests primarily as competitors for scarce economic resources. In this respect, Multi-Purpose Holdings Bhd. (MPH), the multi-million dollar holding company established by the MCA, and Unico, the investment arm of the ACCC, are economic expressions of the communally based approach of MCA politics. SOCIAL BACKGROUNDS AND BUSINESS ACTIVITIES OF THE ELITE

Prominent Chinese business leaders of the current generation share several major characteristics: (1) their social and dialect group backgrounds are so diverse that it can be said there has been no discernable primary route to economic power; (2) most represent "new money" in the sense that they made or vastly expanded their fortunes after the beginning of the New Economic Policy; (3) their business interests are quite diversified and have become international; and (4) they are all closely tied to Malay patrons and allies, who protect them and give them access to joint-venture opportunities and foreign capital. Each of these findings will be discussed in turn. Of the eleven tycoons, five were China-born (Chong Kok Lim, H. S. Lee, Lim Goh Tong, Loh Boon Siew, and Teo Soo Cheng), four were local-born Malaysians (Khoo 2

The remaining three businessmen receiving the awards were Tunku Imran Tuanku Jaafar, Datuk Syed Kechik Syed Mohamed, and Tan Sri Kishu Jethanand. 3 H. S. Lee died in 1989, leaving his three sons to take charge of the family business. Although I interviewed the former MCA president and finance minister Tun Tan Siew Sin in connection with this study, I have not included him among the eleven who are the focus of the paper, because the company of which he is chairman, Sime Darby Bhd., is owned by Malay interests. Nonetheless, his proven record of business success and effective interaction with Malay political and economic elites exemplifies the points made in the study regarding the prerequisites for business success in Malaysia today.

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Kay Peng, Robert Kuok, Lee Loy Seng, and Loy Hean Heong), and the remaining two (William Cheng and Teo Soo Cheng) were born in Singapore. The majority of them are Hokkien: Khoo Kay Peng, Robert Kuok, Lim Goh Tong, Loh Boon Siew, Loy Hean Heong, and Quek Leng Chan. Of the remaining five, two are Cantonese (Lee Loy Seng and H. S. Lee), two are Teochew (William Cheng and Teo Soo Cheng), and one is a Hakka (Chong Kok Lim). With the exception of H. S. Lee, who was educated in Chinese and English up to the tertiary level, the China-born leaders received limited formal education in Chinese. The Singaporean- and local-born leaders were educated in English, except for Lee Loy Seng and William Cheng, who received education in both English and Chinese. Of these only two were educated beyond the secondary level: Robert Kuok and Quek Leng Chan. With regard to political activity and participation in Chinese community affairs, the China-born and/or China-educated have tended to play key roles in the activities of Chinese associations (huay kuan) and Chinese chambers of commerce (CCC). For example, Lim Goh Tong is a leader of the Selangor CCC and Hokkien huay kuan, while Chong Kok Lim is a leader of the Perak CCC. English-educated business leaders, in contrast, tend not to play active roles in the affairs of the CCC and huay kuan, although their leadership and financial patronage are often sought by their respective clan and dialect associations. Apart from H. S. Lee, a former top-ranking MCA leader and minister of finance, and Lee Loy Seng, a former MCA member of the upper house of Parliament, the Chinese businessmen studied here are not actively aligned to any political party. The sources of wealth of these men are as diverse as their backgrounds. Three of them (H. S. Lee, Lee Loy Seng, and Quek Leng Chan) inherited the capital which is the basis of their current wealth, three (Chong Kok Lim, Lim Goh Tong, and Loh Boon Siew) began virtually as penniless immigrants, three (Robert Kuok, William Cheng, and Teo Soo Cheng) came from middle-class trading families, and two (Loy Hean Heong and Khoo Kay Peng) began as salaried professionals. Thus, the large majority of these elites represent "new money" as opposed to inherited wealth. Although the NEP was conceived to advance Malay business interests, it has offered a framework within which these men could significantly expand their fortunes. By adapting to the new rules established by the NEP, especially by forging close links to the centers of Malay power, these tycoons have achieved success far beyond that of Chinese businessmen who have remained within the traditional "ghetto" or "Chinatown" economy characterized by small-scale trading and manufacturing activities, and service industries such as small hotels and restaurants. A post-NEP development that greatly benefitted Chinese big business was the splitting off of the Kuala Lumpur Stock Exchange (KLSE) in 1973 from its parent Singapore body. The establishment of the KLSE, by dramatically expanding the Malaysian domestic capital market, provided an unprecedented source of capital for financing corporate expansion. This rich lode of private-sector funds was quickly tapped by numerous Chinese businessmen, including several of the tycoons treated in this article. The business empires of Khoo Kay Peng and Loy Hean Heong, in particular, grew almost overnight through a complicated and fast-changing series of share swaps, as well as periodic new share issues. A brief analysis of the nature of the business concerns of these tycoons within the context of NEP targets for corporate equity holdings highlights the strengths and weaknesses of Chinese business activities in the country. Government statistics on

130 Southeast Asian Capitalists the distribution of equity holdings by race show that Malay ownership of corporate wealth in the country has grown from 2.4 percent in 1970 to 17.8 percent in 1985, while the foreign share has dropped from 63.3 percent to 25.5 percent. During the same period the non-Malay (largely Chinese) share grew from 34.3 percent to 56.7 percent.4 These figures, however, have been strongly disputed by Chinese political and business leaders on the grounds that two variables have been wrongly computed.5 There is reason to think they are right. The holdings of nominee companies and locally controlled subsidiaries of foreign-based corporations, in which Malay ownership is considerable, have been counted in their entirety as non-Malay owned. Moreover, the very substantial Malay ownership of corporate plantation wealth has been excluded from the computations of the Malay figures. Should these deviations be corrected, the revised figures may well show that Malays attained their 30 percent target of corporate wealth as early as 1983-1984. More significantly, the Malay share of corporate equity has surged well ahead in the sectors most important in generating growth and export earnings: banking and finance, manufacturing, minerals and petroleum extraction, and plantation agriculture. The eleven entrepreneurs studied here are in the vanguard of Chinese corporate growth, with their combined business activities spanning all sectors of the Malaysian economy, from the traditional plantation and mining sectors to the more modern ones of manufacturing, property development, and finance.6 The greatest proportion of their investments has been concentrated in property development and construction and manufacturing, (although the large-scale heavy industrial sector, including car assembly, is dominated by state-run enterprises). While they also have some holdings in plantations and mining, the lion's share of these traditional industries, once the domain of British capital, has come under Malay ownership represented by large state-run enterprises, in particular Pernas (Perbadanan Nasional, or National Trading Corporation). Chinese performance in the financial sector has likewise been eclipsed by Malay capital accumulation. By mid-1984 it was estimated that equity held by Malay trust agencies and individual Bumiputera in the commercial banking sector amounted to 75 percent (61.9 percent and 13.1 percent respectively).7 Furthermore, Chinese businesses have also been largely excluded from the country's most recent growth sectors, those of petroleum extraction and high technology, which are dominated by foreign—particularly American and Japanese—interests in joint venture arrangements with the state. In the manufacturing sector, Malay capital investments have 4 Third Malaysia Plan 1976-1980 (Kuala Lumpur: Government Press, 1976), p. 86; and Far Eastern Economic Review (hereafter, PEER), September 25,1986. For a good discussion of changes in patterns of ownership and control of the various economic sectors in the post-NEP period, see Tan Tat Wai, Income Distribution and Determination in West Malaysia (Kuala Lumpur: Oxford University Press, 1982), ch. 5. 5 Parti Gerakan Rakyat Malaysia, DEB INEP] Selepas 1990 (1983), Table 2, p. 187; and Malaysian Chinese Association, Report of MCA National Task Force on Deviations in Implementation of the New Economic Policy (NEP) (1988), pp. 29-33. ° The information in Appendix A contains the breakdown of company activities and membership of boards of directors as of 1986/87. 7 New Straits Times, August 4,1984. See Benny Liow Woon Khin, "Malaysia's New Economic Policy and the Restructuring of Commercial Banks, 1971-1983," Kajian Malaysia, 4,1 (June 1986), for a discussion of the state's growing role in the financial sector.

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dramatically outstripped those of Chinese companies.8 The pervasive penetration of Malay state capital, often in alliance with foreign partners, into these key sectors of banking and finance, high technology, and manufacturing, as well as the "staple" plantation and extractive resource (in particular, petroleum) sectors appears increasingly likely to marginalize the role of Chinese capital, especially medium and small scale capital, and push it toward traditional "ghetto" specializations. Although the overwhelming proportion of their assets and operations are located in Malaysia, and their profits are mainly re-invested in the country, leading Chinese businessmen have also established many joint ventures with foreign interests. The most substantial portion of their foreign operations are in Singapore, and Singaporean Chinese are their most frequent business partners. The Hong Leong and See Hoy Chan groups in Malaysia sprang from Singaporean parent bodies, and almost every other group described here has business interests in Singapore. They also have substantial connections with Overseas Chinese businessmen residing throughout Southeast Asia: for example, the Kuok Bank, expressed in the Shangri-la Hotel in Bangkok, William Cheng's Lion Group's steel interests in Indonesia, and the Hong Leong group's interests in the Dao Heng Bank in Hong Kong. Other major foreign interests in the companies studied here include Japanese (in the sugar enterprise of the Kuok group, the Honda motor vehicle assembly plant of Loh Boon Siew, and the electrical appliance business of the H. S. Lee family); Australian (in Lim Goh Tong's Genting and Khoo Kay Peng's MUI group); English (Manson Finance Trust in the Hong Leong group); and Canadian (in Khoo Kay Peng's MUI group). Of the groups studied here, the international business ties of the Kuok family are by far the most extensive. The group's offices incorporated in Singapore and Hong Kong manage a major portion of its interests spanning all of Southeast Asia, as well as Fiji, China, and Australia. While the level of investments in overseas enterprises is still relatively low, these entrepreneurs appear interested in widening their foreign linkages, especially with North America and Australia. They perceive that there is limited room for growth in Malaysia, because of the size of the domestic market and the political and economic constraints of the NEP. It is also clear that, whenever adverse economic conditions in the country are compounded by a deteriorating political climate, the outflow of Chinese capital investments into overseas markets becomes especially heavy. While it appeared that Chinese money was moving out primarily to seek higher profit margins from more lucrative offshore investments during the 1985-1987 downturn in the Malaysian economy, anxieties over a then-growing authoritarian trend probably 8 Statistics compiled by the Malaysian Industrial Development Authority (MIDA) on the capital structure of companies in the manufacturing sector as of December 31,1987 show the leading position of Bumiputera in the economy. The breakdown of total paid-up capital (M$'000) was as follows: Bumiputera 5,439,996; foreign 4,960,717; Chinese 2,927,527; Indian 91,481; and nominee companies (including Bumiputera, non-Bumiputera , and foreign ownership) 1,905,864. Bumiputera capital investment exceeded that held by Chinese companies in the following industries industries: food manufacturing, beverages and tobacco, textile and textile products, leather and leather products, furniture and fixtures, paper and paper products, chemical and chemical products, petroleum and coal, non-metallic mineral products, basic metal products, machinery manufacturing, electrical and electronic products, and transport equipment. The figures likewise show that more Malays than Chinese were employed in the manufacturing sector: 225,303 compared to 120,922 persons. Malaysian Industrial Development Authority, Statistics on the Manufacturing Sector 1987, Table 18, p. 19.

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quickened the pace.9 With the country's economic recovery in 1988, the outflow of Malaysian Chinese money was staunched. The level of Chinese domestic capital rose dramatically, drawn by the return of profitability in local enterprises and encouraged by the government's moves to liberalize the climate for foreign and private domestic investments. Having successfully contained the challenge to his leadership of the ruling UMNO party, Prime Minister Mahathir Mohamad had become more conciliatory in his management of political and economic issues, thus gaining a higher level of commitment from the country's ever-pragmatic Chinese big businessmen. THE CHINESE BUSINESS ELITE AND THE MALAY POWER ELITE

The one factor which most clearly unites the Chinese business leaders is their reliance on a relationship with Malays in state power. To achieve such alliances they all use the corporate form as a means both of cutting in the Malays and expanding their capital base while not giving up individual control. Accepting the fact of Malay political dominance and seeing the need to establish their own lines of communications with prominent UMNO leaders, the aristocracy, the bureaucracy, the military, and other centers of Malay power, the successful Chinese businessmen have carefully chosen their Malay patrons and allies. For example, members of the various royal families, high-ranking former civil servants, and generals have been regularly sought for positions on their boards of directors. To a lesser degree, the tycoons have also coopted newly affluent Malay entrepreneurs. Since top-ranking UMNO politicians are not allowed to engage in business activities which are incompatible with their public responsibilities, individuals who have the ear of such national leaders are considered particularly desirable business associates.10 State governments, state-run enterprises, and state-supported savings and investment institutions are also courted vigorously as financial partners. Their participation ensures state protection and patronage, including expeditious facilitation of bureaucratic procedures, and provides a rich source of capital. Although the participatory level of Malay interests in their companies can be significant, the Chinese entrepreneurs retain centralized control of the businesses through ownership of large blocks of shares. Robert Kuok, for example, despite his close association with a vast panoply of Malay partners, is legendary for his tight control of the running of his family's vast business empire. The Kuok group, the most successful Chinese conglomerate in the country, exemplifies the way these Chinese tycoons have formed alliances with prominent Malay patrons. From its modest beginnings in the sugar and rice retail trade, the Kuok family has developed into one of Asia's largest sugar traders. The group integrated backwards into sugar cultivation and refining, and diversified into a wide 9

After narrowly surviving a bid by Trade and Industry Minister Tengku Razaleigh Hamzah to replace him as president in the UMNO party elections of April 1987, Mahathir took a number of controversial measures to consolidate his position. These included: the reorganization of UMNO into UMNO Baru, excluding Razaleigh and his backers from membership; the detention of over 100 of his critics from both government and opposition parties, as well as religious and civil rights groups; and the removal from office of the Lord President of the Supreme Court for objecting to the authoritarian actions of the government's executive arm. 10 Although cabinet ministers are required to divest themselves of large business holdings, it is known that some individuals have circumvented this ruling by transferring their interests to nominee companies headed by family members or trusted business aides.

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range of interests which include shipbuilding, flour and feed milling, property development and construction, and the world class Shangri-la chain of hotels. The Malay directors represented on the group's publicly listed companies reflect a judicious mix of individuals from different power centers within the Malay establishment. The aristocracy, for example, is represented by Tengku Suleiman Ibni Tengku Abdul Bakar and Tunku Osman Ibni Tunku Temenggong Ahmad, the military by General Tan Sri Ibrahim bin Ismail, and the bureaucracy by former top-echelon civil servants, Tan Sri Taib bin Andak and Tan Sri Nasruddin bin Mohamed. The position of Tunku Osman Ibni Tunku Temenggong Ahmad, a member of the Johore royal family, as chairman of the Kuok family's Johore-based real-estate company (Perusahaan Pelangi) is noteworthy, since land matters in Malaysia come under the jurisdiction of the states. Both Robert Kuok and his brother, Tan Sri Philip Kuok, are extremely well connected in the highest circles of UMNO. Robert Kuok's business expertise is frequently sought by the Malaysian government: he was a founder of Bank Bumiputera, the state-run bank, and of MISC, the state shipping enterprise. Philip Kuok has similar standing and is the among the handful of Malaysian Chinese to be appointed as an ambassador, having served in that capacity in Germany and the Benelux countries. State governments with substantial financial interests in the Kuok group include the Perak and Perils governments in Rahman Hydraulic Tin Berhad and the Johore state government in the Perusahaan Pelangi housing projects. State-supported savings and investment bodies with significant share-holding stakes in some of the Kuok-controlled companies include the trust funds for Malay pilgrims (Lembaga Urusan Tabung Haji—LUTH) and the armed forces (Lembaga Tabung Angkatan Tentera—LTAT). Peremba, a subsidiary of the Urban Development Authority (UDA), is the group's major partner in the Shangri-la Hotel complex in Kuala Lumpur.11 The Malay partners for the other tycoons are similarly well-connected aristocratic, bureaucratic, and military personages. Of special interest is the presence of Tan Sri Dato Haji Mohamed Noah bin Omar on the boards of directors of Khoo Kay Peng's MUI group, Lim Goh Tong's Genting Bhd., and Teo Soo Cheng's Paramount Corporation. As father-in-law of two previous prime ministers (Tun Abdul Razak and Tun Hussein Onn) and former speaker of the Dewan Rakyat, Tan Sri Mohamed Noah is regarded as being able to fulfill the role of a general protector. Other Malay partners appear to be selected on the basis of their special influence or connections in a specific line of business, as in the case of Tan Sri Nasruddin bin Mohamed, the chairman of William Cheng's Amalgamated Steel Mills. Having served as secretarygeneral of the Ministry of Trade and Industry, Tan Sri Nasruddin is especially well qualified to advise on commercial matters. Few of the Malay partners are themselves prominent businessmen. Those rare Malays who have achieved great wealth tend to operate either independently or in collaboration with foreign business interests. For the overwhelming majority of contemporary Malay tycoons, well-placed connections within the Malay aristocraticpolitical nexus remain the all-important ingredient in the amassing of personal fortunes. In the group of Malay business partners sought by the Chinese entrepreneurs studied here, only one man, Datuk Syed Kechik bin Syed Mohamed, stands out as being a highly successful businessman in his own right. The self-made millionaire, 11 Kuala Lumpur Stock Exchange (hereafter KLSE), 1985 Annual Companies Handbook (Kuala Lumpur: UPA Press), pp. 171-72,549,1004,1106.

134 Southeast Asian Capitalists who made his fortune while an adviser to Tun Mustapha bin Dato Harun, chief minister of Sabah from 1965 to 1976, has substantial equity holdings in the Lee family's Development and Commercial Bank and Chong Kok Lim's Sri Hartamas, a realestate and property-development company.12 Malay institutions rather than individuals are the major investors in the businesses of the tycoons. LTAT has substantial equity in the corporations run by four of the businessmen studied here: Quek Leng Chan, Lim Goh Tong, William Cheng, and Loh Boon Siew. Amanah Saham Nasional (ASN, or National Unit Trust) has significant equity in the businesses of William Cheng, Lee Loy Seng, and Khoo Kay Peng. Other significant Malay investment institutions include Pemodalan National Bhd. (PNB—established to hold share equity in trust on behalf of the Malay community), Federal Land Development Authority (Felda), UDA, Kompleks Kewangan Industries (the investment arm of MARA), and Syarikat Nominee Bumiputra Sendirian Bhd. (a government agency investment body). As Lim Mah Hui pointed out in his study of the country's 100 largest corporations, Malay directors are often functional directors (as opposed to owner directors and executive-professional directors), who perform essentially extra-economic protective functions for the corporations.13 While Lim's typology is still generally valid, the Malay participation in the companies of the entrepreneurs studied here does not appear to be just "Ali-Baba" arrangements where the Malay partners are simply paid generous directors' fees for their patronage and special services. Malay interests in these companies are much more than nominal, as evidenced by the major involvement which Syed Kechik had in the businesses controlled by Chong Kok Lim and the H. S. Lee family during the mid-1980s. The "Ali-Baba" relationship is more prevalent among the ranks of Malay and Chinese small- to medium-sized companies, especially those requiring construction contracts and timber licenses. In such instances, the Malay concessionaire collects a fee from his Chinese partner, who operates the business. CHINESE ECONOMIC INSTITUTIONS: MPH AND UNICO

MCA politics during the period following the attainment of independence in 1957 until the racial riots of May 1969 revolved mainly around Chinese cultural and educational issues. The Alliance leadership's gradual, low-key implementation of Malay special rights fell far short of the needs and expectations of the Malay community. When the groundswell of Malay discontent finally broke out in a violent display of anti-Chinese sentiment, the UMNO leadership acted to reassert its authority and legitimacy within the Malay community, primarily through the implementation of theNEP. Faced with the gravity of the NEP's constraints on Chinese business activities, the question of safeguarding the future of Chinese commercial life became the foremost concern of the community's leadership. The MCA, the custodian of Chinese business interests, spearheaded an innovative "self-strengthening" movement to invigorate Chinese business practices. At a series of economic conferences organized 12

In an interview with Alex Lee on April 14,1987, the writer was informed that his family then held 33.22 percent of total shares in the Development and Commercial Bank while Syed Kechik held 30 percent. Due to heavy personal financial setbacks during the recession, Syed Kechik had to reduce substantially his holdings in both the bank and Sri Hartamas. 13 Lim Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (Singapore: Oxford University Press, 1981), pp. 66-69.

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during the early 1970s by the party's English-educated professional leadership in Kuala Lumpur and Petaling Jaya, the clear consensus was that traditional Chinese business practices had become outmoded.14 It was pointed out that in 1970/71, 77 percent of Chinese firms were under-capitalized and labor-intensive family-based enterprises operating as sole proprietorships or partnerships.15 The MCA leadership argued for the corporatization of assets held by individual family businesses, as well as those held collectively by voluntary associations and clans (estimated to total about 4,000) into financially viable "multi-purpose'7 enterprises able to withstand the economic rigors imposed by the NEP. While the MPH was conceived as a key component in the MCA's grandiose plan for Chinese economic self strengthening, the political motive behind its formation was particularly evident. Party president Lee San Choon launched the MPH as part of his five-point program to recoup the party's fortunes, following its debacle in the general elections of May 1969, by addressing the most pressing needs of its constituency as a response to the NEP.16 At the same time, by getting the CCCs and huay kuan to corporatize, the MCA leaders hoped to re-establish the close relationship the party had had with such groups in the 1950s, but had steadily lost during the 1960s.17 Thus were born the large shared-capital Chinese corporations. However, from the beginning their purpose was clearly at least as political and social as it was economic. Those bodies encouraged by the MCA were seen as serving the function of mobilizing support for the party, while the others were closely tied to the CCCs and huay kuan in both leadership and support. Serving as both political/social and economic institutions, they have suffered from a lack of clear-cut business objectives, ineffective management, and divided leadership. Moreover, they did not immediately attract large-scale support from the Chinese tycoons and thus remained under-capitalized. Their most fundamental problem, however, has been lack of access to state patronage and Malay holders of power. With great fanfare, the MCA established MPH in 1975 to spearhead the reformation and modernization of traditional Chinese business practices. Lee Loy Seng, one of the community's most successful and reputable business leaders, became the company's first chairman. The rubber magnate held this office until 1983, when he was replaced by Tan Koon Swan. Tan Koon Swan, previously a general manager of Lim Goh Tong's Genting Bhd., was one of Malaysia's most spectacularly successful Chinese businessmen of the NEP era until his conviction by the Singaporean and Malaysian governments (in 1986 and 1988 respectively) for improper trading practices. As managing director of MPH from 1977, Tan Koon Swan was the principal architect of its initial growth and expan14

See, for example, the speech by Dr. Neo Yee Pan entitled 'The Role of Chinese Business in the Context of our National Objectives," delivered at the MCA Economic Conference held on March 3,1971. 15 Speech by Lew Sip Hon entitled "Contributions of the Chinese in the Private Sector of the West Malaysian Economy," delivered at the MCA Economic Conference held on March 3, 1971. 16 The other four points were: construction of a new party headquarters building, establishment of a Chinese cultural center, a membership-recruitment drive, and expansion of the party-sponsored Tunku Abdul Rahman College. 17 During the 1950s the CCC and huay kuan played pivotal roles in mobilizing popular support for the MCA. See Heng Pek Khoon, Chinese Politics in Malaysia: A History of the Malaysian Chinese Association (Singapore: Oxford University Press, 1988), chaps. 4, 7.

136 Southeast Asian Capitalists sion.18 Through a series of acquisition sprees financed chiefly through syndicated bank loans, bonus issues, and share swaps, Tan built the company into a giant conglomerate with the largest issued and paid-up capital (over M$571,000,000) of the companies listed on the Malaysian stock exchange in 1985, some 18,000 employees, and interests in all the vital sectors of the Malaysian economy—finance, property development, manufacturing, plantations, shipping, and trading.19 The MCA Youth Cooperative Society, Koperatif Serbaguna Malaysia (KSM), set up in 1968 by the party's lower middle class membership, became the largest shareholder in MPH, holding just over 40 percent of share equity. The assets of KSM, used as collateral for bank loans, in fact provided a main source of financing MPH's growth. The bulk of KSM shares were held by some 80,000 families, mostly from 450 Chinese "New Villages" and small towns.20 Wealthy Chinese businessmen took out token to modest subscriptions of the remaining portion of the company's shares, which were bought up by several thousand small Chinese traders and investors. While shareholding is open to non-Chinese, the level of Bumiputera and Indian participation is nominal, standing at 0.13 percent as of December 1984.21 The formation of a spate of Chinese holding companies representing the interests of the CCC-huay kuan network in the country reflected the MCA's success in promoting Chinese corporatization of assets. In the late 1970s and early 1980s, proposals to establish holding companies to advance the economic interests of the CCC-huay kuan membership abounded. In the event some two dozen small- to medium-sized holding companies were set up.22 These included dialect huay fcwan-sponsored bodies such as the Hok Lian and Fui Lian of the Hokkien community; the Kar Yin and Hor Lian of the Hakka community; the United Teochew Holdings Bhd. of the Teochew community; and Grand Ocean and Mewah cooperatives of the Hainanese dialect group. In the forefront of the trade guild-based holding companies was Fun Sun Holdings, formed to represent the interests of the hawking profession. Apart from these, individual MCA state branches also organized holding companies to support the activities of MPH: thus the Johore, Perak, Selangor, and Pahang branches formed the Ma Tang, Pik Hwa, Aik Hwa, and Pan Hwa Holding Companies respectively. Unico, the largest and most important of the CCC-huay kuan holding companies, was formed as the investment arm of the country's paramount Chinese trade association, the ACCC, which comprises seventeen constituent chambers representing more than 20,000 small- to medium-sized business and individual members.23 As with the other CCC and huay tefln-sponsored holding companies, the board of directors of 18

Bruce Gale, Politics and Business: A Study of Multi-Purpose Holdings Berhad (Singapore: Eastern Universities Press, 1985) is a well-documented study of the company which in retrospect appears to have been excessively optimistic about the group's prospects. 19 KLSE, 1985 Annual Companies Handbook, pp. 468-69. Appendix B lists the group's business interests as of December 1985. Note that Ghafar Baba, who was appointed deputy prime minister when Datuk Musa Hitam resigned from that office in 1985, was then chairman of Dunlop Estates. He has been one of the few prominent UMNO leaders to serve on the board of directors of a Chinese-run company, an affiliation which dates back to previous shareholding in Dunlop Estates by Ghafar Baba's company, Pegi Bhd. 20 Asiaweek, June 22,1986. 21 KLSE, 1985 Annual Companies Handbook, p. 471. 22 Information on the activities of the holding companies was provided to the writer by Khor Keng Kee, executive secretary of Unico, on February 27,1986. 23 1985 Handbook of the Associated Chinese Chambers of Commerce and Industry of Malaysia, p. 1.

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Unico is largely made up of office holders of the sponsoring body. The company has established subsidiaries to operate businesses in plantations, credit and leasing, investment holdings, property development, trading, and management and consultancy. PERFORMANCE OF BUSINESS ELITES AND HOLDING COMPANIES

The Malaysian economy remained relatively buoyant until 1981, when worsening oil and commodity prices finally began to affect it seriously. The country's gross domestic product (GDP) growth rate shrank to 1 percent in 1985, compared to the impressive 5 to 8 percent annual levels it had been achieving during the previous fifteen years.24 The economy continued to languish until improving world prices for Malaysia's major export commodities (petroleum, timber, rubber, tin, and palm oil) led to a strong recovery in 1988. Until the plunge, business activities in the country had been quite profitable across the board, with the enterprises of the eleven individuals studied here showing some of the highest rates of success. Although the recession inevitably bit into their profit margins, the majority of the businesses proved to be viable concerns earning respectable profits. Some did exceedingly well; Genting, for example, emerged as the most profitable public company in 1985.25 However, companies which had relied heavily on external borrowings to finance growth fell victim to the pressures of a stagnating economy. The collapse of Chong Kok Lin's highly geared real-estate empire was one of the recession's more notable events. Loy Hean Heong's Malaysian Borneo Finance Corporation, which had likewise been prone to heavy bank borrowing during its dramatic growth in the early 1980s, rode out the recession severely weakened but intact. In the late 1980s, a few other companies began to lose their growth momentum. The changes which affected these enterprises illustrate two major vulnerabilities of Chinese entrepreneurship in Malaysia: the family-based nature of ownership and control, and dependence on Malay political patronage. Sibling rivalry and family dissension within the Teo family, as well as reluctance to bring in outside professional management expertise—a characteristic common to traditionally run Chinese family businesses—has troubled the See Hoy Chan Group. While the business is still sound, its fragmentation into smaller entities by contending family members has left it less solidly grounded and more vulnerable to hostile takeovers. Khoo Kay Peng's problems in the MUI Group were widely said to have resulted from the displacement of former finance minister Tengku Razaleigh Hamzah from the corridors of power. Khoo's close relationship with the UMNO leader, who had played a key role in developing the country's growth strategies from the early 1970s until the mid-1980s, had been a great asset to his business career. Tengku Razaleigh lost his influence when Prime Minister Mahathir successfully fought off his attempt to replace him as UMNO president and subsequently had him excluded from office 24 25

PEER, September 25,1986. Asiaweek, June 15,1986.

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in the newly constituted UMNO Baru.26 As Khoo had been identified as a Razaleigh supporter during the acrimonious struggle, his access to the power center was seriously diminished. When Khoo divested his shareholding in the MUI Group from around 30 percent to 10 percent, it was believed that the decision stemmed from an understanding that his weakened political standing with the Mahathir government would be detrimental to the future well being of the company.27 Changes have also come to the H. S. Lee family's business interests centered on the Development and Commercial Bank and Roxy Electric Industries. The death of founder and patriarch H. S. Lee and the appointment of his son Alex Lee as deputy agriculture minister in 1987, a position which obliged him officially to divest many of his business interests, has made the family's holdings more vulnerable to outside takeover attempts. Although the businesses of the individuals and families discussed above experienced setbacks of varying severity during the recession years of the mid-1980s, the large majority of family-based Chinese big businesses continue to be strong and profitable concerns. In contrast to these overall successful performances, the holding companies have fared poorly. MPH, after taking off in a promising manner, turned out to be the greatest disappointment. Even in the period of high economic growth the company was able to generate only marginal profits; and in 1986 it declared losses of some M$200 million, the largest ever for any local firm. The following year it recorded an even greater loss of M$228 million.28 The performances of Unico and the other holding companies have been decidedly lackluster. Of the seven subsidiary companies formed by Unico, only two, the plantations and the management and consultancy divisions, were operational in mid-1984. Except for some investments in property development undertaken by a few huay kuan holding companies, the majority of these have remained essentially inactive as well.29 While the dramatic differences in performance between the tycoons and the holding companies can be attributed to such business-related causes as recessionary pressures, bad management, and faulty business judgement, the more fundamental reasons for the failings of MPHB and the other holding companies appear to be political. Although they were set up to advance Chinese business interests, their selfconscious Chineseness has inevitably given them a political character which has undermined their effectiveness as economic institutions. Although at the time of the MPH's establishment the MCA leaders took care to temper their rhetoric with assurances to Malay leaders that the MPH was an extension of MCA-UMNO political cooperation into the economic field, and although they established a small joint-venture housing project with UMNO's investment arm, 26

Tengku Razaleigh, backed by several hundred UMNO dissidents who were likewise excluded from UMNO Baru, subsequently formed a new party, Semangat '46 (Spirit of '46), to continue his fight against Mahathir. This party was soundly defeated in the October 1990 elections. 27 Khoo currently shares control of MUI with the company's two new major shareholders, IGB Corporation and Inter-Pacific Industrial Group, both of which are Chinese controlled. The alliance of these three corporations, with their extensive interests in property development, manufacturing, and gambling, is expected to become a leading corporate force in Southeast Asia. 28 Asiaweek, June 22,1986; PEER, May 21,1987. 29 Interview, Khor Keng Kee, February 27,1986.

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Pemodalan Bersatu Bhd. (PBB), they were unable to allay the UMNO leadership's considerable suspicion. Some leaders, such as Datuk Suhaimi Kamaruddin, the then UMNO Youth leader, were outspokenly hostile to the MPH as a competitor with state economic institutions. Datuk Suhaimi's antagonism ultimately prevented the MPH from gaining a controlling stake in the country's third largest bank, the United Malayan Banking Corporation (UMBC), and forced the MCA to accept a compromise solution which gave Pernas and MPH joint control of the bank, with each holding an equal 20.34 percent stake.30 In the early 1980s MPH and PNB appeared to be competing for controlling stakes in British-based companies owning Malaysian resources. It was, not surprisingly, an uneven contest, for PNB had access to federal funding as well as government-secured loans from international banking syndicates at highly competitive interest rates. An outstanding example of this competition was the Guthrie takeover bid. In mid-1981 Tan Koon Swan announced that MPH had purchased a 71 percent stake in Guthrie Bhd., a trading subsidiary of the London-based Guthrie Corporation.31 A few months later PNB emerged with the bigger prize: a controlling stake in one of the largest plantation groups in Malaysia. MPH rallied with a bid for Dunlop Estates, a medium-sized estate group. Although UMNO Youth attempted again to obstruct the purchase, MPH was eventually allowed to go through with it, perhaps because by this point PNB already controlled Sime Darby. That purchase, together with the newly made acquisition of Guthrie Corporation and the intended purchase of Harrisons and Crosfield, would and did give the Malay community the predominant share of the plantation sector. MPH's purchase of Guthrie Bhd. (renamed Mulpha Trading) was said to have been transacted at a price well above the market value of the company.32 That the group borrowed heavily to finance the purchase indicated its willingness to pay uneconomical prices in its efforts to rival PNB. It may be said that the fact MPH was managed for so long by a man with obvious political ambitions added considerably to its problems. The company was undeniably the power base which facilitated Tan Koon Swan's rise to the office of MCA party president in November 1985. His position as managing director of M*PH enabled him to build up support among the numerous MCA members who comprised the majority of the corporation's small investors, a group already culturally inclined to give immediate social and political status to anyone with obvious business acumen and rapid acquisition of wealth. Tan's MPH position also enabled him to gain allies among other MCA leaders who served on the group's boards of directors, and it widened his access to important contacts in the Chinese business and professional community in general. The MCA English-educated professional leadership, which was small in numbers but dominated the influential branches located in the Federal Territory, tended to support Tan Koon Swan. They were impressed by his good relations with top-ranking UMNO leaders and believed his proven abilities as a modern corporate manager gave the potential to lead the MCA to success through economic reform. 30

See Gale, Politics and Business, pp. 141-53. MPH subsequently sold off its shares to Daim Zainuddin prior to his becoming finance minister. Daim in turn sold off his interests to Pernas, which is presently the bank's largest shareholder. 3 ^ Business Times, June 14,1981. 32 Asiaweek, June 22,1986.

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When Tan Koon Swan challenged Acting President Neo Yee Pan for the party's top position, MPH inevitably became caught up in the twenty-month period of fierce infighting which undermined morale within MPH and produced severe tensions between employees of the company and MCA-employed workers (both of whom worked out of the same MCA headquarters building). The bitter and sustained struggle seriously debilitated the party and severely damaged its standing with the Chinese community at large, thus contributing to its poor performance in the August 1986 national election. Apart from negative business consequences that have arisen from politically motivated policies, MPH's financial problems also stemmed from causes that are more strictly economic. In particular, MPH's corporate strategy and management style, both of which have carried the strong imprint of Tan Koon Swan, have made the company highly vulnerable to difficult economic conditions. It was Tan's penchant for relying on bank borrowings to finance expansion, as well as a number of dubious dealings in the stock market, which led to the demise of his personal business empire. Headed by Tan Koon Swan, MPH grew and diversified too quickly, relying heavily on bank loans to finance its ambitious expansionary program. It became so highly geared that its earnings were eaten by repayments on its loans. Furthermore, poor business judgment was demonstrated by its decisions to pay an uneconomic price for Guthrie Bhd. and to buy into the declining shipping industry (most of MPH's heavy trading losses in 1985 were sustained by Promptship, a maritime company which operated an ageing 32-vessel fleet). Finally, MPH also suffered from management problems, arising, it would appear, from the appointment of individuals whose primary qualification was party loyalty. With the departure of Tan Koon Swan from both the MCA and MPH, the company underwent reorganization to redress its weaknesses. MPH's major shareholders first replaced its MCA-dominated board of directors with a new board of well-known Chinese businessmen headed by Robert Kuok, who immediately de-emphasized political and communal considerations in the company's operations in favor of a more hard-headed business approach. After its restructuring, MPH was once again considered an attractive business proposition and became the object of a hostile takeover bid by Hume Industries, a company controlled by the Quek family's Hong Leong Group. The MCA leadership succeeded in blocking the bid by selling 29 percent of the shares held by the party's Cooperative Youth Society, KSM, to a buyer of its preference, while retaining a power of veto stake of 20.9 percent.33 The new majority shareholder of MPH, Kamunting Corporation, led by chief executive T. K. Lim, shares the major characteristics of the leading Chinese businesses studied here: it is a family-controlled enterprise which came of age in the NEP period.34 Unlike the expected turn-around in the fortune of MPH, there are no optimistic forecasts for Unico and the holding companies of the huay kuan, which probably will continue to languish. Notable for their strong spirit of parochialism, the huay kuan venture into the unfamiliar world of collective business undertakings was bound to be fraught with difficulties. 33

PEER, May 25,1989; Star (Penang), June 15,1989. The Lim family originally built its fortune in hydraulic tin mining and subsequently expanded its wealth upon gaining the right to collect tolls on a major highway interchange outside of Kuala Lumpur.

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Possessing relatively small capital assets, these companies lack the means to pay top wages to attract highly qualified professional teams to manage their businesses. Moreover, the few professional managers who do become employed by them are often frustrated by the way decisions are made, or not made, because of weak managerial leadership from boards of directors comprised of CCC and huay kuan stalwarts. Coming in the main from traditional family-based businesses in diverse fields, these directors tend to lack clear-cut common strategies for corporate growth. The more experienced and successful, being already involved in their own businesses, are hard-pressed to find the time and energy necessary to develop the holding companies into fruitful enterprises. The tentative and limited nature of the huay kuan leaders' involvement is reflected in business portfolios which are narrow and cautious in scope, concentrating on property development, plantations, credit, and leasing. Formed in the wake of MPH at a time when there was widespread enthusiasm for the corporatization movement as a means of advancing communal Chinese interests, Unico and the other holding companies appear unable to overcome what appears to be a central contradiction: they were formed with the intention that they would make a respectable level of profit; at the same time they avowed a policy of not competing with small Chinese businesses.35 A second fundamental problem of the holding companies is that, even more than MPH, they are seen by many Malays as advancing Chinese sectional interests to the point of being overtly confrontational, and thus furthering ethnic polarization along economic lines. Representatives of the holding companies have complained about meeting unsympathetic, if not hostile, responses from bureaucrats responsible for approving licenses and assisting with other procedural formalities necessary for doing business in Malaysia.36 It is noteworthy that such difficulties persist despite assurances from the holding companies that they intend to seek Malay partners in their business ventures.37 In a period of economic stagnation, such as the mid-1980s, access to state resources takes on even greater importance for the Chinese holding companies and other institutions. Under such circumstances negative attitudes by UMNO and other major Malay-dominated institutions bears even more serious consequences. As Malay dominance of the nation's major private and public organs continues, one may expect a commensurate decline in the fortunes of Chinese institutions deemed hostile to such interests. IMPLICATIONS AND CONCLUSIONS

Although in most capitalist societies economic performance and policies are normally dictated by "rational" economic factors such as the interplay of supply and demand forces, competitive prices, and management skills, in Malaysia such considerations are strongly affected by the heavily politicized and racially polarized milieu of the NEP period. The NEP itself set the basic political framework within which all business activities take place. Moreover, the Malaysian government enters directly into numerous business activities whose intended benefits appear at least as political as 35

Unico chairman Datuk Wee Boon Peng stated that the company would not operate in areas where small Chinese businessmen were well established. Star, July 30,1984. 36 See the article by Keping Hoo (planning and operations manager of Fui Lian Holdings) in Malaysian Business, March 1983, pp. 18-20. 37 Star, July 30,1984.

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they are economic. For instance, Malaysian (or, more specifically, Malay) nationalistic sentiments appear to have played a major role in PNB's takeover bid of Guthrie Corporation. And again, despite the assertions by critics that the "Made in Malaysia" car project would prove economically unviable in the long run, the government, for reasons of industrial self-reliance as well as national pride, has pushed ahead with it. It is the thesis of this paper that those Chinese business leaders who have attempted to carry out their enterprises in ways acceptable to Malay power brokers have achieved greater success than other businessmen and narrowly Chinese-focused institutions like MPH and the CCC-huay kuan sponsored holding companies. While the institutions still adhere to the notion of Chinese unity and an ideal of mobilizing community resources for mutual economic benefit, the orientation of the individual tycoons is away from the Chinese community in a quest for Malay patronage and overseas business opportunities. By distancing themselves from their communal roots, the group may become inclined to identify itself more closely with the interests and needs of the Malay capitalist class (a group that virtually did not exist in the 1950s and 1960s) and the requirements of a Malay-dominated state. To the extent that these tycoons have also maintained their distance from the Chinese political leadership, they make it more difficult for parties such as the MCA to exercise influence at the political center. Another important implication of this line of speculation is that this new generation of Chinese business leaders has decided that it has a limited future in building close economic ties with middle-level Chinese capital and with the socio-economic and political institutions of the community, which can offer it neither financing, nor social status, nor political influence. Rather, the tycoons appear to have chosen a twopronged strategy: to work closely with Malay patrons to achieve financial success and social status in Malaysia, and at the same time to build relations with nonMalaysian capital that can serve as potential source of wealth should conditions in Malaysia deteriorate. Yet, while Malay political patronage is crucial to successful business activities, the Chinese client is always on an uncertain footing, for his protectors can easily be swept aside by the shifting political tides. The huay kuan and CCC-sponsored holding companies have tended to mix communal politics and business, thereby appearing confrontational from the perspective of influential Malays. While it may be argued that these institutional corporations are experiencing "teething problems" and learning from their mistakes, as appears to be the case with MPH, even this optimistic forecast must take into account the fact that there are real limits on the amount of middle-level and lower-level Chinese capital that will be available, particularly under conditions of growing disparity between the Malay-oriented tycoons and their less wealthy and poorly connected Chinese brethren. Although the majority of the successful Chinese entrepreneurs studied here come from strongly Chinese backgrounds (i.e., were China-born and/or Chinese educated), give some financial support to the major Chinese parties (MCA and Gerakan in particular, but also to a lesser extent to the opposition DAP), and some are office holders in the CCC and huay kuan, they have recognized and capitalized upon the political realities of present-day Malaysia. Giving support to UMNO and to prominent Malay leaders, and in turn receiving their cooperation, investments, and protection, as well as high honors from the state in witness of their symbiotic relationship, the Chinese business leaders appear well positioned to reap handsome dividends in the years ahead. In contrast, those Chinese businessmen who flourished in the early

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years of independence but are now experiencing difficulties have not adjusted successfully to the realities of a Malay-dominated state. The shared capitalistic interests of the Chinese business and Malay power elites continue to attenuate communal tensions at the elite level, a process first set in motion by the multiracial Alliance leadership, which was united by a common Westernized background and the overarching political objective of attaining independence. However, emphasis on class rather than communal interests remains very much an elite phenomenon. There is no evidence of a similar development among the tycoons' counterparts at the middle and lower levels, where there are relatively few class ties with Malays.38 Such Chinese businessmen, who have tended to remain inward-looking, face a widening gap in income levels between themselves and the successful tycoons. Just as they find themselves tied to political parties of declining relevance, they are likewise becoming increasingly marginal elements within the Malaysian economy. It can perhaps as plausibly be argued that the Chinese tycoons are in many respects transitional figures. The style of operations in which a complex corporate empire is dominated by members of a single family may itself be inherently unstable, unless some means can be found to disperse and share management responsibilities with non-family professionals, a point well illustrated by the difficulties of the See Hoy Chan group. Moreover, with the impact of Islamic fundamentalism on all aspects of society, and with the increasing role of Malays in all phases of the nation's government and corporate activity, these Chinese business leaders may come to be seen by political power holders as like the expatriate British civil servants who stayed on after independence: as individuals with the expertise (and, in the case of the Chinese, capital) necessary for national development in the short run, but not central to the nation's well being in the long term. In this respect, the current situation could be described as a transitional phase on the road to Malay domination of corporate wealth in the country. Under the NEP, the Malaysian government's success in carving a bigger share from the country's economic cake for Malay business interests attests to the impending marginalization of Chinese business in Malaysia. As it is a foregone conclusion that the NEP will be extended indefinitely beyond its original 1990 cut-off deadline, the Malay community can be expected to improve on its economic position, as well as continue to enjoy advantages in higher education, public sector employment, and other opportunities for socio-economic betterment. Without a commensurate measure of state support, the largely self-help efforts of the Chinese community in the building and preservation of wealth may become less effective in future years. Suspicion that those are indeed the dynamics of the present-day Malaysian political economy underlies current sensitivity regarding Chinese capital flight, to say nothing of a "brain drain," which becomes especially marked during recessionary periods. As noted above, it appears that even the outstandingly successful tycoons studied here have hedged their bets by developing business activities in countries which offer high potential for future relocation of both capital and the coming generation of their families. It is indeed an irony that the tycoons studied in this paper, 38

For a wide-ranging analysis of the failure of cross-ethnic class ties to develop between Malays and Chinese, especially at the lower levels of Malaysian society, see S. Husin AH, ed., Ethnicity, Class and Development in Malaysia (Kuala Lumpur: Persatuan Sains Sosial Malaysia, 1984).

144 Southeast Asian Capitalists nearly all of whom were themselves immigrants or the sons of immigrants, are poised on the brink of emigration at the very moment of their maximum success in integrating themselves into contemporary Malaysian society.

MARCOS, His CRONIES, AND THE PHILIPPINES' FAILURE TO DEVELOP Gary Hawes

n an earlier era, before the current fascination with third-world democratization, many academics, developmentalists, and politicians accepted the idea that one of the keys to accelerating economic growth in the less developed countries was strong, perhaps even authoritarian leadership. When Philippines president Ferdinand Marcos declared martial law in 1972 he seemed to fit comfortably this model of the authoritarian developer. At the time there was little official international condemnation, and the American business literature began predicting that the Philippines would be the next "Asian economic miracle/7 Marcos, it seemed, now had it in his power to reform and restructure the Philippine economy, and many observers (myself included) thought this was what he would set out to do. Closing the Philippine congress, it was felt, would allow for swifter, more impartial implementation of rational policies by an enlarged, more powerful set of technocrats. In the most sweeping of the optimistic analyses Marcos was said to be breaking the stranglehold of the old oligarchy—the landed elite which controlled agricultural exports and had diversified into finance and real estate. New investments in industry and manufacturing would provide jobs and, it was predicted, diversify structure by creating middle-class opportunities in management and the professions. But something happened between 1972 and 1986. In spite of strong leadership, abundant natural resources, investor confidence, and unparalleled external support, the Philippines failed to keep pace with its neighbors. By the late 1970s investment (both foreign and local) had fallen off once again, political opposition began to appear, rural insurgency grew rapidly; and after the assassination of Benigno Aquino, Jr. the entire political and economic order slowly disintegrated. The authoritarian leader of an economic miracle in the making was transformed into the disgraced kleptomaniac living in exile. Why this happened has remained something of a puzzle, which this paper will attempt to address. The instant journalistic and academic analyses that followed Marcos7 fall had a simple solution for this failure, namely that Marcos, his family, and his cronies stole the country blind. There is something to this, as we shall see, but in itself it is too easy an explanation, a simple reversal of 1972's wishful image of Marcos as the farsighted, strong-willed leader the nation needed. We need to ask whether Marcos' rule was ever about what the early analysts imagined—had he ever really set out to impose a new model of development, over the wishes of landowners and protected

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146 Southeast Asian Capitalists business interests? And how far did the wider context of Philippine history and society constrain political leadership? Was there something about the Philippines that made it unable to take advantage of commodity prices and a changing international division of labor, unable to occupy that niche which would have allowed it to harness its entrepreneurial and labor resources to spur a more sustained growth, unable to restructure the political and economic foundations of the society so as to remove roadblocks to development? I shall argue here that Marcos acted within a political-economic pattern which began before him and continued after his flight. The choices which were open to him—and which he was capable of perceiving—were conditioned first of all by such factors as the Philippines7 class structure, its relationship with foreign capital, the nature of local entrepreneurs, and the security interests of the United States. Without considering these larger contextual elements our picture of Marcos' rule will necessarily be incomplete. Marcos7 election to the presidency in 1966 was also the product of the particular circumstances of that decade, and his policies during the twenty years he ruled thereafter provided opportunities and constraints that were peculiar to that time. These conditions were determined in particular by the international system, which acted both directly, as on the availability of international credit, and indirectly, as in the way the changing international division of labor affected Philippine class structure so as to make easier the ascendance of a modern authoritarian leader. In a volume devoted to the rise of Southeast Asian industrializing elites, the Philippines presents a negative case in the form of the "crony capitalists77 who assisted Marcos in fleecing the country. But simply contrasting their failings to the accomplishments of entrepreneurs elsewhere will not particularly help us to understand why they came to play so prominent a role, and what broader significance their appearance may have. For this, too, we must look to the larger context in which the Philippines existed, in terms of Philippine culture, its historical conditioning, and the demands of the international system. Let us therefore turn to this background, sketchy though our discussion of it must be, and then consider in its light the meaning of Marcos' rule for the business community. CULTURAL AND HISTORICAL ASPECTS OF THE PHILIPPINE POLITICAL ECONOMY

In an interview soon after Marcos7 overthrow, a prominent Filipino businessman made an extended and emphatic argument that much of the blame for the regime's failings ought to be borne by Philippine society. It was his opinion that the failures of Philippine industrialization policy were linked to the political system and the political culture, which were excessively based on personal relations; in general, he said, "we have no institutional loyalty, only personal loyalty."1 This meant that there was no rational, even-handed treatment of entrepreneurs, who had to seek political benefactors in the absence of universal rules. As another first-hand observer argued, "proximity to the seat of power has always been the source of wealth in the Philippine political economy: sugar quotas, dollar quotas, tax exemptions, etc., have always 1

Interview, April 10,1987, Makati, Metro Manila. This and other interviews were conducted with the assurance that the subject would not be cited by name. In this case, the views are those of a member of the 1986 Constitutional Convention who is prominent in the business community as an adviser to some of the largest foreign and local corporations.

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been important. With the advent of martial law the government was vastly more powerful, thus the opportunities for corruption were vastly greater/'2 In other words, the principal features of the crony capitalism of the martial law years—attempts by entrepreneurs to capitalize on political connections and the expectation of the political leader that those he favored would be unquestionably loyal—were nothing new;what was unusual were only the sums of money involved. Why are loyalty and political connections so important in the Philippines? It is sometimes supposed that, because the Filipino elite's wealth was based on land, and the bureaucracy did not have the central social and political importance it did in some other Southeast Asian countries, there has been a less intimate linkage between wealth and politics. But that is not so: as far back as the Spanish and American colonial regimes, economic development depended on the support of the state, which promoted the production and export of agricultural products. Only those who understood the new and complicated systems of land titling or export licensing could take full advantage of the opportunities that began with the opening of the Philippine economy in the late eighteenth century. Those most likely to understand and take advantage of these opportunities were either already in the government or were fluent in the colonial language and had friends in government. From the start, wealth and political connections were necessary to get ahead. The personal loyalty that was the basis for precolonial Filipino political organization carried over into the colonial period and into the networks of patron-client relations that linked economic and political power. Landowners cultivated ties of personal obligation on the part of their tenants, in addition to the power they exercised through control of access to land, and made this into the basis for their command of votes when democratic forms of government were introduced into the Philippines. Money, dependency, and the ideology of personal loyalty were used to construct pyramids of clienteles which funneled support to the leaders at their apex. The colonial experience also did much to determine the course of industrialization itself. As Bruce Cumings has argued for Northeast Asia, present patterns of industrialization can only be understood in the light of development trajectories launched in the colonial era.3 In the case of Taiwan, Alice Amsden points out that In the 1930s, Japan reshaped its policy of transforming Taiwan into a source of food supply for the home market. The shift in policy can be understood only in the context of Japan's increasing militarism and expansionism in the Pacific. Belatedly and frantically, Japan sought to refashion Taiwan as an industrial adjunct to its own preparations.... From a few industries with strong locational advantages before 1930 (e.g., sugar and cement), industry in Taiwan expanded in the 1930s to include the beginnings of chemical and metallurgical sectors, and as World War II cut off the flow of duty-free goods, some import substitution began.4 2 Interview with a former cabinet minister under Ferdinand Marcos, May 26, 1987, Pasig, Metro Manila. 3 Bruce Cumings, 'The Origins and Development of the Northeast Asian Political Economy: Industrial Sectors, Product Cycles, and Political Consequences," International Organization 38,1 (Winter 1984): 1-40. 4 Alice Amsden, "The State and Taiwan's Economic Development," in Bringing the State Back In ed. Peter Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University Press, 1985), p. 81.

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In contrast, Spanish and American ambitions in the Philippines were limited primarily to agricultural exports. The regnant model of development alleged that the Philippines' comparative advantage was in the export of minerals and tropical agricultural products, and such industrialization as there was remained limited to the processing of agricultural goods. More importantly, industrialization strengthened existing patterns of the country's political economy, most particularly by reinforcing rather than diluting the concentration of wealth and political power in the hands of a land-holding elite. The land-owning elite during and after the colonial era was not greatly interested in furthering the country's industrial development. Consequently, in contrast to the classical European pattern (but like some other Southeast Asian countries), it was the political leadership rather than an entrepreneurial bourgeoisie that led the effort at national industrialization which began after independence. As Frank Golay explained: In the fact of the reluctance of tradition-bound Filipinos to provide the necessary entrepreneurial behavior and given the self-confidence of the nationalist leaders, the government experimented with public corporations—in manufacturing, banking, marketing and public utilities.... By the early 1950s it was operating railroads, hotels, electric power, gas and water works as well as producing coal, cement, fertilizer, steel, textiles, cotton yarn, and operating a shipyard and engineering shops.5 But, Golay concluded, ''corruption, nepotism, and mismanagement in the operation of directly productive government enterprises ultimately produced such deep disillusionment that the policy was abandoned."6 Ties of patronage, the valuing of personal above institutional loyalties, and the desire for wealth to further political ambitions combined with industrial inexperience to produce failure. The subsequent sale of government corporations to the private sector did, however, give impetus to a process of successful private industrialization. The environment which enabled this reversal of fortunes was created more or less by accident, as a result of the serious shortages of foreign-currency reserves and the continuing balance-of-payments deficits, which had occurred following World War II as pent-up demand bolstered imports far more quickly than exports could recover. The government had responded with import and exchange controls, which were strictly enforced from 1950 to 1962. Very soon, this evolved into a policy of support for importsubstituting industries. The landed elite was severely penalized by the currency laws, which discriminated against exporters. One study concluded, not surprisingly, that the major beneficiaries of the government's developmental policies during the 1950s and early 1960s were "those who own[ed] or control[led] business in the industrial sector. Exchange control as well as related import substitution policies created enormous windfall 5 Frank Golay, 'The Philippine Economy/' in Six Perspectives on the Philippines, ed. George M. Guthrie (Manila: Bookmark, 1971), p. 239. 6 Ibid.

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gains and profits in the industrial sector, which were then exploited by a vigorous Philippine entrepreneurial group/'7 The resulting outcry on the part of the exporters, and the opposition of virtually everyone to a system giving windfall profits to manufacturers, eventually led to a compromise on economic policy. In 1962 President Macapagal removed most currency and import restrictions, and devalued the peso. In the place of direct controls on imports, tariffs were used to protect "infant industries/' Freeing the agricultural export sector from controls resulted in a 50 percent increase in the land planted to export crops in the 1960s, following a decade of stagnation. It must be emphasized that this development of domestic industry was accompanied by a rapid growth in foreign investment—primarily American-owned and protected by "parity rights." In addition, much of the technology, managerial knowhow, and capital for the new industries was provided by multinational corporations (MNCs). These MNCs, in turn, looked to local partners who could arrange licenses, labor, and local plant facilities. The chance for windfall profits, thus, attracted both foreign and domestic entrepreneurs. In this era of dynamic change, many of today's industrialists got their start. It was at this point that some members of the landed elite moved part of their wealth into the equally conservative fields of real estate and banking. A few, such as the Ayala and Araneta families, moved from land holding and sugar milling into real estate or banking, and from there to industrial shareholding and ultimately a widely diversified agricultural, commercial, and industrial empire. Generally, though, those who made their money from "the production of sugar and other cash crops and real estate development did not invest much in manufacturing/'8 In the relative absence of interest from the landed elite, the manufacturing sector of the 1950s remained open to those from humbler origins. Yoshihara Kunio found that the Chinese who entered import substitution came primarily from amongst the merchants, with a few who were artisans or financiers. Among Filipinos the entry patterns were more varied, with import-substituting manufacturers getting their start in trading, agricultural processing, management of other enterprises, the professions, and government service.9 Through strong government intervention in the economy most retail trade was transferred from the Chinese minority to the Filipino majority; the country now assembled rather than imported most of its consumer durables, and the elite had gradually diversified. Social mobility was fairly easy, with small-scale traders, whitecollar employees, and land owners all moving gradually to take advantage of the windfall profits provided by government protection. This social mobility seems to have declined over time, however, as the tendency increased for enterprises to start "big," thus requiring considerable seed capital.10 7

Robert Baldwin, foreign Trade Regimes and Economic Development (New York: Columbia University Press, 1975), p. 149. 8 Yoshihara Kunio, Philippine Industrialization: foreign and Domestic Capital (Quezon City: Ateneo de Manila University Press, 1985), p. 137. 9 Ibid., pp. 90,124-34, passim. 10 John J. Carroll, S. J., The Filipino Manufacturing Entrepreneur (Ithaca, NY: Cornell University Press, 1965); idem, "Filipino Entrepreneurship in Manufacturing," in Four Readings on Filipino Values ed. Frank Lynch and Alfonso de Guzman II (Quezon City: Ateneo de Manila University, Institute of Philippine Culture, 1973), pp. 129-42.

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What was vital to all entrepreneurs in import-substituting manufacture was access to both capital and political favor, for the government controlled the licensing of new import-substitution ventures, the granting of import permits, the right to exchange pesos for the dollars needed to import, and the amount of hard currency exporters would get after turning in their export receipts to the Central Bank. Prior to this time the key to political harmony and economic stability had been seen as a government which protected the favored position of Philippine exporters to the US market. Now, the government was playing a more positive role and had greater economic power; yet its use of that power was almost always determined by patronage relationships between politicians and entrepreneurs. The result was constant political conflict, charges of corruption and favoritism, and the failure to respond dynamically as a national economy to changes in the international economic environment. The controls necessary to generate industrialization were employed for personal ends, to the extent that the economic historian A.V.H. Hartendorp contended that "there is reason to believe that the various government economic controls ... were, in spite of their obvious failure, continued with a view to continued extortion, by racketeers, both in the government and in the new pseudo-business, including also the operators of political party machines—"n Nonetheless, within this continuing pattern of intimate linkage between political and economic power the balance was shifting in favor of the goverment; and within the government the balance of power was moving towards the executive branch. The president had always controlled the release of government funds, but with an increase in the role of economic planners, the new emphasis on technical expertise in the control of the economy, growing economic and military assistance from abroad, and an increased resort to foreign borrowing to supplement locally available capital for investment, the power of the executive branch grew, and for the first time began to extend out into the countryside and into local politics. This paralleled the increased political participation which followed World War II and which brought a need to mobilize ever greater numbers of voters. To meet this need, there emerged a new group of professional politicians at the local and provincial level. Kit Machado has argued that this development meant some power was transferred from traditional land-holding political faction leaders, who were dependent on their own resources and thus relatively autonomous of the national political leadership, to professional politicians who were more dependent on national party funds with which to mobilize voters at the local level. This enhanced national power at the expense of local power, and it also tended to weaken the land-based political elite.12 The 1950s and 1960s were also a period of rising nationalism, which stemmed in large part from a realization that national sovereignty meant little without national control of the economy. It became offensive to Filipinos that much of the commercial and financial sectors were in the hands of the Chinese minority and that large parts H A.V.H. Hartendorp, The Magsaysay Administration: A Critical Assessment (Manila: Philippine Education Company, 1961), p. 301. 12 Kit Machado, "Changing Patterns of Leadership Recruitment and the Emergence of the Professional Politician in Philippine Local Politics," in Political Change in the Philippines; Studies of Local Politics Preceding Martial Law, ed. Benedict Kerkvliet (Honolulu: University of Hawaii, 1974); idem, "Continuity and Change in Philippine Factionalism," in Faction Politics: Political Parties and Factionalism in Comparative Perspective, ed. Frank P. Belloni and Dennis C. Beller (Santa Barbara: ABC-Clio, 1978), pp. 195-217.

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of the mining, industrial, and manufacturing sectors were controlled by foreign investors or MNCs. Nationalism became the battle cry of both local industrialist and the masses seeking structural change. This was a major reason why, even after the lifting of exchange and import controls in 1962/63 (in response to the political clamor of the exporters and the "advice" of the International Monetary Fund), the Filipino import-substitution industrialists remained protected by high tariffs. The politicization of the development process delayed or prevented the structural and economic reforms which most observers agreed were vital to the re-invigoration of the growth process. There was, in effect, a stalemate between the new government-sponsored entrepreneurs, who wanted to protect the local market, and the technocrats and free-traders, who wanted to open the economy wider to foreign competition and investment. The politicized Philippines of the 1950s and 1960s can be contrasted with the more successful, but also more technocratic and repressive, experience of other countries. Bruce Cun\ings tells us that South Korea and Taiwan passed through an import substituting phasic that was much shorter and that this phase did not hav§ the political characteristics it had in Brazil and elsewhere. Politics did not stretch to include workers, peasants, or plural competition for power. The political sequence of inclusion followed by exclusion, as the 'easy' phase ended and export-led development began, was absent. Labor was excluded in the 1950s and remained excluded in the 1960s; nor did the squeezed middle class of bureaucrats and small businessmen achieve representation in either Taiwan or South Korea,53 Yet, given the nature of the neocolonial economy the Philippines inherited—Americans with "parity rights," ethnic minorities in control of much domestic trade as well as the processing and export of agricultural commodities, many of the most modern, capital-intensive enterprises owned by MNCs, and with macro-economic policy increasingly falling under the control of the World Bank and IMF—it is only to be expected that Filipinos, both entrepreneurs and politicians, should look to political power as a way of gaining economic control. The import-substitution phase and the "Filipino First" policies were at their very core based on favoritism. But it was a favoritism which spawned a whole new generation of entrepreneurs, thus diluting foreign control of the economy. If only for this increase in national economic control, the import-substitution policies performed a positive service. By the late 1960s domestic trade was largely in the hands of Filipinos, most of the manufactures that could easily substitute for imports were being assembled or made in the Philippines, and the miniscule Philippine elite had been opened up to include more ethnic Filipinos. However, the dynamism of the new model was by now exhausted, and the inequalities within Philippine society remained larger than anywhere else in Southeast Asia. By the late 1960s serious questions were being raised about Philippine economic policy. Industrial growth stagnated as the limits to import substitution were reached; balance-of-payments deficits grew because the import-substituting industries remained import-dependent and because Marcos resorted to increased borrowing to finance his infrastructure projects and electoral campaigns; and nationalist concerns 13

Cumings, 'The Origins/' p. 27.

152 Southeast Asian Capitalists were raised over the growing role of multinational corporations and the US military bases. The Supreme Court issued a number of decisions limiting the role of foreign investors, Americans in particular. The economic stagnation and conflict over the proper direction of development were manifested in demands for a new constitution, in the rise of urban demonstrations, and a revitalized rural insurgency. By 1972 a constitutional convention was in session, its members popularly elected; it gave every indication of moving towards a governmental structure that would reflect new political and economic interests. Widespread disillusionment with a parochial and obstructionist Congress, dominated by landlords, led the convention to contemplate a parliamentary system, which it was believed would reflect popular sentiment more accurately and provide a more dynamic leadership. But, fearing the overwhelming ambitions of both Ferdinand and Imelda Marcos, the framers of the new constitution moved to ban either the president or his wife from becoming prime minister should the nation approve parliamentary government. It was this which provided the proximate cause for Marcos' seizure of power. The turbulence which gave rise to the constitutional debate was symptomatic of a nation in the midst of structural change, a point at which in other countries military or civilian leaders have seized authoritarian control in order to break policy deadlocks.14 Marcos' ability to overthrow the democratic system did not depend on control of the military or on overwhelming popularity—he had neither—but on the fact that Filipinos generally recognized there was a crisis in national leadership and believed Marcos' assurance that martial law was a temporary measure. Those who opposed him faced the full force of the state, and enough prominent opposition leaders were arrested to intimidate most prospective dissidents. MARTIAL LAW: NEW POLITICAL ECONOMY OR CONTINUATION OF THE OLD?

The World Bank, the International Monetary Fund, the commercial bankers, and donor governments all were quick to express their support for the new regime. To them, it promised the kind of "developmental authoritarianism" which elsewhere had seemed a solution to third-world economic stagnation. They were already deeply involved in efforts to restructure the Philippines' economy: since the late 1960s hardly a year passed when the Philippine government did not enter either a standby agreement or an extended fund facility agreement with the International Monetary Fund, placing constraints on the country's monetary and fiscal policy making. The international institutions sought reforms that would lead the Philippines in the direction of (a) less governmental interference in the market and (b) an opening of the Philippine economy. Their problem was that they had few local allies for this effort; and consequently, when Marcos appointed Filipino technocrats to responsible economic-management positions, they were eager to believe that they at last had the political-economic grip which they needed. The technocrats themselves had no local constituency but depended for their clout on Marcos' backing; however, since that leader expressed the proper sentiments concerning development, the foreign donors 14

For a discussion of this phenomenon see the works of Guillermo O'Donnell, in particular Modernization and Bureaucratic Authoritarianism: Studies in South American Politics (Berkeley: University of California Institute for International Studies, 1973); and David Collier, ed., The New Authoritarianism in Latin America (Princeton: Princeton University Press, 1979).

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were easily convinced that the way was open for the Philippines7 transformation from import-substituting to export-oriented industrialization. A decade and a half later it all seemed quite different. A Philippine businessman whom I interviewed soon after Marcos' fall declared that he did not believe an argument could be made for linking the declaration of martial law to a change in industrialization policy. For him the declaration could be completely understood in terms of Ferdinand Marcos' desire to prolong his rule.15 Was our entrepreneur simply reinterpreting people and events (as we all do) to account for their most recent manifestation, or did he have a better insight into Marcos' relationship to capitalist development than did early observers of the regime? If the businessman was right, how do we account for the initial actions which so impressed outsiders: the collection of hundreds of thousands of unregistered firearms, the firing of hundreds of corrupt bureaucrats, the announcement of a sweeping land reform? Economically, Marcos had seemed to be moving against the entrenched interests of both the landed oligarchy and the protected bourgeoisie. He outlawed strikes, opened the economy marginally, and sought out new foreign investment. It was this combination of reform and policy change which seemed to early observers to lay the basis for rapid economic growth, and on it they had based their faith in the president as a developmental hero. It was not that Marcos did not undertake such measures, or that they were not drastic in the context of their time; the problem is rather what they were actually intended to accomplish. Developmentally minded analysts assumed that their purpose was economic restructuring, but in retrospect it seems far more likely that their intent was fundamentally political and aimed at preservation rather than transformation. In "this sense the businessman was right. It was not only Marcos' rule which was being preserved, however, but also the Philippine socio-economic system, whose elite had come to accept that major adjustments would have to be made to accommodate rising interests and restore order. The drastic measures which Marcos initially was able to take—the very fact of his seizure of power—were made possible by this consciousness, but it did not imply a dedication to economic growth. True, Marcos made play with the terminology of developmentalism, but this was largely for the benefit of the foreign interests which seemed happy to lavish support on a regime which employed its rhetoric. For him, development was a spin-off of political endeavor; and when political power and economic growth pointed in contrary directions, there was no question as to which way Marcos' policies turned. For this reason, analyses which suggest Marcos attempted initially to pursue a strategy of export-oriented industrialism, but foundered on a combination of landed and import-substituting industrial interests, are wide of the mark. They attempt to bridge the gap between the developmentalists' early expectations and Marcos' ultimate failure without raising the question of whether the analysts' early assumptions about the orientation of the regime were wrong from the start. If they were, then the policy debates and conflicts of the 1970s and 1980s were not the bitter struggle between interest groups and over developmental strategy that they have often been made out to be, but more simply the tussling of political-ins and political-outs, for whom policy choices served primarily as a way of dividing the spoils. However "unstructural" such an interpretation may seem, it renders many failings of the Marcos regime less mysterious. To take a simple example: if Marcos had 15

Interview, April 10,1987, Makati, Metro Manila.

154 Southeast Asian Capitalists been truly interested in making the Philippines a platform for low-wage manufactured exports, if he had truly wanted to follow the example of Taiwan, Korea, Hong Kong, or Singapore, he would surely have worked to make the Philippines' exportprocessing zones attractive and workable. However, at the end of his reign the Bataan zone, the nation's first, suffered from the same complaints as it had at the beginning: poor infrastructure, inefficient communication linkages, inadequate housing facilities, and over-regulation by the government. Philippine businessmen were convinced that these problems could easily have been overcome given governmental will, thus attracting new foreign investment; but, as it was, the Bataan zone remained a limited contributor to employment and export earnings. When asked their opinion as to why Marcos failed to deal with this relatively simple problem, Philippine businessmen I interviewed soon after his fall gave different answers. For some it was just that he had "other priorities/7 such as making money and staying in power. When confronted with the suggestion that there was nothing incompatible between the goals of staying in power and making the exportprocessing zone work, one suggested that Marcos was good at starting projects and seeking the attendant publicity, but was no good at seeing them through to completion. A former cabinet member referred to the highly centralized style of decision making in Marcos' day: the president had to decide on everything personally, large or small, which left him no time for supervision and gave no incentive for bureaucrats to take responsibility for projects themselves. Most credible of all was the response offered by a representative of the American Chamber of Commerce, who said that Marcos and the Philippine government in general wanted to attract foreign investment, but were not so dedicated to pursuing it as to do what was necessary to make the environment conducive. He pointed out that there was no problem in getting capital during the 1970s; grant money was available, and a variety of financial sources competed to extend loans to the country. But where Hong Kong or Singapore would ask of foreign investors, "What can we do for you," Philippines' officials would respond more on the line of, "Here are the regulations, if you want to invest."16 Not surprisingly, investment capital tended to settle elsewhere. Such explanations, concentrating on Marcos' style and priorities, might give the impression that personal politics was the sole element of his rule, and that the martial-law regime had no impact on class or interest group relations. This would be an error, for Marcos vigorously defended the rights of private property (when they did not conflict with his own interests), and both labor and the peasantry suffered economically and politically under him. The already unequal distribution of income and wealth worsened during the martial-law years. Likewise, Marcos' policies had a sectoral impact. He implemented a limited land reform and effectively monopolized the extraction of surplus from the sugar and coconut industries.17 And he seemed to respond positively to efforts by the World Bank/International Monetary Fund group to push reforms that, through a variety of measures such as tariff reductions, elimination of quotas, even-handed implementation of policies, and new investment incentives, would have opened the economy. In the process, the protected segment of the import-substituting industries would have 16

Based on a series of interviews, April-June 1987, Metro Manila. 1 have discussed this in more detail in The Philippine State and the Marcos Regime: the Politics of Export (Ithaca, NY: Cornell University Press, 1987). 17

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suffered a loss of windfall profits and the export-oriented sector would have benefitted.18 But it was precisely in this last effort, the key to the developmentalists' belief in Marcos' rule, which failed to bring much change. To see why this was so, we need to consider just what Marcos was aiming at in his response to international capitalist urgings. Initially, as we have noted, the World Bank/International Monetary Fund group and foreign investors generally were strong supporters of Marcos' authoritarian rule. They were impressed with his technocratic appointments, spoke regularly with the president, and had access to any cabinet member whose cooperation they needed. They felt that Marcos was always responsive to their needs; and yet nothing much happened. Later, ruefully, they concluded that the decisions reached and orders given in their presence were quietly contradicted by phone calls or directives after they had left.19 For Marcos was not just a skillful politician, he was a skillful confidence man; and what he was doing was persuading the foreigners to part with their money. He was able to convince investors and international bankers that he and his technocrats were struggling to implement their policies, against the opposition of entrenched landlord and business interests. Patience and understanding—and more money— would be needed before the battle could be won. But he had no real interest in undercutting his own political base by opening the economy to new foreign competition—the import-substitution (and virtually every other) sector of the economy was controlled by his cronies. Likewise, he was not going to reduce state interference in the economy when extremely profitable monopolies in sugar and coconut could be created by government manipulation of the market. In this game Marcos was building on experience he had garnered during the earlier, democratic years of his rule. He had been the first Philippine president to be reelected, running successfully for his second term in 1968 as the president who had built more roads and schoolhouses than all his predecessors together, and who had (through the benefits of the "Green Revolution") brought the nation to self-sufficiency in rice production. As one study of the economic crisis of the 1980s pointed out regarding this earlier period: compared to the immediately preceding five-year period, 1961-1965, the late 1960s witnessed a marked increase in the overall deficit of the central government which was 72 percent higher compared to the average annual level in the previous five year period. This was due mainly to a surge in government construction expenditure, which increased 92 percent compared to 1961-1965. It will be recalled that the government then staked its reputation on a programme of vast infrastructure projects (e.g., roads, bridges and schoolhouses).*0 18 See, for example, the impressive evidence presented in Walden Bello, David Kinley, and Elaine Elinson, Development Debacle: the World Bank in the Philippines (San Francisco: Institute for Food and Development Policy and Philippine Solidarity Network, 1982); and Robin Broad, "Behind Philippine Policy Making: the Role of the World Bank and International Monetary Fund" (Ph.D. diss., Princeton University, 1983). 19 Interview, April 30,1987, Makati, Metro Manila. 20 Emmanuel S. DeDios, ed., An Analysis of the Philippine Economic Crisis (Quezon City: University of the Philippines Press, 1984), p. 11.

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Marcos learned a valuable lesson, that, in addition to the "guns, goons, and gold" he had used to full advantage in his re-election, there was a great deal to be gained by borrowing money for government programs, which not only bought support but enhanced his power by virtue of his control over the distribution of this largesse. Even before martial law, he had worked to centralize political power in the executive branch by strengthening his administrative linkages to the villages (thorough the Presidential Arm for Community Development), by enlarging the government's role in economic management (through the creation of the Board of Investments and the National Economic and Development Authority, and by augmenting the central government's budget through ever-higher levels of borrowing, both local and foreign. Martial law gave Marcos free rein to extend this pattern. Short-term public debt doubled between 1970 and 1975, while the external public debt jumped 214 percent in the same period, from $822 million to $2,586 million. Then, from 1975 to 1980, foreign borrowing quadrupled, from $2.6 billion to $10.5 billion.2* He received these loans and grants on the strength of his reputation as an investor in infrastructure, on the basis of faith in his technocrats, and not least because the international banking system was then awash in capital. This massive inflow of capital, with no effective constraints on its disbursal, resulted in economic disaster. As a group of Filipino academic economists concluded even before the regime was out: . . . we argue that the main characteristic distinguishing the Marcos years from other periods in our economic history has been the trend towards the concentration of power in the hands of the government, and the use of governmental functions to dispense economic privileges to some small factions in the private sector.22 The "small factions in the private sector" were Marcos' cronies, people who were linked to him by ties of patronage, relationship, and friendship, who owed their prominence largely to him, and whose primary quality was loyalty to their leader. As we noted earlier, personal loyalty was highly valued in Philippine politics, and Marcos placed more than usual emphasis on it. He was reared in, and typical of, a political system in which a leader cultivated and rewarded political supporters on the basis of their personal loyalty and not on a shared allegiance to a set of principles. His loyal followers in turn were expected to control their own followings, so as to maintain a hierarchical political coalition based on personal patronage, not on common causes or sectoral economic interests. Promoting those close to him was one way of breaking the power of business and political interests opposed to his rule. As one of the president's technocrats explained, "in a developing country like the Philippines which is semi-totalitarian, it is necessary for the president to have essential sectors of the economy in his control, or in the control of his trusted associates."23 Indeed, Marcos's technocrats, for all their Western training, were not prepared to defend their institutions or their professional integrity against Marcos' interference: not only their positions but their cultural values dictated loyalty to the man who appointed them. Thus, foreign businessmen concluded ruefully in the end, cabinet 21

Ibid. Ibid., p. 10. 23 Interview, Hermenegildo Zayco, Makati, Metro Manila, May 9,1980. 22

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members such as Prime Minister Cesar Virata and Budget Minister Jaime Laya had not been able to bring themselves to speak out against the president's excesses.24 Although cronyism has usually been considered in connection with Philippine industry and agriculture, it affected almost all sectors of the economy. Agricultural exports, banking, real estate, services, gambling, hotels, manufacturing for the local market, construction, and logging were all parceled out in one way or another to those close to Marcos or his wife.2^ Interviews with leading entrepreneurs and representatives of key business groups following Marcos' fall revealed these main characteristics of the "crony capitalists": 1) Cronies were active in every sector of the economy. The only one in which they were relatively weak was in manufacturing for export, where they had a role only in textiles. Their strength rested largely on politically allocated monopoly of one sort or another. In most export-oriented industries fierce international competition made it difficult to translate local monopoly into international advantage, because value added in Philippine export manufacturing was quite low, being limited primarily to labor content. In the case of exported agricultural, mineral, or timber products, local monopoly gave international advantage because local resources were being exploited and the price of environmental degradation was not necessarily paid immediately. Textile exports by crony capitalists were feasible because the same plants, technology, and labor force could be used for both local and international marketing. 2) The cronies were relatives or close associates of the president or Mrs. Marcos; they had not been well known or spectacularly wealthy before Marcos came to power. Some had gone to school with Marcos, such as the sugar czar Roberto Benedicto, who had been his classmate at law school; others started as campaign contributors during his first presidential election. 3) The cronies' role in support of the president could be either political or economic (or both). One group of primarily agricultural exporters—Juan Ponce Enrile, Roberto Benedicto, Antonio Floirendo, and Eduardo Cojuangco, Jr.—controlled vital sectors of the economy and a large mass of voters. These people became regional political chieftains responsible for controlling their territory and delivering the votes for Marcos. Others in the industrial and services sector—Herminio Disini, Ricardo Silverio, and Rodolfo Cuenca—did not play a political role but, as one former cabinet member quipped, were important in providing AIDS, "acquired investments deposited in Switzerland." Of course, not all the funds ended up abroad, for Marcos used much of the money for domestic political purposes. 4) Each crony had a retinue of sub-cronies. These consisted of such aides as the military officers who provided protection for a logging concession, foreign associates who collaborated in falsifying invoices in order to accumulate money in foreign bank accounts, labor contractors who kept the work force docile and underpaid, government officials who cooperated in bid rigging, and favored subcontractors who actually performed the services for which the crony had won the monopoly. 24

Interview with an official of the American Chamber of Commerce of the Philippines, April 30,1987, Makati, Metro Manila. 2 ^ A number of works published after Marcos' fall provide copious detail of corruption under the regime. See, for example, Belinda Aquino, Politics of Plunder: the Philippines under Marcos (Quezon City: University of the Philippines College of Public Administration and Great Books Trading, 1987).

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5) There is general agreement that what might seem a natural corollary of cronyism—the punishment of individual business interests—was relatively rare (with a few striking exceptions like the victimization of the Lopez and Jacinto families). The general pattern was rather for a whole sector, such as sugar planters, to suffer at the expense of manipulations of the industry by Benedicto, or for all construction companies to suffer some loss of business because of the favored position of Cuenca's Construction and Development Corporation of the Philippines. Despite this broad sectoral impact of cronyism, the pervasiveness of political manipulation, and the corruption of the economy, business opposition to Marcos was slow to develop. It is generally agreed that the business community supported him until 1978—the policy environment was acceptable, and most investors were willing to believe the president was working to implement recommended reforms. Around that year, though, the scale of government favoritism became apparent, Imelda Marcos' economic extravagance became prominent, and the government embarked on a number of massive projects which clearly had been poorly thought out. By 1980 the president of the European Chamber of Commerce in the Philippines was moved to remark that there were two ways to make money in the Philippines—establish an arrangement with an associate of Marcos so you could make a quick and dirty profit, or look for inconspicuous opportunities where you would not attract the attention of the cronies and dig in for a long wait until the regime passed.26 Between 1978 and 1983 the growing mistrust between Marcos and the business community had little outward expression; perhaps most businessmen were, like the one quoted above, simply hoping to survive the regime. Nor were foreign investors open with their doubts. It was only after the assassination of Benigno Aquino, Jr., that capitalist displeasure turned to outright hostility. When, after Marcos' fall, I asked businessmen and close observers why the business community had taken so long to organize and oppose him, they confessed to a certain confusion on the issue. A representative of the Makati Business Club explained that entrepreneurs are by nature goit-alone types who make profits by competing, not by working together. And, he added, since every economic decision was politically colored it was hard for an individual businessman to risk his firm's profits by antagonizing Marcos. A representative of the American Chamber of Commerce said it was not until the last year and a half of Marcos' rule that foreign investors got fed up with lip service and decided there was no hope for reform. Only at that point, he said, would they have tended to contact the home office and advise it to enter a holding pattern—no plans for new investment, no local expansion. We might add that one reason for this was clearly political. The United States did not oppose Marcos until his last, misguided electoral exercise, for he led a nation that was host to the largest naval and air bases outside the United States mainland. The strategic importance of the Philippines meant that a dictator, even if he could no longer be considered a developmental authoritarian, was preferable to chaos or (given the anti-foreign rumblings of the last democratic years) a successor opposed to the US military facilities. Another observer pointed out that, even at the end, the business community did not actively oppose Marcos, save for those few capitalists who were able to look beyond their own interests. Most businessmen accepted the need for crony connections as part of the Philippine political economy under Marcos, and if they did not have this access they concentrated on surviving until he had left. Thus they might quietly 26

Interview, Nigel Rich, Makati, Metro Manila, 1980.

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contribute to Corazon Aquino's electoral campaign and allow their employees to participate in public rallies, but as individuals they chose to remain silent. Once opposition began to develop within the economic elite, it soon spread across sectoral boundaries. For example, the leadership of the Bishop's Businessmen's Conference for Human Development and the Makati Business Club—two groups which provided opportunities for public critiques of the Marcos administration—were founded or led by such people as Enrique Zobel, Vicente Paterno, Jaime Ongpin, Vicente Jayme, and Jose Concepcion: agricultural and mineral exporters, supporters of a larger role for foreign investors, and (Jose Concepcion) the man who was regarded as the spokesman within the Aquino government for the protection of local markets and industries. Positions for or against Marcos were not necessarily permanent, however: Enrique Zobel ended up supporting him, while Paterno, who had served him as minister of industry, was to become a senator in Aquino's ruling coalition. SUMMARY

The cronyism and developmental failure of the martial-law years were indeed the products of personal politics, but any analysis which stops with that will enable us to understand neither how the regime came about nor why many things in Philippine capitalism have changed little after its fall. Neither Marcos' greed nor the impositions of the International Monetary Fund are sufficient answers, but must be considered in the light of Philippine social structure and historical experience. As we have seen, political and economic power were highly concentrated in a landed elite. In wielding political power, this group relied heavily on cultural values which stressed personal loyalty, and on the patronage possibilities of wealth. Economic and political power were inextricably linked. The domination of the landed elite only began to be loosened in the 1950s, with the rise of import-substituting industrialism. A new class segment emerged, bringing into economic and political power people who had been traders, merchants, and bureaucrats, as well as some diversifying landlords. The ensuing years saw a heated struggle over the economic direction of the Philippines, as well as a gradual increase in the role of central authority. By the late 1960s the political-economic system was in crisis, as a result of failure to accommodate the new social interests and of the end of the easy phase of import substitution. Marcos was the product of this general tradition and of the particular circumstances of its crisis. His seizure of power seemed to represent a radical break with the Philippines' past, but in fact it was an increase (if a considerable one) in the existing trend toward state centralization; his promotion of crony capitalists was an exaggeration of, and not a deviation from, existing relationships between economic and political power. He was able to move radically within the political-economic system because of the generally acknowledged crisis and because his role as president under the democratic period enabled him to lay the groundwork for a seizure of power. But he did not go beyond the system; his purpose was to exploit its money-making possibilities to the fullest, while obtaining further wealth from foreign investors by promising to change it. The crony capitalists of Marcos' regime reflected the emergence of new social elements in the elite, insofar as they generally did not come from the great landowning families. Their appearance, however, represented less the tide of social change than the president's desire to patronize men whose lesser wealth and position would ensure their loyalty. Aside from personal profit, his purpose in promoting his

160 Southeast Asian Capitalists agents among the entrepreneurs was to increase central power, a project he had already engaged in prior to declaring martial law and which seemed urgent given the disorder of the times. But insofar as enterprises and agencies handed over to the cronies were mismanaged, income was diverted from the state, or personal relations counted over government authority, cronyism ultimately had quite the opposite effect. It brought about a catastrophic decline in the ability of the government to function, and not even the cronies themselves were protected from the economic damage it did. By the early 1980s the Philippines, unlike the other Southeast Asian capitalist countries of the time, was experiencing a recession; the cost of borrowing money was rising, and the mismanaged crony empires began to collapse. By the time Marcos was overthrown crony capitalism was literally bankrupt. The relationships of patronage and personal loyalty which had long characterized Philippine society hypertrophied, under Marcos, into a grotesque exaggeration. His removal ended this distortion, but it did not change the social structure or deal with the problems that had brought the economy and political institutions into crisis. The government that succeeded him inherited the same underlying political economy, the same social traditions and linkage between wealth and political power; and Filipino businessmen could be sure that under the new regime they would continue to need political as well as entrepreneurial skills if they were to prosper.

CHANGING PATTERNS OF CHINESE BIG BUSINESS IN SOUTHEAST ASIA Jamie Mackie

O

ver the last twenty years or so, more than seventy very larg conglomerates have emerged in Southeast Asia, several of them owned or controlled by men who are in or close to the billionaire category in US dollar terms.1 Some of these conglomerates have become transnational; nearly all of them are linked with multinational corporations (MNCs) in various ways, and all but a handful of them are owned or controlled by ethnic Chinese.2 Many of these new conglomerates have become larger than all but the biggest local branches of the global MNCs which proliferated throughout the region in this period.3 1

The foremost of these men have been Liem Sioe Liong of Indonesia, the late Chin Sophonphanich of Thailand (who died in 1988), and Robert Kuok, whose fortune originated in Malaysia and Singapore. Several other conglomerates are owned or controlled by multimillionaires who rank well above the hundred-million dollar level in net worth, like the Lee Rubber-OCBC (Overseas Chinese Banking Corporation) group and the Kwek family's Hong Leong group in Singapore-Malaysia, William Soeryadjaya's Astra International group in Indonesia and the Thai Farmers Bank/Lamsam group in Thailand. For details, see the appendix, below, pp. 185-90. The estimates of net worth given here are taken from the periodic estimates in Forbes, Fortune, and South of the world's biggest corporations and richest millionaires. All such figures raise major problems of categorization and measurement (aggravated by the natural reticence of their subjects); however, they serve as rough indicators of rankings and orders of magnitude. All the groups mentioned, except the Lamsams, now the second largest of the Thai conglomerates, were listed in a survey of 'The Super-Duper Rich" by Ranjit Gill, Insight (December 1983): 9-22. 2 The word "Chinese" is used here to refer to people of ethnic Chinese descent, regardless of their citizenship status, even though this fails to distinguish between the vast majority of Chinese who have adopted the nationality of those countries and the relatively few who have retained PRC or Taiwan nationality. It also implies a more significant distinction than one would wish between the ethnic Chinese and the indigenous citizens of those countries. Law and administrative practice take no cognizance of this difference in theory, although in practice they often do. Prior to 1941, many of the Chinese in Southeast Asia were mere sojourners and remained Chinese citizens. Since World War II the nationality issue has been very complex, and I will not deal with it here. Increasingly Southeast Asian Chinese businessmen are locally born, but this has only been common in the last generation of big business leaders. 3 This paper does not touch on the large indigenous private corporations or big state enterprises that exist alongside the Chinese conglomerates, mainly in Indonesia and Malaysia. Nor does it do more than refer incidentally to the Philippines and Singapore, the latter an essen-

162 Southeast Asian Capitalists There is nothing unique about such large-scale enterprises in a developing region: similar organizations can be found in India, the Middle East, Latin America, in the Northeast Asian newly industrializing countries (NICs), and even a few in Africa. What is distinctive in Southeast Asia is that postcolonial business leadership has been in the hands of the domestic Chinese minority, and that indigenous entrepreneurs have lagged far behind them, both as private businessmen and as successful managers of state enterprises, despite massive government help in the form of protectionist and discriminatory regulations. I take it as axiomatic that certain cultural characteristics of the Southeast Asian Chinese, relating in particular to their family firms and clan or pang (speech group) networks, were highly conducive to economic success at the elementary stages of commercial activity on which the region's entrepreneurs operated prior to the 1960s.4 Whether these features are still helpful in the very different circumstances of presentday, large-scale corporate activity is less certain. As the studies in this volume have shown, the Chinese big businesses are all essentially "family firms/7 in the sense that ultimate control is exercised by one man or one family, rather than joint-stock companies with widely dispersed shareholdings. This has not prevented their growth into giant conglomerates (as some analysts once predicted it would); but we will also note from the essays here that there have been increasing efforts to modernize management and to broaden the bases of control. Will this succeed? Is it a response to a recognized need or an imitation, for political or public relations purposes, of what is supposed to be "modern"? We should be careful about assuming that what made for success at one point is always a positive feature, or that changing business arrangements necessarily reflect fundamental changes in business culture. We should also bear in mind that Chinese businessmen have not "made" the recent Southeast Asian capitalist upsurge in the same way that the entrepreneurial bourgeoisie of nineteenth century Europe or the USA created capitalism there. Rather, as the studies here have made clear, the state has been central to change. The political-economic "growth coalitions" that lie behind state power have ensured that advantage has been taken of the unusual opportunities for sustained and rapid growth which confronted Southeast as well as East Asia from the 1960s through the tially Chinese city-state, the former a country whose capitalist class is centered on a large indigenous property-owning elite (many of its families having Sino-mestizo ancestors from the eighteenth or nineteenth century. The Philippines has several large, old-established familycontrolled corporate conglomerates, such as San Miguel and the Ayala Corporation, of a kind we do not find elsewhere in the region. Like Thailand, it has also had a high degree of assimilation of its ethnic Chinese immigrants over the centuries. See Edgar Wickberg, The Chinese in Philippine Life (New Haven: Yale University Press, 1965). The distinctive features of both the Philippines and Singapore make comparisons with the other three countries not very fruitful. 4 On the importance of pang groups or organizations, usually referring to dialect groups, see Yen Ching-hwang, A Social History of the Chinese in Singapore and Malaysia 1800-1911 (Singapore: Oxford University Press, 1986), pp. 177-83; on trust, shinyung, in a Vietnamese context, see Clifton Barton, 'Trust and Credit: Some Observations Regarding Business Strategies of Overseas Chinese Traders in South Vietnam" in The Chinese in Southeast Asia, ed. Linda Lim and J. A. Peter Gosling (Singapore: Maruzen Asia, 1983). The significance of such networks is stressed as an important structural advantage for the Chinese businessmen in Southeast Asia by Yoshihara Kunio, The Rise of Ersatz Capitalism in South-East Asia (Singapore: Oxford University Press, 1988), pp. 53-55, and, as a mechanism for reducing transaction costs, particularly in large-scale organizations, by Nathaniel H. Leff, "Capital Markets in Developing Countries: the Group Principle," in Money and Finance in Economic Growth and Development, ed. Ronald I. McKinnon (New York: M. Dekker, 1976).

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1980s. Expanding markets, foreign capital inflows, new technologies, and the growth of urban, educated middle classes—all factors involving but not determined by the Chinese entrepreneurs—created the environment in which business could take off.5 Before discussing the recent development of Southeast Asian Chinese business, some general background may be helpful, particularly for those not familiar with the regiqn's development. The total Chinese population of the region was about 4 million in 1931 and almost 17 million by 1981, despite the cessation of large-scale immigration after the 1930s (see Table 1). Table 1. Ethnic Chinese in Southeast Asia, 1931/1981 in millions (approx. estimates) Total Chinese Population 1931 1981 Indonesia Malaysia Philippines Singapore Thailand

1.2 1.7 0.1 * 0.5

4.1 4.2 0.7 1.8 6.0

Chinese Percentage of Total Population (1981) 3 33 1.5 77 13

Source: for 1931, Purcell, The Chinese in Southeast Asia, p. 3; for 1981, Leo Suryadinata, "Ethnic Chinese in Southeast Asia: Problems and Prospects/' Journal of International Affairs 41,1 (1987). * Singapore included in Malaysia total for 1931; its Chinese population was then approx. 0.5 million. The Chinese businessmen who are prominent in Southeast Asia today are mostly the descendants of poor immigrants from Fujian and Guangdong, who came to the region as coolie laborers, mainly between the 1860s and the 1930s, or of long-established communities of Chinese traders, tax farmers, miners, or agriculturalists which were scattered throughout the region.6 The favored position the Chinese had already achieved in what Wertheim has aptly called the "colonial caste structure"7 was one factor that enabled them to move progressively into more desirable economic roles in the early twentieth century as tradesmen, artisans, and the embryonic mercantile class in all these countries. In general they occupied far more lucrative commercial positions than the local people. That early advantage was one of the principal reasons why the foremost Chinese have been better placed than others to seize the business opportunities that have arisen in the boom conditions of recent years throughout most of Southeast Asia, although it is not the whole explanation.8 They were con5

Harold Crouch and James Morley, 'The Dynamics of Political Change," in Economic Growth and Political Change in East Asia, ed. James Morley (forthcoming). 6 The best synoptic account of the economic roles of the Southeast Asian Chinese is given by Mary Somers-Heidhues, Southeast Asia's Chinese Minorities (Melbourne: Longman, 1976), pp. 829; for a longer but largely anecdotal and not very coherent story, see Victor Purcell, The Chinese in Southeast Asia (London: Oxford University Press, 1965). G. W. Skinner's, Chinese Society in Thailand: an Analytical History (Ithaca, NY: Cornell University Press, 1957), is still the model comprehensive account of Chinese contributions to a Southeast Asian country's development. 7 W. F. Wertheim, Indonesian Society in Transition (The Hague: van Hoeve, 1956), p. 136. ** No thorough analysis of the reasons for the remarkable business success of the Chinese in Southeast Asia has yet been attempted, but for some suggestive ideas see Wang Gungwu, Trade and Cultural Values: Australia and the Four Dragons (Sydney: Asian Studies Association of Australia, 1988). The perennial question of whether these should be attributed mostly to values (hard work, frugality, enterprise, etc.) or to structural factors (the corporate character of the

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strained by the dominance of the European colonial overlords until the 1950s-1960s, but have been able since then to diversify their occupations and economic strength, although along different lines in each country. Since the ending of colonial rule in Southeast Asia, the economic roles of the Chinese have been changing, gradually at first, but very dramatically over the last twenty years as economic growth has picked up momentum throughout the region. Chinese commercial middlemen, often characterized as "compradors/7 used to occupy a position subordinate to the big European companies of the colonial era—trading houses, banks, shipping and plantation companies, and so on. The estimates made by Callis of the total amount of capital invested in Southeast Asia in 1937, the only reasonably precise set of figures available to us, showed a total of about US$670 million of Chinese capital in the region (excluding Burma and Brunei) as against about $2,750 million of European capital, about a fifth of the total (Table 2). The greatest amount of Chinese capital was in Malaya, where it totaled nearly half the European sum, whereas in the Netherlands East Indies a slightly smaller amount reached only about 10 percent of the vastly greater European investment. In Thailand, Chinese and European capital were roughly similar in amount, there being relatively little of the latter at that time, whereas in both the Philippines and Indo-China the Chinese proportion, although lower in absolute terms, was of the order of 20 to 25 percent of the European stake. Table 2. Chinese and European Capital in Southeast Asia; 1937 Chinese Malaya-Singapore NEI Thailand Philippines Indo-China

US$

200m 150m 120-140m 100m 80m

European US$

455m 1411m 124m 376m 384m

Chinese Proportion of Total

30% 10% ca. 50 % 21% 17%

Source: H. G. Callis, Foreign Capital in Southeast Asia (New York: Institute of Pacific Relations, 1942), p.109.

Since that time, the amount of Southeast Asian Chinese capital in these countries must have increased enormously, while there has been considerable disinvestment of British, Dutch, US, and French capital, followed by new, very different, and larger family firm and its property, the various types of socio-economic networking mechanisms, such as the pang or siang hwee, with their benefits in providing better access to credit, market information, and sanctions ensuring payment of debts) have direct relevance to our concerns here, but are too complex to unravel thoroughly. One of the earliest and best treatments of the problem was that of Maurice Freedman, 'The Handling of Money; A Note on the Background of the Sophistication of Overseas Chinese," Man 59 (1959): 64-65, who observed that they prospered "not simply because they were energetic immigrants, but more fundamentally because they knew how to handle money and organize men in relation to money," which in turn was because their "shrewdness in handling money was an important part of the equipment which ordinary Chinese took with them when they went overseas in search of a livelihood." He was referring to the first-generation Chinese immigrants who became small-scale traders, but we lack any comparable analytical treatment of the economic skills of the Southeast Asian Chinese at much higher levels of commercial, financial, and organizational activity thirty years later.

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MNC investment, especially in mining ventures.9 A very rough set of estimates of Southeast Asian Chinese capital in 1975 by Wu and Wu10 resulted in US$10-16 billion, which in real terms would amount to at least two or three times the 1937 figure. There has undoubtedly been a considerable increase since, quite possibly a doubling of the total, in spite of the fact that a good deal of Chinese capital was liquidated in Vietnam and Cambodia. Whether or not the total amount of Chinese capital now exceeds European capital invested in Southeast Asia, it is certainly no longer subordinate to it in the way it was only twenty or so years ago.11 The prevalence of joint ventures in which Chinese firms are the most favored partners or agents of foreign companies—and frequently their competitors—testifies to the great shift that has taken place in the bargaining strength of the two sides. Increasingly, it is the foreigners who most need the domestic Chinese in order to get access to Southeast Asian markets, whereas the big Chinese corporations are increasingly able to pick and choose worldwide in obtaining the capital and technology they need from foreign companies. The globalization of capitalism over the last thirty years has worked very much to their advantage. The efforts made by economic nationalists in the various Southeast Asian governments in the 1950s and 1960s to break what they saw as "the economic stranglehold of the Overseas Chinese" excluded them altogether from certain lines of business, put entire sectors under state enterprises, or gave indigenous businessmen favored conditions of access to licenses, contracts, subsidized credits, and joint ventures with foreign companies; but none of these mechanisms achieved its objective, except partially in Malaysia and at a high cost in economic disruption.12 Most Chinese businessmen proved extremely resourceful in getting around such measures or finding opportunities which proved even more profitable in the fast-changing economic conditions of the last thirty years, when adaptability has been at a premium. Economic nationalism has subsequently fallen out of favor with the more technocratic policy makers, although not yet entirely amongst the politicians. It is generally the Chinese firms rather than the financially weaker indigenous ones that are able to survive the cut and thrust of competition when controls are lifted and markets deregulated so that a "level playing field" is made accessible to them. The reasons for that are well known. The Chinese firms generally have access to well-established networks of credit, market information, and domestic and overseas trading contacts, which enable the stronger among them to ride out the fluctuations of business cycles. Most also have to rely on political connections, bribes, and pay-offs to ensure immunity from arbitrary imposts. It is generally the larger Chinese corporations which can do this; not enough is known about the myriad small Chinese firms to generalize about how they cope with adverse political conditions. 9

The total inflow of foreign capital into the ASEAN countries between 1970-1984 is estimated by Hal Hill, Foreign Investment and Industrialization in Indonesia (Singapore: Oxford University Press, 1988), p. 48, to have been around US$27 billion, including oil investments; but figures such as these are not much more than guesstimates, because of the inadequacy of the statistics. Very little private foreign capital was invested in any part of Asia between 1945-1970. 10 yyu Yuan Li and Wu Chun-hsi, Economic Development in Southeast Asia (Stanford: Hoover Institute, 1980). 11 Yoshihara, Rise of Ersatz Capitalism, pp. 16-19; Hill, Foreign Investmentf p. 48. 12 Frank Golay et. al., Underdevelopment and Economic Nationalism in Southeast Asia (Ithaca, NY: Cornell University Press, 1969); Somers-Heidhues, Southeast Asia's Chinese Minorities; Wu and Wu, Economic Development; and Lim and Gosling, Chinese in Southeast Asia.

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Because the degree of assimilation or integration into local society that has been achieved in Thailand and the Philippines is much greater than in either Indonesia or Malaysia, impediments to Chinese business have been considerably less there.13 This has been profoundly important in setting the socio-cultural, political, and economic parameters within which the economic roles of the local Chinese have developed. Little discrimination has been applied against the Chinese in Thailand since the mid1950s, and the distinction between Sino-Thais and full-blood ethnic Thais is commonly said to be no longer a particularly important one in respect of their economic roles. There has been virtually no significant indigenous business class in Thailand in competition with the Chinese—many of the emerging Thai businessmen have been coopted into partnerships with the Chinese on advantageous terms—in contrast to both Indonesia and Malaysia, where attempts have been made to build up a class of indigenous businessmen.14 The reasons why assimilation of the Chinese has proceeded so much more smoothly and steadily in Thailand than in Indonesia have previously been clarified15 and need be mentioned only briefly here. Religion (i.e., the fact that Islam seems to pose a barrier to acculturation and assimilation, whereas Buddhism attracted Chinese adherents very easily) is probably less salient than it is often thought to be, although it is clearly not irrelevant. More important is the fact that for several generations the leaders of the Sino-Thai communities have been moving toward integration into the Thai social hierarchy; and as role models to other Sino-Thai they have led the way toward a general assimilation and social acceptance. That did not happen in Indonesia until very recently (some would say it has not yet happened at all), for in colonial times the Chinese were more inclined to identify with the Dutch than the Indonesians and only in the 1950s began to shift toward full identification with the latter.16 In Malaysia the prospects of ultimate assimilation are even less promising, because the Chinese are so numerous and their economic power seems so overwhelming. The strong drive to advance the Malays under the New Economic Policy sharpened the ethnic division and heightened racial antagonisms. Malaysia is the classic case of a "plural society" and likely to remain so for a long time to come. In considering the recent developments of Southeast Asian Chinese entrepreneurs, we will concentrate on the very largest private businesses in the three countries of the region which can be most profitably compared in this regard—Malaysia, Thailand and Indonesia. The names and certain characteristics of their major conglomerates are set out in the appendix to this essay. Being the largest and wealthiest 13 The word assimilation implies something very like "becoming similar/' hence indistinguishable—the ideal of the old "melting pot" theory, whereas integration implies retention of the cultural and social characteristics of various immigrant ethnic groups as in the United States; my own views on this are set out more fully in J.A.C. Mackie, "Changing Economic Roles and Ethnic Identities of the Southeast Asian Chinese: A Comparison of Indonesia and Thailand," in Changing Ethnic Identities of the Southeast Asian Chinese since World War II, ed, Jennifer Cushman and Wang Gungwu (Hong Kong: University of Hong Kong Press, 1988), pp. 225-33. 14 Golay, Underdevelopment; Mackie, "Changing Economic Roles." 15 G. W. Skinner, "Change and Persistence in Chinese Culture Overseas; A Comparison of Thailand and Java" Journal of the South Seas Society 16,1-2 (1960): 86-100. 16 Somers-Heidues, Southeast Asia's Chinese Minorities; Leo Suryadinata, Pribumi Indonesians, the Chinese Minority and China (Singapore and Hong Kong: Heinemann Educational Books (Asia) Ltd .,1978); Charles Coppel, Indonesia's Chinese in Crisis (Kuala Lumpur: Oxford University Press, 1983).

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Chinese corporations in the region, they are obviously not typical of Chinese business in general and should not be taken to reflect more than a limited if powerful segment of Chinese entrepreneurial experience. They are also strikingly diverse among themselves, in spite of the many characteristics they share. Of their common features, the most noteworthy is perhaps the fact that they nearly all represent "new money" rather than "old wealth."1' Only a handful of the biggest family firms of the early twentieth century flourished into the 1980s, mainly in Malaysia, not at all in Indonesia, and only to a small extent in Thailand. Why these survival rates differed was, as we shall see, related less to the firms' characters than to the very different socio-political environments these countries presented Chinese businessmen. The failure of old money to thrive raises the question whether the traditional (and still prevalent) Southeast Asian Chinese family firm has adapted to a modern business world in which impersonal corporate enterprise predominates.18 Are the old-style towkay businessmen changing into new-style tycoons or taipan as Southeast Asia is drawn ever further into the cosmopolitan network of worldwide capitalist enterprise?19 As we shall see, this is no easy question to answer, with much depend17

Terms like "olct wealth" and "new money" are, of course, relative: I include in the former category all family firms that were well-established before World War II (e.g. the OCBC-Lee Rubber empire in Malaysia-Singapore, the Tan Cheng Lock rubber interests, the Lamsam and Wanglee family companies in Thailand, the Oei Tiong Ham Concern in Indonesia), or are today second-generation firms (such as the H. S. Lee-Alex Lee family interests in Malaysia). The latter category would include those which have come to prominence over the last twenty or thirty years. This leaves an intermediate group of those that emerged in the 1950s, of which the Kuok, Hong Leong and perhaps the Sophonphanich groups might be included, i.e. those that are not really in the "new money" category, but are not very old, either. 18 The traditional Chinese family firm is well described by Linda Lim, "Chinese Economic Activity in Southeast Asia; An Introductory Review," in Chinese in Southeast Asia, pp. 245-46, as family-owned rather than a joint stock company, usually employing a mix of unpaid family labor and wage labor, small in size and scale of operations, concentrated in commercial-sector activities (rural and urban retailing, crop brokerage, market gardening, money lending, simple processing, etc.) and performing "middlemen functions" between the indigenous and the modern economy. Maintenance of family control and ownership is the key consideration, even when such firms grow into large corporate empires and become joint stock companies. See also John T. Omohondro, Chinese Merchant Families in Uoilo: Commerce and Kin in a Central Philippine City (Athens: Ohio University Press, 1981), for a fine picture of the commercial culture of such family firms in Iloilo. The emergence of a new and different type of family-firm activity over recent years, modern manufacturing for export markets, is dealt with by Lim, "Chinese Economic Activity," pp. 1,245-75. 19 On the origin of the words towkay, tycoon, and taipan, Mary Somers-Heidhues (Southeast Asia's Chinese Minorities, p. 114) refers to the former as "widely used to refer to a Chinese big businessman." According to Yen Chin-hwang, Social History of the Chinese, pp. 53-55,154, citing Vaughan, it derives from t'ou-chia, a title bestowed on the leader of a dialect association (luchou) "owner of the incense burner" which only a wealthy Chinese could afford; Vaughan says it was applied in early British Malaya to a leader of a dialect kongsi of that name. There were no rules about who could become a lu-chou or t'ou-chia, but it was necessary to have a house or shop with the proper place for the incense-burner, hence only a few wealthier merchants were qualified. The term came to be applied also to leaders of pang (speech-group) and clan organizations; since they were expected to donate to festivals and group functions: "a charitable spirit, education and charisma had their role in determining the leadership of Chinese dialect organizations." Edwin Lee, The Towkays ofSabah (Singapore: Singapore University Press, 1976), p. 1, says the word means "head of either the household, community or business, and worthy was he who could discharge the duties of all three.... "—but also that he often "earned the Chinese the reputation for rapacity and aggrandizement. But equally he came forth to lead the Chinese from a base in the Chamber of Commerce. He organized the social and educational in-

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ing on the specifics of time and place; but we will attempt some general conclusions at the end of the paper. MALAYSIA

We shall begin our consideration of Chinese business experience in individual countries with Malaysia, for there it is easier to document the processes of change from old-style family firms based on commodity production and trading towards modernized corporations with increasingly wide international connections. These transformations have also gone further in Malaysia than in the other two countries, partly because its Chinese population is much larger and its educational system and economic structures are more highly developed, but also because its stock exchange has been longer established and has hastened the process of corporatization. By the same token, the Malaysian experience may provide clues to the future direction of change elsewhere in the region. Moreover, Malaysia illustrates in a particularly poignant manner how much the fortunes and even the character of Southeast Asian Chinese big business is affected by the need to adapt to the local politico-economic environment. Chinese business firms have played a leading part in the economic life of Malaya/Malaysia and Singapore since the late colonial era, assuming roles more prominent than their counterparts in Indonesia and more diverse than those in Thailand at that time.20 A greater degree of continuity from old wealth to new is discernible among the leading Chinese firms in Malaysia-Singapore than in the two other countries, although since the early 1970s "new men" have been coming to the fore and most of the old-established firms seem to have been slowly declining. In this respect, we can posit a tendency toward convergence in the patterns of development of Chinese big business in all these countries. Chinese kongsi (multi-member business partnerships, or firms) pioneered the tinmining industry in Malaya in the mid-nineteenth century, long before the British became involved in it, while Straits Settlements Chinese became extensively engaged in shipping, commodity trading, money-lending and the rudimentary financial services appropriate to a pre-banking era, gambir and pepper cultivation and other agricultural pursuits, mostly on a very small scale.21 As elsewhere in Southeast Asia, stitutions that so distinguished the overseas Chinese and sustained them with such munificence. This, at any rate, was the image of the ideal towkay." The word tycoon is defined in Webster's Collegiate Dictionary, 1985, as from the Japanese "taikun fr Chin (Pek) ta (great) + chun (ruler) 1858; 1. Shogun; 2 a. a top leader (as in politics) b: a businessman of exceptional wealth and power: Magnate, ibid." Likewise, taipan means "a powerful businessman and especially a foreigner living and operating in China"—Chinese iai pan (ca. 1898). It seems no longer to be confined to foreigners, however. 20 Singapore was incorporated into Malaysia briefly between September 1963 and August 1965, when it was expelled and became an independent state. In the colonial era, it was administered as part of the British Straits Settlements, along with Malacca and Penang. Its economic links with its Malayan hinterland were always very close until 1965 and many business firms still operate in both, the OCBC-Lee Rubber, Hong Leong, and Kuok groups being the most substantial. 21 The word kongsi (Mandarin, kung-ssu) means, literally, a company (Somers-Heidhues, Southeast Asia's Chinese Minorities, p. 114), but was commonly used to designate the semi-cooperative mining and agricultural enterprises of Borneo and the Malayan peninsula. On the general character of early Chinese businesses in Malaysia, see Purcell, Chinese in Southeast Asia; Wong Lin Ken, The Malayan Tin Industry (Tucson: University of Arizona Press, 1965); James C. Jackson, Planters and Speculators: Chinese and European Agricultural Enterprise in Malaya 1786-

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the many Chinese business enterprises that rose and fell in the course of the nineteenth and early twentieth centuries were family firms, sometimes quite large and complex ones in their prime, but none of them enduring for more than the legendary three generations from rags to riches to ruin. British capital began to supersede Chinese in the last decades of the nineteenth century, particularly after large-scale mechanized tin mining became more profitable than the labor-intensive methods of the small Chinese firms, while the development of vast British-owned rubber estates on a corporate basis around 1910 brought about a new wave in British investment in the colony. The Chinese businessmen could not match the huge amounts of capital brought in by the British, but they were able to benefit from such ancillary activities as rubber dealing and, some time later, small-scale banking services. They were never as remorselessly excluded from modern, corporate-sector activities as were the Indonesian Chinese (mainly because Dutchmen were involved much more deeply and broadly throughout the modern, commercial sector than the British were), with the result that by the 1930s at least half-a-dozen famous Chinese towkays had emerged with substantial investments in various fields of activity, including rubber plantations and tin. On the other hand, British capital remained the dominant force within the Malaysian economy until well into the 1970s, far longer than Western capital prevailed in the other countries.22 The foremost of these early businessmen was Tan Kah Kee, an unusually singleminded man who made a fortune in the early years of the century, lost it in the 1920s, and then made another. With his extensive holdings in pineapple cultivation and canning, then in rubber plantations and remilling, he was renowned throughout both Southeast Asia and in his home province of Fujian for his munificence in building schools and other educational institutions, long before he returned to China after the Communist revolution in 1949.23 Tan was an archetypal old-style towkay, very autocratic and austere in his life-style, yet forward-looking in his belief in education and business practices. Among the others of his ilk to emerge in prewar Malaya-Singapore were the redoubtable Lee Kong Chian, founder of a vast business empire which eventually embraced, inter alia, the plantation interests of Lee Rubber Company and the Overseas Chinese Banking Corporation (OCBC), still one of the biggest as well as the oldest of the big Malaysia-Singapore corporate conglomerates; Tan Lark Sye, whose fortune was based on rubber trading; and Aw Boon Haw, the Tiger Balm king, who later diversified into newspapers, banking, and other fields. Some of the firms they established have survived into the postwar era, more of them proportionately than in Thailand and far more than in Indonesia. We can most easily discern the changes occurring in the patterns of business enterprise in Malaysia from 1957 on by comparing the picture given on the eve of independence by James Puthucheary in his account, Ownership and Control in the 1921 (Kuala Lumpur: University of Malaya Press, 1968); and Yen Ching-hwang, Social History of the Chinese. 22 Jomo K. Sundaram, A Question of Class: Capital, the State and Uneven Development in Malaya (New York: Monthly Review Press, 1982). 23 For an informative life of Tan Kah Kee, see C. F. Yong, Tan Kah Kee. The Making of an Overseas Chinese Legend (Singapore: Oxford University Press, 1986). The huge monument erected by the seashore at Xiamen after his death in 1961 to celebrate this great capitalist's contributions to his Communist homeland was a notable oddity of People's China of that day.

170 Southeast Asm Capitalists Malayan Economy,2* with later studies of the subject in the mid-1970s by Lim Mah Hui and Tan Tat Wai, and of the mid-1980s by Ranjit Gill Bruce Gale, and others.25 Puthucheary rejected the commonly held view that "the Chinese dominate the economy," describing the part they played as still very limited: "Even the most developed Chinese capitalist organization has not gone very far in taking over 'European' concerns " he noted; it could only be said that "Chinese capital has gone into partnership with British capital." Even that degree of partnership did not go beyond locally floated companies, however, for there had been very little Chinese penetration into the ownership structures of the big British corporate enterprises, based in London, which dealt mainly in rubber and tin. The Singapore and Malayan stock exchanges were still very rudimentary arrangements, little more than personal networks of brokers, and local share trading was extremely limited. But Puthucheary also remarked on "the growing maturity of [the] Chinese compradors," some of whom had recently "gathered momentum" although only in one case could it be said that "in their process of evolution from comprador to partner [they] have gone on to become the senior partner." In other words, they were then just beginning to challenge the dominance of the British. Puthucheary noted also that "Chinese capital is not concentrated to the same extent as European capital," but tended to be very fragmented even in the secondary industry sector, where the Chinese then predominated, and in tin mining. A few important clusters of Chinese ownership and control of large companies were becoming discernible in the 1950s, mostly around the Lee-OCBC group of interests, interlocked by a network of common directors. However, Chinese businessmen generally still preferred to run their own private companies or partnerships rather than to invest in public firms over which they might lose control. Chinese small savers did not yet regard shares as a safe or attractive way to invest their money; hence only the well-off were willing to put funds into public companies at that time, and even they preferred real estate as a safer investment. There was very little mobility of Chinese-owned capital from industry to industry at the end of the 1950s, except in such cases as the long-established Lee Rubber-OCBC group, the Aw Boon Haw interests (manufacturing, banking, insurance, and newspapers), the Loke group (tin mining, real estate, mining insurance, and entertainments) and the Eu Tong Sen group of tin-mining, plantation, real estate, and importing interests. These forerunners of today's conglomerates were still on a very small scale, and only the first would be regarded today as a significant force in the Malaysian business world. The Chinese business role in Malaya and Singapore changed remarkably in less than fifteen years after Puthucheary's account. They did not long remain mere "partners" of the British in locally floated companies, but soon emerged as aggressive competitors to them in various fields, displacing British capital altogether, even from London-based companies. The British continued to hold the lion's share of tinmining, rubber, and palm-oil investments, fields into which not much Chinese money has flowed in recent times. But in the manufacturing sector, property devel24

James Puthucheary, Ownership and Control in the Malayan Economy (Singapore: Eastern University Press, 1959), pp. 123-40. 25 Lim Mah Hui, Ownership and Control of the One Hundred Largest Corporations in Malaysia (Kuala Lumpur: Oxford University Press, 1981); Tan Tat Wai, Income Distribution and Determination in Malaysia (Kuala Lumpur: Oxford University Press, 1982); Ranjit Gill, The Making of Malaysia Inc. (Petaling Jaya: Pelanduk, 1985); and Bruce Gale, Politics and Business: A Study of Multi-Purpose Holdings Berhad (Singapore: Eastern Universities Press, 1986).

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opment, and to an increasing extent in banking, Chinese capital has become generally dominant, frequently in conjunction with foreign capital, Japanese and American as well as British. It prevails in spite of the fact that under the New Economic Policy inaugurated after the the May 1969 race riots the Malaysian state's share in these sectors has also been increasing.26 Equally important to Chinese business growth has been the gradual diversification of ownership of much of the corporate sector in both Malaysia and Singapore since the development of the stock market there in the early 1960s.27 This not only drew scores of thousands of small, middle-class investors into the capital market, but made it much easier for larger Chinese companies to advance beyond the single-family firm toward more complex patterns of interlocking share ownership and control, bringing very large sums of capital within the grasp of a single group through takeovers, capital issues, and share swaps. They rarely advanced much more than one step, to be sure, for few family firms were willing to risk losing control to outsider shareholders, as happened increasingly to smaller and more vulnerable corporations in the 1970s and 1980s. Though the family firm remains the rule, ownership patterns in Malaysia are undoubtedly much more diversified, with family members frequently holding no more than enough shares to maintain control. Moreover, this share-dealing activity contributed to the emergence in Malaysia and Singapore of several large corporations headed by "stock-market millionaires/' of a kind familiar enough in Hong Kong and other advanced capitalist countries but still barely known in Indonesia or Thailand. The changes in ownership patterns were well depicted in Lim Mah Hui's mid1970s survey of one hundred of the largest corporate enterprises in Malaysia.28 He identified eight major "cliques," of which four were still based on the old British companies and the other four were essentially Malaysian Chinese. All of the latter could still be called "old money" (my term, not his)—with the possible exception of the Kuok group, which began to emerge only in the 1950s-1960s—in contrast to the "new money" that came to the fore in both Malaysia and Singapore in the 1970s. Those four locally owned conglomerates consisted of two large and well-established clusters, the OCBC-Sime Darby and Kuok groups, and the smaller but long-established Lee Loy Seng and Sung Chi Fang groups of plantation companies. With their diversified financial and property interests and more complex interlocking share holdings, they displayed some of the features of the new-style Nanyang conglomerates. But even the largest and most modernized of them still kept control securely in 26

The Second Malaysia Plan (1971-1975) incorporated a two-pronged New Economic Policy for development, intended, first, to reduce poverty and increase employment opportunities for all Malaysians, ostensibly regardless of race; second, to bring about the restructuring of Malaysian society to redress the economic imbalances and eventually eliminate the identification of race with economic function. Special rights for Malays were to be extended into the private economy and the ambitious goal set for the achievement of 30 percent Malay ownership of all corporate assets by 1990. The principal means of achieving this has been through the acquisition of the share capital of British-owned companies. For the best recent account of Malaysian politics since 1969, see Zakariah Haji Ahmad, ed., Government and Politics in Malaysia (Singapore: Oxford University Press, 1987) and, on the socio-economic situation, the fine studies by Tan Tat Wai, Income Distribution, and E. K. Fisk and H. Osman Rani, eds., The Political Economy of Malaysia (Kuala Lumpur: Oxford University Press, 1982). 2 ^ A colorful journalistic account of the development of the stock markets of Malaysia and Singapore is given in Ranjit Gill, The Making of Malaysia Inc.; see also Michael Skully, Financial Institutions and Markets in Southeast Asia (London: Macmillan, 1984), chap. 3. 28

Lim Mah Hui, Ownership and Control.

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the hands of one family, unless straitened circumstances or political pressures forced them to include outsiders. The changes discernible between the time of Puthucheary's study in the late 1950s and Lim's in the mid-1970s were hardly greater, however, than those which have occurred between the latter date and now. The big British companies have largely been taken over or broken up, mainly as a consequence of the Malaysian government's drive under the New Economic Policy to achieve by 1990 a 30 percent share of corporate wealth for the "Bumiputera" (i.e., the Malaysian government and private Malay businessmen). Many Chinese also benefitted greatly from this policy, having been able to collect good pickings as the British sold up. Whereas between 1970 and 1985 the "foreign" (i.e., British) share of corporate wealth in West Malaysia fell from 62 to 30 percent, the Chinese share rose from about 37 to 48 percent, while the Bumiputera share is estimated to have increased from about 2 to 22 percent.29 Another major change during these years was wrought by the tremendous surge of activity on the Malaysian and Singapore stock exchanges during the relatively prosperous period between the early 1970s and 1984-1985. The fortunes made and lost then resulted in the emergence of at least a dozen new multi-millionaires, some of them Malays, whose businesses tended to be of a very different character from the "old money" firms established before 1970. Many of the new ventures were little more than "paper" companies, built around highly leveraged share dealings and speculative transactions in property companies or finance, and these often experienced difficulties in the more austere environment of the mid-1980s. The most successful of the new "paper millionaires" were Khoo Kay Peng (MUI group) and Vincent Tan (Berjaya group), whose rapid rise was due largely to the backing of influential Malay political leaders.30 The rise of these new-style tycoons has coincided with a decline in the prominence of the older towkays. The Lee Loy Seng, Loke Yew, and Eu Tong Sen plantation-mining groups no longer rank amongst the largest conglomerates, although they too diversified into new and more lucrative fields of investment or shifted part of their capital off-shore. On the other hand, several other "old money" groups benefitted from the post-NEP expansion of the economy, notably the OCBC-Lee RubberSime Darby empire, the Hong Leong group, and the Kuok conglomerate. Significantly, the first and last of these developed around basic core groups of enterprises— rubber and banking in the former; sugar, shipping, shipbuilding, and metal industries in the latter—while Hong Leong built up a solid reputation in the property and financial fields. The big Chinese firms in Malaysia appear to have moved a good deal further than their counterparts in Thailand or Indonesia in the direction of modern-style 29

The figures are from Gill The Making of Malaysia Inc., p. 94, based on the Mid-Term Review of the Fourth Malaysia Plan 1981-1985. These figures have been criticized for faulty categorization and inconsistencies, resulting in an underestimate of the Malay share, although it is unlikely that the figures are very wide of the mark. 30 Khoo Kay Peng, Vincent Tan, and Alex Lee all benefitted from their close personal and business connections with Daim Zainuddin or Tunku Razaleigh. Other leading Chinese who did well in the boom conditions of the 1970s were Teng Hong Pow (Public Bank), Tan Koon Swan (Magnum and Multi-Purpose Holdings), Chong Kok Lim (Landmark Holdings), Loy Hean Heong, Wong Kee Tat, Lim Goh Tong, Loh Boon Siew, and Teo Soo Chuan. Some of these came to grief later in the 1980s. I am much indebted to Peter Searle for his assistance and much of the information contained here, although responsibility for its presentation and interpretation rests solely with me.

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managerial techniques and structures, with OCBC, the Kuok empire, and several other older firms leading the way. There has been some tendency towards diversification and interlocking of shareholdings, although not yet enough to imperil the dominance of the family-based group. Old-style autocratic towkays like Tan Kah Kee or Tan Chin Chuan of OCBC are rarely prominent in the larger companies. The smaller corporations are likely to follow in the footsteps of the larger ones in the adoption of modern structures, despite (or perhaps because of) the more difficult political environment confronting them. Whereas political connections were not crucially important to Chinese businessmen in Malaya during the late colonial era or the early years of independence, they became quite essential from the 1970s. As is richly illustrated by the studies on Malaysia in this volume, all the leading towkays who did well under the NEP had close personal connections with particular government ministers or key Malay political figures. Concomitantly, major business leaders no longer tried to utilize the Malaysian Chinese Association (MCA) as a source of political influence and connections, for it no longer had great clout; government decisions could best be influenced through direct relations with the Malays who made them. Political patronage was now essential if one wanted access to contracts and licenses; moreover, the government itself became heavily engaged in business activities through large public-sector investments, while increasing numbers of Malay politicians and officials became shareholders in a wide range of businesses and thus had entrepreneurial interests of their own to defend. Malaysia's political circumstances have forced Chinese businessmen into dependency relationships akin in kind if not degree to Riggs' "pariah entrepreneurship." Will this trap Malaysian capitalists into a subordination to bureaucrats and politicians which they had hitherto been spared? In this regard, it is worth reflecting on the career of the country's greatest capitalist success, Robert Kuok. Having come from a moderately well-off Johore family, he obtained a good education at Raffles College and in Britain, along with Lee Kuan Yew, Goh Keng Swee, and several Malays who were later to become leading UMNO politicians—Datuk Razak, Datuk Ismail, and Husein Onn. These political contacts were undoubtedly helpful to him later as he expanded and diversified his Malaysian interests beyond sugar trading and planting into flour milling, shipbuilding and shipping, and manufacturing.31 He was thus well placed to take advantage of the political patronage central to success under the NEP. But instead of cherishing his political links, he began to de-emphasize them and to extend his Hong Kong and China interests, eventually himself moving to Hong Kong. This did not reduce his standing in Malaysia, however. On the contrary, his off-shore investments, together with his great financial strength and industrial expertise, have given him considerable leverage with the Malay political leadership. No other Malaysian Chinese businessman has Kuok's strengths, but the implications are clear. The wider network of overseas Chinese investment is a source of support for those powerful enough to have access to it. It also serves as a haven for flight 31

Kuok's "blue-chip background" is regarded as one of his particular strengths and "his connections with government and business figures ... cut across national, racial and party lines/' according to Robert Cottrell, Far Eastern Economic Review (hereafter PEER), October 30,1986. He was a founder-director of Bank Bumiputera and a partner with Daim Zainuddin in the Malaysia-French Bank; yet he also led a syndicate that assisted Tan Koon Swan, the MCA Secretary, when he was imprisoned in Singapore on breach of trust charges.

174 Southeast Asian Capitalists capital for those less sanguine of their ability to reconcile their interests with the ambitions of the Malaysian regime. As international Chinese investment is increasingly important in Southeast Asian economies, Malaysia's in particular, this is something which political leaders must bear in mind when seeking to apply the screws to local entrepreneurs. THAILAND

Thailand's commercial and industrial activity is dominated by about thirty large conglomerates of which all but two (the Crown Property Bureau and the militaryowned Krung Thai Bank) are owned by Sino-Thai.32 In spite of their size they are all in family hands, and in their business arrangements none has moved very far across the spectrum from traditional Chinese family firm to modern-style corporate organization. A few of them developed from businesses founded in the early years of this century, but most have come to the fore since the 1960s, when the Thai economy began its great leap forward. "New money" is even more characteristic of Thai capitalism than of Malaysian. Most Chinese immigrants to Thailand arrived at about the same time in the late nineteenth and early twentieth centuries as their counterparts in Malaysia and Indonesia.33 I shall not discuss the historical development of their business involvement, as Suehiro has done so in this volume. It is worth noting, though, the relatively strong positions of the Thai Chinese: in the 1930s the amount of their capital was roughly comparable to European capital invested in the country.34 In spite of this relative equality and the absence of colonialism, we do not find wealthy towkays in pre-war Thailand, as we do in Malaya-Singapore. Most likely this was because the economy of Thailand did not experience the rapid economic growth which rubber brought to the Malayan peninsula early in the century, which made fortunes for Chinese as well as Europeans. The leading Thai capitalists were in the rice trade, a highly competitive and speculative business, and the hazards of this specialization were no doubt one reason why few of the firms they founded rank among the leading businesses in Thailand today. In spite of Thailand's formal independence, the scope for Chinese businesses in Thailand was limited by the fact that foreign banks and trading firms dominated commercial life. The Great Depression and World War II loosened the foreign grip, only to be followed by the intense nationalism and anti-Sinic policies of Phibun Songkhram's regime.35 This caused Chinese businessmen to increase their reliance on 32

Details on the twenty largest Sino-Thai conglomerates in Thailand in 1979 are given in Krirkiat Phipatseritham and Kunio Yoshihara, Business Groups in Thailand (Singapore: ISEAS Research Notes and Discussions, 1983), pp. 3-9, and Suehiro Akira, Capital Accumulation in Thailand 1855-1985 (Tokyo: The Center for East Asian Cultural Studies, Toyo Bunko, 1989), who lists about twenty additional industrial conglomerates prominent in the 1980s; see also Suehiro in this volume. For other information on these firms, I am indebted to Dr Ammar Siamwallah, Anek Laothamatas, M.R Prudhisan Jumbala, the late Jennifer Cushman, Kevin Hewison, John Girling, Bob Muscat, and Marcel Barang. The Crown Property Bureau is described in the PEER, June 30,1988, pp. 60-63, as "perhaps the wealthiest institution in Thailand," with shares in more than forty companies, but its status is anomalous, being "neither public nor private." 33 Skinner, Chinese Society, pp. 80-118,213-227. 34 Callis, Foreign Capital in Southeast Asia, p. 109. 35 Skinner, Chinese Society, pp. 353-65.

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financial deals with political leaders to ensure protection and access, providing the model for Riggs' "pariah entrepreheurship" discussed earlier in this volume. A less celebrated but at least equally significant effect was that it compelled community leaders to decide once and for all whether they wished to be accepted as citizens of Thailand or would identify with China under its new and strong Communist regime.36 The firm commitment to assimilation which resulted from the crisis was later strengthened by increasingly close social relations and intermarriage. The subsequent transformation of Thai business-political relations may be illustrated by the adventures of the Bangkok Bank and its leader Chin Sophonphanich.37 In the bureaucratic polity of the 1950s the bank had invited General Phao Sriyanon, a key figure in the Phibun regime, to be chairman of the corporate group to which the bank belonged. When the regime was overthrown in 1957, Chin deemed it prudent to withdraw for a time to Hong Kong, where he occupied himself by drumming up overseas business for the bank. As the new Sarit regime abandoned parasitization for the promotion of private business and encouraged foreign investment, Chin was able to return under favorable circumstances for himself and his bank. This did not mean an end to the bank's involvement with political leadership. Indeed, the prominence of former Bangkok Bank executives in high government offices reached a point where they came to be known as "the Bangkok Bank Mafia/'38 But political connections were not, as Suehiro points out, the critical factor behind the bank's success.39 They were now a way of increasing leverage over politics, not of sheltering under a patron; and growing pluralism in Thai politics has required that business establish links with a range of bureaucrats and parties rather than one or two powerful protectors.40 Not only is political connection no longer central to business success, but the most "political" of the big conglomerates are not the most successful or the most modernized. On the whole they are those which continue to operate in the manner of earlier towkays, in areas which are highly dependent on bureaucratic or political contacts or which rely on corruption for their success. The new independence and the publicly wielded political influence of Thai businesses, particularly the banks, have led some analysts to return to Marxist models based on European capitalist development to explain the Thai system. Thus Hewison has characterized Thailand's bank-based conglomerates as the core of the country's "financial bourgeosie," unified by marriage and interlocking ownership and directorships. They are, he argued, able to monopolize the capital market, since "their 36

E.B.Ayal, 'Thailand/' in Golay et al., Underdevelopment and Economic Nationalism, pp. 299329. 37 For good accounts of the rise of Chin Sophonphanich and the Bangkok Bank, see Suehiro, Capital Accumulation., pp. 158-60,253-56 and Insight (June 1978): 8-18, The Institutional Investor (November 1981): 136-44, PEER, July 28,1983, pp. 52-58 and April 13,1989, pp. 52-57.

38 39

Skully, Financial Institutions, p. 309.

See Suehiro's paper in this volume, and his Capital Accumulation, pp. 4-77. When civilian politicians and political parties became active to an unprecedented degree during the "democratic interlude" (1973-1976), many Chinese capitalists became involved in the founding or funding of parties. Business-party identification was especially close in the main provincial towns, the Bangkok-based corporations preferring instead to spread their risks by making contributions to several political organizations. See Benedict Anderson, "Withdrawal Symplons; Social and Cultural Aspects of the October 6 Coup," Bulletin of Concerned Asian Scholars 93,3 (1977): 13-30. 40

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investments have penetrated into every sector of the Thai economy/'41 While it is true there are many elements of oligopoly and market distortion in the Thai economy from which those corporations have been able to benefit, the bank-based groups have nothing like monopoly control. As Suehiro has pointed out above, the leading industrial capitalists have neither derived from nor depended on the "old money" of the Thai banking groups; rather, they have looked to foreign joint venture partners as sources of both capital and access to new technologies. The model of finance capital giving rise to industrial capital does not work in the Thai case, the more so since the main stimulus to the country's post-1960 economic growth has been the remarkable increase in and diversification of agricultural production and exports. This gave impetus to the commercial sector and the tertiary services generally, as well as to government revenues, all of which helped generate a rising demand for the goods and services to which the great financial and industrial conglomerates could respond.42 More than elsewhere in Southeast Asia, the rise of big Chinese-owned conglomerates seems to have been a product rather than the producer of national economic growth. Though, as we have noted, Thai business groups have not yet moved far from their origins as old-style Chinese family firms toward modern, impersonal corporate entities, the trend is clear enough. At the traditional end of the spectrum are one-man autocracies like Sukree's textile empire or Saworn's Siam Motors group. At the modernizing pole are groups like the Lamsam-Thai Farmers Bank conglomerate, the agribusiness giant Charoen Pokphand, and the Bangkok Bank—this last especially since Chartri Sophonphanich took over in 1983. The modernizers are adopting new managerial techniques from the international business schools and going beyond the family circle to hire the best executives they can find, though not (yet) to the point that family control of the core companies is endangered. Some groups have compromised, conducting their commodity trading very much along traditional lines but modernizing in sectors such as banking and finance (e.g the Wanglee group, Saha Union, Hong Yiah Seng). In the trend toward more expert and impersonal management the Sino-Thai conglomerates are not very different from their Malaysian and Singapore counterparts, but the latter have gone much further in using the stock exchange to raise capital and diversify their holdings across a range of business interests while retaining control of the core holding company. Thailand did not have a stock exchange at all until the Securities Exchange of Thailand (SET) was established in 1975, long after Malaysia and Singapore but several years ahead of Indonesia. Even today the SET's significance as a vehicle for share transactions and transfers of ownership in the major public companies is very slight.43 The volume of daily turnover on the Bangkok exchange in June 1988, about US$8 billion, was only about one-fifth of the combined Singapore-Kuala Lumpur turnover and one-tenth that of Taipei's stock ex41

Kevin Hewison, 'The Financial Bourgeoisie in Thailand" Journal of Contemporary Asia, II (1981): 401,409. 42 E. C. Chapman, 'Thailand's Recent Economic Growth," in Economic Development in East and Southeast Asia: Implications for Australian Agriculture in the 1980s, ed. M. G. Adams (Canberra: Australian Government Printing Service, 1984), pp. 205-17; Peter Warr, The Thai Economy (Cambridge: Cambridge University Press, forthcoming); Suehiro, this volume. 43 Regulations intended to guard against the use of the Stock Exchange by the big conglomerates to enhance the concentration of ownership of Thai industries had the effect of discouraging them from going public in the early 1980s; for details see Skully, Financial Institutions.

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change. Trading in the shares of the big conglomerates is marginal and there have so far been no major changes of ownership or takeover battles via the exchange. It is worth noting, with regard to the modernization of Thai Chinese entrepreneurial values, that the prestige of business leaders within the Chinese community rests on "old money" rather than current wealth. At the same time, it is accorded to businessmen of standing in either Thai or Chinese social systems. Thus the Lamsam family, highly assimilated into Thai society, is regarded almost as "aristocratic" in the Thai sense, while equal admiration is accorded the related Wanglee clan, which stresses its Chinese heritage and remains closely connected with the country's network of rice traders. In this mixture of old money and new, modernization and tradition, there is much similarity between the Chinese leadership of Thailand and Malaysia. It is very different from the new, socially unprestigious wealth of the Chinese in present-day Indonesia and the Philippines. INDONESIA

The term "pariah entrepreneur" has become generally inappropriate to describe Chinese businessmen in Thailand, but it is not yet entirely so in Indonesia. Indonesian Chinese still have to take great care to maintain cordial relations with both civilian and military authorities, operating as they do in a highly centralized, authoritarian, and strongly patrimonialist political system. Whereas the families controlling the big Sino-Thai conglomerates are now very firmly entrenched near the heart of the economy and class structure of Thailand, the Indonesian Chinese are far more marginal, the super-rich as well as the middle-class and the poor. One result of this vulnerability is that Indonesian Chinese businessmen have a strong interest in the status quo, for (as Robison's essay has elaborated) they have grown rich under the Suharto regime, with whose leadership they have a symbiotic relationship. They have had a harder and longer struggle to get to their precarious eminence than the Sino-Thai businessmen. Whereas ethnic origins and identities are fast becoming of little consequence in Thai social and economic life, that is far from the case in Indonesia. It is hardly surprising, therefore, that most of the leading SinoIndonesian businessmen have short investment time-horizons, put a premium on security, accept the need to make pay-offs for political protection on a patron-client basis, and play no part in efforts to expand civil rights. We cannot, therefore, interpret their economic role solely in class or structural terms,44 nor should we take their short-term perspectives and political dependency to mean that they are not real capitalists at all.45 The economic roles of the Chinese in Indonesia were already changing quite considerably in the last twenty years before World War II, as many Chinese moved into a wider range of commercial and some rudimentary industrial activities throughout the archipelago. However, they were still constrained by the dominance of Dutch capital in all the modern sectors of the economy, and only the Oei Tiong Ham Concern and a handful of others were able to make any inroads there. The 1930s depression, World War II, and the Indonesian struggle for independence opened up a wider range of opportunities.46 The early post-revolutionary period was one of expanding 44

Robison, Indonesia. Yoshihara, Rise of Ersatz Capitalism. 46 Many of the more solidly established firms which were linked into Dutch business networks failed to survive the disruptions of the 1930s and 1940s because they were unable to adjust to 45

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but still strictly limited economic opportunities for the Chinese, as the Dutch retained control of the commanding heights until their assets were nationalized in 1957-1958. No Chinese business firms became as prominent during that period as Oei Tiong Ham in colonial days. On the other hand, some newcomers who had learnt how to cut deals with Indonesian officials and military officers during the struggle for independence began to take advantage of the new opportunities, particularly members of two very small Chinese sub-groups, the Hok Chia and the Hin Hua, of whom the most famous representatives are Liem Sioe Liong and Mochtar Riady, today the leading taipan and top banker in the country.47 After the nationalization of Dutch investments and their incorporation into the now huge state sector under President Sukarno's "Guided Economy/' a new phase of business activity began to unfold for the Indonesian Chinese. This was at first a very difficult period for them, for the official ideology was strongly antagonistic to private business in general, and intense anti-Chinese sentiment was stirred up by right-wing elements as a means of attacking Sukarno and the left.48 Yet it was in the chaotic and highly inflationary conditions of the Guided Democracy years that Chinese businessmen proved themselves indispensable, for the cumbrous state enterprises and distribution networks were incapable of operating effectively in those circumstances except with the assistance of Chinese as fixers (tukang catut, in Indonesian terminology).49 Apart from a few of those, not many Chinese businessmen grew rich in those years, since there was little money to be made. But in general they survived better than their indigenous competitors, private as well as public, and so were well placed to take advantage of the improved economic climate and openness to private enterprise of Suharto's New Order. The prosperity of Chinese businessmen under the post-1965 regime has often been attributed to their political connections as cukong to the New Order powerholders.50 The term came into currency around 1970 to denote a close relationship the changed conditions. See Twang Peck-yang, 'The Transformation of the Trading Minorities in Indonesia, 1940-50" (Ph.D. diss., Australian National University, 1988). 4 ^Ibid. I am much indebted to Twang for drawing my attention to the extraordinary prominence of the Hok Cia among the top businessmen in Indonesia since World War II. 48 The government regulation PP X/1959, banning trade-stores owned by aliens from rural areas, caused a great deal of racial tension in the early 1960s and there were several outbreaks of anti-Chinese violence between 1959-1965. See J.A.C. Mackie, ed., The Chinese in Indonesia: Five Essays (Melbourne: Thomas Nelson, 1976). 49 At a time when most channels of trade were clogged by the tangle of government regulations in the name of Sukarno's "Guided Economy," the Chinese were the only group sufficiently adaptable to be able to keep at least minimal flows of goods and services. See Lance Castles, "Socialism and Private Business: The Latest Phase" Bulletin of Indonesian Economic Studies 1 (1965): 13-45, and J.A.C. Mackie, Problems of the Indonesian Inflation (Ithaca, NY: Cornell Modern Indonesia Project, 1967). *® The word cukong is of Hokkien derivation and literally means "master" (Leo Suryadinata, "Chinese Economic Elites in Indonesia: a Preliminary Study" in Changing Ethnic Identities, p. 266). More broadly, it signifies something between "boss" and "grandfather," referring originally to a kinsman who was both a patron-adviser and backer to a businessman, although in the Indonesian context the cukong is much more subordinate to his political protector (Coppel, Indonesia's Chinese, p. 212). The first article published on the cukong phenomenon, by Frank Hawkins in the Bangkok Post, January 28,1971, named four major cukong; Liem Sioe Liong, Yap Swie Kie, Njoo Han Siang, and Harjyanto Lim, and referred to a group of about twenty in all who had a "steady and inside track to government contracts, investment credits and other funds" (Suryadinata, "Chinese Economic Elites," p. 267). Interestingly, quite a few of these are

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between a Chinese who knew how to raise money and an Indonesian official (often an army officer) who could provide protection and influence. During the early years of the regime the government budget was quite inadequate to fund more than a small part of the routine expenditures of the armed forces and the regional civilian administration. "Unconventional finances'7 had to be raised by any means whatever, at both the local and national levels. For this purpose, recourse was made to Chinese financiers and business advisers—in return, of course, for protection from harassment from other military or civilian marauders and access to scarce goods, bank credits, licenses, and government contracts. There was thus a massive expansion of a relationship which had already existed for some time between certain army officers and Chinese businessmen. By 1970/71 about a dozen of the cukong became notorious because of their very close relations to the president and members of his family. Of these the foremost was Liem Sioe Liong, an associate of Suharto since very early in his career and today Indonesia's leading entrepreneur. But almost every provincial governor and military commander was said to have developed similar relationships with the wealthiest local Chinese, and the system was perpetuated on a lesser scale at lower administrative levels, so that it became a highly visible characteristic of relations between Chinese businessmen and Indonesian authorities. By the 1980s it could be said that "the economic fortunes of the Indonesian ruling class are firmly intertwined with those of the Chinese."51 When we recall the intensity of anti-Chinese sentiment amongst many of the New Order anti-Communist activists in 1965-1967,52 the anti-Chinese riots of 1959 and 1963, and sporadic outbreaks under the New Order itself, we can appreciate both the distance that Chinese businessmen have traveled and the fragility and dependence of their position. Even so, the balance between political and business power has been changing. It began to do so with the economic improvement of the 1970s, and by the early 1980s the word cukong itself came to be heard far less frequently. A crucial juncture was the 1973/74 oil boom, which vastly increased the decision-making authority of the government and the financial resources at its disposal. This strengthening of the bureaucracy paradoxically freed businessmen of their close dependence on one or two powerful government patrons, as it released officialdom from its dependence on "unconventional financing." By the late 1980s several of the top ten businessmen— those who had most profited from the system—relied far less than before on political connections. Of course, it has remained important for Chinese businessmen to maintain good connections with the relevant authorities and to be able to "lubricate" them with occasional bribes, sweeteners, and "administration costs"—a common enough phenomenon in countries where the government intervenes extensively in economic life. But these days that may mean little more than keeping on the right side of the Directorate of Industry, or the Ministry of Public Works, or the Forestry Department; it does not necessarily mean establishing the same sort of symbiotic linkage with toplevel government officials as in the classical cukong relationship. no longer prominent today. Several later lists of leading Chinese businessmen in Indonesia in the years 1973,1979, and 1984 are published by Suryadinata in ibid., pp. 282-88). A useful list of the forty major Chinese business groups in the 1980s is given in Richard Robison, Indonesia:The Rise of Capital (Sydney: Allen and Unwin, 1986), pp. 278-88. 51 Robison, Indonesia, p. 317. 52 Coppel, Indonesia's Chinese.

180 Southeast Asian Capitalists Leading Chinese businessmen of today exhibit varying degrees of political involvement.53 Among the more highly "political" of the original group of cukong might be included, in addition to well-known names like Liem Sioe Liong and Bob Hasan, the late Ong Seng Keng (one of the earliest and most controversial of them all); Hendra Rahardja; Cokrosaputra of the "Batik Kris" organization; Goh Swie Kie, the "Bulog cukong"; Ir. Ciputra, associated initially with the Jakarta municipal government and later directly with Liem Sioe Liong and the palace circle; and Liem Bian Koen. But since the 1980s there have been notable businessmen who were less directly "political/7 such as William Soerjadjaja and Tan Siong Kee, who head the large Astra and Roda Mas groups respectively, Go Ka Him of the fast-rising Dharmala group, the late Suryo Wonowijoyo of the giant Gudang Garam cigarette company, and Adil Nurimba, a leading shipping magnate. All of these seem to have built up their wealth more by carefully nurturing their businesses than by wheeling and dealing, although most have judged it expedient to cut in members of the Suharto family or their circle as shareholders or functionaries. None entirely neglect the cultivation of political connections. Lacking institutionalized mechanisms for exerting influence over the government's economic policies through pressure group mechanisms of the kind we see in more advanced industrial economies, they have to rely on personal ties to bend public policies or obtain dispensation from them.54 In general this has meant achieving special privileges and exemptions (e.g. Liem Sioe Liong's monopoly rights over steel imports for tin-plate [a quid pro quo for bailing out the state's lossmaking Krakatau Steel plant in 1983] and the exclusion of Bob Hasan's rattan-processing monopoly from the 1988 trade deregulation package). However, at the level of general economic policy making, these businessmen do not have anything approaching the influence of the technocrats in the bureaucracy. All Indonesia's major private corporations are owned and controlled by what are essentially family firms. Although most of the twenty-odd largest corporations have connections with business groups involving the presidential family and Liem Sioe Liong, there has otherwise been very little interlocking of shareholdings and directorships. The interlocking process has not yet gone as far as in Malaysia or Thailand, where it is also quite rudimentary compared with the NICs and other capitalist economies. In a handful of Indonesian family firms, most notably Astra, there has been some progress toward modern-style managerial structures and the employment of well-trained executives from outside the family circle, although here again this has occurred far less than in Malaysia or Thailand. Most heads of Indonesian conglomerates are no longer old-style towkays, but only a few have moved far toward modern business practices. 53

Most of the information about the leading Indonesian Chinese capitalists in the following section is based on material compiled by Dorodjatun Kuntjorojakti, who generously allowed me access to it; and from P. N. Sondang, "100 Tokoh Milyarder Indonesia: Apa dan Siapa Mereka?" Expo, nos. 1,2,4, andlS, 1984, Fokus (1984), and Robison, Indonesia. 54 The formal channels for business interaction with government on policy matters have been rudimentary in New Order Indonesia; the extent of informal pressures by big business leaders cannot be gauged, but has on some issues been substantial. Andrew Maclntyre, "Politics, Policy, and Participation: Business-Government Relations in Indonesia" (Ph.D. diss., Australian National University, 1988) discussed several cases where private business interests in the late 1980s were able to exert some influence through official channels. He expects the process to go further, but, given the opacity of Indonesian policy making, the evidence is unclear.

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Most Indonesian conglomerates are highly diversified. This makes good sense in an uncertain economic or political environment, as a means of spreading risks, but it has hindered serious industrial commitment and long-term investment strategy. Liem Sioe Liong may be richer than was his friend Chin Sophonphanich, and he controls a vast and heterogeneous business empire, including the fast-growing Bank Central Asia (BCA) group, but he rules over a much more rambling collection of enterprises. Cash flow and control of assets seem to be his primary aims, not corporate strategy or market dominance, and this is true of the other Indonesian conglomerate heads. The main exceptions to the disinterest in concentrated investment are the Astra International corporation (mainly involved in motor-vehicle assembling and manufacture), Sinar Mas (cooking oil and oil-palm plantations), and Gudang Garam (kretek cigarettes), although all of these also have property divisions and minor investments in other lines of business. A few business leaders have concentrated predominantly in one field of activity: thus we find a "textile king" (The Nien King), a "timber king" (Jos Sutomo), a "sewing machine king," and even a "prawn king." To them we might add Adil Nurimba, owner of the largest inter-island shipping fleet by the early 1980s; Mochtar Riady, Liem Sioe Liong's right-hand man in charge of Bank Central Asia; and the Director of PT Kalbe Farme, Dr. Bunyamin Setiawan, who made a fortune in Pharmaceuticals. Like all the leading Indonesian Chinese businessmen, theirs is new money; Adil Nurimba, for example, started life on a river boat in the east Sumatra fishing port of Bagan Siapiapi. The fact that the risks of specialization began to recede much earlier in Thailand than in Indonesia is one reason for the latter's failure to produce industrial leaders. In addition, the larger role of foreign capital in manufacturing has probably had a more inhibiting effect on Indonesian industrial entrepreneurship than in Thailand or Malaysia.55 Moreover, investment in real estate has been a highly attractive alternative. A prime focus of Chinese business investment in all these countries, it has been particularly important in Indonesia. Because of the country's rudimentary property markets prior to the 1970s, there were huge windfall gains to be made as land values and rents rose rapidly during the boom years. As in most countries, political connections and back-door pay-offs are essential in that line of business; this reinforced the need for political patronage, and gave men close to the inner circle of the presidential palace the inside running. Property development became one of the easiest means of accumulating capital during the boom phase of New Order growth, with extensive financial leverage being assured by easy access to bank credit on subsidized terms.56 Few of the big Indonesian firms have been able to call on private commercial bank connections in the manner of their Thai equivalents. Indonesia has nothing comparable to the Bangkok Bank, nor any big banking-based conglomerates like 55

Thee Kian Wie and Yoshihara Kunio, "Foreign and Domestic Capital in Indonesian Industrialization/' Southeast Asian Studies 24,4 (1987): 327-50; Hill, Foreign Investment. 56 A few corporations have specialized in property dealings, displaying, apart from small banking connections, few other interests. These include the Pembangunan Jaya group, led by Ir. Ciputra, the "Medan group" of Ongko Kaharuddin and Lembana Ali, and the Tripoda group. It should be remembered that the activities of the great property developers in Jakarta, Medan, and Surabaya are replicated on smaller scales in hundreds of cities and towns throughout the archipelago, as urban growth pushes up land values. Thus it has been a source of capital accumulation not only for major cukong but also for thousands of smaller Chinese businessmen.

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Thailand's "Big Four/7 Because the lucrative field of deposit banking is dominated by the state banks, which are also the major source of subsidized credit, only a few of the sixty or so private banks with which many of the big corporations are associated had reached any significant size prior to the deregulation of the banking industry in 19881989.57 In 1983, only two of them ranked among the top ten Indonesian banks, BCA and its main rival Panin (Pan Indonesia Bank); another seven, all considerably smaller, were in the top thirty. Most private banks existed mainly to transact the business of the companies that owned them. Throughout the 1980s the private financial sector in Indonesia was still extremely rudimentary in all respects, apart from informal-sector credit transactions.58 The stock exchange only began to play a significant role as part of the capital market in late 1989, and only a few small parts of the largest conglomerates are as yet registered there for share transactions. Much more important as a source of finance has been (and still was at the end of the decade) the state banking system, which made cheap credit easily available to the politically wellconnected. Needless to say, this reinforced the dependency of businessmen on political patronage. The Indonesian conglomerates have, however, been able to call on foreign sources of capital to varying degrees. Many are associated on a joint-venture basis with Japanese companies; others have connections with Hong Kong, Taiwan, and, increasingly, South Korean capital. European industrial firms seeking access to the Indonesian market through joint ventures are also sources of finance, but relatively few conglomerates have ties with US capital, which is mainly invested in oil and minerals, where the Indonesian Chinese have little involvement. In a few cases the Indonesian companies been able to emulate their Thai counterparts in achieving substantial bargaining leverage vis-a-vis their joint-venture partners. In general, though, they have been less independent. A key factor in this has been the changing attractiveness to foreign investors of the Indonesian economy: this looked good during part of the 1970s, but seemed far less so after 1983, causing the foreign investors to drive much harder bargains. By the end of the decade, however, Indonesia was regaining its appeal and hence, perhaps, increased leverage. Moreover, the fact that several of the big conglomerates have a variety of foreign partners and are thus not dependent on any one has changed their negotiating strength considerably. In short, it seems likely that the link with foreign capital is less a source of national economic dependency, as was feared in the early 1970s, than a potential mitigator of business dependency on domestic political patronage. CONCLUSION

These accounts reveal that, in spite of the great variety of Southeast Asian Chinese business experience, there are significant similarities in business leaders' sources of wealth, the predominance of "new money" and the relative decline of old entrepreneurial families, the importance of property dealings and of political connections. Foreign capital has not determined their role. In spite of the importance of joint ventures, few big corporations seem to be fronts for MNCs, while several Southeast Asian business groups are aggressively moving into the international commercial arena themselves. If anything, foreign capital has served to decrease Chinese busi5' J.A.C. Mackie and Sjahrir, "Survey of Recent Developments," Bulletin of Indonesian Economic Studies 25,3 (1989). 58 Skully, Financial Institutions.

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ness dependence on local sources of support, and thus to increase its political and financial leeway. Nor has finance capital played a central role in business development: only in Thailand is banking capital a main base for business development, and even here the major banking conglomerates appear to be quite distinct from the industrial groups. We have seen that virtually all the large conglomerates are still owned or controlled by family firms, and that relatively few have moved noticeably toward more modern corporate organization. Nor is there much sign of movement toward the separation of ownership from managerial control.59 We can, however, see some movement, and corporatization has gone further in Malaysia (and Singapore and the Philippines) than in Indonesia or Thailand. We must bear in mind that the very newness of most big Southeast Asian businesses means that we are talking about change within one generation, and it is very hard to expect men who rose from nothing to head great corporations to relinquish the methods that were their key to success and remain the basis for their current power. It is also notable that the wealthiest businessmen of the 1980s engaged primarily in financial and commercial activities rather than in manufacturing.™ This is not because, as has sometimes been suggested, Southeast Asian Chinese have no stomach for manufacturing. We need only remember that they pioneered many manufactures all over Southeast Asia, in products like food processing, soap, cooking oil, matches, cigarettes, and biscuits. To be sure, these were small-scale ventures, requiring none of the financial and organizational inputs of today's large industries. Perhaps even more significantly, the really big money-makers of recent decades have been commercial activities and property deals with short turnover times, or financial operations, banking, insurance, and building construction. Capital tends to flow into those spheres of activity where the rate of return is highest, and in the economic circumstances of the last decades manufacturing industry has often not provided very high rates of return. Nevertheless, there are signs that the long-term advantages of a manufacturing base are making themselves felt, aided by foreign investors' willingness to provide finance. Domestic industrial groups are now a marked feature of the Thai economy, and even in Indonesia exports of manufactured goods are becoming significant. We have noted the connection of major Southeast Asian business leaders with overseas Chinese capital, centering on the greater Nanyang (southern seas) area. Only half-a-dozen are yet operating transnationally on a large scale, although many 59

It is possible, of course, to introduce managerial and administrative techniques of the business-school variety that should result in better allocation of resources without losing overall control of the firm. Many new Chinese corporations, particularly in Malaysia, seem to be moving in this direction. In Indonesia, William Soerjadjaja's Astra group has long been seen as the paragon of a new breed of local business; and in Thailand, the Lamsam, Charoen Pokphand, and Saha Union groups illustrate the trend. 60 This is particularly noticeable in Thailand, where the three largest conglomerates are bankbased (the fourth is the Crown Property Bureau, which has the large Siam Cement Co. and various other industrial investments, as well as the Siam Commercial Bank). The more exclusively industrial corporations are a good deal smaller. See Krirkiat and Yoshihara, Business Groups, p. 29. In Malaysia, Robert Kuok is the sole tycoon with big manufacturing investments, and these form only a small part of his highly diversified empire. In Indonesia, the Liem Sioe Liong and Astra groups are both among the largest conglomerates and have major industrial interests, though Liem's fortune was made on non-manufacturing investments.

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businessmen have moved part of their capital abroad and many more have minor business connections in other countries. In one sense this is not new: late-colonial tycoons such as Tan Kah Kee, Aw Boon Haw, and Oei Tiong Ham had overseas connections, but the internationally active Southeast Asian Chinese businessmen of the present day are making much larger investments throughout the region. Many have links with Hong Kong, as a source of finance, an investment nest egg, or a trade connection looking to the China market.61 The volume of Chinese money moving around Southeast Asia has increased enormously over the last thirty years, and we have noted the leverage which this mobility gives businessmen against local government pressure. Regionally active Chinese capital is also being invested differently: instead of the old commercial emphasis on rubber, copra, rice, and other commodities, it now concentrates on international financial and property transactions. New types of skills and connections are required to make large profits in these new fields, and one might assume (though so far there is not much evidence) that this will have an impact on Southeast Asian Chinese ways of doing business. While Southeast Asian businessmen are becoming more integrated with capital in the greater Nanyang region, they are detaching themselves from Chinese communities in their own countries. The successful tycoons of the present day do not provide social leadership in the same way as the great siang hwee (chamber of commerce) leaders of the last colonial century. They may command a great deal of respect and influence among other Chinese merchants, but, as Heng's essay points out for the case of Malaysia, they have avoided formal leadership responsibilities within their communities. Indeed, the Chinese communities themselves have changed profoundly, and non-communal types of social organization are meeting the needs that Chinese institutions used to address. Save in the Philippines, the siang hwee have disappeared, and the traditional community associations are atrophying. Increasingly, though slowly and at different speeds, the Southeast Asian Chinese are identifying as Thais, Indonesians, or Malaysians, and so, too, are Southeast Asian Chinese businessmen. 61

The most dramatic internationalization has been that of Liem Sioe Liong, who moved into Hong Kong with the establishment of the First Pacific group in the early 1980s and subsequently acquired companies in the USA and the Netherlands; he was also making major investments in Singapore (and minor ones in Thailand) in 1990-1991. Dozens of smaller Chinese business leaders in Singapore, Malaysia, and Indonesia have financial investments in at least two of these countries, as do various shipping and commodity trading companies. Since the 1960s, the Bangkok Bank has steadily extended its network of branches throughout Southeast Asia (but not in the Philippines or Hong Kong) in order to service Chinese business requirements in the region, particularly those involving international linkages; however, it does not appear to have made investments or equity acquisitions outside Thailand.

APPENDIX MAJOR CHINESE CONGLOMERATES IN THAILAND, INDONESIA AND MALAYSIA

This table lists leaders and names of about twenty of the largest Chinese conglomerates of the 1970s-1980s in each of the three countries, including a handful, marked *, which subsequently collapsed or their founders died. For Malaysia, it also lists some of the older colonial-era firms. Major Activities

Family and Group

Date of Origin

Other

THAILAND GROUP l: "THE BIG FOUR" IN BANKING Sophonphanich - Bangkok Bank

Banking, investments.

Lamsam - Thai Farmers Bank

Banking, manufacturing, investments.

Techaphaibun - Bangkok Metropolitan Bank

Whisky, banking, etc.

Ratanarak - Bank Ayudhya

Lighterage, banking, manufacturing.

1930s Chin Sophonphanich 1944 Bangkok Bank 1900-10 1945 Thai Farmers Bank

Relatively concentrated. Major bank in region.

1910-30 TaeTsu Ping 1950 Bkk. Metro. Bank 1959 Mahaguna Distillery 1950 Bangkok Lighters 1958 Oman RBankof Ayudhya

Diversified around liquor-banking core. Highly political.

Strong pol. connections initially, later more diffuse. Modernizing in the 1980s. Diverse but strong modern corporate structure: close ties with other leading groups, relatively nonpolitical.

Relatively concentrated initially, diversifying later. Strong political links early.

Changi P t er s of B u 185

00

GROUP 2: RICE, SUGAR, AND AGRIBUSINESS GROUPS Wanglee Bank 1874-1910 Rice milling, banking, property development.3 Hong Yiah Seng - Betagro Rice trading, textiles, importing, 1946 and manufacturing. Thai Roong Ruang Sugar and related business. 1946 Mitr-Pol - Kwang Soong Lee Sugar and related business. 1950s (?) Yongsak Kanathanavanich Rice & jute export, animal feed etc. 1960s-70s Laem Thong Chia Bros.—Charoen Pokphand Chickens, animal feed, agri1940s business, telecommunications. Prasert Tangtrongsakdi - Metro GROUPS: INDUSTRY-BASED GROUPS Boonsong Chirathiwat - Central Dept Stores Taworn Pornprapha - Siam Motors *U Chu Liang - Bangkok Metropolitan Bank Damri Darakanda - Saha Union

Fertilizer importer & manufacturing, flour mill.

1966

Auto importing, and manufacturing.

Early 1900s

Retail trade, property development. Motor distribution & assembly (Nissan), property development.

1940s-50s

Importing, banking, misc.

Wholesale trade, manufacturing (household goods). Sukree Phothirattanangkun - Thai Manufacturing (textiles). Wuthipat

1930s Taworn's firm est. 1950s Siam Motors founded 1920s 1950 Bangkok Metro Bank 1960s 1940s-50s

Diversified. Diversifying. Concent rated. Political ties crucial. Concentrated.Political ties crucial. Diversifying into agribusiness generally. Started in agribusiness, diversifying in 1980s: joint venture links with various MNCs. Overseas branches in several countries. Several families involved. Diversified.

Concentrated. Dominant position in the industry. US & Japan joint venture links in autos and manufacturing. Relatively concentrated. Business links with other large groups. Concentrated. Strong pol. connections early. Old style autocratic management until 1985 business downturn leads to bank intervention. Diversified: Leader of Teochiu community; died 1976. Diversified. Concentrated.

186SoutheasAinCpl

Osathanukroh - Osothsapha Srifuengfung - Cathay *Sithi-Amnuay - PSA Tarnvanichkul - Asia Trust Bank

Pharmaceuticals (importing and manufacturing), property development. Trade, banking,finance, manufacturing. Finance, insurance, tourism. Banking, finance, property development.

1940s-50s

Diversified.

1940s-50s

Diversified.

1970s 1965

Substantially diversified. Collapsed mid-1980s. Collapsed early 1980s.

INDONESIA Liem Sioe Liong - SEDC (Salim Economic Development Co.)

Trading, cement, steel, autos, property development.

1938-40s 1967-70 big expansion

William Soerjadjaja - ASTRA

Auto importing and manufacturing, property development, agribusiness.

1950s 1968 auto business

Indra Wijaya - Sinar Mas

Cooking oil manufacturing and distribution. Commodities trading, manufacturing, finance, property development. Rice, sugar, commodities distribution. Trade, manufacturing, timber. Banking (Lippobank and BCA), finance, etc. Banking, finance, etc. Construction, property development.

1950s

Gondokusuma - Dharmala Goh Swie Kie - Gunung Sewu Yap Swie Kie - Berkat Mochtar Riady - Lippo Gunawan Gunadi - Panin Bank Ciputra - Pembangunan Jaya

1950s

Joint ownership with Suharto family in various firms. Links with foreign capital diversified. Large off-shore arm in First Pacific Holdings. Highly diversified group. Relatively concentrated group, but diversifying. Joint venture with Toyota Corp. Political connections important initially, less significant later. Strong corporate structure. Concentrated. Business associate Liem Sioe Liong in 1980s. Initially concentrated, latterly diversifying. Nonpolitical.

1960s ??

Diversified. Close connections with BULOG.

1960s 1960s

Concentrated. Close political connections. Concentrated. BCA part of Liem empire.

1950s-60s ?? late 1960s

Concentrated. Main rival to BCA. Diversified. Strong in real estate and construction: close to Jakarta City administration and latterly to Palace group.

ChangiPtersofBu187

Bob Hasan *Ong Seng Heng - Bank Ramayana/Coopa *Hendra Rahardja - Harapan

late 1960s

Shipping, timber, property development, misc. Trading, banking.

1960s

Agus Nursalim - Kedaung

Motorcycles (Yamaha), property 1970s development, finance. Manufacturing (glass, cooking oil). 1960s

The Nien King - Damatex

Textile manufacturing.

1970s

Tan Siong Kie - Roda Mas

Glass and electrical goods importing and manufacturing. Real estate, banking, manufacturing. Shipping.

1950s

Qngko Kaharuddin - Arya Upaya AHil MiirimHa - r^»siiri T.lnvH

1970s 1950s

Diversified. Highly political with close Palace connections Close to Gen. Suryo, the most notorious of early cukong; died 1976 Diversified. Collapsed 1983-84, bailed out by Liem Sioe Liong. Concentrated; Suharto's brother Probosutedjo a shareholder. Relatively concentrated. 'Textile king" in 1980s. Strong political connections. Relatively concentrated. Limited political connections. Diversified. Strong Medan connections. Concentrated. Big jst shipping group by 1970s; in difficulties mid-15 3s. No longer appears very political.

MALAYSIA GROUP 1: "OLD WEALTH" Kuok Bros - Perlis Plantations

Sugar trading, flour, shipping, 1950s manufacturing, property development, finance, investments

Kwek Bros - Hong Leong

Finance, investments, construction, manufacturing.

1950s (Singapore)

Lee Seng Wee - OCBC/Lee Rubber^

Banking, plantations (rubber, palm 1930s oil), investments, property development.

Loke Yew - Cathay Group

Tin, plantations (rubber), property development, banking, finance.

1860s

Largest Malaysian conglomerate, with many overseas affiliates: close links with UMNO leadership since 1960. Relatively modern corporate structure. Originally Singapore-based group, Malaysian arm now significant in its own right. Close UMNO connections. The oldest large corporation, Singapore-based; founded by Lee Kong Chian in 1930, now dominates rubber trade. Unpolitical and fairly corporatized. Initially tin, later diversified.

18SoutheasAinCpl

Eu Tong Sen Lee Loy Seng - Austral Amalg. Tin

Tin, rubber, banking, finance. Rubber, plantations, investments, banking.

GROUP 2A: "NEW WEALTH" (PRE-19805) Loh Boon Siew - Oriental Investments, motorcycle Holdings distribution (Honda), property development. *Chang Min Tien Banking (UMBC), property development, manufacturing, plantations, investments. c Banking, real estate (hotels), KhooTeckPuat investments. Casino, plantations, property Lim Goh Tong - Genting development. Tin, property development. Chong Kok Lim - Landmarks Teh Hong Piow - Public Bank

Banking, finance.

1890-1910 1930s

Ditto Fairly concentrated; founder was MCA Senator, broad political and business links

1960

Relatively diversified; modest political links.

1960s

Diversified, loose group; modest political links; leader moved offshore to Hong Kong 1981, died soon after. Founded Malayan Banking Bhd., later forced out, then diversified; frail political links. Initially concentrated, later diversified; broad links with various UMNO leaders. Concentrated (tin, then real estate); political links with Perak royalty, then MCA and UMNO leaders in 1960s. Concentrated; links with UMNO leaders.

1960 1960s

1960 1965

GROUP 2B: "NEW WEALTH, PosT-NEP" Khoo Kay Peng - MUI Property development, banking, finance, manufacturing (cement). Manufacturing, property Vincent Tan - Berjaya development, investments, Sports Toto lottery. Chan Teik Huat - Metroplex

1982

Yap Lim Sen - Ipoh Garden Bhd.

1970s

Lim Thian Kiat - Kamunting Loy Hean Heong - MBF Finance

Property development, construction, investments, manufacturing. Toll road concession, plantations, manufacturing, trading. Financial services.

1976

1987 1970s

Diversified; links with Razaleigh, then other Malays. Diversified; wide political links, especially to Daim Zainuddin Diversifying; links with UMNO leaders and Fleet Group. Diversified. Significant international operations and investments. Previously linked to brother and nephew of Daim Zainuddin in Sen Angkasa. Concentrated. Links to Negri Sembilan royalty

ChangiPtersofBu i—i VO

Alex Lee - Roxy Tan Koon Swan - GUH/MPH Teo Soo Chuan - Paramount

Banking (D&C Bank), property development, manufacturing (electrical goods). Investments, tin, property development.

inherited wealth

Diversified; founder is son of Col. H. S. Lee, extensive political links to Daim, Mahathir, etc.

1976

Diversified; founder had a unique political career in MCA; jailed in 1987 in Singapore on breach of trust charges.

Property development, investments, plantations (palm oil).

1960s

GROUP 3 MAJOR COLONIAL-ERA GROUPS (MALAYA-SINGAPORE) Tan Kah Kee Rubber (plantations, processing, and trading), pineapples, rice trading. Lee Kong Chian Aw Boon Haw Tang Cheng Lock - Unitac Plantations

1900-1910

Rubber (founder of Lee Rubber), 1920s banking (OCBC) Chinese medicines ('Tiger Balm"), 1920s newspapers, banking. Shipping, rubber plantations. 1880s

Tan Lark Sye

Rubber trading, misc.

1920s

Col. H. S. Lee

Tin, banking, misc.

1920s-1930s

Wealthiest colonial-era Chinese businessman in Malaya-Singapore for thirty years. Strong KMT supporter and active community leader and educational benefactor. Son-in-law of Tan Kah Kee, father of Lee Weng See. Close links with British authorities. Wealthy Singapore firm to 1960s. From old-established Malacca family; prominent in MCA politics 1940s-50s; son, Tan Siew Sin, was long-time finance minister in 1960s-70s. Leading Singapore community leader in late colonial era; prominent in 1950s; later deprived of citizenship by PAP for alleged pro-Communist sympathies. Major tin interests in 1920s-30s; leading MCAAlliance minister; first finance minister of Malaya.

Sources: for Thailand, Krirkiat and Yoshihara, Business Groups in Thailand, Yoshihara, Rise of Ersatz Capitalism, Suehiro, Capital Accumulation in Thailand; for Indonesia, Sondang, "100 Toko Milyarder Indonesia," Fokus, May 10,1984, Robison, Indonesia; for Malaysia, Lim, Ownership and Control, Tan, Income Distribution, Searle, "Changing Character of the Malaysian Elite." a The term property development also embraces hotels and real estate. b OCBC is Singapore-based, as also Lee Rubber, although the main plantations and other assets of the latter are in Malaysia. c Khoo Teck Puat was active in business in Malaysia in 1960s-70s but is now based mainly in Singapore and elsewhere.

190SoutheasAinCpl

h CAPITAL IN SOUTHEAST ASIA: AUTO INDUSTRIES IN THE PHILIPPINES ANDTHAILAND Richard Doner

the late 1960s the Philippines and Thailand each initiated efforts to develop national automobile industries.1 Both aimed to move from local assembly of imported auto parts to local parts manufacture. The Philippine plan, known as the Progressive Car Manufacturing Program (PCMP), stressed the promotion of local capital through auto industrialization.2 The present essay explores the question of why, despite this emphasis, Philippine auto firms experienced less growth than local capital in the Thai auto industry. The market potential for local auto manufacture seemed similar in both countries. During the late 1960s and early 1970s vehicle sales in both were small relative to the totals assumed necessary for efficient parts and vehicle manufacturing; but each country's market had expanded during the 1960s and would continue to do so at roughly the same rates for both during the 1970s—8.6 percent in the Philippines and 9.1 percent in Thailand.3 The market opportunities for indigenous manufacturing were further suggested by the fact that in both countries locally assembled vehicles accounted for less than half of the vehicles sold during the early 1970s. Viewed from the early 1970s, several factors indicated that Philippine auto entrepreneurs would develop more rapidly than their Thai counterparts.4 The economic capacities of the Philippine private sector were particularly impressive relative to firms elsewhere in Southeast Asia. Philippine managers accounted for 300,000 of the region's 748,000 total in 1971. While Thai firms were only just moving from commer-

In

1

Much of the material for this essay comes from interviews conducted in Tokyo, Manila, and Bangkok from January to August, 1985, and in Bangkok in June 1989. 2 "BOI Guidelines for Progressive Car Manufacturing Program," Industrial Philippines, JuneJuly 1972. 3 Stuart W. Sinclair, Motorizing the Third World: Prospects to 2990, Economic Intelligence Unit (hereafter EIU) Special Report no. 131 (London: The Economist, 1983), table 3. 4 Indeed, this was the assumption of Thai government officials at the time. Interviews, and Daily News (in Thai), February 10,1972.

192 Southeast Asian Capitalists cial into industrial activities in the 1960s, Philippine metal-working and engineering firms were more advanced than even those in South Korea and Taiwan and were selling locally made intermediate machinery to Pakistan. In the auto sector, Philippine entrepreneurs were building the widely used basic transportation vehicle known as the jeepney by reconditioning engines and other components from surplus US army jeeps.5 The Philippine auto effort was also led by a group of highly trained government technocrats such as Board of Investment (BOI) chief Vicente Paterno. Paterno and his colleagues pledged to promote local industry by weeding out weaker firms and using foreign funds to strengthen local manufacturing. They were backed by the Marcos martial-law regime and a business community anxious for help in streamlining the country's many inefficient sectors.6 Thailand had also developed a core of capable civil servants. However, these officials operated under six different prime ministers ruling with different cabinets during the 1972-1977 period. In fact, the growth of Philippine auto assemblers and parts firms was disappointing, relative to both the objectives of the Philippines and developments in the Thai private sector. How are we to account for these results? Contrasting national macroeconomic performances certainly had an impact. By the early 1980s the Philippine debt crisis led to a severe fall in auto sales and a government decision to cut off all foreign-exchange allocation to auto assemblers. The continued growth of Thailand's auto market provided significantly greater opportunities for local producers. But there are limits to the macroeconomic explanation. Thailand also experienced severe market and debt difficulties during the early and mid-1980s. Debt levels were sufficiently threatening to generate public discussion over the dangers of a "Philippines problem" (rescheduling of loans, externally enforced austerity programs, and poor credit ratings).7 Most important, I shall show in the following pages that the Philippines' inability to promote local auto interests was evident by the late 1970s, prior to the onset of the country's debt problems. A second possible explanation stresses the attitudes of foreign capital toward the two countries. Given the Philippines' economic and political disintegration of the 1980s, foreign auto firms might well have been more willing to cooperate with Thai capital rather than with the Philippines. Indeed, Ford and GM quit the Philippine market in the mid-1980s. But this approach also suffers from important drawbacks. Philippine problems began in the 1970s, even as Japanese and US auto firms viewed the country as an excellent market and were willing to comply with ambitious Philippine projects for automobile manufacture. Japanese firms have remained in the 5

Ceferino Follosco, "Developing the Engineering and Metalworking Industries in the Philippines," (Paper presented to the Symposium on Engineering Industries, Manila, April 25,1985). For a broader discussion of the growth of Philippine manufacturing, see Amado A. Castro, "Import Substitution in the Philippines, 1954-61: A Historical Interpretation," in Asian Industrial Development, ed. Nagatoshi Suzuki (Tokyo: Institute of Developing Economies, 1975). 6 On local business support for the technocrats' industrial goals, see Robert B. Stauffer, "The Political Economy of Refeudalization" in Marcos and Martial Law in the Philippines, ed. David Rosenberg (Ithaca, NY: Cornell University Press, 1979), pp. 194-95. 7 Kevin Hewison, "National Interests and Economic Downturn: Thailand" in Southeast Asia in the 1980s: The Politics of Economic Crisis, ed. Richard Robison, Kevin Hewison, and Richard Higgott (Boston: Allen and Unwin, 1988), p. 63. Thailand's total external debt in 1985 was $13 billion, with a debt-service ratio of over 20 percent. In 1984 the country's debt represented over 36 percent of GNP and 25 percent of foreign-exchange reserves, and fully one quarter of the total debt was in short-term loans and credits.

Politics and the Growth of Local Capital

193

Philippines, with Mitsubishi even increasing its investment just as the US firms were leaving. Finally, Thailand was no model of political stability during the 1970s. Political shifts and government openness to popular demands during the 1973-1976 democratic period discouraged foreign-capital inflows and led to general capital flight. In this essay I emphasize a political explanation for the contrasting developments of Philippine and Thai auto firms. My focus is on the way each national political economy raised or lowered entry barriers for local firms. This approach does not contradict the emphasis on macroeconomic problems, but it examines the auto industry within the context that gave rise to those challenges. Three interrelated components of this broader context merit special emphasis: the social bases of the respective states, the level of expertise and institutionalization in each bureaucracy and financial system, and the development strategies espoused by state officials responsible for the auto industry. The Marcos regime was established in conscious opposition to existing societal groups, and its business base rested on a very small number of firms benefiting from extensive privileges. The social base of the Thai state was significantly broader: political leaders were responsible to numerous competing groups capable of ensuring that none obtained a monopoly on stategranted privileges. These different social bases encouraged contrasting levels of bureaucratic capacity. Intervention from the presidential palace to benefit favored interests undermined the ability of career officials to formulate and implement consistent automobile policy in the Philippines. The Thai bureaucracy, while far from free of private influence, nevertheless had the political "space" to pursue auto policy with greater consistency and less politicization. The two countries also differed with regard to development policies. The goal of officials in both the Philippines and Thailand was local auto manufacture. Yet the Philippine technocrats emphasized auto parts exports and large, capital-intensive projects as the key to local production. The developmental sequence in Thailand began with production of more labor-intensive products for the domestic market; exports and large projects were not pursued until the early 1980s. In the Philippines this set of conditions imposed very heavy burdens on most firms while removing the privileged from market discipline. The result was corporate weakness across the board. Thai firms, on the other hand, faced a more level playing field. All benefitted from tariff protection and, as we shall see, access to financing; but Thailand's more equal distribution of political power forced firms toward greater efficiency in line with market conditions than was the case in the Philippines. The following section provides empirical evidence concerning the strength of Thai auto firms relative to their Philippine counterparts. I will then briefly outline the sets of external conditions both countries faced in the international auto industry, before describing the macropolitical context of each country's auto industry and then showing how these conditions influenced the growth of local firms. In the concluding section I briefly explore some broader implications of these cases for the growth of local capital in developing countries. LOCAL AUTO FIRMS IN THE PHILIPPINES AND THAILAND The Philippines Board of Investment chose five assembly firms to produce cars and light commercial vehicles under the Progressive Car Manufacturing Program. Four of the five were operating under majority or significant local ownership in 1972 (Table 1). Only Ford began and remained a wholly foreign-owned subsidiary. GM's assem-

194 Southeast Asian Capitalists bly operation began in 1972 as a joint venture between GM (60 percent) and two local interests—Yutivo (30 percent) and Francisco (10 percent). Carco began as a joint venture between a local group, the Yulos (65 percent), Japan's Nissho Iwai and Mitsubishi (15 percent each), and Chrysler (5 percent). Delta was owned 100 percent by local businessman Ricardo Silverio and operated through technical support from Toyota. DMG was also a Philippine firm, 100 percent owned by the Guevarra family. Some of these firms had developed significant industrial ambitions and, to some degree, capacities. Silverio's Delta Motors, which dominated the passenger vehicle market through 1980, had established the country's most advanced tool- and- die shop and maintained a competent research and technical center. Francisco Motors was one of the major producers of the jeepney. Officials within Yutivo had developed extensive plans for local production; and DMG, with support from Volkswagen, was producing a basic "utility" vehicle. Table 1: Ownership of Philippine Auto Assembly Firms

Firm/Brand

Local Equity in 1972 1985

Delta - Toyota DMGVW GM Phils. Carco - Mitsubishi Ford Phils.

100 100 40 65 0

bankrupt bankrupt 0 0 0

Local Interest Silverio Guevarra Franciso Yutivo Yulo —

Market Share 1983 (%)*

27 — 19 22 29

Source: Philippine Automotive Manufacturers Institute cited in EIU, The ASEAN Motor Industry: Problems and Prospects, Automotive Special Report no. 2 (London: The Economist, 1985), pp. 41,43. * Market shares include commercial and passenger vehicles. Figures do not total 100 percent due to exclusion of lesser-selling brands.

But Yutivo and Francisco sold out to GM in 1976. DMG was taken over by Pilipinas Nissan after going bankrupt in 1982. Nissho Iwai and Mitsubishi bought out the Yulo family in 1984. And Silverio went bankrupt in 1984, after which 35 percent of Delta went to Toyota and Mitsui and the rest to the Philippine government.8 By the mid-1980s the major local interests remaining in assembly were tied to Imelda Marcos' family, the Romualdez. Local capital had been largely reduced to providing political influence for foreign firms.9 The promotion of Philippine parts firms was more successful, but only slightly so. The Philippine assemblers' association asserted that the number of indigenous parts firms had grown from 20 in 1972 to 225 in 1977, and that local content had risen from under 10 percent to over 60 percent.10 But an International Labor Organization report found around 150 original equipment suppliers in 1977, with the sector as a 8

On Toyota's efforts to purchase Delta see Far Eastern Economic Review (hereafter FEER), June 9,1988, p. 104. 9 Pilipinas Nissan was formed after DMG failed and involved a joint venture between Nissan, Marubeni Trading Co., and First Manila Management Corp (FMMC). Mazda Philippines was formed after Ford quit the market and involved a joint venture between Mazda, Sumitomo, and Genasia Management (GMMC). Both FMMC and GMMC were owned by a business group led by the Romualdez family. Interviews. 10 Automotive Manufacturers Institute Inc. (hereafter AMII), Annual Report 1978.

Politics and the Growth of Local Capital

195

whole characterized by a very high turnover rate and real local content lower than 30 percent.11 Subsequent local content levels have probably never exceeded 35 percent, despite targets of 70 percent and above.12 Most of the local content reflected in-house production by the assemblers and high technology items from foreign subsidiaries. Local parts firms contributed only a small quantity of low-technology items to the local production of original equipment and close to nothing to the country's auto parts exports.13 All of this reflected a vertically integrated industry and minimal technological development among local parts firms. Local assemblers in Thailand remain dependent on foreign firms for management and technology. But, as reflected in Table 2, they have maintained and even expanded their ownership positions. Some groups involved in auto assembly have also moved into parts production. While the primary example of this pattern is the Phornprapha family's Siam Motors group, others include prominent families such as the Sarasins, Boonsungs, Chansues, Lamsams, Lee Issaranukuls, and Leenutaphongs.14 The expansion of local firms devoted solely to auto parts production has been more extensive. From several dozen in 1970, the number grew to roughly 140 in 1975; by 1986 there were 150 auto parts firms producing original equipment and some 200 producers of parts for the replacement market. Complete figures on ownership are not available, but a 1981 study of the larger parts firms found that 23 of 34 were majority Thai-owned, with 15 completely owned by Thais.15 Local parts firms also progressed in terms of overall technical capacities, reflected in local content levels of 54 percent for passenger vehicles and roughly 65 percent for pick-up trucks as of 1988.16 Exports are another indicator of local production capacity. Thai auto parts exports jumped from 2.4 million baht in 1976, to 265 million in 11

Susumu Watanabe, 'Technical Co-Operation Between Large and Small Firms in the Filipino Automobile Industry," World Employment Programme Research-Working Paper (Geneva: ILO, March 1979), p. 14, from which the rest of the paragraph draws. 12 EIU, The ASEAN Motor Industry, p. 37; and interviews. ^ Watanabe, 'Technical Co-Operation," pp. 54.. 56. According to one source, the assemblers own production accounted for about half of actual domestic content. "Car pricing explained," Times Journal (Manila), September 2, 1977. By 1978, it was found that only 14 percent of 51 metal-working and machine-building firms involved in auto parts production had advanced to higher categories of product development, equipment operations, and production management; almost 80 percent had remained in their original categories and 7 percent had dropped to lower ones. Arturo Tolentino and Roy Ybanez, "Ancillary Firm Development in the Philippine Automobile Industry," in The Motor Industry in Asia ed. Konosuke Odaka (Singapore: Singapore University Press, 1984), p. 254. 14 A partial list includes the following tie-ups: Sarasin, Boonsung, and Chansue with Nippondenso (Thailand); Phornprapha family with a number of parts firms, including Siam Auto Parts; Leenuttaphong family with A. T. P. Auto Parts; Techaphaibun and Srifuengfung families with Goodyear; Lee Issaranukul family with Inoue Rubber. See "Ownership Relations in the Automotive Industry," Business in Thailand, March 1983, based on information from the Department of Commercial Registration. 15 Asian Institute of Technology, Role of Japanese Joint Ventures, pp. 11-13, and see Department of Industrial Economics, "Utsahakam phlit chin suan rotyon" [The Automobile Parts Manufacturing Industry] (Bangkok: Ministry of Industry, 1986), p. 3. 16 Bangkok Post, September 29,1988.

196

Southeast Asian Capitalists

Table 2: Ownership of Thai Auto Assembly Firms

Firm/Brands

Local Equity 1983 1972

Bangchan (Opel, Daihatsu,Honda, etc.)

40

66

Isuzu Thailand (Tri-Petch Isuzu, Mitsubishi) Karnasutra (Alfa, Ford) Siam Motors (Nissan) Sukosol Mazda

50

53

70

80

100

100

30

35

Thai Hino Thai-Swedish (Volvo) Thonburi Benz Toyota Thailand

30 40

30 40

100 0

100 35

40

60

100

100

United Development/ Sittipol (Mitsubishi) Yontrakit (Peugeot, Citroen, BMW)

Local Group/ Family *

Market Share 1985 (%)

YipInTsoi Boonsung Sarasin Chutakul Tansakul Sarasin Chansue Boonsung Chainuwat Kowintha Phornprapha

1

21 2-3

22

Sukosol Patchimsawat Thienprasit Kowintha Sitti-Amnuay

6

Viriyapan Bangkok Bank Book Club Finance Cheevamongkol Lee-Issaranukul Phanchart Leenutaphong

-1 28

3 -1

8 1

Source: Ownership: Dept. of Commercial Registration figures in "Ownership Relations in the Automotive Industry," Business in Thailand, March 1983; Asian Institute of Technology, The Role of Japanese Joint Ventures in the Development of the Automobile Industry in Thailand (Bangkok, March 10,1981). Market shares: Thai Ministry of Industry. * These represent the families with direct equity links to the firm in question.

1985, and 680 million in 1988.17 Most sources agree that local firms have accounted for the greater part of this growth. Much of the expansion in local manufacture has been in relatively simple, laborintensive products (nuts/bolts, batteries, radiators, wire harnesses) or items using 17

Export figures for 1976 and 1985 from the Thai Department of Customs, cited in Spare Parts Producers Club, Association of Thai Industry, Newsletter, no. 2,1986: 42. Figures for 1988 are from Thai Farmers Bank, Bangkok Post, June 2,1989. Data on the portion of exports from locally owned firms is not available. According to interviews with Thai government officials, the prominent role of Thai firms is indicated by the fact that most exports involve spare parts, an area in which local firms have excelled. See also Industrial Finance Corporation of Thailand (hereafter IFCT), Raingan kansuksa ruang utsahakam chin suan lae uphakon rotyon [Research Report on the Automotive Parts and Equipment Industry] (Bangkok, February 1988): pp. 1920. Finally, note that Thai capital accounted for 20 million baht of the 27 million total of the auto parts production projects submitted for Thai Board of Investment (BOI) promotion privileges between 1985 and 1987. (BOI, cited in Newsletter, pp. 7-14).

Politics and the Growth of Local Capital

197

Thailand's natural resources (tires). But Thai-owned firms have made considerable progress in more complex items (e.g. brake drums, jigs and dies, and flywheels).18 Leading this development have been a number of large parts firms, the most prominent being Siam Nawaloha, a member of the Siam Cement family, Thailand's largest industrial group. We shall examine the features of local capital in both auto industries in more detail below, but before this we need to consider the external industrial context in which both countries pursued automotive manufacturing. THE EXTERNAL AUTOMOTIVE CONTEXT

The Philippine and Thai automotive efforts occurred during a period of increasing market domination by Japanese automakers in Southeast Asia. Western brands had an initial hold on the region in the early postwar years, but by the early 1980s the Japanese accounted for 80 percent of auto sales in the Philippines and over 90 percent in Thailand, Malaysia, and Indonesia. The region also became a major focus of Japanese overseas production. Since roughly 1960 the Japanese presence in ASEAN shifted from the export of completely built-up vehicles (CBUs) from Japan to overseas assembly of completely knocked-down (CKD) parts and the gradual incorporation of locally made auto parts. By 1982 forty-seven of the 138 assembly or production bases established outside Japan were located in the Philippines, Thailand, Malaysia, and Indonesia.19 This regional concentration of Japanese overseas plants seems puzzling in the light of the fact that the five ASEAN countries (excluding Brunei) accounted for less than 8 percent of Japan's motor vehicle exports in the early 1980s.20 Explaining the Japanese presence can help us understand the obstacles and opportunities facing Filipino and Thai automotive efforts. The intensely competitive structure of the Japanese auto industry lies at the center of this explanation. In Japan itself during the 1960s, the auto makers faced declining market growth rates, high fixed charges from debt-financed capital investments, increasing efficiency and production volumes, new domestic entrants, and intense competition among the industrial groups to which many of the auto assemblers belonged. This domestic rivalry affected export competition.21 Southeast Asia became the earliest locus of this export rivalry for several reasons. Tied reparations money and other forms of economic aid facilitated the purchase of Japanese vehicles and equipment; thus the Philippines1 Silverio used two Japanese reparations loans, funneled through Marcos, to establish a trim plant and a foundry.22 Japan's geographical proximity and wartime activities provided Japanese executives with contacts and experience, and encouraged a view of the region as a strategic buffer against Western capital for Japanese firms. In Thailand and elsewhere 18

For an emphasis on the export capacities of Thailand's larger parts firms, see EIU, 'The ASEAN Motor Industry." Since 1985/86, Japanese firms have praised the quality of Thai-made jigs and dies. See, for example, EIU, Japanese Motor Business, no. 12, June 1986: 42. For a complete list of firms producing specific parts, see IFCT, Raingan, app. 1, pp. 106-43. 19 The Automobile Industry of Japan: Japan and Toyota, (Tokyo: Toyota Motor Corporation, 1982), pp. 26-27; Auto Markets of Southeast Asia and Oceania (Tokyo: Toyota Motor Corporation, 1984). 2 ^ Economist Intelligence Unit, ASEAN Motor Industry, p. 14. 21 OECD, Long Term Outlook for the World Automobile Industry, (Paris: OECD, 1983), p. 85. For background on developments in Japan, see William Duncan, US-Japan Automobile Diplomacy: A Study in Economic Confrontation (Cambridge: Ballinger, 1973). 22 Interviews and Manila Chronicle, May 4 and 23,1971.

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Southeast Asian Capitalists

in the region, heavy infrastructure spending created a strong need for trucks during the 1950s and 1960s, precisely the product strength of Japanese firms at the time.'" Indeed, the region's markets constituted a testing and training ground for Japanese vehicles and personnel prior to the penetration of advanced country markets. The ASEAN markets declined in importance for Japanese auto makers relative to the developed-country markets in the 1970s; but competitive pressure for overseas markets among the Japanese firms grew, with exports accounting for an increasing share of sales.2* Inter-firm rivalry and the lure of growing markets compelled an expansion of Japanese assembly and manufacturing operations in ASEAN in response to localization efforts such as those undertaken by Thailand and the Philippines. Market share, not cheap labor, was ASEAN's attraction for Japanese firms. Two characteristics of the Japanese auto companies—intense inter-firm competition and opposition to overseas parts manufacture—provided both obstacles and opportunities to countries such as the Philippines and Thailand. Rivalry resulted in almost all Japanese firms entering and remaining in fairly small markets, regardless of short-term profit levels or problems with local partners. Competition provided host countries with the potential to obtain better investment terms by playing firms off against each other. This pattern was especially clear in the Philippines during the formulation of the Progressive Car Manufacturing Project (PCMP). Japanese rivalry was reinforced by Ford's attempt to use the Philippines as part of a regional production base in Southeast Asia.25 The result was Japanese compliance with Philippine demands for local manufacture and export of major auto components. Toyota established an engine plant, and Mitsubishi joined Chrysler in setting up a transmission plant. Numerous Japanese assemblers and affiliated parts firms established operations in Thailand during the early 1970s in response to the country's local content regulations.26 Inter-firm competition has also had negative consequences. To insure market access, each Japanese assembler establishes protective ties with local interests. Economically, this results in a proliferation of both brands and models as each firm competes through product differentiation and the use of new materials and technologies. Highly sophisticated and fragmented markets emerge which undermine local parts manufacture. The production of many parts with changing specifications and material inputs requires frequent tooling and equipment changes that reduce economies of scale, inhibit mastery of changing technology, and increase costs of locally made parts. In the Philippines the number of models actually grew from twenty-five in 23

Somsak Kongkalai, "Import Substitution by Way of Trade Protection: a Case Study of Automobile Assembly Industry in Thailand," (M.A. Thesis, Thammasat University, 1975). 24 Exports accounted for 29 percent of Toyota's sales and 31 percent of Isuzu's in 1974, and 38 percent of Nissan's sales in 1975. By 1980 the percentages were 39 for Toyota, 52 for Nissan and 34 for Isuzu. Japan Company Handbook (Tokyo: Oriental Economist, various years). 2 ^ Harold C. Livesay, 'The Philippines as an Example of the Ford Motor Company's Multinational Strategy," in The Philippine Economy and the United States: Studies in Past and Present Interactions, ed. Norman G. Owen (Ann Arbor: University of Michigan Paper on Southeast Asia, no. 22,1983), pp. 63-76; and interviews with Ford officials. 26 For assemblers, see Nawadhinsukh, "Ancillary Firm Development." On parts firms, see Dodwell Marketing Consultants, The Japanese Auto Parts Industry (Tokyo, 1984).

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1973 to fifty-one in 1981, while the Thai market included twenty brands and one hundred models in 1983.27 A general Japanese antipathy to overseas auto manufacture has further raised the entry barriers for local manufacturers. At home, Japanese assemblers have been able to combine efficient mass production with the manufacture of many different and changing models. They have used production techniques and product technologies that reduce labor costs, thus obviating the attraction of inexpensive Southeast Asian labor. Japanese methods also require tight coordination with efficient and innovative component supplier firms capable of supplying quality parts "just in time" to assembly plants.28 The ASEAN countries have had neither the infrastructure, the financial capacities, nor the existing technology base to provide such service. Until the mid-1980s, then, the lure of the Philippines and Thailand for Japanese auto assemblers lay in their market potential. Both governments used access to their markets as means to "coerce" rival Japanese firms into establishing local production operations.29 In response, the Japanese have attempted to (1) limit the actual degree of local procurement, and (2) insure that any local manufacture that does take place is limited to nonessential items and/or remains under the control of affiliated Japanese parts makers.30 Only with the yen's appreciation in the mid-1980s did the Japanese begin to view the ASEAN countries as attractive sites for auto manufacture and reexport.31 In sum, both the Philippines and Thailand had to contend with foreign firms which were reluctant to produce overseas but compelled to do so by competition for market access. In the following sections we examine the ways in which the domestic political conditions influenced each country's ability to make use of these external conditions. THE PHILIPPINES

The Marcos martial-law state constituted the political context of the PCMP. That context was characterized first by the state's narrow social base. By the late 1960s the Philippines faced structural economic problems and growing political fragmentation. A divided but still powerful land-owning elite successfully resisted national efforts to wrest control of local and regional politics from its hands; a Congress of elected landlords dragged its feet on desperately needed land reform; and, as typified in the 27

Philippine figures from AMII, Annual Reports, 1979-1983; and Philippines Daily Express, March 31,1980. Thai figures from Bangkok Post, October 1,1983. This phenomenon is endemic to developing-country auto industries: see Rhys Jenkins, Transnational Corporations and Industrial Transformation in Latin America (London: Macmillan, 1984), pp. 65-69. 28

Michael Cusumano, The Japanese Automobile Industry: Technology and Management at Nissan and Toyota (Cambridge: Harvard East Asian Monographs, 1985). 29

Fumihiko Adachi, "Trade, Growth and International Conflicts," University of Nagoya, unpublished ms., 1984, p. 28. 30 For a full discussion of Japanese responses, see Richard F. Doner, Driving a Bargain: Automobile Industrialization and Japanese Firms in Southeast Asia (Berkeley: University of California Press, 1990). 3 * See EIU, Japanese Motor Business, various issues from 1986-1989.

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auto industry, the country's postwar import substitution-based economic growth was floundering on saturated markets and inefficient enterprises.32 Many in the country's business community, including those with nationalistic leanings, had come to believe that "the total system needed rationalization based on greater discipline, leadership, and less interference by politicians, especially those in Congress."3"* The time seemed ripe for a strong political leader and "neutral" technocrats capable of pursuing industrial reforms without regard for vested interests. In ignoring existing interests, the Marcos state turned to a a narrow set of new ones. These were, according to one of the president's ghost writers, the Philippine equivalent of Japan's zaibatsu and South Korea's chaebol—government-backed conglomerates capable of implementing the technocrats' industrial strategies. These favored interests—Rudolf Cuenca, Herminio Disini, the Romualdez brothers, Roberto Benedicto, and Ricardo Silverio—emerged to dominate particular sectors. Under state guidance, Silverio was to become the Philippines' Hyundai in the auto industry. What emerged instead were the "cronies," robber barons who were "more interested in enriching themselves in the short run than in building lasting industrial empires."34 Unlike their idealized East Asian counterparts, these men used preferential state finance, monopolies over critical imports, and special exemptions from state regulations to develop highly leveraged, overextended, and inefficient business empires. I shall argue that this was the case in the auto industry at least partly due to the absence of effective private-sector counterweights to the cronies. It was also due in part to a deinstitutionalization of the state bureaucracy. While initial martial-law measures hinted at a "possible institutionalization of corporativism," the regime destroyed old institutions without creating new ones.35 In economic policy a "dualistic" structure emerged, composed of technocrats undercut by political leaders.36 The prime minister was unable to implement cabinet decisions because of objections from non-technocrats in the cabinet, especially Mrs. Marcos who controlled funds equal to 50 percent of the government budget.37 Through presidential decrees, letters of instructions, and personal appointments, Marcos circumvented technocratic influence in financial institutions and the Board of Investments. The cronies were thus removed from the discipline imposed by competitors or the financial system. Finally, the regime was characterized by a penchant for expensive projects. This was in part a function of the technocrats' emphasis on the need for state-led industrialization. People such as Paterno advocated increased foreign investment, but the 32

See Gary Hawes, The Philippine State and the Marcos Regime (Ithaca, NY: Cornell University Press, 1987); William H. Overholt, 'The Rise and Fall of Ferdinand Marcos," Asian Survey 26, 11 (November 1986): 1137-64. On the auto industry's problems, see Institute of Small Scale Industry, "Survey of Car Parts Manufacturers," (Quezon City: University of the Philippines, March 1971). On general industrial conditions, see Walden Bello et al., Development Debacle: The World Bank in the Philippines (San Francisco: Institute for Food and Development Policy, 1982). 33 Stauffer, "Political Economy of Refeudalization," p. 194. 34 See Bernardo Villegas, "Another View of the Philippine Economic Crisis" (Manila: Center for Research and Communication, 1984), p. 12. 35 Stauffer, "Political Economy of Refeudalization," pp. 203-204. 36 Stephan Haggard, 'The Political Economy of the Philippine Debt Crisis" (Harvard University, mimeo, 1989), p. 3. 37 PEER, January 1,1982; Overholt, 'The Rise and Fall," p. 1148.

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technocrats viewed foreign capital as a means to steer the Philippines away from the labor-intensive activities that would leave the country one of "sweatshops, processing through our cheap labor the produce of the industrialized countries around us."38 Reinforcing this preference for large projects was the presidential palace's desire to benefit favored businessmen through vertically integrated operations. The impact of these factors on local capital growth can be seen in the PCMPs formulation up to 1972, and in subsequent efforts to implement the project. Let us begin by noting some important features of the private interests involved in automobile manufacture during the early period. The assemblers finally chosen to participate in the PCMP represented three categories of local capital. 1. Silverio represented the ascending class of entrepreneurs whose strength was based on links to Marcos and Japanese capital. He had begun as a textile importer but shifted to auto assembly through a tie-up with Toyota.39 By overcoming initial market resistance to Japanese vehicles through the use of Toyotas in the Philippine taxi market, Silverio made Toyota the country's best-selling car by the late 1960s and established a firm base for Delta Motors. However, Silverio's rapid rise was largely a function of his close ties to Marcos, which reportedly originated in his substantial financial support to the president's 1965 election campaign. Marcos subsequently provided the Japanese reparation funds noted earlier (reportedly over the objections of the president's own economic advisers), as well as other preferential financing. Delta's automotive growth led to Silverio's expansion into some thirty-eight firms, mostly joint ventures with Japanese capital.40 2. Yulo represented pre-martial law agricultural interests enjoying some presidential support, but clearly none so extensive as Silverio. From a base in sugar, the Yulo family expanded into twenty-seven diversified corporations, including finance, wholesaling/retailing, and a variety of manufacturing sectors. Unlike Silverio, the Yulos' participation in auto and the PCMP involved little effort to develop a manufacturing base. It instead reflected the family's hope that Chrysler's plans for a transmission plant could solve unemployment problems on their sugar estate.41 3.Yutivo/Sycip, Guevarra, and Francisco represented the more industrial-based sector of the pre-martial law elite. The Francisco family had expanded from auto painting in the late 1940s into general automotive repair and then jeepney body building in the mid-1950s.42 The Guevarra family business began in the import and 38

Roberto Ongpin, cited in Robin Broad, "Behind Philippine Policy making" (Ph.D. diss., Princeton University, 1983), pp. 262-63. 39 Silverio reportedly learned of a ship loaded with CKD Toyota cars floating in the China Sea after having been refused entry to Taiwan. After buying the cargo at a token price, he had the vehicles assembled and established at Delta Motors. Helmut Schutte, "M.A.N. Philippines," unpublished case study prepared for the Euro-Asia Center, INSEAD, Fountainbleau, January, 1982. The remaining information on Silverio is drawn from Schutte, "M.A.N."; Yoshihara Kunio, Philippine Industrialization: Foreign and Domestic Capital (Quezon City: Ateneo de Manila University Press, 1985); and Mamoru Tsuda, A Preliminary Study of Japanese-Filipino Joint Ventures (Manila: Foundation for Nationalist Studies, 1978). 40 Interview. These included ventures in heavy machinery, ceramics, banking, insurance, real estate, air transport, logging, mining, consumer electronics, as well as automobiles. 4 * Interviews. 42 Information on Yutivo, Sycip, and Guevarra is drawn from Yoshihara, Philippine Industrialization, and Tsuda, A Preliminary Study.

202 Southeast Asian Capitalists repair of radios before World War II. As the import supply of radios dried up, the family had shifted into machinery imports and assembly, and eventually into the assembly of Volkswagen in the late 1950s. The Yutivo family was the country's largest retailer of hardware and construction materials during the 1930s. It obtained the distributorship rights for GM products before World War II and expanded into vehicle assembly when foreign exchange for the import of assembled vehicles became scarce in the 1950s. David Sycip, himself a member of an economically prominent family, married into the Lutivo family and became heavily involved in its GM distribution operation. As a leader of the Philippine Automotive Association during the mid-1960s, he was also the Filipino private sector's most sophisticated proponent of a long-term rationalization and industrialization policy for automobile manufacture. We shall return to Sycip's views shortly. The point to be stressed here is that Silverio's access to political power far exceeded the influence of the other assemblers. Some parts makers such as Concepcion and Del Rosario were part of the pre-martial law elite, but these firms had neither the capital nor the political ties to counterbalance the influence of Silverio.43 Most of the parts firms were in fact relatively small, and many of the smallest were owned by Chinese, who complained of abuse by dishonest government officials before martial law. These firms were also fragmented by market orientation, size, and business association.44 Besides Silverio, the only local capitalists with potentially sufficient assets and managerial skills to develop a strong base in the auto industry were members of the "old elite"—the long-established, usually landed entrepreneurs such as the ZobelAyala family and the Sorianos.45 While these firms were involved in a number of industrial sectors, especially food processing, they were conspicuously absent from automobile manufacturing. Why? A principal reason was that their relations with Marcos involved mutual wariness. Too powerful for Marcos to take on directly, these interests were themselves anxious to avoid the palace's harassment. They thus maintained a superficial loyalty to Marcos, but they stayed clear of industries such as auto which required state support and, as a result, made participating firms vulnerable to presidential influence.4" This constellation of local interests, reinforced by an already weak bureaucracy and a general state preference for capital-intensive projects, gave rise to an auto project whose entry barriers for local firms were quite high. The evolution of four of the PCMP's central policy components illustrates this impact. The first concerns the 43

The only exception of which I am aware concerns Republic Glass, whose ties to Marcos facilitated domination of local glass production. Interview. 44 See "Survey of Car Parts Manufacturers," (University of the Philippines, Institute of SmallScale Industry, Quezon City, March 1971), pp. 8-9. Three associations involving auto parts makers were operating in 1972. The Philippine Automotive Parts Manufacturers' Association was composed of small- and medium-sized Chinese firms serving the replacement parts market; and the Philippine Automotive Association (hereafter PAA) was dominated by the assemblers but included some parts firms. The most active group, the Car Automotive Parts Producers Association, was organized by local firms in the PCMP-generated market for original equipment. Interviews and Tolentino and Ybanez, "Ancillary Firm Development." 45 On the entrepreneurial strength of these firms, see 'The Entrepreneur as a Conglomerate," FEES, September 12,1986, p. 108. 46 See Charles W. Lindsey, "In Search of Dynamism: Foreign Investment in the Philippines under Martial Law," Pacific Affairs 56,3 (February 1983): 493.

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degree of the industry's vertical integration, i.e. the level of parts production by the assemblers. The Board of Investment's (BOI's) original position strongly emphasized the benefits of horizontal integration, and the PCMP was to promote the emergence of small and medium engineering firms. But the final PCMP guidelines allowed for a case-by-case determination of the optimal type of integration,47 a modification which resulted from presidential pressure. Marcos believed that vertical integration would compel the assemblers to make stronger commitments to the car program. Even more important was the fit between vertical integration and Silverio's ready-made capacity for engine parts production due to his Japanese reparation loans. A second weakness was the BOI's emphasis on the immediate manufacture of major functional parts as the criterion for PCMP participation. In one sense this reflected technocratic assumptions about the localization process. Paterno believed that real technology transfer and export earnings required the manufacture of major parts such as engines and transmissions. He also felt lower-technology parts produced by Philippine firms would be undersold by imports from Taiwan and India. Yet Paterno rejected the argument that the tight specifications required for major parts manufacture could only encourage in-house production dominated by foreign firms. Sycip had in fact advanced such objections and proposed an alternative.48 He advocated initial localization of components with high replacement rates such as brake linings and radiators; the use of basic rather than semi-finished products to help promote industrial linkages; the rebuilding of parts by using "cores'7 from originally imported parts; and the standardization of locally produced parts. The objective was to reduce local parts firms' high tooling costs. If the major assemblers would not cooperate, Sycip urged the government to bring in independent producers, such as the US axle manufacturer Dana-Spicer, who were presumably more amenable to standardization. These ideas were opposed not only by the BOI but by foreign assemblers concerned that the plan would cut into their sale of original equipment parts. With no political base, Sycip's views were rejected. The PCMP's localization provisions constitute a third important weakness of the project. The BOFs desire to promote auto exports resulted in several provisions which weakened pressure on assemblers to increase real local content.49 Assemblers obtained credit for local content through their export earnings instead of their actual purchases of local parts. Taking advantage of a "carry-over" provision, they also built up local content credit one year and used it to reduce local procurement the next. And they sometimes simply disregarded local content regulations, since the potential market benefit from producing a new model for which local parts were not yet available exceeded the penalties imposed for not meeting local content requirements. Perhaps the PCMP's most significant initial weakness was its failure to rationalize the market through limits on the number of certified assemblers. Backed by recommendations from the auto assemblers' association (the Philippine Automotive 47

This emerges from interviews and a comparison between Paterno's December 11, 1970 "Letter to President Marcos," Manila, mimeo, p. 9, and the final 1972 BOI Guidelines. The rest of this paragraph is based on interviews. 48 Interviews and PAA Information Memo. No. 68-07, March 12, 1968, cited in A. C. Mangahas, 'The Automobile Industry in the Philippines: Its Profile, Problems and Perspectives" (Manila, Ateneo Graduate School of Business, 1970), p. 53. 49 "BOI Guidelines" and interviews.

204 Southeast Asian Capitalists Association), the BOI initially wanted only two assemblers.50 This would reduce the number of brands, encourage efficiency in assembly, and promote standardization and larger-scale economies for local parts firms. Deciding such a limit to be politically unwise (since it would exclude either a Japanese, European, or US firm), Paterno decided on three assemblers. But the number was expanded to four by the National Economic Council, a presidential body anxious to include more local interests. It then grew to five when Ford, threatened with exclusion, gained admission to the program by using its personal ties to the palace and promising to expand its investment in the country's new Export Processing Zone. Political support for market rationalization was simply too weak. The Philippine Automotive Association's backing for assembler limits became academic, as its members realized the number would be expanded, and scurried to insure their own participation. Some local parts firms protested, but the parts sector was poorly organized and some were lured by Ford's declaration of its intention to place extensive orders with local parts firms.51 These weaknesses led to serious problems during the next decade. But before examining them, it is important to note weaknesses among the bureaucratic and private-sector forces most interested in promoting local firms other than Silverio. One was the BOI itself. The board's technical capacity was noticeably low in the early 1970s and it may have declined thereafter, for several individuals with extensive knowledge of the industry and the assemblers' original commitments left it by the middle of the decade. The board thus lacked the expertise on auto part prices which was critical to identifying the assemblers' actual local contents levels. BOI officials were forced to rely instead on the assemblers to design their reporting, monitoring, and auditing systems.52 The other source of pressure for strengthening local capital was the Philippine parts firms themselves. As we have noted, the number of these firms increased during the 1970s, and their organizational presence did as well. Paterno himself urged the car parts firms to merge existing associations into one group for better leverage in bargaining with the assemblers,53 and this led to the establishment of the Consolidated Auto Parts Producers Association (CAPPA). The BOI recognized this group as the official parts firm representative for purposes of program review. During the latter part of the 1970s CAPPA's membership expanded, and the group played an increasingly public role under the leadership of Joe Concepcion, a member of the pre-martial law elite. Concepcion was a prominent self-made businessman, a leader in pressing for an ASEAN regional automotive production scheme, and subsequently minister of industry under Aquino. But he was unable to transform CAPPA into a major auto policy force, for not only did he lack political clout under 50

PAA, "Position Paper on LC Program" (Manila, December 22,1969), p. 3; interviews. According to former Ford executives, Ford's application to the PCMP was extremely weak in terms of local content provisions. (Indeed, the firm's Filipino officials rewrote the original proposal before submitting it to the BOI.) When word emerged that Ford's application was considered too weak by the BOI, the company took two measures: first, Christina Ford was dispatched to speak with Imelda Marcos; second, the company publicly pledged to increase its investment in the Export Processing Zone if approved for the PCMP. Information on Christina Ford from interviews. On Ford's investment promises, interviews and Manila Chronicle, March 31,1972, p. 7. On Ford's offer of orders with parts firms, see Manila Chronicle, July 6,1972, p. 6. 52 Interview. 53 Manila Chronicle, May 12,1972, p. 10, and interviews, from which the rest of this paragraph is drawn. 51

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Marcos, but he could not overcome the inborn disunity of his organization. Differences between the smaller Chinese firms and the larger, more ethnically Filipino parts producers seem to have played only a minor role in these problems; more critical was CAPPA's sub-sectoral heterogeneity. The group included manufacturers of truck and motorcycle components, and those firms producing for PCMP assemblers constituted only 30 percent of its membership.54 The negative impact of these factors on local capital can be seen in several shortcomings of the PCMPs implementation during the remainder of the Marcos regime. The first involved the failure to tighten up localization provisions. Roughly a year following the PCMP's official inception in 1972, the government, under pressure from the parts firms, decided that component exports could offset only 15 percent of local content. While this move ostensibly increased pressure for local manufacturing, it was undermined by the government's decision to exempt Silverio's Delta Motors from the 15 percent limit *5 Thus, the firm holding the dominant market share was allowed to reduce its local procurement more than its competitors. Another effort to increase physical localization involved mandatory deletion— the designation of specific parts to be deleted from imported CKD packs and thus procured from local firms. After several years of complaints from local parts firms, the BOI came out with a schedule for such procurement in 1980. But, equipped with little policing capacity and faced with continued assembler opposition, the board was unable to implement the program. Most critically, the BOI's hands were tied by Silverio's connections with the palace. Delta was consistently able to import mandatory deleted parts, avoid payments of duties and tariffs, and generally exaggerate its actual degree of localization. This localization failure reduced the total market (and thus scale economies) available for local parts firms; and it allowed Delta to avoid even the minimal constraints imposed on its competitors. These same consequences resulted from the failure of attempts at market rationalization, i.e. the reduction of makes and brands. The BOI had originally assumed that the increased costs of localization would result in the withdrawal of brands and models with limited sales volume; but low localization levels undermined this strategy. As we have seen, intense rivalry among assemblers took the form of new models and frequent model changes. This promoted a sophisticated consumer demand that weakened local assemblers such as Guevarra and Francisco vis a vis foreign technology.56 The proliferation of brands and models also meant small and constantly changing orders to parts firms that discouraged capital 54 Collective action was also impeded by the participation of assembler representatives, for by virtue of their roles as (in-house) producers and users of components, assembler-purchasing officers occupied visible leadership roles in the association. Interviews and Tolentino and Ybanez, "Ancillary Firm Development," p. 240. 55 Interviews and Louis Krarr, 'The Philippines Veers Toward Crisis/' Fortune, July 27,1981, p. 37. 56 Guevarra was shoved out of the basic utility-vehicle market niche by more sophisticated utility vehicles from Ford, GM, Toyota, and Chrysler. See Manila Chronicle, May 12,1972, p. 10; May 20,1972, p. 7; June 8, 1972, p. 7. Francisco shifted out of reconditioning engines for its jeepneys and into installing engines and power trains from Japan. Watanabe, "Technical Cooperation," p. 75.

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investments and limited the opportunities for increased efficiency through a "learning by doing process/'57 With these problems in mind, the BOI decided to attempt a more interventionist approach to model reduction. From 1976 through the early 1980s it negotiated with the assemblers, finally arriving at specific model limits and even establishing a compliance committee to enforce them. Again, however, the board's technical and political resources were overwhelmed by the assemblers. Technically, the BOI was often not sure as to whether a particular model violated its own regulations.58 Politically, its efforts were undermined by Silverio, whose blatant violation of the model limits was acknowledged by government officials.59 Thus, by the early 1980s new and changing models were flooding the market. A third important PCMP weakness was the lack of assembler technological and financial support for parts producers. The BOI presumed that local parts firms would expand their capacities through supply linkages to the auto assemblers. But low levels of real local content and extensive in-house manufacture by the assemblers led to highly unstable ties between parts and assembly firms. Financing was an especially serious problem. The problem manifested itself first with regard to the general lack of funds for local parts firms. The pool of available money was reduced by the fact that all of the assemblers operated on very high debt-equity ratios, with most of the loans coming from local sources. The BOI had developed no special financing programs for local parts producers, most of whom had insufficient collateral or were too intimidated by the paperwork required for government loans.60 A further manifestation of the PCMP's financial shortcomings was the almost unlimited loans Silverio obtained from the Philippines National Bank through his ties to Marcos.61 With little or no bank control over the use of these funds, Silverio diverted Delta money into his own pockets and into numerous ill-conceived ventures. Delta operated in a flagrantly inefficient manner, yet Silverio's ties to Marcos blocked even Toyota from imposing any fiscal or managerial discipline on the firm.62 Silverio's financial position did weaken in early 1981 when a financial panic caused by the flight of Dewey Dee, a textile and banking crony of Marcos, caused the collapse of numerous banking institutions, including Silverio's own Philfinance. This allowed 57

Thus, one of the assemblers frankly stated that one had to produce probably 1,000 units before one could adjust a mould and start producing plastic parts of satisfactory quality, and yet the actual amount of their (the assemblers') order was often only 150 units or so at a time. Watanabe, 'Technical Cooperation/' p. 33. 58 Interviews. See also Business Day, July 6,1981, p. 9. 59 A government official stated that Delta had the "blessings of the government since . . . Delta has led the market in terms of sales . . . and it would be ungrateful to penalize the company with the new PCMP rules." Business Times, June 23,1982, p. 2. Silverio had earlier claimed exemption from such rules which, he stated, would only help multinationals. Times Journal, April 9,1981, p. 12. 60 Interviews. 61 For accounts see Bello et al., Development Debacle, and Belinda Aquino, The Politics of Plunder; The Philippines under Marcos (Manila: University of the Philippines, College of Public Administration, Occasional Paper no. 87-1,1987). 6 ^ Toyota had attempted to compel Silverio to streamline Delta's operations since the early 1970s. In 1973 Toyota obtained 40 percent of equity voting rights in Delta as collateral for a $3 million loan to Sliverio. But the Japanese were unable to exercise these rights, since Silverio obtained presidential directives prohibiting foreign equity in a firm that had received reparations money. Interviews.

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the technocrats, backed by World Bank and IMF officials, to compel Silverio to drop an effort to produce commercial vehicle engines; but Silverio's ties to Marcos guaranteed rescue funds from the Philippines National Bank, and Delta continued to operate in the car market until 1984.63 As a crony, Silverio benefitted from resources that allowed extensive investments and gave him some autonomy from his foreign partner, Toyota. This leverage against foreign capital might have contributed to the emergence of a "national champion" firm a la South Korea's Hyundai, as Marcos originally intended. But neither the state bureaucracy, nor competing assemblers, nor the country's financial institutions had the leverage to impose any financial or managerial discipline on Silverio. In the end, his failure to transform a political base into an efficient industrial operation left him all the more vulnerable to his patron's eventual wrath: in 1984, even as the president provided huge loans for another crony, Marcos directed the Philippines National Bank to foreclose on Silverio's debt-ridden operations. Silverio's rise arid fall reflected the Philippines' broader weaknesses under Marcos, including those that led to the 1980s debt crisis. His unconditional access to resources were part of a narrowly based political economy that bled the country generally and impeded the development of even his own business. THAILAND

Local capital in Thailand's auto industry operated within a very different and more "nurturing" set of socio-political arrangements than those of the Philippines. During the Marcos years the Philippines' political leadership became more centralized and its source of business support narrowed. During the same period (and into the present) the leadership of the Thai state has become less dominant, while influential business groups have expanded in both numbers and economic resources. Competition among both private and public-sector elites has intensified, and that very competition has required constant compromise by the participating parties. Yet these parties almost always adhere to a moderate conservatism in political and economic affairs. An important source of this development so far as the state is concerned has been the gradual fragmentation of the Thai military. With little strong ethnic base, shared ideology, or nationalist tradition, the Thai armed forces have been vulnerable to factionalization across service, patron, and academic class lines. A 1957 coup brought to power Field Marshall Sarit, an officer whose power base lay in the private sector more than the state enterprises of his military predecessors.64 Sarit's authoritarian regime provided a fertile context for the continued growth of private Thai capital in terms of organization and economic resources. Military fragmentation accelerated with the winding down of the Indochina conflict and drying up of US military aid. The growth of increasingly assertive societal forces—students, workers, professionals, and business groups—accelerated the military's weakening. The 1973-1976 democratic period effectively broke the back of the military's domination of Thai politics. The value of armed forces patronage for local firms seriously dwindled: thus the Bangkok Bank decided in 1974 not to replace the deposed Field Marshal Praphat with another soldier as its president but with a professional 63

Helmut Schutte, "MAN." Thak Chaloemtiarana, Thailand: The Politics of Despotic Paternalism (Bangkok: Thai Kadi Research Institute, 1979).

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banker. Armed forces figures did lead Thai governments from 1976 through the late 1980s and seized state power in 1990, but they did so under relationships which ushered in growing roles for businessmen, whether as cabinet members, members of parliament, or association leaders consulting with government officials. The result has been a dynamic power balance of contention among the military, the monarchy, the bureaucracy, business, and civilian politicians. A small number of political-economic groupings can no longer dominate Thai politics.65 It is important to emphasize that the Thai business world's combination of cohesion and competition has been central to this arrangement. Recent studies have demonstrated the dominance of large groups, especially bank-based groups, in Thailand's economy; their strong political influence; and the ways in which the groups are linked through overlapping directorships and/or family ties.66 Yet these studies fail to highlight the high level of competition among large Thai business groups. There is also evidence that the breaking of military dominance in 1973 opened up political channels through which less influential businesses were able to expand and intensify competition in the economic realm; and since the early 1980s, such rivalry has also been fueled by growing competition for customers among the commercial banks.67 The critical point here is that diversity in economic power has reinforced political competition. As a result, the pattern of Thai state action involves ongoing negotiations with a broad range of societal actors. The impact of this arrangement on bureaucratic capacity has been both negative and positive. On the one hand, intraelite competition often impedes necessary state initiatives. On the other hand, this more equal distribution of power helps to block unnecessary or wasteful initiatives, as we shall see. It also compels state agencies to respond to the concerns of smaller and medium-sized interests. And finally, with no absolutely dominant party or army, the civil bureaucracy has been able to maintain its presence as an independent force and expand its competence despite periodic intervention by various political interests. While the country has pursued a protectionist, import-substitution development strategy, Thailand has generally avoided the capital-intensive efforts seen in the Philippines. A long tradition of state financial conservatism helps account for this tendency. But its persistence is also a function of expanding bureaucratic expertise and "political competition producing a critical scrutiny of public investment that planning bodies do not always provide."68 These features began to emerge at the in65

On the organizational strengthening of Thai business, see Anek Laothamatas, "No Longer a Bureaucratic Polity: Business Associations and the New Political Economy of Thailand" (Ph.D. diss., Columbia University, 1989). See also Thirayuth Boonmi, 'Thailand: A Political Figuration of the Traditionalistic Controlled Bourgeois Representation," Journal of Social Sciences and Humanities (Kasetsart University) 15,2 (December 1981): 46-67. 66 Akira Suehiro, Capital Accumulation and Industrial Development in Thailand (Bangkok: Social Science Research Institute, 1985); Krirkkiat Phiphatseritham, Wikhro laksana kanpen chao khong thurakit khanat yai nai prathet Thai [A Study of Big Business Ownership in Thailand] (Bangkok: Thai Khadi Institute, 1982); Krirkkiat Phiphatseritham, "Kanruam amnat kanngoen lae kankamnot nayobai setthakit," [The Power of Finance in the Formation of Economic Policy] (10th Symposium, Faculty of Economics, Thammasat University, June 1986); Kevin Hewison, 'The Financial Bourgeoisie in Thailand," Journal of Contemporary Asia 11,4 (1981): 395-412. 67 See, for example, "New TBA Chairman Comes with a New Era of Competition," Business Review, May-June 1989, pp. 30-31. 68 Peter G. Warr and Bandid Nijathaworn, "Thai Economic Performance: Some Thai Perspectives," Asian-Pacific Economic Literature \, I (May 1987): 64.

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ception of Thai auto industrialization efforts. The local interests involved in the Thai assembly sector in the early 1970s reflected a wide range of large business groups. 1. The Phornprapha and Sukosol, Yip In Tsoi, and Boonsung, groups represent some of the country's oldest entrepreneurs, having been active before World War II. The Phornprapha and Sukosol families are the most automobile-based of all the Thai interests, the former having expanded from import to local assembly in the 1960s, while Sukosol shifted from electricals to auto assembly. Both Yip In Tsoi and Boonsung expanded into the auto industry from an original base in tin-mining operations. 2. Lee Issaranukul, Leenutaphong, Sitti-Amnuay (PSA), and Sarasin represent somewhat more recently established groups whose interests include manufacturing but are more diversifieid (this is especially the case for Sitti-Amnuay and Sarasin).69 3. The Bangkok Bank and the Phanchart family represent long-established commercial banking interests. The former is the core of the country's largest financial group. Phanchart, markedly smaller, has interests in the sugar industry as well as banking. Major Thai banking groups are also represented in the auto industry through close ties to the other firms noted above.70 The fluidity of Thai politics during this period makes it difficult to measure the political strength of these groups with any precision. The influence of some, such as the Phanchart family, reached a high point under the military regimes of Sarit and Thanom. But, as illustrated by the Bangkok Bank case noted above, most were able to maintain and/or expand their leverage following the military's overthrow. Indeed, it is during this period that business groups increased their ties to the civil bureaucracy, reduced their reliance on military patronage, and expanded their associational presence through the growth of the Association of Thai Industries.71 The Thai bureaucracy had also become increasingly professionalized by the early 1970s. In consultation with local auto assemblers in the Association of Thai Industries, the Ministry of Industry's Department of Industrial Economics designed a series of measures to expand national automobile manufacture. In July 1971 the Department announced requirements for gradually increasing local content and efficiency.72 Unlike the Philippines' PCMP, the Thai program contained no provision for exports or the production of major functional components. The intention was to move gradually from lower to higher value added components while imposing strict limits on the numbers of makes and models assembled. But the policy was not implemented as originally designed. In November 1971 the military temporarily reasserted its power by dissolving the country's two-yearold legislature. The result was a return to reliance on patronage networks and a tem69

Lee Issaranukul and Leenutaphong are //medium"-sized groups, with assets from 500 to 1,000 million baht. Sarasin is a medium-sized group (by Krirkkiat Phiphatseritham's categorization), with assets under 500 million baht. Until the early 1980s Sitti-Amnuay was a "large" group, with assets over 1,000 million baht. It since encountered several setbacks and was probably much smaller by the mid-1980s. 70 Thus, for example, Phornprapha has family and/or corporate links with the Bangkok Bank; Yip In Tsoi with the Techaphaibun, Lamsam, as well as Bangkok Bank groups; and Sarasin with Lamsam and Techaphaibun. See Hewison, "Financial Bourgeoisie," pp. 403-404. 71 For a discussion of these trends, see Patcharee Thanamai, "Patterns of Industrial Policymaking in Thailand: Japanese Multinationals and Domestic Actors in the Automobile and Electrical Appliance Industries" (Ph.D. diss., University of Wisconsin, 1985). 72 Thanamai, Patterns, pp. 123-26; and Siriboon Nawadinsukh, "Ancillary Firm Development," p. 277.

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porary reduction in the influence of career officials such as those who had designed the automobile program. The effect of this can be seen in the actions of Bangchan General Assembly, a newly established firm which had been attempting to break into the market by producing more models than the number allowed by the Ministry of Industry. Ministry officials had refused Bangchan's request to relax the model limits, but, following the parliament's dissolution, Bangchan appealed to the coup leaders and to the new minister of economic affairs, Pote Sarasin. Sarasin, soon to be a Bangchan shareholder, approved changes in the limits despite strong protests by the other assemblers.73 In February 1972 the government announced new regulations that retained local content goals but dropped restrictions on vehicle types and models. Other assemblers, while initially opposing the change, proceeded to demand "equal rights'7 with Bangchan. As in the Philippines, numerous new makes and models entered the Thai market during the 1970s, further reducing scale economies for aspiring parts producers. Yet during the 1970s the level of local auto parts manufacturing rose, as did the number and production capacity of local firms. More specifically, three general categories of firm emerged. One included small and medium-sized businesses that either produced spare parts, or were involved in non-auto manufacturing but sought to produce original auto equipment for the assemblers. A second group was composed of large-sized, independent ancillary firms producing original equipment. By far the largest of these was Siam Nawaloha Foundry (SNF), a subsidiary of the country's most powerful and modernized industrial conglomerate, Siam Cement. Finally, some interests already in auto assembly expanded into parts manufacturing. Included here are the Karnasuta, Leenutaphong, and Phornprapha families; the Phornprapha's Siam Motors group emerged as the country's major automotive operation.74 As will be discussed, the policy role of Thai parts firms has been much more influential than that of Philippine producers. But that begs the question of how the Thai firms managed to develop their economic and political strength in the first place. Healthy auto sales certainly provided important market opportunities. But the ability of local entrepreneurs to respond to and expand that potential reflected other aspects of the Thai political economy. One involved new opportunities for political action by a wider range of business interests. The repression of 1976 closed the door of political participation to the popular groups which had been most active in opening it three years earlier; but the student uprising of 1973 had succeeded in freeing financial and industrial interests from reliance on military patronage. In so doing, it opened industries such as automobile manufacturing to more extensive participation by a wide range of businesses interests. It also allowed for the growth of independent political activity by small and medium as well as large business interests.75 Public efforts to organize and influence auto policy began with the smaller parts producers during the mid-1970s. Accusing the assemblers of obstructing Thai industrialization efforts, they kept issues of auto industry reform on the policy agenda and made the first attempts to develop an independent parts producers' association. The 73

Interview; and Bangkok Post, January 8,1972. "Ownership Relations in the Automotive Industry/' Business in Thailand, March 1983. 75 See Laothamatas, "No Longer a Bureaucratic Policy"; Montri Chenvid-yakarn, "Economic Interest Groups in Thailand/' Thammasat University Journal (February 1974): 44-78; and also Boonmi, 'Thailand/' p. 54. 74

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larger parts firms were initially reluctant to level public criticisms against the assemblers, but gradually they moved to a more active policy role. These larger firms were part of an assembler-dominated association—the Automotive Parts Industry Club— organized in 1976/77 to participate in negotiations on the ASEAN automotive-production scheme. But in 1978 several club members founded a separate association— the Thai Auto Parts Manufacturers' Association (TAPMA)—in order to develop an independent voice and maintain direct ties with government officials.76 The impact of ethnicity merits attention in this context. Most of the Thai auto parts producers are ethnic Chinese (Sino-Thai). Does the aggressive organization of these Thai firms reflect the advantages of ethnic homogeneity? In part, yes. But ethnicity is not a sufficient explanation of associational strength. On a national level ethnic relations have been fairly harmonious in both the Philippines and Thailand. There is also evidence of extensive and formal communal networks in both countries. And as noted, many of the smaller Filipino parts firms were owned by ethnic Chinese. Ethnic ties are thus best considered a potential resource whose impact varies with the national political context. The auto cases suggest that Chinese networks were more important in Thailand because of the fact that the small Thai firms enjoyed a more stable political position than did their Philippine counterparts. A second factor promoting local capital was the expansion of technocratic influence in the economic-policy process. Critical to this was the Auto Industry Development Committee, the inter-agency body established by Ministry of Industry officials to develop the 1971 policy. While that policy was sharply modified, the committee continued its operations through the 1970s as the country's acknowledged source of automotive expertise.77 Constant ministerial changes reduced its impact through the late 1970s; but—in contrast to the Philippines' case—its basic personnel remained, especially within the Ministry of Industry. The committee maintained pressure for rising local content, helped integrate the work of several ministries, and, as discussed below, played an active role in the development of subsequent policies. Supplementing government efforts during the late 1970s was an administratively and politically strengthened Thai Board of Investments.78 This institutionalization of bureaucratic agencies reflected and contributed to a financial system markedly less politicized than its Philippine counterpart. The Thai commercial banking system has been criticized for its practice of lending based on personalized ties rather than clear project criteria. But these ties have tended to link bank owners and clients within or close to the banking group, not owners and political figures. The end of military rule in 1973 reduced political intervention in financial allocation. Closer links were forged between commercial banks and emerging Thai manufacturers, as the drop in foreign investments during the mid-1970s compelled Thai firms to develop local funding sources. In the auto industry this was illustrated 76

Interviews. This has meant that the parts firms are represented by two associations. One, the Club, operates in close coordination with the assemblers in the context of the country's major peak association, the Federation of Thai Industries. The other, TAPMA, operates independently, but most parts firms are in both of the associations. 77 "Growth despite chaos/' Business in Thailand, October 1977. 78 The inflow of foreign funds had declined sharply during the 1973-1976 period. The Board was streamlined and given new powers by Prime Minister Thanin in 1977 in order to attract foreign investment. 'Thais Hitched to a Resource Boom/' PEER, September 9,1977, p. 9.

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by increasingly close collaboration between the Bangkok Bank group and the Phornprapha family's Siam Motors group.79 At least two features of the financial system promoted smaller firms as well. One was the country's informal financial market, a system estimated to account for almost 50 percent of funds in circulation in the late 1980s.80 There is at present no study of industrial financing in the auto industry, but interviews suggest that auto parts firms, especially at initial stages of operations, relied on mechanisms such as "rotating credit societies" in which several individuals contribute to a pool of money and then bid for the right to use the principal. Ethnicity certainly played a role here. As sources of business finance, these societies began and have remained most prevalent in the Sino-Thai communities. Since Chinese did not dominate Filipino parts production, ethnic-based financial arrangements constitute part of an explanation for the relative growth and stability of the Thai parts sector. But again, "Chineseness" is only a partial explanation. For one thing, some of the more successful and politically active parts firms were ethnic Thai. For another, rotating credit societies usually provide relatively small sums of money. Thus, the fact that such practices did promote the growth of auto parts firms in Thailand rather than the Philippines may also be linked to contrasting state development strategies. The Thai localization process did not begin with an emphasis on major functional components as occurred in the Philippines. Assemblers could choose which components they would use for local content. While this allowed Thai assemblers to postpone localization of the higher value added parts, it also allowed local parts firms to enter the industry with lower capital requirements.81 Items which were made mandatory in the late 1970s (to be discussed below) were ones in which Thailand had a "natural" or developed comparative advantage. Finally, the limited sums of money provided by the rotating societies meant that expanding Sino-Thai parts firms have had to "graduate" from the informal system and increase their reliance on the banks over time. Indeed, their owners seem to have done so by establishing distinctly less personalized ties with bankers than did their parents. In this regard, the Thai experience supports the argument that successful Chinese entrepreneurs in Southeast Asia may lose "Chinese" features such as reliance on communal financial and trading networks.82 But we should not disregard the ethnic context completely, for interviews suggest that the informal credit networks 79

Akira Suehiro, Commercial Bankers and Industrial Elites in Thailand (Tokyo: Institute of Developing Economies, 1985) p. 5. 80 Alex Rozental, Financial Institutions and Development in Thailand (New York: Praeger, 1970); and Supachai Panitchpakdi, Issues in Banking and Finance in Thailand 1975-1980 (Bangkok: Marketing Media, 1981). The 50 percent figure is based on interviews with faculty members of Thammasat and Chulalongkorn universities in Bangkok. 81 One of the more successful locally owned parts firms set up shop in 1971 with an initial capital of 100,000 baht or roughly $4,000. The firm had three small casting machines of its own, but shared other facilities with a lock and key factory belonging to the owner's father-in-law. See Pravich Rattanapian, "Wichien Auto Parts, Limited Partnership, Bangkok," Innovative Approaches to Industrial Relations in ASEAN (Geneva: International Labor Organization, 1985), p. 213. For a general view of the localization process, see W. Twarngkoon, "Comparative Advantage and Protection in Automobile Parts and Components Industry in Thailand," (M.A. thesis, Thammasat University, Bangkok, May 1984). 82 Linda Y. C. Lim, "Chinese Economic Activity in Southeast Asia: An Introductory Review," in The Chinese in Southeast Asia, ed. J. A. Peter Gosling and Linda Lim (Singapore: Maruzen Asia, 1983), vol. 1, pp. 1-30.

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have become important for certain Thai parts manufacturers during periods of weak sales (e.g. when the domestic auto market dropped in the early-mid 1980s) And, for those firms just moving into manufacture for export, Chinese trading companies often constitute an important link to new markets. The Thai financial system's depoliticization has also encouraged a greater monitoring and disciplining of industrial borrowers than occurred in the Philippines. The case of Siam Motors, owned by Thaworn Phornprapha, is instructive in this context. This firm encountered severe financial difficulties during the early 1980s due to excessive diversification and inefficient family management, precisely the weaknesses of Silverio's Delta Motors. Siam Motors' principal creditor is the Bangkok Bank, on whose board Thaworn sits. The bank reduced its exposure and pressed Thaworn to restructure the group's activities; subsequently Thaworn brought in an outsider as the firm's chief executive, a former governor of the Bank of Thailand. While not completely successful, these efforts were more extensive and effective than anything occurring in the Philippines.83 Finally, the financial system's discipline has taken the form of discouraging the late payments by assemblers so common in the Philippines. Interest penalties levied on late payments are fairly high; a parts firm suffering from late payment has recourse to litigation, which usually goes in favor of the payee; and finally, late payments can reduce an assembler's credit rating since news of such a practice spreads rapidly throughout the banking community. The preceding constitute the background conditions for the growth of Thai automotive capital. Let us now examine the more discrete instances in which local officials and entrepreneurs have influenced Thai auto policy. The period between 1972 and 1977 was one of auto policy paralysis. The continuing proliferation of makes and models led to high costs and poor quality of local parts. One local firm had to produce over 200 specifications for radiators, and the leading shock-absorber firm produced 130 types. The state admitted to having no concrete plans for developing the industry. Yet local content rose to roughly 25 percent by 1977 and, as noted earlier, the number of parts firms grew both numerically and organizationally toward the end of the decade.84 Between 1978 and 1980 several new auto policy measures were adopted.85 First, in early 1978 the government adjusted import duties and imposed a ban on the import of completely built-up cars. These measures were part of a broader government attempt to reverse trade and payments deficits. But they also resulted from persistent Ministry of Industry efforts to rekindle localization and rationalization efforts, from pressure from local parts firms attempting to reduce the list of brands available, and from support by leading Japanese assemblers who had increased their investments in 83

The ex-Bank of Thailand governor left Siam Motors after a year as a result of persistent family squabbles. Yet those interviewed stated that the firm was in much better shape in 1988 than a few years earlier. While this was in part a result of a market upturn, it also reflected more streamlined management. 84 Choosak Ratanachaichanan, "Excess Capacity in Automobile Assembly Industry in Thailand/' (M.A. thesis Thammasat University, 1977), pp. 203-204. On costs and quality, see "Components and Parts: Widening the Range," Business in Thailand, October 1977. On the lack of state policy, see "Chaos Reigns in Local Automobile Industry," Financial Post, October 26, 1973. 85 Unless otherwise noted, the following account draws from Richard F. Doner, "Weak State— Strong Country? The Thai Automobile Case," Third World Quarterly 4 (October 1988): 1550-52.

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Thailand and wanted to force weaker firms out of the market. Pressure from local parts firms was especially important in the development of a new local contents formula. While the old method of computing localization allowed the assemblers broad flexibility with regard to the parts purchased locally, the new formula provided incentives to localize parts contributing to the growth of local manufacturing capacity. This move toward more targeted localization was supplemented by two other policies. One was a Board of Investments program to promote the local production of agricultural and automotive diesel engines. This effort was largely a state initiative, one of several agro-industrial projects initiated in response to the board's belief that Thailand had exhausted its stage of "easy" (i.e. consumer goods) import substitution and that it was now necessary to move into higher value added activities that could also boost agricultural production. The other component of targeted localization was the mandatory deletion of a small number of auto parts. This measure reflected the economic and political strength of the larger, better-established firms producing items with broad markets, ease of standardization, and local comparative advantage (exhaust systems, leafsprings, safety glass, radiators, batteries, and brake drums). And while the increasingly organized strength of these firms was central to the adoption of mandatory deletion in general, the compulsory localization of brake drums was largely a function of Siam Nawaloha Foundry's influence. On the basis of its experience in machining and casting for agricultural and construction products, SNF began to produce brake drums as original equipment for the auto industry around 1979. The firm soon appealed directly to the Ministry of Industry for mandatory localization of this part. The ministry granted the request without consulting the assemblers, a move that provoked intense anger on the part of the Japanese and their local partners. While the Philippines never implemented a similar program, it is tempting to interpret Thailand's push for mandatory deletion as reflecting a similar use of political influence to protect inefficient local firms. Mandatory deletion certainly did constitute protection for local firms, and SNF, with its royal connections, has political influence. But the political leverage of SNF (and Siam Cement) has never approached that of Silverio under Marcos. Unlike Delta Motors, SNF and the other firms benefitting from mandatory deletion were not insulated from competition by other well-established local firms. Furthermore, in Thailand mandatory deletion was only adopted when local capacity was sufficient to replace imported parts. These policy efforts encountered strong opposition. The program to promote local manufacture of diesel engines had mixed results, at least in the short term. Production of agricultural diesel motors proceeded smoothly, with SNF and Japan's Kubota competing with two other joint ventures.86 But the automotive side of the project was essentially moribund by 1982. The Board of Investments technical staff had argued strongly that the limited size of the Thai market could support only one manufacturer, at the most two, but they were overruled by a BOI governing board more sensitive to the political costs of excluding foreign firms and their influential local partners. The board finally settled on three Japanese engine makers (Hino, 86

"Diesel Farm Equipment/' The Investor, December 1978, pp. 40-41. By 1986, the three manufacturers were producing roughly 130,000 agricultural engines per year at reasonable prices, generating work for eighty parts firms, and moving toward 76 percent localization. Bangkok Post, March 20,1987.

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Isuzu, and Nissan), but these three demanded new conditions and essentially dragged their feet until all work on the project was halted. Mandatory deletion proceeded as planned, and local content reached approximately 45 percent by 1983. At that point, even though 1978 regulations mandated a move to 50 percent localization, deletion was frozen by the Ministry of Industry, in a response to combined pressure from Thai government economists87 and Japanese assemblers. Backed by the World Bank (which had just provided Thailand with a structural adjustment loan), the economists had formed a Restructuring Committee whose goal was to reform ten inefficient industries, of which automobile manufacture was considered the worst offender. The committee proposed cutting local content, forcing out low-volume assemblers, and restructuring tariffs so that Thailand would become an export base for auto parts production.88 These proposals drew skeptical reactions from the Ministry of Industry, Board of Investments, local parts firms, and the Japanese assemblers. The last had little interest in exporting from Thailand; nor, given their existing investments, were they willing to cut current localization. But the assemblers did argue for a freeze on further localization, a position which reinforced pressure from the Restructuring Committee. The freeze, however, was temporary. Between 1984 and 1985 the Ministry of Industry announced a series of measures requiring sharp localization increases based on a list of specific components.89 Critical to this shift was the appointment of Ob Vasuratna as the new minister of industry. Ob was a self-made businessman, prominent in one of the government coalition parties, a former minister of commerce, and a former head of Thailand's major commercial peak association (the Board of Trade). He was strongly committed to local auto parts manufacturing, and as minister of industry he headed and effectively neutralized the Restructuring Committee. Under Ob the political influence of local parts firms grew, while intense inter-firm rivalry weakened assembler opposition to increased local content. Yet this same inter-firm rivalry blocked Ob's efforts to rationalize the industry. The minister rejected as politically unfeasible an Auto Development Committee proposal to revoke the licenses of any series selling less than 600 units per year. This would have terminated twenty-seven of the forty-two series being produced and harmed the interests of Thai business groups involved in auto assembly. Even the higher local contents objectives seemed in doubt when Ob was forced to resign in September 1985, following an unsuccessful coup attempt which implicated the head of his party. The new minister of industry, Chirayu, was a supporter of the Restructuring Committee. With auto sales dropping badly, the cabinet looked ready to roll back local auto manufacturing, and the economic position of local parts firms seemed especially precarious.90 87

These economists came from the government planning agency (the National Economic and Social Development Board [NESDB]), the Industrial Finance Corporation of Thailand, and consultants from Thammasat University. 88 The entire proposal is found in William Hock, Policy Proposals for the Restructuring of the Automobile Industry in Thailand (Bangkok: Industrial Management Co., for the UNIDO/NESDB Project on Industrial Restructuring in Thailand, August 30,1983). 89 The goal was 70 percent local content by 1988 and 100 percent thereafter. See Ministry of Industry, "Announcement Concerning Permission to Assemble Motor Vehicles" (Bangkok, November 20,1984), and subsequent Ministry announcements for 1984 and 1985. 90 Interviews and World (Bangkok), January 16,1986.

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Few if any parts firms went out of business, however, in part because of economic factors.91 Financing through commercial banks and/or the informal market remained available; also, local parts firms have operated largely on variable costs, and, with little fixed overhead, many were able to weather market slumps by laying off workers and reducing orders of raw materials. Finally, many original equipment manufacturers responded to the lack of domestic sales by aggressively seeking out new export markets. As exports of auto parts rose in the mid-1980s, government and private sector made virtue out of necessity and identified low technology auto parts as a critical foreign-market niche for Thai producers. The parts firms also did not have to face any reduction in local content levels. As noted, sunk investments encouraged even the assemblers to oppose localization cuts, and bureaucratic leverage for such cuts was weak. The attention of Chirayu, the new minister of industry, was focused on other policy disputes, and the Automotive Development Committee resisted the Restructuring Committee's proposals as an infringement on the former's authority. But a compromise did occur, which at least partially reconciled the Restructuring Committee's concern for efficiency with the parts firms1 desire for local manufacturing. The latter recognized that reduced domestic auto sales required a slowing down of the localization process, and in August 1986, following extensive consultation, they agreed to a freeze of local content at 54 percent for passenger cars. In exchange, the assemblers agreed to a long-term localization process involving mandatory deletion. A new local contents formula was developed with two specific lists, one of roughly twenty-eight parts whose localization was compulsory, the other of parts from which the assemblers could choose to localize, as long as local content reached certain levels.92 But localization increases were to continue for commercial vehicles, merely oneton pick-up trucks. Specifically, by 1985 the Board of Investment's technical staff had redesigned the original engine proposal to focus on diesel engines for pick-ups; the board accepted bids for engine manufacture in which localization was to begin at 20 percent and rise to 80 percent within five years. The Ministry of Industry followed suit by mandating the localization of non-engine parts for diesel pick-ups. This new focus was in part a function of greater expertise and sophistication within the BOI and Ministry of Industry. The stress on pick-up trucks made good economic sense, for sales of one-ton pick-ups amounted to 60,000 in 1983, roughly half of the entire Thai market. Because new technology and consumer-oriented addons were relatively unimportant for pick-up trucks, these vehicles also lent themselves to greater standardization. Stressing this potential, the Ministry of Industry's chief engineer advocated a limit of two engine manufacturers, one Japanese and one European, in order to bolster Thailand's bargaining power.93 The engine project also reflected an emerging governmental consensus on what might be called an "efficient" strategy of second-stage import substitution. Advocates 91

This assertion and the following discussion are based on extensive interviews with both parts firms and government officials in Bangkok, 1989. 92 These levels would be held constant at 54 percent for passenger vehicles, at least for the foreseeable future. This formula has undergone a series of modifications, involving the addition of various parts to each list. The relevant decrees are found in Ministry of Industry, Sapawa pachuban khong utsahakam rotyon [Present Conditions of the Automotive Industry] (Industrial Policy Section, Industrial Economics Dept., Office of Deputy Director, August 1988). 93 Interview and Bangkok Post, April 14,1986.

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of greater localization recognized the need to emphasize parts whose cost and technology were more consistent with local conditions. Simultaneously, those in the Restructuring Committee were impressed by the economic rationality of the new engine project, and they began to acknowledge that local parts firms were not as inefficient as originally assumed. The rapid expansion of exports by Thai firms was evidence of competitive strength. Private-sector initiatives and capacities were central to the focus on pick-up trucks in a more immediate sense. While BOI officials were anxious to revive the engine project, pressure from Siam Nawaloha got the whole process started, the firm arguing that its success in manufacturing agricultural diesels (with Kubota) qualified it to produce castings for automotive engines. SNF also organized a trip for government officials to Japanese engine facilities, both to educate the officials and to impress the Japanese with Thailand's commitment to engine manufacture. A fairly coherent constellation of public and private interests in favor of targeted localization thus emerged in Thailand during the mid-1980s. It did not go unchallenged: foreign assemblers and their local partners blocked efforts to insure scale economies by limiting the number of engine manufacturers to one or two. The assemblers appealed directly to Thai political leaders, arguing that such limits would hinder competition and that inter-brand standardization was not possible. In the end the BOI was forced to accept four bids (Nissan, Toyota, Isuzu, and Peugeot). However, significant scale economies remained guaranteed. The project's terms of reference require that casting be done by local firms; Siam Nawaloha holds stock in three of the new engine firms, and by the summer of 1989 was producing castings for them. SNF's dominance in the engine project does not mean that smaller firms are excluded from the localization process. At least one other local firm will be involved in providing castings, and the Board of Investment has stipulated that both must subcontract to other local enterprises. And, as noted, other firms are also involved in producing non-engine parts for both pick-up trucks and passenger cars. While some resentment of SNF was evident from interviews, less powerful firms considered it less a threat than a leader in localization efforts which benefit others as well. Part of this leadership involves active SNF participation in the parts firm associations. More critical is that Siam Nawaloha's position in the industry is largely as a result of its technical and managerial expertise. The political clout of its parent firm, Siam Cement, is significant but, given Thailand's competing clusters of power, far from decisive. As one radiator firm official noted, "The critical fact in Thailand is the free market. Siam Cement may have some privileges, but they have to compete/' CONCLUSION

This essay has proposed a political explanation for Thai-Philippine differences in local capital growth. I have argued that the narrow base of the Marcos regime, the politicization of its bureaucracy and financial system, and its capital-intensive development strategy raised entry barriers for most local firms while obviating any market constraints for Delta. By contrast, Thailand's more competitive distribution of political and economic power, its relatively neutral bureaucracy and financial system, and its more modest approach to industrialization provided both greater opportunities and discipline for local firms. I have also argued that the impact of ethnicity is best understood as mediated by the political context. Developed organizational and financial networks seem to have

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existed in the Chinese communities of both countries; their contribution to the growth of Thai enterprises reflects the political strength of small and medium-sized firms in Thailand rather than that of the Chinese community itself. Finally, a word on the broader implications of the two cases. Our analysis of the Philippines' auto experience is consistent with Peter Evans' description of the Marcos regime as akin to the, "Latin American tradition of the caudillo." For Evans, the developmental alternative to such a system is the "East Asian style of bureaucratic authoritarianism."94 Undoubtedly the strong state systems of the South Korea and Taiwan have promoted significant expansion of indigenous capital, but the particular origins of the Asian Newly Industrialized Countries suggest that few others will be able to imitate their political arrangements.95 The Thai system described in this study represents still another developmental option, one perhaps a bit more realistic for countries with less highly organized governmental structures. Here the state is activist but far from hard and autonomous. Its ability to take the initiative derives in part from the high level of competition among local business interests, and its impact on the economy involves prolonged negotiations with organized private groups, rather than any skillful mix of incentives and harsh authority. This is a "growth coalition" reliant on initiative from below. As such it is less efficient than arrangements in South Korea or Taiwan for building up local capital and infrastructure. Indeed, as Thailand becomes more industrialized it may encounter challenges exceeding the capacities of its political arrangements,96 but so far these relationships have provided fertile ground for the initial growth of local enterprises. 94

Peter B. Evans, "Class, State, and Dependence in East Asia: Lessons for Latin Americanists," in The Political Economy of the New Asian Industrialism, ed. Frederic C. Deyo (Ithaca, N.Y.: Cornell University Press, 1988), pp. 211-12. 9 ^ Bruce Cumings, 'The Origins of the Northeast Asian Political Economy," in Deyo, Political Economy, pp. 44-83. 96 For example, the very success of Thai parts firms is requiring higher levels of fixed investment that will make it increasingly difficult to ride out market declines by laying off workers and cutting raw materials supplies. Such a situation will require either a state or private-sector body capable of coordinating adjustment efforts. More generally, Thailand's infrastructure, especially its educational system, is woefully inadequate to cope with new investments. There are real questions as to the present political system's ability to mobilize resources sufficient for infrastructure development.

CONTRIBUTORS

Ruth McVey is Emeritus Reader in Politics with reference to Southeast Asia at the University of London. Jean Aden is Environmental Specialist in the Asia Environment Division of the World Bank. Richard Doner is Assistant Professor of Political Science at Emory University. Gary Hawes is Associate Professor of Political Science at Ohio University. Heng Pek Koon is Adjunct Professor in the Department of Comparative and Regional Studies at the School of International Service, American University, Washington, D.C. Jamie Mackie is Emeritus Professor at the Research School of Padfic Studies, Australian National University. Richard Robison is Professor of Southeast Asian Studies at Murdoch University. Sieh Lee Mei Ling is the Professor and Chairman of the Division of Business Administration, at the Faculty of Economics and Administration, University of Malaya. Suehiro Akira is Associate Professor at the Institute of Social Science, University of Tokyo.