Political Business in East Asia
“With a good mix of well-considered theory and appropriately detailed case studies, this book provides a unique, comprehensive and authoritative account of business–state relations in East Asia. This is an important and wonderfully rich book in the best traditions of political economy. It is a must-read for all interested in the political economy of East Asia.” Professor Kevin Hewison, Director, Southeast Asia Research Center, City University of Hong Kong When the financial crisis occurred in East Asia in 1997, it drew attention to the need to institute important structural reforms in business and politics. The crisis raised questions about the quality of government intervention in the economy, the mode of enterprise development, and the form of democracy emerging in East Asia. However, in spite of the political upheavals following the financial crisis, there have been few fundamental structural changes in politics and in business, particularly involving the links between the two. In Political Business in East Asia two important questions are examined: ●
●
Why was the opportunity for reform in business and in politics not taken advantage of after the crisis? What is it about the nature of politics and of business in East Asia that has restrained the fundamental changes shown to be necessary?
The authors argue that the process of consolidation of democracy has been marred by massive corruption of politics, portending little hope of genuine political and economic reform. In particular, it has been hindered by the manner of funding of political parties, which is heavily influenced by ties developed between politicians and businessmen. Political Business in East Asia provides challenging new insights for students of politics, Asian studies, economics, and government–business relations. Edmund Terence Gomez is Associate Professor in the Faculty of Economics and Administration, University of Malaya. His publications include Malaysia’s Political Economy: Politics, Patronage and Profits (with K.S. Jomo, Cambridge University Press, 1999) and Chinese Business in Southeast Asia: Contesting Cultural Explanations, Researching Entrepreneurship (with Michael H.H. Hsiao, Curzon Press, 2001).
Politics in Asia series Edited by Michael Leifer London School of Economics ASEAN and the Security of South-East Asia Michael Leifer China’s Policy towards Territorial Disputes The Case of the South China Sea Islands Chi-kin Lo India and Southeast Asia Indian Perceptions and Policies Mohammed Ayoob Gorbachev and Southeast Asia Leszek Buszynski Indonesian Politics under Suharto Order, Development and Pressure for Change Michael R.J. Vatikiotis The State and Ethnic Politics in Southeast Asia David Brown The Politics of Nation Building and Citizenship in Singapore Michael Hill and Lian Kwen Fee Politics in Indonesia Democracy, Islam and the Ideology of Tolerance Douglas E. Ramage Communitarian Ideology and Democracy in Singapore Beng-Huat Chua The Challenge of Democracy in Nepal Louise Brown Japan’s Asia Policy Wolf Mendl The International Politics of the AsiaPacific, 1945–1995 Michael Yahuda Political Change in Southeast Asia Trimming the Banyan Tree Michael R.J. Vatikiotis Hong Kong China’s Challenge Michael Yahuda Korea versus Korea A Case of Contested Legitimacy B.K. Gills Taiwan and Chinese Nationalism National Identity and Status in International Society Christopher Hughes Managing Political Change in Singapore The Elected Presidency Kevin Y.L. Tan and Lam Peng Er
Islam in Malaysian Foreign Policy Shanti Nair Political Change in Thailand Democracy and Participation Kevin Hewison The Politics of NGOs in South-East Asia Participation and Protest in the Philippines Gerard Clarke Malaysian Politics Under Mahathir R.S. Milne and Diane K. Mauzy Indonesia and China The Politics of a Troubled Relationship Rizal Sukma Arming the Two Koreas State, Capital and Military Power Taik-young Hamm Engaging China The Management of an Emerging Power Edited by Alastair Iain Johnston and Robert S. Ross Singapore’s Foreign Policy Coping with Vulnerability Michael Leifer Philippine Politics and Society in the Twentieth Century Colonial Legacies, Post-Colonial Trajectories Eva-Lotta E. Hedman and John T. Sidel Constructing a Security Community in Southeast Asia ASEAN and the Problem of Regional Order Amitav Acharya Monarchy in South-East Asia The Faces of Tradition in Transition Roger Kershaw Korea After the Crash The Politics of Economic Recovery Brian Bridges The Future of North Korea Edited by Tsuneo Akaha The International Relations of Japan and South East Asia Forging a New Regionalism Sueo Sudo Power and Change in Central Asia Edited by Sally N. Cummings Political Business in East Asia Edited by Edmund Terence Gomez
Political Business in East Asia
Edited by Edmund Terence Gomez
London and New York
First published 2002 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2004. Selection and editorial matter © 2002 Edmund Terence Gomez; individual chapters © the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book is available from the Library of Congress ISBN 0-203-16633-7 Master e-book ISBN
ISBN 0-203-26096-1 (Adobe eReader Format) ISBN 0–415–27148–7 (hbk) ISBN 0–415–27149–5 (pbk)
For Evie, Eric, and Eshward who give meaning to the effort and for Sharm
Contents
List of tables List of figures Notes on contributors Preface Acknowledgments Introduction: political business in East Asia
ix x xi xiii xv 1
EDMUND TERENCE GOMEZ
1 Development and corruption: the East Asian paradox
34
ANDREW WEDEMAN
2 Political business alliances: the role of the state and foreign and domestic capital in economic development
62
JOHANNES DRAGSBAEK SCHMIDT
3 Political business in Malaysia: party factionalism, corporate development, and economic crisis
82
EDMUND TERENCE GOMEZ
4 KMT, Inc.: liberalization, democratization, and the future of politics in business
115
KARL J. FIELDS
5 State predation and rapid growth: politicization of business in China
155
ANDREW WEDEMAN
6 The political business of development in South Korea
182
PETER WAD
7 Politics, business, and democratization in Indonesia STEFAN EKLÖF
216
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Contents
8 Democratization and economic crisis in Thailand: political business and the changing dynamic of the Thai state
250
TOM WINGFIELD
9 State, politics, and business in Singapore
301
STEPHAN HAGGARD AND LINDA LOW
10 Politics, business, and the inescapable web of structural corruption in Japan
324
JAMES BABB
Index
339
Tables
1.1 Comparison of regional growth rates and levels of corruption, 1960–93 2.1 State intervention in East Asia before liberalization 3.1 Malaysia: ownership of share capital (at par value) of limited companies, 1969–95 3.2 Reputed political connections of some prominent business figures 3.3 Loans by government-owned banks to UMNO companies, 1990 3.4 Changing nature of companies linked to UMNO politicians, 1970s and 1990s 4.1 Leadership of KMT, Inc., 1945–2000 4.2 Public-listed KMT enterprises, 1992 4A.1 KMT, Inc.: firms invested in by the Kuomintang, 1928–96 5.1 Distribution of forms of enterprise, China, 1985–96 5.2 Gross value of industrial output by ownership, 1985–96 8.1 Election results by political party, 1975–92 8.2 Professional background of elected assemblymen, 1933–92 8.3 Election spending, 1986–96 8.4 Senate candidates, March 2000 8.5 Non-performing loans (NPLs), November 1999–January 2000 9.1 Major holdings of Temasek Holdings Ltd, 2000 9.2 Sectoral distribution of industrial enterprises in Singapore, 1963 9.3 PAP share of popular vote, general elections, 1959–97 9.4 Sectoral distribution of promising local enterprises, May 1997 10.1 Zoku MPs and factions (Upper and Lower House MPs), 1987
36 68 85 87 93 99 123 124 141 159 160 258 259 266 275 278 305 307 311 313 330
Figures
I.1 Model of the practice of political business 1.1 Corruption and growth, 1982–96 3.1 Daim Zainuddin’s common directorship in his triple capacity as trustee for the government, UMNO, and his family companies, 1990 3.2 Tajudin Ramli’s control of the corporate sector, 1997 3.3 Wan Azmi Wan Hamzah’s control of the corporate sector, 1997 4.1 Organizational structure of the Kuomintang, 1994 5.1 State subsidies and SOE losses, 1985–96 5.2 Political business fund flows, China, 1998
4 35
92 94 95 125 163 165
Contributors
James Babb is Lecturer in Japanese Politics at the University of Newcastle upon Tyne. His major publications include Tanaka: The Making of Postwar Japan (2000) and Business and Politics in Japan (2001). Stefan Eklöf is a Ph.D. candidate at the Department of History, Lund University, Sweden. His publications include Indonesian Politics in Crisis: The Long Fall of Suharto (1996–98) (1999) and Colonialism in the 1990s: The Use of History in Dutch–Indonesia Relations (1999). Karl J. Fields is Chair of the Department of Politics and Government, former Director of Asian Studies, and Associate Professor of Politics and Government at the University of Puget Sound in Tacoma, Washington. His published volumes include Enterprise and the State in Korea and Taiwan (1995), and his forthcoming book is entitled KMT, Inc. Edmund Terence Gomez is Associate Professor at the Faculty of Economics and Administration, University of Malaya. He is the author of Politics in Business: UMNO’s Corporate Investments (1990), Political Business: Corporate Involvement of Malaysian Political Parties (1994), and Chinese Business in Malaysia: Accumulation, Ascendance, Accommodation (1999); co-author of Malaysia’s Political Economy: Politics, Patronage and Profits (1997) and Ethnic Futures: The State and Identity Politics in Asia (1999); and co-editor of Chinese Business in Southeast Asia (2001). Stephan Haggard is Professor at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. He is the author of Pathways from the Periphery (1990), Developing Countries and the Politics of Global Integration (1995), and The Political Economy of the Asian Financial Crisis (2000). He is the co-author, with Robert Kaufman, of The Political Economy of Democratic Transitions (1995), and with David McKendrick and Richard Doner of From Silicon Valley to Singapore: Location and Competitive Advantage in the Hard Disk Drive Industry (2000).
xii Contributors Linda Low is Associate Professor at the Department of Business Policy, National University of Singapore. Her numerous publications include The Political Economy of a City-State: Government-Made Singapore (1998), Singapore: Towards a Developed Status (1999), and The Economics of Information Technology and the Media (2000). Johannes Dragsbaek Schmidt is Associate Professor, Research Center on Development and International Relations, Aalborg University, Denmark. His co-edited publications include Globalization and Social Change (2000), Social Change in Southeast Asia (1997), and The Aftermath of “Real Existing Socialism” in Eastern Europe: Between Western Europe and East Asia (1996). Peter Wad is Associate Professor at the Department of Intercultural Communication and Management, Copenhagen Business School, Denmark. He has served as guest editor to several journals, including the Copenhagen Journal of Asian Studies, and has contributed articles to a number of edited volumes. Andrew Wedeman is Associate Professor of Political Science at the University of Nebraska, Lincoln. His recent publications include From Mao to Market: Rent Seeking, Local Protectionism and Marketization in China (2001). Tom Wingfield was formerly a lecturer with the Department of East Asian Studies, University of Leeds. Before taking up this academic appointment, he was a journalist covering business and politics in Thailand, Indochina, Burma and Indonesia. His publications include “Myanmar: Political Stasis and a Perilous Economy,” published in Southeast Asian Affairs 2000.
Preface
Since it is well known that links between politics and business are common in East Asia, when a financial crisis occurred in 1997, it was partly attributed to the impact of systemic development of this nexus on the corporate sector. This financial crisis, which eventually evolved into economic and political crises, exposed many problems that had been camouflaged by the impressive economic growth registered by most East Asian countries since the late 1980s. The impact of the financial crisis raised questions about the quality of entrepreneurship and of the burgeoning democracy in this region. In this volume, through the use of the concept of political business, we propose to trace the inter-relations between politics and business to draw conclusions on their influence on enterprise development, corruption, and the consolidation of democracy in East Asia. To achieve this objective, we attempt here to provide a critical historical account of the evolution of state and capital in the region. While not all countries in East Asia have democratized, we are concerned that in countries that have achieved this transition from authoritarianism, the process of consolidation of democracy has been marred by massive corruption of politics portending little hope of genuine political and economic reforms. We argue that one factor hindering the consolidation of democracy in East Asia has been the manner of funding of political parties, which is heavily influenced by ties developed between politicians and businessmen. Such political business ties are also hindering important structural reforms and the development of a more transparent and accountable form of governance. In order to understand the nature of the ties between politics and business, we argue that there is a need to understand how capital has been developed in East Asia, mainly because of the role of the state in promoting the rise of big business. While the rise of capital has been heavily influenced by the state, with the emergence of democracy, the practice of politics has been greatly affected by money emanating primarily from big business. The impact of big business on domestic politics has contributed to growing corruption and “money politics,” bringing into question the quality of democracy emerging in East Asia. Terence Gomez
Acknowledgments
The idea for this project on a comparative study of the links between politics and business in East Asia was first conceived in June 1998, when I presented a paper entitled “Political Business in Malaysia” at a workshop organized by the Manchester Business School. This workshop was convened to discuss the problems in the East Asian economies that had been exposed by the financial crisis that broke in 1997. I am indebted to Jeffrey Henderson, convenor of this workshop, for inviting me to present this paper and to the participants who raised searching questions and provided important feedback on my paper. In November 1998, I approached Robert Cribb, then Director of Nordic Institute of Asian Studies (NIAS), to fund a workshop to bring together scholars who had been researching the links between politics and business in East Asian countries. I am extremely indebted to NIAS for providing me with some funds to start this project. Peter Wad of the Copenhagen Business School contacted a number of research institutes in the Nordic countries about the possibility of hosting a workshop on politics and business before receiving a positive response from Jacques Hersh and Johannes Schmidt of the Research Center on Development and International Relations at Aalborg University, Denmark. This Center agreed to absorb all expenses to host the workshop I intended to convene. The workshop was held on June 4–5, 1999, and I am very grateful to staff of this Center for their efficient organization of the workshop. I thank Jacques Hersh for his keynote address, which he used effectively to draw our attention to key issues we needed to consider during our discussions at the workshop. I am also beholden to Johannes Schmidt, who went the extra mile by offering to prepare a chapter for this volume. His chapter helped fill an important void in this project, which became evident during the workshop. Among those present at the workshop and who contributed to the discussions were Robert Cribb, Eric Lonergan, Flemming Christiansen, and James Putzel. The insights they provided were crucial in helping us develop the perspective we eventually adopted in the volume. I am deeply indebted to Tom Wingfield, my colleague at the University of Leeds, where I was working when this project was conceived. Tom helped me identify and contact academics who could be approached to work on this project.
xvi
Acknowledgments
I thank all the contributors to this volume who needed little persuasion to work with me on this project. I was pleasantly surprised at their willingness to support this project, since I had not met some of them, like James Babb and Stefan Eklöf, when they were approached to write a chapter for this volume. Karl Fields, who could not attend the workshop, was very supportive when I asked him to make numerous revisions to his article, to help his analysis tie in with the main themes of the volume. Some of the contributors to this volume came on board after the workshop. Stefan Eklöf agreed to write the chapter on Indonesia after the researcher originally identified for this project was called to participate in a peacekeeping mission in East Timor. I thank Stephan Haggard and Linda Low for agreeing to write the chapter on Singapore. At the workshop in Aalborg, the participants had felt that there was a need to incorporate a chapter on Singapore, to facilitate the comparative dimension of the project. Singapore is the exception to the rule in that the negative aspects of political business, as we conceive the concept here, are non-existent in this country. I wish to mention my deep debt to Andrew Wedeman who agreed to write two chapters for this volume. Andrew was incorporated into this project to prepare an article discussing the concept of corruption, but was subsequently persuaded to write a country chapter, on China. I thank the late Michael Leifer of the London School of Economics who, as Editor of Routledge’s Politics in Asia series, was very keen on publishing this volume when I mentioned the project to him. Michael had promised to write the Foreword for this volume, and it is unfortunate that we will not benefit from the insights of this doyen of Southeast Asian Studies. Finally, but not least, I am very obligated to Sharm, who provided unstinting support when I was preoccupied with organizing and completing this project, even though she was then working on her doctoral dissertation. To her, and our children, Evie, Eric and Eshward, who shared my enthusiasm for this study in our conversations about life, social change, democracy, and justice in Asia, I dedicate this volume. We hope that this volume will contribute in some small way to the debates now taking place among reformers in Asia, on how to develop truly democratic nations. Terence Gomez March 2001
Introduction Political business in East Asia Edmund Terence Gomez
Financial crisis and political change In 1997, a financial crisis occurred in East Asia1 seriously impairing economies that had generated half the world’s economic growth since 1990. Such economic growth had led to the rise of a large middle class that had, in some countries, contributed to the promotion of greater democratization. The impact of the crisis has drawn attention to a need for an inquiry into a number of important issues in the areas of business and politics, including the quality of state intervention in the economy, the mode of enterprise development, and the form of democracy emerging in East Asia, involving in particular the question of funding of political parties. Our concern here is not an in-depth analysis of the factors that contributed to this crisis, that is the impact of currency speculation, unregulated capital flows (specifically portfolio investments), and imprudent financial liberalization and weak supervision of the banking sector, all issues that have now been well documented.2 Our key focus is on the links between politics and business and the implications of this nexus on enterprise development and democratization in East Asia. These links forged between politicians in power and businessmen have unquestionably facilitated the rise of a number of major companies in the region, aided through the use – and in many cases, abuse – of the domestic financial sector. Such links led to the development of some factors that contributed to the crisis, including lax supervision of the financial sector and an unsustainable form of corporate growth through debt. The ties between politics and business have also influenced the form of creation and distribution of state rents, contributing to the rise of a “new rich,”3 as well as allegations of cronyism, corruption, and nepotism. Wanton corruption and cronyism, in various forms, had transpired long before the onset of the crisis, suggesting that the ties between politics and business had not precipitated the financial crisis in 1997.4 These links, however, had influenced government policies that contributed to the crisis and affected responses in ways that exacerbated the crisis.
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Edmund Terence Gomez
Following the financial crisis, it was evident that the repercussions arising from the links between politics and business had emerged as a primary factor contributing to political tension and/or change in a number of countries in East Asia. In Southeast Asia, Indonesia’s long-standing president, Suharto, was forced to resign, Malaysian Prime Minister Mahathir Mohamad came under unprecedented open public dissent, while Thailand’s Chavalit Yongchaiyudh government was replaced by a coalition forged by Chuan Leekpai. In Northeast Asia, Japanese Prime Minister Ryutaro Hashimoto had to step down in favor of Keizo Obuchi, while South Korea’s out-going president Kim Yong Sam was so tainted by a scandal that exacerbated the financial crisis that it facilitated the election of the long-standing government critic Kim Dae Jung. In all these countries, the close ties between politicians and businessmen have influenced the form of economic development and, following the financial crisis, have been a factor that has contributed to political upheaval. However, in spite of the political upheavals following the financial crisis, which eventually became an economic crisis, there have been little fundamental structural changes in politics and in business, particularly involving the links between the two. In Japan, the banking crisis remains unresolved in spite of a change of political leadership, Korean chaebols appear reluctant to reform their pattern of corporate growth, while the influence of big business over the Philippine state appears to be growing. In Malaysia, Mahathir controversially sacked Deputy Prime Minister Anwar Ibrahim, consolidating more power in the office of the executive and yet secured an overwhelming electoral victory during the 1999 general elections. In Thailand, in spite of promises by politicians of greater devolution of power to the people through amendments to the constitution, there have been no significant political reforms. During the 2001 general election, mired in allegations of corruption, including vote-buying, the party that secured the largest number of seats in parliament was the newly formed Thai Rak Thai Party, formed by Thaksin Shinawatra, reputedly to be the richest person in Thailand. Why has the possibility of reforms in business and politics that appeared imminent following the crisis not occurred? What is the nature of politics and business in East Asia that has the capacity to restrain fundamental changes that were shown by this crisis to be necessary? This volume is an attempt to answer these questions by tracing the form of development of capital in East Asia as well as the evolution of the links between politics and business.
Defining political business The favoring of particular business interests by politicians in power has been broadly and popularly referred to as “cronyism.” This term, however, carries dissimilar meanings in different contexts and is not an effective tool for conceptualizing the variety of issues that have shaped the links between politics and business in East Asia. The issues that have to be incorporated in an analysis of the links between politics and business in a country can range
Introduction 3 from corruption, nepotism, insider trading, and political patronage to the abuse of the financial sector for vested political interests as well as covert funding of political parties or presidential candidates. Other issues, however, that may also require analysis in this discussion of politics and business is the need for the state to implement policies that involve positive discrimination to rectify social and economic imbalances, create or promote indigenous capital, or encourage industrialization. For this study, the concept, “political business,” has been developed, which will be applied to analyze the various forms of links between politics and business that can have positive or negative impact on local economies and political systems. In order to understand the form and implications of political business ties in East Asian countries, two key issues need to be analyzed in greater depth. There is a need to understand the politics of the state, that is to establish the institutions or actors in whom power is centered, including determining if political power has been secured through the aid of capital. Second, an analysis is required of the development of the corporate sector, particularly the rise of big business, to determine the nature of the relationship between capital and the state. For example, the rapid growth of some major East Asian companies, whether privately owned or a state enterprise, was due to political considerations and aided through much state support. Moreover, following democratization in a number of East Asian countries, the influence of capital over politics has increased appreciably. The changing pattern in the balance of power between capital and the state in democratized countries also appears to have affected the dynamics of policy-making and policy implementation, the form of corporate development, as well as the flow of funds from business into politics. Political funding by business has contributed to a significant rise in the phenomenon of “money politics,” that is the use of money in the political arena to secure control over the state in order to influence the distribution of state-generated economic rents. Since political contests are being extremely influenced by access to money, this brings into question the quality of democracy that is emerging in East Asia. Figure I.1 provides a model of the practice of political business and the outcomes of the nexus between politics and business on the corporate and financial sectors. Politicians holding office in government use their power to distribute to party members or select business associates state-created rents in the form of licences, contracts, subsidies, and privatized projects. Funds to acquire these rents are secured through favorable loans from banks and other financial institutions owned or controlled by the state and well-connected businessmen. Distribution of such rents to party members, in turn, helps party leaders secure or promote their positions in the party and in government. Many recipients of these rents use numerous corporate maneuvers, most commonly shares-for-assets swaps and reverse takeovers, to capture control of public-listed companies, usually characterized by concentration (large firm size) and conglomeration (multi-sectoral diversification). These companies, in turn, are used for other types of corporate maneuvers, including mergers,
Edmund Terence Gomez
Political Leaders / Political Parties
▲
4
control over Government distribution of state-controlled concessions: government funding, licences, contracts, various types of privatized projects
government-owned or politically-controlled banks and other financial institutions
▲
funds to secure these concessions come from
used by clients for
▲
shares-for-assets swaps, reverse takeovers, mergers, and acquisition of public-listed companies
results in creation of politically-linked “new rich,” insider trading, manipulation of share prices, conflict of interest situations, corruption, politicization of the economy brings about access to substantial funds part of which are chaneled back as political funds to government
Figure I.1 Model of the practice of political business.
acquisitions, and takeovers, to develop their business interests. As share prices escalate, corporate equity is used as security to secure more loans from banks for further acquisitions. Such corporate strategies contribute appreciably to the increase in the stock exchange’s market capitalization. Political patronage, sophisticated but unproductive corporate maneuvers and the rise in market value of quoted equity contribute to the emergence of a politically well-connected new rich. The emergence of this new rich leads to a concentration of corporate wealth, while selective distribution of state concessions results in corruption, business scandals, and conflicts-of-interest involving senior government leaders. Companies controlled by well-connected
Introduction 5 businessmen are involved in insider trading and manipulation of stock prices. Political patronage also creates avenues for politicians to gain access to large sums of money for political activities, particularly to fund campaigns during party and general elections. In some cases, as companies grow large enough to achieve much autonomy from the state, they channel funds to political parties, or factions within ruling parties, in an attempt to influence state policies. In other instances, business elites form political parties or participate directly in presidential elections in an attempt to secure control over the state. On the other hand, certain positive outcomes can arise from political business ties. For example, state patronage through positive discrimination can be used to rectify social problems such as wealth and income disparities between ethnic communities, while the need to promote domestic entrepreneurship and create indigenous businessmen can be dealt with through political business ties. Selective rent distribution can also help to promote industrialization and diversification of the economy. In many cases, however, financial institutions, usually those that are stateowned, have been an avenue for politically well-connected companies to secure funds on favorable terms to generate growth, primarily through acquisitions, contributing to the rise of huge enterprises within a relatively short period. This has led to the problem of huge gearing ratios among many of these firms, though such loans are manageable with continued support from financial institutions and the state. In a number of countries, the stock market, and a variety of corporate maneuvers, including shares-for-assets swaps, takeovers, reverse takeovers, and bonus and rights issues are employed to pursue a conglomerate style of growth. In many instances, huge, but normally short-term, loans from abroad, as well as significant foreign portfolio investments, are crucial for promoting the growth of these companies as well as grossly increasing their market capitalization on local stock exchanges. Such forms of loans and portfolio investments, however, contribute to financial crises when large numbers of investors withdraw their funds from the stock markets. In other words, the business style of many of these large-scale companies, and of the manner of their growth – that is, whether a vertical, horizontal or diversified pattern of growth was employed – appears to be a factor determining their capacity to deal with economic crises. Most politically well-connected firms tend to focus their investments on services and other non-tradeables, such as real property, construction, infrastructure, and importsubstituting manufacturing. Politically well-connected enterprises tend frequently to be involved in unproductive business ventures, usually adopting a conglomerate style of growth, with limited focus on developing expertise in a particular industry or with little attention on research and development. Another facet of political business is that funds raised in the corporate sector are channeled into the political arena, for activities such as funding party and general election campaigns or for buying the support of party members to create and maintain power bases. These links between politics
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Edmund Terence Gomez
and business lead to differences among political elites, as well as widespread corruption, nepotism and conflicts of interest; in a number of cases, disclosure of such improprieties precipitates profound political change and form of governance. Political business ties are widespread in almost all countries in East Asia, although the form that such links take differs. In Taiwan and Malaysia, the Kuomintang (KMT) and the United Malays’ National Organization (UMNO), respectively, each have direct or indirect control over a vast array of corporate assets. In Japan, major corporations fund particular factions within the ruling Liberal Democratic Party (LDP). In the Philippines, although capitalists lost their inordinate influence over the outcome of presidential elections through their capacity to fund the rise of politicians during the authoritarian era of Ferdinand Marcos (1966–86), they are again beginning to secure influence over the state through similar means. In Thailand, businessmen have established political parties as a means to capture control of the state. Similarly, in South Korea, one leading capitalist made an unsuccessful bid for the office of President during the 1992 campaign. In Indonesia, the emergence of a number of conglomerates during the Suharto regime (1966–98) was attributed to the close personal ties established by their owners with leading politicians. The dynamics of political business within each East Asian country has also evolved with political or regime change. Even though systemic development of political business ties contributed to the scale of the financial and political crises after 1997, very little is known of the dynamics involved in the links between politicians and businessmen and of the reasons why the latter secured rents from the state. Since the rationale for the award of state rents to businessmen influenced the pattern of development of enterprises owned by these capitalists, this had a bearing on the extent to which these firms were affected by the crisis, both economically and politically.
Contextualizing political business in East Asia Most debates on the links between the state and business, adopting either a statist or a market (rational choice) perspective,5 tend to focus on the state as a monolithic unit, analyzing its capacity to promote economic development. Although an institutional perspective provides an alternative to societycentered and state- and/or system-centered explanations of politics, it has not provided an adequate theory of change. Moreover, while an institutional perspective recognizes that institutions can collapse in times of crisis, it does not explain, or deal with, the political factors contributing to the breakdown.6 More specifically, the debate on the developmental state has centered attention on a bureaucracy dominated by technocrats driving economic growth (see, for example, Johnson 1982, 1987). Another body of literature has drawn much focus to business groups that organize themselves to act individually or collectively to secure rents from the state (Domhoff 1967;
Introduction 7 Heidenheimer and Langdon 1968). This concentration on technocrats and capitalists has diverted attention from the machinations within the political system, usually occupied by politicians who have overwhelming influence over the various arms of the state, including the bureaucracy. There is growing evidence that politicians work through the state to procure rents for themselves – or their families and allies – to develop huge corporate enterprises. East Asian history, however, has also shown that politicians who secured control of the executive were simultaneously driven by a desire to promote economic development, usually as a means to justify their rule. This has contributed to contradictory actions by government leaders, that is the promotion of growth-generating policies while also permitting corruption, political patronage or unproductive rent distribution. The institutional and organizational structure of a government and ruling party has a bearing on the form of rent distribution by politicians to businessmen. An analysis of institutional control of government, that is of how politicians control the state, for example, the bureaucracy or the legislature, to formulate and implement policies affecting business, can provide insights into how capital develops. A study of the organizational structure of a party involves an analysis of where power is centralized; this will help indicate why politicians distribute rents to specific businessmen or why capital channel funds to particular politicians or factions. In most analysis, since no distinction is made between state and political parties or politicians, there is little insight into the nature of a political system, which helps explain the nature of rent distribution. One objective here is to deconstruct the concept of the state, with the central analytical focus on particular political parties, factions,7 or politicians who have hegemony over the state. The inadequate focus on the links between political parties or politicians and the corporate sector in East Asia is surprising given that the states in this region had played a significant role in promoting the development of public and private enterprises and new capitalists. For example, in South Korea, Taiwan, Malaysia, Indonesia, Singapore, Thailand, and the Philippines, politicians in government have heavily influenced rent creation and distribution in the corporate sector through various policy mechanisms. On the other hand, in Japan and China, powerful factions in the ruling parties, the LDP and the Chinese Communist Party (CCP), respectively, have been able to influence how state economic rents should be distributed. How, and why, factions are created and controlled also differ between countries. A faction, a system of cooperation among a number of recognized leaders within a political party for the purpose of influencing the decisions and conduct of the party organization as a whole, is usually short-lived. This, however, has not been the case of the five major factions in the LDP, which appear more institutionalized. In Malaysia, UMNO is fraught with factions that are loosely based which tend to have a shorter life-span, depending on the longevity of their leader; inevitably, these factions have differing access to
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rents depending on the influence of their leader.8 In Japan, Taiwan, and Malaysia, factional disputes within the ruling parties have been a major factor in precipitating political crisis or change.9 In Thailand and the Philippines, factionalism has contributed to incessant party-hopping and “turncoatism,” as influential leaders move, usually with their supporters, between parties that provide them with the best hope of securing a place in the executive arm of government. In both authoritarian and more democratized countries, factionalism has also influenced the volume of fund flow into the political arena, especially during party elections as politicians distribute money, corporate equity, and other rents to buy support to accelerate their ascendancy in the party hierarchy. In some cases, the volume of funds disbursed during contests for posts in the ruling party can be considerably more than the amount of money used during campaigns in general elections. One reason for the growing use of money in politics is that with the emergence of democracy in East Asia the state is increasingly being captured by capital, mainly through the latter’s capacity to influence electoral outcomes in party and general elections by channeling substantial funds into the political arena. Such capture of the state by capital has taken various forms. In Japan, when the businessman, Tanaka Kakuei, became Prime Minister, a profound change occurred in the LDP, involving the growing importance of money in party affairs. Even though Tanaka’s government was eventually rocked by a series of corrupt financial dealings, the practice of extensive distribution of funds to buy party support that he actively promoted became institutionalized in the LDP.10 In Thailand, businessmen have actively begun to use political parties as vehicles to seek public office and secure control over the state to gain access to rents that can facilitate the growth of their business. Banharn Silpa-archa of the Chat Thai Party, who had served briefly as Prime Minister in 1995, had first established himself in business in the 1970s. In South Korea, Chung Ju Yung, the chairman of the conglomerate, Hyundai, established the United People’s Party during his unsuccessful bid to secure victory in the 1992 presidential election.11 In the Philippines, major capitalists have been funding politicians as a means to secure access to the presidency or secure seats in the cabinet. Since political elites who have control over the state determine the form of rent distribution, this would suggest that most rents have been unproductively deployed, inevitably inhibiting growth. This, however, has not been the case in most countries in East Asia as the state has been led by politicians who have a developmentalist agenda. As government leaders strive to create an industrial order capable of self-sustaining growth or international competitiveness, “selective intervention” by the state and the desire to “pick winners” to promote their industrial drive have been used to justify preferential treatment in the distribution of rents (Lall 1996). The importance of cultivating domestic entrepreneurs in industry, to ensure that a country is not overly dependent on foreign corporations for technology development, is another reason used to legitimize selective rent distribution. Through control over the
Introduction 9 financial sector, the state had also been able to influence business ownership patterns and reform managerial style, both of which have had an impact on the form of capital development. Most authoritarian regimes in East Asia, specifically in Malaysia, Singapore, and Indonesia, had also recognized that one way to justify their form of political control was to ensure economic growth. Economic growth had helped quell discontent over suppression of political rights. Moreover, in Malaysia and Indonesia, there was a legitimate need to develop indigenous capital, correct equity imbalances along class and ethnic lines, and promote inter-ethnic business cooperation. The ability of the government to implement policies involving patronage favoring select ethnic communities or individuals has been attributed to the existence of a strong state, one that has been independent of capital.
Strong state, political autonomy, and big business It has been widely argued that the presence of a strong state in East Asia has been beneficial in promoting social reforms and economic development, including implementing land reform, advancing industrialization, developing domestic entrepreneurship, and undertaking wealth and income redistribution (see, for example, Johnson 1987; Haggard 1990). An essential feature of a strong, developmental state has been its autonomy from sectoral interests, enabling it to dispense with the need to reconcile diverse differences in its attempt to develop a strategy for promoting rapid economic development (see, for example, Evans 1995). In Korea, Taiwan, Singapore, Malaysia, and Indonesia, the high levels of economic growth recorded by these countries had been attributed to the presence of a strong state. These strong states, according to Johnson (1987: 156–7), could resort to “authoritarian means” to pursue policies that involved, among other things, nurturing or disciplining business to achieve their objectives as they were occupied by politicians who had much autonomy from capital. For example, while KMT’s ownership of companies provided it with financial independence from Taiwanese enterprises, Korean politicians had other sources of income than contributions from big business. In Thailand, the transition to a modernizing economy has been attributed to the presence of a bureaucratic state that had been relatively indifferent to the demands of social groups and hence could act independently in the long-term interests of the nation’s economy.12 In Singapore, in the immediate postcolonial period, big business had not been able to secure any influence over the state, and eventually the former’s economic influence was also weakened appreciably with the promotion of government-owned enterprises. In the Philippines, on the other hand, a weak state had partly contributed to the difficulties the country had faced in developing its economy. Put differently, one reason why the Philippine economy did not develop as rapidly as that of its East Asian counterparts was that the Filipino state was not
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autonomous enough from the vested interests of the business elite. McVey (1992: 27–9) stresses this point, arguing that the development of the Philippine economy was hindered by the fact that the state “was ‘penetrated’ or ‘colonized’ by social forces that could bend the state for their parochial ends.” State support of enterprise development in some countries contributed to the rise of big business where much wealth was concentrated. In South Korea, the top five companies, or chaebols, Hyundai, Samsung, Daewoo, Lucky Goldstar, and SK, accounted for 29 percent of assets and 32 percent of all corporate sales. All these companies were well diversified. Samsung, for example, controlled 61 subsidiaries involved in ten industries ranging from electronics to newspapers. In Thailand, by the early 1980s, large firms amounted to only 1 percent of all industrial enterprises but they owned 54 percent of all industrial assets and accounted for 41 percent of industrial employment. Fifty of Thailand’s largest 100 manufacturing enterprises belonged to one of 16 large diversified enterprises; together, these conglomerates accounted for 90 percent of the total assets of Thai enterprises (Doner and Ramsay 1997: 255–6). The rise of big business with government patronage has not only enabled their owners to achieve much autonomy from the state, but has also contributed to a desire by capitalists to seek some influence over policy-making, particularly following democratization. Since a number of these capitalists had been privy to numerous rents in the form of bank loans, tax exemptions, privatized contracts, etc., this contributed to a desire by capitalists to achieve some leverage over the executive as a means to maintain their access to state rents. In more authoritarian East Asian countries, however, in spite of the growing role of the private sector in the economy with the retreat of the interventionist state, politicians still seem to have an inordinate influence over the corporate sector. For example, in Malaysia and Singapore, which remain under authoritarian rule, capital is still very subservient to the state. There are, however, significant differences in political business links in these two countries. In Malaysia, UMNO’s easy access to funds from business tends to be abused by influential leaders to consolidate power, while the number of politicians who have ventured into business because they have been privy to state rents has increased considerably. This is not the case with the ruling People’s Action Party (PAP) which does not depend on business for funds, while corruption is rather limited in Singapore. In this regard, it is important to note that the scale – and form – of corruption is growing with the emergence of democracy in East Asia, particularly in Philippines, Thailand and South Korea. In these three countries, businessmen have made attempts to, or have secured, control of the executive, through direct involvement in politics or through the funding of particular parties or politicians. Growing corruption in these countries appears to be due to the need for politicians, having captured office through funding from capitalists, to pay back such support by channeling rents to the latter.
Introduction 11 In democratized Taiwan and Japan, funds raised from the private sector by politicians are used by them primarily to consolidate their power within the ruling party or in parliament. In a multi-party system, where party-hopping is permitted or when coalitions need to be forged to form a government, this has contributed to an increase in the use of money to buy over politicians; much evidence of this is has emerged in the Philippines as well as in post-Suharto Indonesia.
Business development and corporate debt East Asian history has indicated that state control over the financial sector had been important in terms of determining the growth of particular economic sectors and certain corporate enterprises. There were, however, notable policy differences among East Asian countries that influenced form of corporate development. In Taiwan, the government provided tax breaks and high depreciation allowances, rather than access to bank loans, to promote investment in particular sectors. When bank lending was used as a mechanism of shaping policy objectives, it corresponded closely with government sectoral targets (Johnson 1987: 148–9; Waldner 1999: 191). In Singapore, while incentives to upgrade and develop high technology were provided primarily to multinational corporations (MNCs), large public enterprises were created to enter targeted economic sectors (Lim 1994). The Malaysian government actively cultivated MNC investment in manufacturing, especially in more technologically sophisticated, export-oriented industries, while simultaneously developing local capitalists by providing lucrative rents, along with bank credits on favorable terms, to a select well-connected business elite (Gomez and Jomo 1999). The Korean state exercised enormous influence over private firms through control of domestic and foreign credit and investment capital (Amsden 1989). Apart from access to bank loans on favorable interest rates, other policy instruments used by the Korean government to encourage the development of big business included the award of contracts in major sectors of the economy and protection of industries from foreign competition (Lee 1997). In Japan, state restrictions on the involvement of foreign companies in the domestic economy helped large enterprises develop their own base for innovation, though many firms also grew to depend heavily on bank loans to facilitate growth. Between the period 1972 and 1981, for example, most large Japanese firms obtained approximately 75 percent of their funds through loans from banks and only about 19 percent from shares (Johnson 1987: 148). This pattern of corporate growth through debt was, however, to prove unsustainable. The impact of the financial crisis on some of the largest enterprises drew attention to a number of important issues on state policies, specifically on the control and use of the financial sector to promote corporate expansion. Sachs (1998) noted that the five countries most affected by the crisis, Malaysia,
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Thailand, Indonesia, South Korea, and the Philippines, owed about US$175 billion in short-term debt to international banks as of mid-1997, but had only about US$100 billion in foreign exchange reserves. In most of these countries, a considerable portion of this corporate debt had been accumulated by a small number of – usually well-connected – publicly quoted companies. The access that these private firms had to such a large volume of loans was facilitated through the huge inflow of foreign funds into these countries, especially from the early 1990s. Between late 1991 and 1996, private inflow of funds into developing countries had risen from US$44 billion to US$304.5 billion; East Asia received a high proportion of such funds.13 This enormous inflow of foreign funds, as loans and portfolio investments, had also occurred during the period of another notable development during the 1990s in Asia – the rapid growth of stock markets. One reason for the growing impact of the stock exchange in East Asia was that public listing had emerged as an effective means for raising funds for further corporate expansion. Since the owner of a public-listed company could use the firm to buy other quoted and private enterprises, this relieved the owner of the burden of holding the stock in his own name, yet gave him control over a vast diversified corporate empire. Control of a public-listed company permitted the rise of intricate crossholdings involving other quoted and private firms, facilitating rapid growth of an enterprise. Since public listing of a firm increased the number of shareholders, dispersing ownership of the company’s equity, the majority shareholders of these quoted enterprises could reduce substantially their shareholdings yet retain control over the company. An increase in market capitalization of quoted firms enabled companies to secure more loans from foreign and local banks with equity as collateral. An inordinate increase in foreign portfolio investment (FPI) also contributed to the appreciable increase in market capitalization of quoted stock in the region. Unproductive corporate acquisitions of this nature, facilitated through inordinate access to foreign and local bank loans, contributed to significant wealth concentration. In South Korea, for example, between 1990 and 1996, the volume of FPI increased from a mere US$9 billion to a massive US$121 billion! By 1990, the Korean stock market had become the ninth largest in the world in terms of stock market capitalization. In Malaysia, stock market capitalization relative to GDP was the highest in Southeast Asia; between 1989 and 1993, equity market capitalization as a percentage of GDP increased from 105 percent to 342.1 percent. By 1997, Kuala Lumpur Stock Exchange (KLSE) had emerged as the 15th largest in the world in terms of market capitalization. In Indonesia, a year after the deregulation of the financial sector in 1988, which led to hugh inflow of FPI and a marked increase in the listing of local firms, the Jakarta Stock Exchange (JSE) became the fastest growing bourse in the world (Schwarz 1994: 156–7). During the period 1989 to 1993, equity market capitalization as a percentage of GDP increased from a mere 2.4 percent to 22.8 percent in Indonesia. In Thailand, during the same period, a similar rate
Introduction 13 of increase in equity market capitalization as a percentage of GDP was noted – from 35.5 percent to 104.5 percent. The rise in market capitalization of listed equity facilitated access to bank loans, with such stock used as collateral, contributing to a rapid rise in debt– equity ratios of large enterprises in East Asia. In South Korea, in 1998, the top 30 South Korean conglomerates’ debt–equity ratios averaged 519 percent, while the top five chaebols, Hyundai, Samsung, Daewoo, LG, and SK, alone accounted for 30 percent of total debt (Far Eastern Economic Review 19/11/ 98).14 In Malaysia, in 1997, the foreign borrowings of the largest quoted companies were estimated at around RM35 billion (or about US$14.6 billion before the crisis), with the three biggest firms accounting for three-quarters of these loans. One company, the highly-diversified public listed, Renong, a firm closely associated with UMNO, had accumulated debts totaling about 5 percent of all loans accumulated in the Malaysian banking sector (Asian Wall Street Journal 12/10/98). In Indonesia, the value of the private and publicly listed business assets owned by the Suharto family in 1996 was estimated at US$5 billion. Following the crisis, the companies owned by Suharto’s children reportedly had debts amounting to US$4 billion (see Far Eastern Economic Review 4/6/98).15 In the Philippines, it has been alleged that the biggest debtors to state-owned financial institutions were companies owned by tycoons closely associated with former president, Fidel Ramos. For example, the state-owned Development Bank of the Philippines’ three largest debtors were the power and media giant Benpres, with loans of 6 billion pesos (US$143 million), Alson’s Cement, with 1.2 billion pesos, and Philippine Long Distance Telephone, with 500 million pesos (see Far Eastern Economic Review 15/6/99). In Taiwan and Singapore, whose economies had not been as badly affected by the crisis, the rise of big business was not actively encouraged by the state. Corporate debt in Taiwan was among the lowest in East Asia, while the Singaporean government had been quite prudent in checking the inordinate flow of loans into the corporate sector. While corporate debt of South Korean companies was sometimes four times the value of assets, the average overall debts of Taiwanese firms was only about 30 percent of equity (Newsweek 2/11/98). This drew attention to another aspect of corporate development: the pattern of enterprise growth. Unlike other East Asian countries, Taiwan’s economy is dominated by small and medium scale enterprises (SMEs). While almost 80 percent of South Korea’s GNP is generated by just about 30 family-owned chaebols, in Taiwan nearly 98 percent of all enterprises are considered SMEs (Hsiao 1994: 83). The reason for the different approach adopted by these states to enterprise development is linked to issues of political concern. In Taiwan, the KMT’s fear of the impact the rise of big business would have on the party’s hegemony over the state contributed to strict control by the government over the financial sector. Inevitably, most Taiwanese SMEs have grown not to depend on loans to generate growth, while conglomerate-style development through bank loans was not encouraged.
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There is much evidence to substantiate this argument that conglomeratestyle growth is ultimately unsustainable and does not help increase efficiency and expertise in particular industries. Following the financial crisis, the First Pacific group, the Hong Kong-based conglomerate controlled by Indonesia’s Liem Sioe Leong, found itself laden with debts that it managed to reduce by divesting some companies in the group. First Pacific has since begun adopting a more focussed approach to business, concentrating on a few major industries because, as its management has argued, “We’re determined that the conglomerate approach will go out of favor as a result of the Asian crisis. We’ll have to invest in fewer, larger businesses . . . where we’ll be in for the long-term” (quoted in Far Eastern Economic Review 17/12/98). In Thailand, the Charoen Pokphand (CP) Group, which also found itself burdened with huge debts following the financial crisis, resorted to divesting its peripheral business activities to raise cash. The CP Group’s chairman, Dhanin Chearavanont, is also quoted as stating, “CP is resolved to safeguard its core businesses” (quoted in Far Eastern Economic Review 28/5/98). Samsung, South Korea’s second largest chaebol, also divested assets to trim debts and announced that it would concentrate on maximizing its strengths, in electronics abroad and financial services at home, where it is a market leader in insurance and securities industries (see Far Eastern Economic Review 19/11/98). This change to a more focussed approach to business is important because the impact of the financial crisis suggests that selective intervention seems to have failed, though not because these big firms did not get enough support from the state and financial institutions. The strategies developed by companies are being brought into question by this crisis, particularly extensive diversification through acquisitions as opposed to long-term growth plans based on product development and market penetration. Short-term financial gains as well as growth through debt, rather than through equity and reinvestment of profits, were not the best basis on which to develop modern industry.
Corruption, democracy, and the evolution of political business Following democratization in Thailand, South Korea and the Philippines, the scale of corruption and money politics has increased appreciably (see Phongpaichit and Piriyarangsan 1996; Chang 1998; Hedman 1998). Corruption took various forms in different countries following democratization, reflecting the changing nature of political business. The different manner in which money is used in politics in East Asian countries also necessitates that a distinction be made between the nexus between politicians and business elites, money politics practices within ruling parties, and the use of funds during general elections, involving numerous parties and the electorate. Within political organizations, during party elections, aspiring leaders distribute money to members to secure ascendancy in, or control over, the hierarchy. Politicians with a strong grassroots base usually hold much
Introduction 15 influence over party leaders. During general elections, money is distributed to the electorate as a means to secure victory. After a general election, a party may buy over parliamentarians to enable it to form a majority in parliament; this encourages party-hopping which in numerous cases causes the demise of small or fledgling parties. In Thailand, under authoritarian rule, the influence that capital had had over the state had been minimal. During this period, political business ties had been characterized by businessmen seeking out patrons among government leaders to secure access to state rents. Following democratization, businessmen began moving into the political arena, eventually even securing control of the executive. The capture of the executive by capital contributed to allegations of corruption involving previously clean and independent state institutions, including the central bank, while numerous questionable activities involving the stock exchange were also exposed. However, as Doner and Ramsay (1997: 238–9) have noted, during both the authoritarian and democratized periods in Thailand, the nature political business links had been “diffuse, particularistic, personalized and thus clientelist,” and “intra-elite rivalries [had] led to a competitive rather than a monopolistic market for state-supplied goods and services.”16 The emergence of businessmen in mainstream politics was a major contributory factor to the rise of money politics during general elections, involving extensive vote-buying with funds raised from the private sector. According to one estimate, during the 1995 general election, Thailand’s political parties spent the equivalent of US$670 million on buying votes.17 Inevitably, businessmen captured control of the executive.18 When Chavalit became Prime Minister in 1996, Pasuk and Baker (1998: 266–7) noted that “three party financers were given potentially lucrative ministerial posts” and “cabinet posts seemed distributed across ministries according not to workload but to potential income.” In the Philippines, elite families had independent power bases that allowed them to influence presidential elections (McCoy 1993). That changed with the rise of authoritarianism under Marcos who, after securing control of the state, moved to check the influence of elite families in politics, distributing rents to select individuals. The “crony capitalism” sponsored by Marcos led to the emergence of new tycoons, like Lucio Tan, who is still involved in banking and cigarette manufacturing. With the rise of democracy, the Ramos government moved to expand the political clout of middle-class businessmen and professionals, and actively promoted privatization and other liberalization measures, ostensibly to check protectionism and promote competition and efficiency.19 In spite of this, a new set of business groups emerged with close ties to Ramos. Under the Estrada government, business tycoons who had emerged before and during the Marcos regime were appointed to the new cabinet, suggesting that with the return of a more democratic system, big business was re-asserting its control over the executive by influencing presidential and general elections through the channeling of funds to select candidates (Kervkliet and Mojares 1991; Hedman 1998).
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In Indonesia, during the long Suharto regime, different types of politically connected enterprises emerged, that is Chinese conglomerates, state-owned enterprises, pribumi (or indigenous) firms and the corporate empire of the president’s relatives, especially his children. Capitalists in each of these four groupings were privy to state rents, but there was little cohesion and cooperation in business between members, especially among Chinese and pribumis; moreover, not all capitalists had direct links with Suharto. For example, among the Chinese firms was the Salim Group, controlled by Liem Sioe Leong whose links with Suharto preceded the latter’s ascendance to the office of President. Other leading Chinese capitalists, like the Riady family of the Lippo group, were not closely associated with Suharto or his family but had also managed to develop huge conglomerates. There was also little intraethnic cooperation among the leading Chinese capitalists, many preferring to establish links with well-connected politicians or pribumis. Similarly, there was little evidence of significant intra-ethnic business ties among pribumi capitalists. A number of capitalists who were part of the Chinese and pribumi business elite, as well as members of Suharto’s family, secured control of banks in an attempt to develop their corporate base, in the process accumulating huge debts. Political change, with the collapse of the Suharto regime, did little to curb such political business ties and money politics, while there were little attempts to deal with the huge debts accumulated by a number of the conglomerates. During the ethnic crisis that subsequently erupted, pribumi capitalists attempted to get the state to allow them to take over the assets of Chinese capitalists, while the latter tried to forge new alliances with leading pribumi capitalists.20 During the general and presidential elections held in 1999, there were numerous allegations of money politics. Some political parties alleged that the ruling Golkar had distributed funds to buy voter support during the general election, while in the run-up to the presidential election B.J. Habibie was implicated in a scandal involving the transfer of funds from a bank to his party for use during his campaign. A discredited Habibie failed in his bid for the presidency, but members of the old regime, including Golkar and army leaders, were appointed to President Abdulrahman Wahid’s new cabinet, bringing into question his capacity to institute reforms in politics and the corporate sector. In South Korea, under the authoritarian rule of Park Chung Hee, funds had flowed from business to politicians and bureaucrats in power, but there had been little distinction in the way in which the chaebols were accorded preferential treatment by the government. During the tenure of Kim Yong Sam, democratically elected to power in 1992, some chaebols, in particular Samsung, reportedly came to be closely associated with the new president (see Chang 1998). The Kim government was embarrassed when it was revealed that the president’s son had an interest in another chaebol, Hanbo, a new enterprise that benefited from state patronage but went bankrupt during the financial crisis. The Hanbo scandal indicated that allegations of nepotism were just as rife in a democracy as it was in authoritarian Malaysia and
Introduction 17 Indonesia. Chang (1998) made another observation regarding the changing nature of political business following the transition to democracy. Under authoritarian rule, “[fund] flows were often tied to particular projects in areas like urban planning and government procurements, but they were rarely directed to particular projects in the main manufacturing sectors . . . Under the Kim government, there was a fundamental transformation in the state– business relationship in Korea, which meant that the major manufacturing sectors were now not as insulated from corrupt political exchanges as before.” In Taiwan, since there was little distinction between the KMT and the state during the almost 40-year period of martial law, the pattern of development of the party’s corporate assets had been intertwined with the promotion of state enterprises. It was, for instance, not uncommon for KMT- and state-owned enterprises to have joint ownership of a company or to collectively implement a takeover of another firm. Delinking the ties between politics and business in the face of public scrutiny by the opposition and growing public demands for accountability in government was to prove difficult to implement in terms of restructuring KMT’s ownership of its corporate assets.21 Moreover, and more importantly, since election campaigns had become very expensive in the postauthoritarian period, the KMT’s corporate assets were believed to have become a major source of funding for the party (see Shiau 1996). While it has been difficult to quantify the exact amount of funds used during elections, Shiau (1996: 221–2) estimated that during the 1989 legislative election, the campaign expenditure of some candidates amounted to between US$1.2 and US$3.2 million. A survey undertaken during the 1995 legislative election revealed that some candidates had spent up to US$10 million (Guo et al. 1998: 209–10). Karl Fields, in Chapter 4 in this volume, also quotes a KMT staff member as saying that the party spends many times more than its annual operating expenditure of US$40 million during election campaigns at the national, provincial, and local levels. Shiau (1996), Guo et al. (1998), and Fields concur that the funds used in these elections came not just from KMTowned enterprises but from key business figures. In Japan, in spite of major scandals in the 1970s and 1980s involving attempts by big business to influence the LDP, and even though the party briefly lost power in 1993 – after having been in power since 1955 – the ties between politics and business still exist. There are two levels at which funds are channeled into the political arena: through individual firms to particular politicians and through individual firms to a faction, presumably because a particular leader leads the faction. This pattern of political business links has not changed significantly since the 1970s.22 Money politics during LDP elections persist as state rents are distributed according to the strength of a particular faction. Although such factionalism remains a key factor in bringing about a change in government leadership, the replacement of one LDP leader with another has not led to reforms in government and the economy. Changes in political business linkages were also prevalent in more authoritarian states. In Malaysia, as UMNO came under increasing criticism for
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conflicts of interest in the award of lucrative state rents to its holding companies in the late 1980s, control of party assets was channeled into the hands of private individuals who were accountable only to senior party leaders. This personalized the nature of political business links, consequently exacerbating the impact of money politics as individual politicians cultivated personal ties with businessmen. Businessmen also began capturing key posts in the UMNO hierarchy as a means to secure a position in government to gain more access to state rents. Given the easy access of UMNO politicians to funds, the volume of money distributed to members to secure support grew appreciably, with vote-buying being practiced at all levels of the party during elections. Does the increased use of money in politics in democratized countries suggest that participatory politics can contribute to the rise of corruption and impair the quality of economic development?23 Not necessarily, since among the countries most badly affected by the crisis include Indonesia and Malaysia, both of which had yet to undergo a transition to democracy before the onset of the crisis. Singapore, on the other hand, was not as badly affected by the crisis, and even though power is concentrated in the hands of one party, the government has consistently acted to check corruption. Since there are widespread allegations of corruption in Malaysia and Indonesia but not in Singapore, this suggests that it is not a question of form of governance, that is whether it is democratic or authoritarian, that determines levels of corruption and unproductive or questionable forms of rent distribution. Rather, it is an issue of political will and independence from capital. The emphasis on political will indicates again the importance of focussing on the executive or parties in power, as well as the capacity of the electorate to check such abuse of power. Since the outcome of political competition is being significantly swayed by access to money, most of which come from business, unfair competition in the elections has arisen because of unfair access to money by politicians. This suggests that there is a need for electoral reform, especially on matters pertaining to election financing and funding of political parties.24
Electoral reform: funding political parties The growing abuse of money in politics in East Asian countries reflects a phenomenon that is already of some debate in the western democracies. The issues that require further consideration here are of a more universal nature: the necessity for disclosure of sources of funds to parties, the need to regulate election spending during electoral campaigns, and the requirement that funds are channeled equitably to parties contesting elections. This is important because, as Paltiel (1970) has surmised, funding of political parties is usually an attempt to “surmount the democratic constrains of ‘one man one vote’ to gain disproportionate influence in the decision making process” (quoted in Mendilow 1992). In most democracies, as election campaigns become increasingly sophisticated and expensive, political parties and politicians depend on funds from
Introduction 19 leading corporate figures and business entities. Contributions to a party by business are normally calculated in relation to the anticipated political benefit secured in return for the funding. Politicians thus become indebted to certain business interests, or only candidates selected to represent particular business interests are actively funded to pursue the causes of the former through the state. Inevitably, political parties in government are prevented from pursuing policies in the public good because of their financial dependence on big business. Two suggestions have emerged as a means to check excessive use of money in electoral campaigns. The first is the need for legislation on disclosure of sources of funds, requiring political parties to publicly publish a detailed annual statement of accounts, providing detailed information on its sources of funding. Another view is that state funding of elections should be implemented, to ensure fairness in fund distribution as well as to curb wastage of money during election campaigns. State funding of political parties to finance their activities25 has also been suggested to enable politicians to dispense with the need to approach outside sources, especially influential individuals and big business, for money. In an attempt to circumvent unequal access to funds by political parties, countries like Costa Rica, Austria, Argentina, Germany, Sweden, Italy, Austria, and Israel, have introduced the practice of funding political parties from the national budget, either by subsidizing electoral campaigns or by allocating funds on a regular basis to parties. Three main reasons have been cited to consider public funding of parties. First, membership fees, the main traditional source of a party’s funds, have declined appreciably, mainly owing to the decline in political party membership. Second, the growing expenses in election campaigns, owing to the availability of modern campaign technologies that are far more expensive than a labor-intensive form of campaigning. Third, since escalating campaign costs has contributed to political scandals, public funding can help curb corruption as politicians need not look for avenues to fund their campaign (Alexander 1989). A number of criteria have been used in drawing up legislation to curb exorbitant electoral expenditure. All parties should have access to state funding to contest the general election. To ensure that only serious and legitimate parties and candidates contest elections, they are allowed to recoup their expenses based on the popular vote they obtain after an election. Among East Asian countries, all countries have legislation to limit the amount of funds that can be used by a candidate during an electoral campaign; the legislation also includes the need for parties to file with the relevant authority a campaign budget after the election. In most countries, however, electoral candidates are not required to disclose their sources of funding. Most political analysts in East Asian countries agree that electoral candidates seldom ensure that their campaign expenditure remain within the stipulated budget, suggesting that there have been little attempts to control distribution of funds during electoral campaigns (see Sachsenroder and Frings 1989).
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Legislation has, however, been introduced in some East Asian countries to channel funds from the state budget to political parties. Japan appears to have gone furthest among East Asian countries in terms of reforming financing of political parties and checking flow of funds into the politics. Under the Political Funds Control Law (1994), all Japanese political parties are entitled to state subsidies to fund their activities. The subsidy was introduced to curb the need for politicians to seek funding to finance electoral campaigns that were becoming increasingly expensive.26 This legislation, introduced as a means to reform the political system, particularly to check corruption, also stipulates the types of political organizations that are permitted to receive funds from the private sector or individuals: political parties, political fund organizations specified by a political party and a fund managing organization of a politician, of which he is only permitted one. Public disclosure of such funding is also required (Shinoda 1998: 117). The Public Officials Election and Recall (POER) Law in Taiwan regulates funding involving a politician or a political party during an election. While individual candidates are entitled to government subsidies to fund electoral campaigns, political parties are not provided funding by the state. Under this legislation, contributions from an individual to a candidate in an election cannot exceed more than US$700, while the maximum amount an individual can make to a party cannot exceed more than 20 percent of his annual income or US$7,400, which ever is less. The maximum donation an enterprise can make to a candidate in an election is US$11,000, while the total sum by a firm to a party cannot exceed more than 10 percent of its annual income or a maximum of US$111,000 (Guo et al. 1998: 208–9).27 Taiwan was the only country in East Asia where there was legislation requiring companies to disclose political donations made to political parties or politicians until Singapore introduced a similar regulation in early 2000.28 In South Korea, the Political Funds Act entitles political parties to funds from the state to finance their activities, but there is no requirement for parties to disclose their other sources of their funding; nor is there stringent regulation over distribution of funds during election campaigns. In Indonesia, during the Suharto regime, the only three political parties permitted to contest in general elections were funded by the state budget. This, however, was primarily a means to control the activities of the two opposition parties. In Singapore, where there had been little information on the funding of political parties, and where the state does not subsidize party activities, the Political Donations Act was introduced in 2000, primarily to prevent parties from receiving foreign donations and to curb the receipt of donations from anonymous sources. Donations, including those from anonymous sources, could only be received from Singaporeans above the age of 21 or from Singaporean-controlled companies that undertook their business solely in the city state. A political party could not accept an anonymous donation unless it amounted to less than S$5,000 in any one year. While opposition parties did not oppose the ban on foreign funding of parties, they objected to the need to
Introduction 21 identify anonymous sources of small-scale funding since this meant that they had to keep track of all sources of funding, even small collections received during their public activities. The opposition also feared that many Singaporeans would be reluctant to contribute any funds to them if a record had to be kept of all donors. In Thailand, monetization of politics had been so severe necessitating constitutional reforms to deal with the problem. A number of articles were written into the new constitution to introduce greater transparency in the electoral system, curb vote-buying and party-hopping as well as limit change of government owing to factional disputes. To create greater transparency in politics, an upper house comprising members who are not politicians is to be directly elected to monitor the activities of parliamentarians and legislation passed through the lower house. To discourage vote-buying and improve the accountability of elected members, multi-member parliamentary constituencies were broken up into single-member units. To curb MP-buying, politicians are barred from switching parties less than 90 days prior to an election. The Prime Minister will be chosen by an open vote in parliament. To stem factional rivalry, the right to call a vote of no-confidence is limited to once a year and ministers who leave or are dismissed from the cabinet must relinquish all their political positions. An independent Election Commission (EC) was established to monitor elections with the power to disqualify candidates guilty of vote-buying or fraud. Interestingly, no new regulation was introduced requiring disclosure of party funding nor were there attempts to regulate abuse of funds during elections. During the first elections held after the introduction of this new constitution – the election of members of the upper house – vote-buying still was rampant.29 In spite of the legislation introduced in some East Asian countries on party funding, no country has imposed the regulation that political parties publish their annual accounts. In this regard, it is noteworthy also that in Japan and Taiwan, the extensive use of funds during elections persists or has grown in spite of legislation on state funding of parties and the need for disclosure of sources of funds during elections. This suggests the significance of intra-party factionalism within the main parties, that is the LDP and the KMT. Politicians or factions appear to have covert access to funds from big business, mainly as they are in a position to influence policy decision through their position in the ruling party. This suggests that if a more genuine form of democracy is to emerge in East Asia, the influence that capital can acquire over the state has to be curbed by preventing politicians or parties from seeking funding from business. The desire for businessmen to enter politics only because they have the means to capture control of the executive will also be checked. Political insulation or autonomy from business will help to improve the state’s coordinating capacity. For example, business–government dialogue and cooperation can be undertaken on a more equal footing, and conducted in a transparent and accountable manner, helping to reduce corrupt rent-seeking while ensuring
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that the outcomes of such state–capital proximity will serve public interests.30 State intervention in the economy, for instance, to encourage economic development in particular sectors or to re-shape the character of domestic capital, can be pursued without fear of consequences, and may enhance commitment to competitive behavior among capitalists. The financial crisis has revealed that structural reforms are required if a more genuine form of democracy is to emerge, and if endemic corruption is to be weeded out. Significant reforms in the nature of political business links are first required as the history East Asian political economy is as replete with examples of the state’s predatory tendencies as it is of its developmental capacity.
The structure of the book While our main concern here is to understand the nature of political business links in East Asia, there are two important issues that require further discussion before we deal with the country studies: the role of the state and the impact of corruption on economic development. In Chapter 1, Andrew Wedeman deals with the theme of corruption, arising from the nexus between the state and capital. Wedeman’s main concern is to explain how a country’s economy can register growth in spite of the prevalence of extensive corruption and rent-seeking. Through a review of the history of African, Caribbean and Latin American countries, he draws attention to the different forms of corruption in play in these states, making a distinction between “degenerative” and “developmental” corruption. This discussion on “degenerative” and “developmental” corruption in these three regions provides us with a constructive comparative perspective for differentiating the types corruption found in East Asia and the differing impact it can have on an economy. The conclusion that Wedeman draws from his comparison is that in the long term even “developmental” corruption will eventually impair economic growth. “Developmental” corruption is, therefore, not justifiable as it will not help promote sustainable economic development in the long run. In Chapter 2, Johannes Schmidt deals with the role of the state in promoting economic growth and corporate development in East Asia as well as in the ASEAN countries, that is Malaysia, Thailand, Indonesia, and, to a much lesser extent, the Philippines. One important difference between East Asia, comprising Japan, South Korea, and Taiwan, and the ASEAN economies, is the prominent role of foreign capital in the latter to generate economic growth. The prominence of foreign capital in the ASEAN economies had a bearing on the quality of domestic enterprise that emerged in these countries; a large number of foreign firms also established collusive ties with the politically well-connected or politicians in order to develop their influence over these economies. Schmidt also argues that contrary to conventional wisdom that economic liberalization and democracy are effective curbs on corruption, unproductive political business ties continue to thrive in spite of the growing democratization in East Asia. Schmidt draws our attention to the
Introduction 23 universal nature of political business, tracing the development of the nexus between state and capital from the late eighteenth century. The attempt by the state to develop capital through political patronage and the implications of the rise of big business on control over the political process in developed countries is an important lesson for East Asian economies. More importantly, an argument is made for enhancing the autonomy of the state, with particular emphasis on an efficient, insulated and stable bureaucracy concerned specifically with protecting public interests. The subsequent chapters, the country studies, indicate that there are significant variations in this nexus between politics and business among East Asian nations, as well as different implications on the economies of these countries. In some countries, the links between politics and business have been used to foster the rise of big business, contributing in the process to corruption and other social costs. In other countries, the links have served primarily as a means to raise funds for party activities, contributing to similar social costs. In one country, Singapore, in spite of extensive state intervention in the economy through government-owned enterprises, the dichotomy between politics and business has been stressed and corruption is limited but ruling politicians have undermined the development of domestic entrepreneurial talent in an attempt to retain hegemony over the state. Since in each country the links between state and capital have been established for different reasons and have led to different outcomes, we begin our country studies with a focus on Malaysia and Taiwan, two countries where political parties have had a long tradition of direct involvement in business. In Malaysia, Gomez (Chapter 3) traces how the mix between politics and business has had direct significance for the rise of big business, especially that owned by indigenous Malays and the ruling UMNO. Attention is drawn to how state control over the financial sector has permitted the rise of big business, but much to the detriment of both banks and these firms when the 1997 crisis occurred. The rise of big business, leading to considerable concentration of wealth, has repeatedly contributed to severe factionalism within UMNO and, more recently, intra-ethnic differences among Malays, contributing to instability within the political system. In Chapter 4, the case of Taiwan, Karl Fields provides an original insight into the hitherto nebulous concept, “KMT, Inc.” Fields presents detailed information of how and why these KMT-owned enterprises were formed and function. The impact of the rise of KMT, Inc. on the party, leading ultimately to fall of the KMT from power, is also dealt with in this chapter. Fields and Gomez argue that given the level of embeddedness of KMT (through KMT, Inc.) and UMNO (through individuals) in the Taiwanese and Malaysian corporate sectors, in spite of public desire for the dismantling of the nexus between politics an business, instituting such reforms could be extremely difficult, if not detrimental, to these economies. This may have significant implications on the quality of democratization that will emerge in Taiwan and Malaysia. In Chapter 5, this theme of control by politicians over business through
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their hegemony over the state informs the study on China. By tracing the development of firms that are owned by the state, collectives, and individuals, Wedeman indicates that among each of these types of enterprises some form a symbiotic relationship has been established with elements of the party-state. The key difference in political business ties between China and other East Asian countries, particularly Malaysia and Taiwan, is that while funds from the private sector help politicians in the latter two countries consolidate their power base or that of the ruling party, the CCP does not require funds from business to secure its hegemony over the state. This enables influential politicians to channel a greater volume of funds extracted from the business sector to their personal use, inevitably exacerbating the quantum of corruption and hindering enterprise development in China. In Chapters 6 and 7, we turn our focus to South Korea and Indonesia, respectively, where the state, not the ruling party, has played a significant role in the development of big business, primarily through much government patronage. In both countries, a transition to democracy is transpiring, which is being influenced by the nature of political business links established during authoritarian rule. While big business has managed to achieve autonomy from the state in South Korea, major capitalists in Indonesia, most of whom are ethnic Chinese, appear to have little influence over the state, drawing much attention to the issue of the politics of ethnicity, a problem dealt with indepth by Stefan Eklöf. In the case of South Korea, Peter Wad (Chapter 6) argues that even though big business has tried to capture control of the state, public antagonism for such enterprises, mainly owing to their past links with authoritarian regimes, has impeded capitalists from having much impact on the electorate during elections. In both countries, however, the rise of big business under authoritarian regimes has contributed to problems that necessitate fundamental reforms. In the case of South Korea, Wad contends that a downsizing of chaebols into more focussed enterprises with less power over the economy is necessary to resolve the economic crisis and to ensure the emergence of a viable democracy. Chapter 7 on Indonesia by Stefan Eklöf reveals the problems that occur in the transition from authoritarian rule to democracy in a situation where members of the old ruling elite still retain control of the state during the transition. Economic reforms and the dismantling of conglomerates developed through political patronage were ineptly handled, while issues based on ethnicity were raised to redistribute wealth that had originally been concentrated among the old regime to an elite aligned with the new president, Habibie. More importantly, in the first elections held after the fall of Suharto, there were allegations of “money politics,” mainly because electoral politics had become truly competitive. Although Habibie was not re-elected as president, problems nevertheless exist as members of the Suharto regime still hold positions of power in the new government. The implications of this for the emergence of democracy, economic reforms and the dismantling of big businesses created during the Suharto era are still too early to determine.
Introduction 25 In Chapter 8, Tom Wingfield’s analysis of Thailand’s political economy deals with two core issues occurring in Indonesia and South Korea following the transition to democracy: the attempt by businessmen to capture control of the state and the rise of money politics. Unlike the case of South Korea, in Thailand, capitalists have managed to secure control over the state following democratization, mainly through money politics, involving the buying of votes during elections. In spite of mounting public protests for a stop to the practice of money politics, there have been few fundamental reforms even though a new constitution was introduced to create a more representative political system. Wingfield attributes this to the continued control of the state by businessmen-cum-politicians who lack the political will to dismantle the links between business and politics for fear of the implications of this on their vested interests. In the process, select enterprises have privileged access to state rents, corruption continues to thrive while the quality of democracy in Thailand remains much to be desired. In Chapter 9, Stephan Haggard and Linda Low trace the contentious relationship between business and the PAP after the party secured power, which prevented the development of a symbiotic relationship between the two and contributed to significant state intervention in the economy. The promotion of government-owned firms and the PAP’s independence from the private sector for funding had a significant impact on the further development of private domestic capital, specifically big business. Haggard and Low argue that in the Singapore form of political business, politicians have significant economic influence through their control of the ubiquitous state-owned firms. Yet, while some corruption exists among bureaucrats and politicians, its scale is small and involves only abuse of authority, mainly owing to the political will of PAP leaders to ensure transparency and accountability in government. In Japan, the links between politics and business remain shrouded in secrecy in spite of legislation to curb illegal funding of parties. In this final Chapter 10, James Babb reveals that politicians, especially those from the ruling LDP, remain closely linked with business enterprises, including corrupt underground organizations, which has led to significant abuse of financial institutions. Money from these varied sources is required not for inter-party electoral contests as much as to fund factions within a deeply divided LDP. This is probably one reason why, in spite of the legislation introduced to curb the use of money in parliamentary elections, relationships between business and politicians persist. The implications of this for corporate reform and for policy-making in Japan are clear: since the interests of the LDP, business and financial institutions are so intertwined, no attempt is being made to institute the reforms that are required to revive the long-ailing economy. The issue of corruption arising from public–private ties looms large in all countries, except Singapore. These ties have affected state autonomy – and thus policy choices – and influenced a form of corporate development that has not always been productive and entrepreneurial. The reciprocity emerging
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out of the award of rents by the state to private individuals has been insufficiently conditioned by an expectation of high performance standards from rent recipients and overly concerned with the extraction of funds by politicians in power for vested interests or to consolidate power. In spite of public displeasure with wealth concentration and corruption arising from political business nexuses, no fundamental reforms have been instituted in any of these countries that has effectively dealt with this problem of abuse of state power for vested interests. Yet, a common conclusion that can be drawn from the country studies is that the corrupt collusive links between politics and business will not been sustainable in the long run. With the rejection of authoritarian rule and greater public disclosure of corruption arising from political business links, corrupt politicians have been unable to retain control of public office. In a number of countries, political business ties still contribute to factionalism that has disrupted the sustainability of parties or their control over government. In all countries, economic crises and political uncertainties arising from political business ties have led to growing public calls for the need for reforms and the creation of institutions that can enforce a more genuine form of democracy and ensure transparency and accountability in government. It is a call that politicians in East Asia will find difficult not to heed.
Notes 1 The term “East Asia” is used here to refer collectively to the Northeast Asian states of Japan, China, Taiwan, and South Korea as well as the Southeast Asian states of Thailand, Malaysia, Singapore, Indonesia, and the Philippines. 2 A plethora of literature has already been produced reviewing the factors that contributed to the financial crisis. For a more informed discussion on the crisis, see Montes (1998); Godement (1999); Jomo (1998), and McLeod and Garnaut (1998). 3 The concept, “new rich,” has been variously used to refer to the middle class and entrepreneurs that have emerged in the region following economic growth (see, for instance, Robison and Goodman 1996). This concept is used here, however, to refer specifically to politically well-connected businessmen that have emerged under the patronage of the state. 4 There is a wide literature on corruption, nepotism and other forms of controversial links between politics and business in East Asia. See, for example, Pasuk and Piriyarangsan (1996); Gomez (1994); Hutchcroft (1998); Winters (1996); Lee (1997), and Duckett (1998). 5 Both a statist perspective and rational choice theory have provided interesting insights into the links between politics and business. See Buchanan and Tullock (1962); Olson (1982); and Przeworski (1985) for various views on the application of rational choice theory. For a discussion on the statist perspective, see Evans et al. (1985) and O’Donnell et al. (1986). 6 For a discussion on the institutional perspective see North (1990) and Powell and DiMaggio (1991). 7 A “faction” is defined here as a relatively organized group that exists within a ruling party that competes with rivals for control over the executive arm of government. In East Asia, most factions are normally formed around particular
Introduction 27
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leaders rather than on particular ideologies. For a more detailed discussion on the issue of factionalism, see Belloni and Beller (1978) and Goldman (1993). In both the LDP and UMNO – parties that have much hegemony over the state in Japan and Malaysia, respectively – factions seem to have emerged as a means to gain control of the executive. This, however, does not seem to be the case with the KMT in Taiwan. See Chapter 4 for a discussion on the causes of factionalism within the KMT. Following the 1993 general election in Japan, the LDP lost power for the first time since 1955; the loss was attributed to a crisis within Prime Minister Takeshita’s faction, which contributed to a split within the LDP. Members of the LDP formed new parties that became part of the multi-party coalition that formed the new government (see Stockwin 1999: 78–82). In Malaysia, in 1987 and 1998, factional disputes in UMNO resulted in the formation of formidable, new opposition coalitions led by former government leaders. These opposition coalitions emerged as a major threat to the dominance of the ruling Barisan Nasional coalition during the 1990 and 1999 general elections. In the presidential elections in Taiwan in 2000, the KMT lost power for the first time in 50 years to the candidate from the Democratic Progressive Party (DPP). It is unlikely that the DPP candidate would have won the presidential election if it had not been for the factionalism within the KMT which led to the emergence of a third presidential candidate, James Soong, a former KMT stalwart, who drew the second largest volume of support during the election. The discrediting of James Soong by KMT members, through an exposé of corruption involving abuse of party assets and funds, eventually badly tarnished the KMT’s image. Soon after Tanaka was forced to step down as Prime Minister in 1974, the Lockheed scandal erupted. This scandal involved allegations that the American firm, Lockheed, had paid bribes amounting to several million dollars to LDP leaders to influence the award of aircraft contracts to the company. Although Tanaka was implicated and subsequently sentenced to a four-year jail term for his role in this scandal, and he resigned from the LDP, he remained in control of a major faction in the party. Despite the impact of this scandal, which had, for a long period, a dire impact on public opinion of the LDP, Japanese politics continued to be rocked by similar major controversies involving LDP politicians and companies. One example was the Recruit affair that broke out in 1986, implicating an even larger number of LDP members. For a discussion on the Recruit scandal, see Chapter 10. In 1994, Chung was found guilty in court of having spent US$65 million of funds belonging to Hyundai during his bid for the presidency. Chung, however, was given only a three-year suspended sentence. This argument about the autonomy of the state from capital takes on greater potency when it is noted that the Thai economy was one of the most severely affected by the 1997 financial crisis. Following democratization, the Thai state had been invaded by capitalists who had been able to secure control of the executive and key bureaucratic institutions. Between August and September 1997, during the onset of the financial crisis, between US$25 billion and US$40 billion flowed out of Asia’s equity and currency markets. This large volume of fund outflow within such a short period was believed to have escalated the scale of the crisis. During Kim Yong Sam’s tenure, some chaebols grew more powerful, acquiring small companies as well as venturing into markets abroad, in the process accumulating huge debts. Samsung, which had reportedly received much support from Kim to diversify its operations, had debts more than 3.7 times its equity (see Chang 1998, Far Eastern Economic Review 19/11/98). Other members of Indonesia’s ruling elite, or their relatives, had also managed to develop a huge stake in the country’s corporate sector. For example, the family of
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Edmund Terence Gomez Suharto’s successor, Habibie, was believed to own corporate assets valued at US$6 million in 1996 (Far Eastern Economic Review 4/6/98). Doner and Ramsay (1997: 238–9) go on to argue that the competitive nature of such diverse and diffuse political business ties helped create new market opportunities for businessmen and forced politicians to keep their funds in the country in order to maintain their political support. This figure was cited by Backman (1999: 134), based on a study undertaken by the Thai Farmers’ Bank Research Center. According to one report by Asiaweek (7/11/97), “during the last election . . . powerful businessmen gave millions of baht to Chavalit’s New Aspiration Party (NAP), in the hope of patronage. Much of the money was channeled to vote-buying in the provinces.” One prominent businessman who became Deputy Prime Minister following the 1995 general election was Thaksin Shinawatra of the Shinawatra group who disclosed that he then had assets worth US$2.8 billion. These assets had been accumulated within a period of just seven years, secured primarily through his access to state rents that had appreciated in value following their injection in the stock market (Pasuk and Baker 1998: 29). After the 2001 general elections, Thaksin was appointed Prime Minister. Thaksin’s new party, the Thai Rak Thai Party, had secured the largest number of seats in parliament. See Chapter 8 for a case study on the Shinawatra group. In spite of the emergence of democracy, during the 1992 presidential elections, the first after the removal of Marcos, it was reported that the candidates were heavily financed, usually clandestinely, by big business. Candidates without the backing of a strong party had to spend approximately US$100 million to get elected, while less popular candidates, like Imelda Marcos, reportedly required between US$185–US$360 million to stand a chance in the election (see Asiaweek 11/11/92). See Chapter 7 for an in-depth study of changing political business alliances with the fall of the Suharto regime. See Chapter 4 for a discussion on how the KMT has reorganized control of its corporate assets following the emergence of democracy. Funds also flow, officially, through business associations, that is the keidanren, directly to the LDP. The keidanren, however, merely organize the level of contributions across industries. The actual donations are made by business industries and firms directly to the LDP and no money passes through keidanren hands. This has been part of the argument propounded by supporters of “Asian values” and “Asian democracy.” The leaders of Malaysia, Singapore, and Indonesia have justified authoritarian rule on the grounds that a strong state is required, among other reasons, to promote economic development. This authoritarianism has involved limitations on civil liberties, specifically freedom of press, assembly, and expression. The primary difference between Asian democracy and a liberal democracy is that while the latter stresses the rights of individuals, the former emphasizes the rights of the community. In the Asian form of democracy, there is a negation of the rights of the individual, ostensibly to protect the rights of the community. The basic premise of Asian democracy rests on cultural relativist arguments. In Asian society, social and political structures have been authoritarian, hierarchical, and highly stratified. Asian political structure emphasizes loyalty to the ruler rather than individual freedom and rights, tends to deny adversarial relations and favors order over conflict. Interestingly, among the critics of “Asian democracy” include Fidel Ramos, Kim Dae Jung, Martin Li of Hong Kong, and Au San Suu Kyi of Burma. The political upheavals in Indonesia and Malaysia, precipitated by conflicts among the ruling elite that has spilled into the public arena, have exposed the hollowness of the Asian democracy argument.
Introduction 29 24 There are, of course, a number of other factors that need to be incorporated into this debate on the avenues through which a more genuine form of democracy can be established. Further discussion is required of structural reforms within the state, to ensure limitation of power and tenure of leadership. The avenues to promote greater participation of the citizenry in decision-making and the role of the media are other issues of much concern. Within the electoral system, the debate whether proportional representation or a first-past-the-post form of election is a fairer means of determining voting patterns still needs further analysis. Our concentration here, however, is primarily on the means that can be considered to curb the use of money in a political system. 25 Paltiel (1970: 8–9) argues that there are three main activities for which parties require funds. First, to fight election campaigns; second, to maintain a viable inter-election organization; and, third, to provide research and advisory services for the party’s leadership and elected representatives. 26 Under this Act, for a political party to qualify for state subsidies, at least five of its members had to be parliamentarians or the party had to secure at least 2 percent of the total votes cast during a national-level general election. This subsidy scheme quickly became a major source of income for Japanese parties. In 1995, just a year after this scheme was introduced, just eight political parties received approximately US$260 million from the government, which amounted to about two-thirds of their combined revenue (Shinoda 1998: 89–90). 27 Guo et al. (1998: 214–15) also points out that since political donations by individuals and companies are subject to tax relief, this benefits the KMT since the party still has vast interests in the corporate sector. 28 Disclosure of political party funding by corporate firms is important from the point of view of company shareholders. Ewing (1987: 25) argues that “it is necessary to protect private interests in the sense that directors should be accountable in some way to shareholders before the shareholders’ money is used to promote political causes to which they may object.” 29 See Chapter 8 for an analysis of the constitutional reforms and the Senate elections held on March 2000. 30 A good example of this is the practice of zoku in Japan, where parliamentarians oversee or deal with particular economic sectors, such as construction, agriculture, and telecommunications – as well as education and health – in order to influence policy-making in an informed manner. It appears that if this zoku practice is better regulated, it could emerge as an innovative means for business to keep government informed of the needs of particular industries. See Chapter 10 for a discussion on the practice of zoku.
References and further reading Alexander, H.E. (ed.) (1989) Comparative Political Finance in the 1980s, Cambridge: Cambridge University Press. Amsden, A. (1989) Asia’s Next Giant: South Korea and Late Industrialization, Oxford: Oxford University Press. Backman, M. (1999) Asian Eclipse: Exposing the Dark Side of Business in Asia, Singapore: John Wiley (Asia). Bartell, E. and L.A. Payne (eds) (1995) Business and Democracy in Latin America, Pittsburgh, PA: University of Pittsburgh Press. Belloni, F.P. and D.C. Beller (eds) (1978) Faction Politics: Political Parties, and Factionalism in Comparative Perspective, Santa Barbara, CA: ABC-Clio, Inc. Buchanan, J. and G. Tullock (1962) The Calculus of Consent, Ann Arbor, MI: University of Michigan Press.
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Chandler, A.D., F. Amatori, and T. Hiniko (eds) (1997) Big Business and the Wealth of Nations, Cambridge: Cambridge University Press. Chandrasekhar, C.P. and J. Ghosh (1998) “Hubris, Hysteria, Hope: The Political Economy of Crisis and Response in Southeast Asia,” in K.S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalization and Crises in East Asia, London: Zed Books. Chang, H.J. (1998) “South Korea: The Misunderstood Crisis,” in K.S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalization and Crises in East Asia, London: Zed Books. Diamond, L., J. Linz, and S. Lipset (eds) (1993) Democracy in Developing Countries, Boulder, CO: Lynne Rienner. Domhoff, G.W. (1967) Who Rules America?, Englewoods Cliffs, NJ: Prentice-Hall. Doner, R.F. and A. Ramsay (1997) “Competitive Clientalism and Economic Governance: The Case of Thailand,” in S. Maxfield and B.R. Schneider (eds), Business and the State in Developing Countries, Ithaca, NY: Cornell University Press. Duckett, J. (1998) The Entrepreneurial State in China, London: Routledge. Durand, F. and E. Silva (eds) (1998) Organized Business, Economic Change, and Democracy in Latin America, University of Miami: North–South Center Press. Evans, P. (1995) Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press. Evans, P.B., D. Rueschemeyer, and T. Skocpol (eds) (1985) Bringing the State Back In, Cambridge: Cambridge University Press. Ewing, K.D. (1987) The Funding of Political Parties in Britain, Cambridge: Cambridge University Press. Fields, K.J. (1995) Enterprise and the State in Korea and Taiwan, Ithaca, NY: Cornell University Press. Godement, F. (1999) The Downsizing of Asia, London: Routledge. Goldman, R. (1993) “The Nominating Process: Factionalism as a Force for Democratization,” in G.D. Wekkin, D.E. Whistler, M.A. Kelly, and M.A. Maggiotto (eds), Building Democracy in One-Party Systems: Theoretical Problems and Cross-National Experiences, Westport, CT: Praeger. Gomez, E.T. (1994) Political Business: Corporate Involvement of Malaysian Political Parties, Cairns: James Cook University Press. —— (1999) Chinese Business in Malaysia: Accumulation, Accommodation and Ascendance, Honolulu: University of Hawaii Press. Gomez, E.T. and Jomo K.S. (1999) Malaysia’s Political Economy: Politics, Patronage and Profits, Cambridge: Cambridge University Press (revised edn). Grindle, M.S. (1996) Challenging the State: Crisis and Innovation in Latin America and Africa, Cambridge: Cambridge University Press. Guo, H.H., S.H. Huang, and M.H. Chiang (1998) “Taiwan,” in W. Sachsenroder and U.E. Frings (eds), Political Party Systems and Democratic Development in East and Southeast Asia, Volume II, Aldershot: Ashgate. Haggard, S. (1990) Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press. Haggard, S. and S.B. Webb (eds) (1994) Voting for Reform: Democracy, Political Liberalization and Economic Adjustment, New York: Oxford University Press. Haggard, S. and R. Kaufman (eds) (1995) The Political Economy of Democratic Transitions, Princeton, NJ: Princeton University Press. Haggard, S., S. Maxfield, and B.R. Schneider (1997) “Theories of Business and
Introduction 31 Business–State Relations,” in S. Maxfield and B.R. Schneider (eds), Business and the State in Developing Countries, Ithaca, NY: Cornell University Press. Hedman, E.L. (1998) “Whose Business is it Anyway: Free and Fair Elections in the Philippines,” Public Policy II(3), July–September. Heidenheimer, A.J. and F.C. Langdon (1968) Business Associations and the Financing of Political Parties: A Comparative Study of the Evolution of Practices in Germany, Norway and Japan, The Hague: Martinus Nijhoff. Henderson, J., N. Hama, B. Eccleston, and G. Thompson (1998) “Deciphering the East Asian Crisis: A Roundtable Discussion,” Renewal 6(2). Hewison, K., R. Robison, and G. Rodan (eds) (1993) Southeast Asia in the 1990s: Authoritarianism, Democracy and Capitalism, Sydney: Allen & Unwin. Hsaio, M.H.H. (1994) “The State and Business Relations in Taiwan,” in R. Fitzgerald (ed.), The State and Economic Development: Lessons from the Far East, Singapore: Toppan. Huntington, S. (1991) The Third Wave: Democratization in the Late Twentieth Century, Norman, OK: University of Oklahoma Press. Hutchcroft, P.D. (1998) Booty Capitalism: The Politics of Banking in the Philippines, Ithaca, NY: Cornell University Press. Johnson, C. (1982) MITI and the Japanese Miracle, Stanford, CA: Stanford University Press. —— (1987) “Political Institutions and Economic Performance: The Government– Business Relationship in Japan, South Korea and Taiwan,” in F.C. Deyo (ed.), The Political Economy of the New Asian Industrialism, Ithaca, NY: Cornell University Press. Jomo, K.S., Chen Yun Chung, B.C. Folk, I. ul-Haque, Pasuk Phongpaichit, B. Simatupang, and M. Tateishi (1997) Southeast Asia’s Misunderstood Miracle: Industrial Policy and Economic Development in Thailand, Malaysia and Indonesia, Boulder, CO: Westview Press. Jomo, K.S. (ed.) (1998) Tigers in Trouble: Financial Governance, Liberalization and Crises in East Asia, London: Zed Books. Jones, R.S. (1984) “Financing State Elections,” in M.J. Malbin (ed.), Money and Politics in the United States: Financing Elections in the 1980s, Chatham, NJ: Chatham House. Kerkvliet, B. and R.B. Mojares (eds) (1991) From Marcos to Aquino: Local Perspectives on Political Transition in the Philippines, Quezon City: Ateneo de Manila University Press. Lall, S. (1996) Learning From the Tigers: Studies in Technology and Industrial Policy, Basingstoke: Macmillan. Laothamatas, A. (1992) Business Associations and the New Political Economy of Thailand: From Bureaucratic Polity to Liberal Corporatism, Boulder, CO: Westview Press. Lee, Y.H. (1997) The State, Society and Big Business in South Korea, London: Routledge. Lim, L. (1994) “Foreign Investment, the State and Industrial Policy in Singapore,” in H. Stein (ed.), Asian Industrialization and Africa, London: Macmillan. McCoy, A. (ed.) (1993) An Anarchy of Families: State and Family in the Philippines, Madison, WI: University of Wisconsin. McLeod, R.H. and R. Garnaut (eds) (1998) East Asia in Crisis: From Being a Miracle to Needing One?, London: Routledge.
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McVey, R. (1992) “The Materialization of the Southeast Asian Entrepreneur,” in R. McVey (ed.), Southeast Asian Capitalists, Ithaca, NY: Cornell University Press. Malbin, M.J. (1984a) “Looking Back at the Future of Campaign Finance Reform: Interest Groups and American Elections,” in M.J. Malbin (ed.), Money and Politics in the United States: Financing Elections in the 1980s, Chatham, NJ: Chatham House. —— (ed.) (1984b) Money and Politics in the United States: Financing Elections in the 1980s, Chatham, NJ: Chatham House. Mendilow, J. (1992) “Public Party Funding and Party Transformation in Multiparty Systems,” Comparative Political Studies 25(1). Montes, M.F. (1998) The Currency Crisis in Southeast Asia, Singapore: Singapore Institute for Southeast Asian Studies. North, D.C. (1990) Institutions, Institutional Change and Economic Performance, New York: Cambridge University Press. O’Donnell, G., P. Schmitter, and L. Whitehead (eds) (1986) Transitions from Authoritarian Rule: Comparative Perspectives, Baltimore, MD: Johns Hopkins University Press. Olson, M. (1982) The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities, New Haven, CT: Yale University Press. Orru, M. (1997) “The Institutional Logic of Small-Firm Economies in Italy and Taiwan,” in M. Orru, N.W. Biggart, and G.G. Hamilton, The Economic Organisation of East Asian Capitalism, London: Sage. Paltiel, K.Z. (1970) Political Party Financing in Canada, Toronto: McGraw-Hill. Pasuk Phongpaichit and C. Baker (1998) Thailand’s Boom and Bust, Chiang Mai: Silkworm Books. Pasuk Phongpaichit and S. Piriyarangsan (1996) Corruption and Democracy in Thailand, Chiang Mai: Silkworm Books. Payne, L.A. (1994) Brazilian Industrialists and Democratic Change, Baltimore, MD: Johns Hopkins University Press. Powell, W.W. and P. DiMaggio (eds) (1991) The New Institutionalism in Organizational Analysis, Chicago, IL: University of Chicago Press. Przeworski, A. (1985) Capitalism and Social Democracy, Cambridge: Cambridge University Press. Putterman, L. and D. Rueschemeyer (eds) (1992) State and Market in Development: Synergy or Rivalry, Boulder, CO: Lynne Rienner. Robison, R. and D.G. Goodman (eds) (1996) The New Rich in Asia: Mobile Phones, McDonalds and Middle-Class Revolution, London: Routledge. Rueschemeyer, D., E.H. Stephens, and J.D. Stephens (1992) Capitalist Development and Democracy, Cambridge: Polity Press. Sachs, J. (1998) “Glimmers of Hope,” Far Eastern Economic Review, November 5. Sachsenroder, W. and U.E. Frings (eds) (1989) Political Party Systems and Democratic Development in East and Southeast Asia, Volumes I and II, Aldershot: Ashgate. Schwarz, A. (1994) A Nation in Waiting: Indonesia in the 1990s, St Leonards: Allen & Unwin. Shiau, C.J (1996) “Elections and the Changing State–Business Relationship,” in H.M. Tien (ed.), Taiwan’s Electoral Politics and Democratic Transition: Riding the Third Wave, Armonk, NY: M.E. Sharpe.
Introduction 33 Shinoda, T. (1998) “Japan,” in W. Sachsenroder and U.E. Frings (eds), Political Party Systems and Democratic Development in East and Southeast Asia, Volume II, Aldershot: Ashgate. Sorauf, F.J. (1992) Inside Campaign Finance: Myths and Realities, New Haven, CT: Yale University Press. Stockwin, J.A.A. (1999) Governing Japan: Divided Politics in a Major Economy, Oxford: Blackwell. Suehiro, A. (1989) Capital Accumulation in Thailand, 1855–1985, Chiang Mai: Silkworm Books. Waldner, D. (1999) State Building and Late Development, Ithaca, NY: Cornell University Press. Winters, J.A. (1996) Power in Motion: Capital Mobility and the Indonesian State, Ithaca, NY: Cornell University Press. Yoshihara, K. (1988) The Rise of Ersatz Capitalism in Southeast Asia, Singapore: Oxford University Press.
Newspapers and periodicals Asian Wall Street Journal Far Eastern Economic Review Financial Times Newsweek
1
Development and corruption The East Asian paradox Andrew Wedeman
Introduction East Asia presents scholars of political economy with a number of puzzles and paradoxes. First and foremost, East Asia has defied the developmental odds. While most of the non-western world has struggled and often failed to break out of a vicious cycle of underdevelopment, growth rates in East Asia have greatly exceeded those in all other regions of the world. Since current economic wisdom holds that, ceteris paribus, higher levels of corruption should be associated with lower rates of development,1 East Asia’s economic success is paradoxical because most of the region’s countries have been dogged by relatively serious high-level corruption throughout the period of rapid growth. A comparison of regional growth rates and levels of corruption shows, in fact, that not only have growth rates in East Asia been higher over the past four decades, corruption has been as bad or even worse than in regions where growth rates have been much lower (see Figure 1.1). Annual increases in real per capita income in Japan, South Korea, and Taiwan, for instance, were twice those in the advanced industrial states of Europe and North America, even though on average these Northeast Asian states were considered twice as corrupt. Compared to Hong Kong and Singapore, both of which are considered about as corruption-free as the advanced industrial states of Europe and North America, growth in Northeast Asia was only slightly lower, despite Northeast Asia’s reputation for greater levels of corruption. Compared to Latin America and Africa, per capita income in Southeast Asia and mainland China grew roughly three times as fast, even though all three regions were considered roughly the same in terms of corruption. As a result, whereas per capita income increased an average of 33 percent in Africa between 1960 and 1993, it increased 225 percent in Southeast Asia (see Table 1.1). Students of East Asian development have long known that high levels of corruption accompanied rapid development in that region. Although some scholars have ignored the presence of corruption, mainstream thinking about the political economy of development in East Asia has tended to view corruption as an integral part of the political process. The prevailing view, such as it is, asserts that a collusive relationships between politicians and
Development and corruption 7
Hong Kong, Singapore
●
Average growth rate 1960–93
35
Northeast Asia
●
6
5
PRC
● 4
Southeast Asia
●
Europe
3
● Middle East
South Asia
●
2
Latin America
●
Africa
1
0
●
●
1
2
3
4
5
6
7
Average corruption rating 1982–96
Figure 1.1 Corruption and growth, 1982–96. Sources: Economic data: Penn World Tables, version 5.6. Corruption index: Transparency International. Note Average regional growth rates include only those countries ranked by Transparency International. This may create bias because whereas Transparency International’s rankings are all but comprehensive for East Asia, Latin America, South Asia, Europe, and North America, they are not for Africa and the Middle East. Based on anecdotal evidence, it seems reasonable to assume that if coverage of Africa was more complete, its regional average might well be higher than 6.2. This suggests that the contrast between Africa and East Asia could be even greater if the data were more comprehensive.
business interests was central to the development process. Conservative, promarket, politicians provided business with a pro-growth regulatory regime and cheap capital. In return, business provided conservative politicians with the monetary resources needed to maintain their grip on power. This mutual exchange of rents for political monies created a tight alliance between ruling parties and business that, according to the popular literature, transformed these states into developmental machines (e.g. “Japan, Inc.,” “Korea, Inc.”). Since much of the flow of money between business and politicians was either illegal outright or skirted the letter of the law while trampling on its spirit, corruption was seen as a structural attribute of what Johnson has termed the “capitalist developmental state.”2 In the Introduction to this volume, Gomez proposes a similar explanation for the “East Asian Paradox” of concurrent high levels of corruption and high rates of economic growth. According to Gomez, high levels of political intervention have characterized development in East Asia. The political and business spheres have thus tended to become intermeshed and interpenetrated to the extent that the political economy of East Asia can be best
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Table 1.1 Comparison of regional growth rates and levels of corruption, 1960–93 Region
Change in per capita income, 1960–93 (%)
Annual growth in per capita income (%)
Corruption ranking
Africa Central and Latin America Middle East South Asia Europe Southeast Asia Northeast Asia Hong Kong and Singapore
33.2 49.7 101.8 81.6 140.1 225.3 551.8 548.1
0.9 1.3 1.4 2.0 2.8 3.6 6.3 6.6
6.2 5.9 4.8 6.5 2.0 6.8 4.4 1.8
characterized as “political business.” Gomez defines “political business” as an exchange relationship between a ruling party or politicians and specific business interests wherein the ruling party allocated state resources (concessions, funds, licenses, contracts, and state-owned economic assets) to select business interests, who used these resources to generate profits, a share of which they then channeled back to the ruling party in the form of political funds, which the party then used to strengthen its grip on power.3 As statecontrolled resources are deployed in a manner that allows for private profitmaking and generally coexists with pro-developmental ideologies, political business creates a form of “developmental state” that is, at least in the short term, capable of spurring considerable economic growth. “Political business,” and the “wanton corruption” that frequently accompanies it is, however, a double-edged sword, according to Gomez. On the one hand the lure of corrupt monies may encourage politicians to shift public resources, including rents, into the hands of business capable of utilizing these resources productively and hence helps promote growth. At the same time, however, corrupt relations between ruling politicians and business interests undermine the ability of the state to effectively regulate economic activities while also undermining democratic accountability. Corruption, according to Gomez, can thus play either a positive role in promoting development or can lead to the growth of unsustainable bubble economies. Gomez’s political business model, therefore, raises once more questions about the role of corruption in East Asia development. Like Chalmers Johnson’s earlier “capitalist developmental state” model and “revisionist” models of corruption that pre-date it, Gomez’s political business model suggests that the “East Asian Paradox” reflects differences between corruption in East Asia and elsewhere. Specifically, it suggests that whereas corruption in other regions has been characterized by “degenerative corruption,” frequently in the form of plunder or non-productive rent-seeking, corruption in East Asia has been characterized “developmental corruption” or what has been termed “dividend collecting” (Wedeman 1997: 457–78). Rather than loot the treasury and extort money from society, as is the case in a kleptocracy
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(Andreski 1970: 346–59), politicians, according to the development corruption thesis, accept kickbacks from business as payment for providing a progrowth economic environment. Because politicians’ corrupt incomes are linked to economic performance and business profits, whatever ideological or political incentives they might have for promoting development are thus reinforced by direct material incentives to promote growth because they receive a share of the gains from growth. In Evans’ (1995: 41) terms, by linking the state to business, corruption embeds the state in the economy and creates a shared interest in growth. The “East Asian Paradox” of concurrent high levels of corruption and high rates of growth arises from the existence of a form of “developmental corruption” significantly different from the more common form of “degenerative corruption’ found elsewhere in the less developed world. Thus, contrary to the economists’ formulation that ceteris paribus high levels of corruption will lead to lower rates of growth, the East Asian Paradox suggests that ceteris paribus differences in the form of corruption will determine whether an economy grows at a high or low rate. To assess whether a plausible case can be made that corruption in East Asia was an integral part of the developmental process, in the pages that follow I begin by examining degenerative corruption and its systemic attributes using an inductive methodology. I then analyze corruption in East Asia to deduce how differences in the structure of corruption might explain, in part, why East Asia has diverged so greatly from the rest of the less developed world.
Degenerative corruption To understand the theoretical differences between degenerative and developmental corruption, we need to begin by defining political corruption. At a high level of generality, we can, to paraphrase Nye’s classic formulation, define corruption as the use of public authority for particularistic gain. Obviously individual societies and legal systems will draw the line between allowable use of public authority and the misuse of public authority for particularistic gain, which can involve either individual gain or organizational gain (e.g. the benefit of a political party, an institution, etc.) (Nye 1970: 566–7). Although standards may thus vary across cases, as a general rule political corruption occurs when officials use their authority to divert public resource into their own hands (“auto-corruption”) or to the use of a second party (“transactive corruption”) (Alatas 1990: 3). Auto-corruption can be distinguished from transactive corruption because whereas auto-corruption involves little more than the theft or embezzlement of public property, transactive corruption results in the creation of “a black market for property rights over which politicians and bureaucrats have allocative power” and for which private parties are willing to pay a “political rent” to influence their allocation (Benson 1990: 159; della Porta and Vannucci 1999: 36). Transactive corruption may, however, take three radically different forms depending on the
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power relationship between the “seller” and “buyer.” If the seller (i.e. the corrupt official) is in a position to threaten the private buyer with some negative consequence unless he receives some consideration, then transactive corruption will take the form of “official extortion.” If the private buyer is able to threaten the official with some negative consequences, then transactive corruption will take the form of “private extortion.” If neither seller nor buyer can so dominate the transaction that extortion takes place but must instead offer the other some positive inducement to enter into a corrupt exchange, then transactive corruption will take the form of “bribery.” The distinction between auto-corruption, official extortion, private extortion, and bribery can be used to define a continuum of corrupt exchanges based on the share of the total political rent corrupt officials and private bribers obtain. At one extreme lies “kleptocracy” (or what Linz terms the “sultanistic” state and Levi terms a “predatory state”4), wherein officials use their public powers to loot the state treasury (auto-corruption) and extort monies from private interests. At the other extreme lies a condition of “capture,” wherein private interests extort rents from the state. Between these extremes lie a range of corrupt transactions wherein the price paid for the illicit or irregular allocation of public resources will be primarily a function of which party is in a position of dominance. In theory, at least, if neither the buyer nor the seller occupies a position of dominance, then the value of bribes paid to corrupt officials will be roughly equal to the marginal value of the public resources they “sell” to private buyers. Hypothetically, this suggests that power imbalances will be more likely to result in predatory corruption, that is corruption whereby one party or the other arrogates significant rents to themselves. Power imbalances, in other words, are more likely to result in plundering. If we assume that plunder – and the anarchy and instability associated with plunder – is more likely to threaten the economy than more collusive forms of corruption, it follows that the most degenerative form of corruption ought to be kleptocracy. This is hardly surprising. But it follows from this assumption that as the balance of state–business power improves and – thus the extent of official plunder and extortion – the negative effects of corruption ought to decrease and, in theory, when a balance of power is reached they ought to be at their lowest levels. By assumption, the negative effect of capture ought to be lower than those of kleptocracy because even though capture will likely result in extensive private rent-seeking, the business sector is less likely to be driven to the wall or underground than in the case of endemic kleptocracy.5 An examination of some of the more notorious cases of endemic corruption reveals that pure kleptocracy is rather exceptional. In most cases, we find a combination of plunder and a more complex form of corruption wherein corrupt officials use their authority and leverage to either seize private businesses outright or to force private business to give them a cut of their profits in return for preferential access to public resources and protection. Zaire is perhaps the most frequently cited example of unbridled corruption
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and brazen kleptocracy. During his years in power, Mobutu routinely and systematically diverted monies from the state treasury, the central bank, the state-owned mineral monopoly, and a host of other sources. Mobutu exported much of what he stole, allegedly transferring upwards of US$100 million a year to banks in Switzerland and elsewhere in Europe. Not content to live off public revenues alone, Mobutu also acquired extensive business interests, including plantations and shares in major businesses, and reaped additional profits by engaging in smuggling, often using military aircraft. Mobutu’s immediate subordinates also stole what they could get their hands on, while street-level bureaucrats, policemen and soldiers, all of whom frequently went unpaid as a result of embezzlement by their superiors, engaged in extortion, often at gunpoint. The net result was a bare treasury that left the state unable to function, massive outflow of hard currency that stripped the Zairian economy of investible capital, and a wholesale assault on property rights that drove economic activity underground (Wedeman 1997: 462–5). Kleptocracy and the anarchy that accompanied it can, therefore, be linked fairly directly to the collapse of the Zairian economy during the late 1980s and early 1990s. Elsewhere, we find corrupt officials either selling off monopoly rights to private business interests or scraping off the profits from state-controlled monopolies. In Liberia, for example, President Samuel Doe and later warlord Charles Taylor granted timber companies logging rights in return for money and other support for their private armies, while also leasing out control over ports and transportation facilities to syndicates of businesses and using their military forces to wrest control over lucrative diamond-smuggling networks reaching across the border into neighboring Sierra Leone (Reno 1998: Chapter 3). In Sierra Leone itself, President Siaka Stevens had entered into a partnership with a Lebanese businessman, Jamil Said Mohammed, whereby Stevens privatized a series of state monopolies which were then sold to Jamil, who also managed to gain control over the mining and export of gold and diamonds, as well as the distribution of rice and oil. In return for a cut of the resulting monopoly rents, Stevens protected Jamil and other ex-patriot businesses. Steven’s successor, President Joseph Saidu Momoh transferred control over the crucial diamond and gold sectors to a new state-controlled monopoly, but continued to siphon money out of its coffers into his own. At the same time, however, illegal miners were allowed to continue to operate if they paid off state officials, with a share of the take allegedly ending up in the hands of President Momoh (Kpundeh 1995: Chapter 1; Reno 1998: Chapter 4). Zairian-style kleptocracy represents only one form of endemic corruption. In addition to engaging in simple plunder, leaders in a number of notoriously corrupt regimes used the corrupt monies they obtained from bribery, extortion, and plunder to build up vast business empires that enabled them not only to tap the resources of the state, but to also engage in robber-baronstyle capitalism. In the case of Haiti, for example, the early years of the Papa Doc Duvalier regime resembled Mobutu’s Zaire. Like Mobutu, Papa Doc scraped off vast amounts of public money by imposing mandatory levies,
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ostensibly for the construction of a grandiose new capital, Duvalierville, and then pocketing most of what was collected. He also siphoned off the profits of the state tobacco monopoly, which also controlled monopolies on flour, sugar, automobiles, alcohol, and electronics, and from the state-run old age pension system. Papa Doc also engaged in outright extortion, holding businessmen hostage in the presidential palace until they agreed to buy worthless government securities and cut the President into their businesses. Unlike Mobutu, during his early years in power Papa Doc used most of what he collected to support the Tonton Macoutes and the reign of terror through which Duvalier brutally crushed opposition to his regime (Rotberg with Clague 1971: 223– 57; Heinl and Heinl 1978: Chapter 14). Members of the Duvalier family and the Tonton Macoutes, however, took advantage of the reign of terror to loot and plunder. The anarchy and terror of the early Duvalier years made normal business and commerce impossible. Fearing for their lives, members of the mulatto bourgeoisie, which had formed the heart of Haiti’s business community prior to 1957, fled abroad. Foreign businessmen packed up and left. Tourists stayed away in droves. During the late 1960s, conditions deteriorated still further as Duvalier, having secured himself politically, began to siphon of an estimated US$10 million a year into his own pockets (Abbott 1988: 138). As a result, between 1960 and 1970 the Haitian economy contracted at an annual rate in excess of 2 percent (Dupuy 1989: 161–7). But the Haitian economy did not collapse. On the contrary, once the mulatto bourgeoisie had been broken politically, Duvalier eased off the reign of terror and entered into a new alliance with foreign capital. The new alliance with American investors and the end of the reign of terror also re-opened the doors to renewed foreign aid, most of which had been curtained during early 1960s. Tourism also revived, thus increasing the inflow of hard currency. As a result, the Haitian economy experienced a period of surprisingly rapid growth, albeit one that was concentrated almost entirely in the export-processing, and tourism sectors. As aid, investment and tourist dollars flowed in, Baby Doc Duvalier, who succeeded his father upon his death in 1971, and the members of the new technocracy that replaced the Tonton Macoutes, continued to skim off the top. By 1984, Baby Doc had reportedly amassed a fortune of over US$450 million, while his mother had one of over US$1.5 billion (Dupuy 1989: 172). Duvalier thus rode the wave of growth. The Haitian state, however, did not because the export-processing sector was exempt from taxation. The state’s coffers, therefore, remained bare despite export-oriented industrialization. Corruption and contractor fraud, meanwhile, skimmed off most of the aid dollars long before they reached Haiti’s poor. As a result, economic conditions actually deteriorated because the growth of the 1970s and 1980s witnessed an increasing concentration of wealth in the hands of the Duvaliers and their cronies (Fass 1988: Chapter 1; Troullot 1990: 192–3). By the time that Duvalier eventually agreed to go into exile in 1986 (after losing the support of the remnants of the old Tonton Macoute organization, the army, and, most critically, the Reagan administration), corruption had effectively
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“hollowed out” the economy, leaving close to half of the nation’s wealth in the hands of less than 1 percent of its population (Nichols 1998: 163). Whereas looting was the modal form of corruption in Zaire and Haiti, the Dominican Republic during the Trujillo years and Nicaragua during the Somoza era provide examples of a markedly different form of rapacious corruption. Like Mobutu and the Duvaliers, Trujillo and the Somozas used political power to pursue private wealth. But rather than loot the economy, they sought to take it over by building up extensive, octopus-like business empires that enabled them to tap directly into existing sources of wealth and to scrape off rents created by the manipulation of public policy. Trujillo began by using his power, first as army chief of staff and then president, to set up a series of monopolies controlled by firms in which he held an interest. He started with a monopoly on the distribution of milk and then gained control over the sale of meat through the creation of a slaughterhouse monopoly. Shortly thereafter, he created a system of export licensing for cocoa that enabled him to gain control over that sector. By the mid-1930s, his monopoly interests extended into the production of salt, tobacco products, army boots, edible oils, matches, lumber, and furniture, as well as the export of coffee and rice. His wife, meanwhile, set up a scheme whereby government employees had to “insure” their paychecks by signing them over to a firm she controlled, which advanced them their pay minus a 2 percent service charge. Trujillo himself collected an additional 10 percent of public employees’ pay in the form of a mandatory deduction for dues to the ruling Partido Dominicano, of which he was the head. A percentage of workers’ paychecks was also siphoned off through a workman’s compensation scheme controlled by a Trujillo firm. Trujillo used his income from these schemes to buys shares in existing firms and as his power grew he increasingly used coercion to force the owners of profitable business to sell their shares to him at well below their market value. By the late 1930s, Trujillo had amassed a fortune reportedly worth US$1.5 million and controlled an estimated 40 percent of the nation’s wealth (Crassweller 1966: 125–9; de Galindez 1973: 186–93). In 1941, he acquired de facto control of both the dominant National City Bank, which then became the Banco de Reservas, and the Corporacion Dominicana de Electricidad after both were nationalized. Trujillo was thus positioned to control the allocation of capital and electric power and to ensure that his firms received easy and cheap access to both. During the economic boom triggered by rapid increases in the demand for Dominican products caused by the Second World War, Trujillo extended his business interests to include a stake in firms engaged in the manufacture of cement, chocolate, alcohol, beverage, liquor, paper, cardboard, flour, nails, bottles and glass, marble, medicine, paint, sacks, cord and knitted goods, textiles, and clothing. By the late 1940s, therefore, Trujillo had used his political power to penetrate into virtually all of corners of the Dominican economy. His political power, moreover, allowed Trujillo-owned firms to pay no taxes, receive free electricity from the nationalized electric power industry,
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and draw on unpaid convict or military labor or public employees (including members of the army), thus inflating their profitability considerably. If Trujillo-owned firms began to lose money, for example, he sold them to the state, only to buy them back when their profits revived (Pons 1990: 511–21). The Dominican state, in short, had become a means to advance Trujillo’s private interests. Flush with earnings from these ventures, Trujillo next moved into the sugar industry. Long a bastion of foreign capital, the sugar industry quickly fell under Trujillo’s control as the owners of one sugar mill after another decided to sell out to firms controlled by the President rather than face the threat of labor unrest and government harassment. By 1956, Trujillo controlled 12 of the Dominican Republic’s 16 sugar mills, leaving just one in foreign hands (Hartlyn 1998: 95). By the time of his assassination in 1961, Trujillo controlled 80 percent of Dominican industry and employed 45 percent of its labor force. Given his control over the state, which employed 15 percent of the labor force, this meant that over half of the Dominican population depended on the Generalissimo for their income (Pons 1990: 515). Although Trujillo used state power to further his private increases and to ultimately transform the Dominican economy into a “private business” (Pons 1990: 515), the economy actually grew rapidly during his rule and in fact underwent extensive industrialization and urbanization. Moreover, in contrast to the anarchy and brazen plunder characteristic of the Mobutu regime and the early Duvalier years, the Dominican Republic remained relatively stable throughout his tenure. Growth, however, took place in a way that almost exclusively benefited Trujillo and his inner circle by concentrating wealth in their hands. The wages and living standards of ordinary Dominicans did not, therefore, keep pace with the overall growth of the economy. More importantly, growth was accompanied by monopolization and the transformation of the state into a servant of Trujillo’s private interests, with the result that the economy became increasingly distorted as it grew. In the process, property rights were undermined by his frequent use of state power to gain control over key sectors and firms and the state treasury became a means to subsidize Trujillo’s business interests. Trujillo’s corruption, moreover, was not limited to the use of state power to help expand his business holdings. For example, during the 1959 invasion crisis, Trujillo and various confederates embezzled US$44 million from the US$50 million allocated for arms purchases (Crassweller 1966: 347). Thus, even though Trujillo did not loot the Dominican economy, his corruption of state power for his private interests largely crippled the market-based economy and left the Dominican Republic with an economic system that more closely resembled the private estate of a feudal baron than a modern industrial economy. To a considerable extent, the case of Nicaragua under the Somozas parallels that of the Dominican Republic and Haiti. After seizing power, Anastasio Somoza Garcia farmed out segments of the state to his political loyalists, granting them concessions, contracts, jobs, and tax exemptions,
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while also tolerating widespread diversion of budgetary funds into officials pockets through ruses such as padded payrolls (Crawley 1979: 141–2; Booth 1998: 131–52). Somoza tapped into a variety of sources of illegal income, including accepting “contributions” and “commissions” from the granting of gold, rubber, and timber concessions; collecting protection money from illegal prostitution, gambling, smuggling, and bootlegging racketeers; and selling smuggled goods and illegally exporting cattle to Costa Rica (Booth 1982: 65–9, 80–1). During the Second World War, he “bought” properties confiscated from German nationals, as well as properties seized from supporters of the Sandino rebels, and used blackmail to acquire other profitable enterprises. By the mid-1940s, Somoza had become the largest landowner in Nicaragua and had diversified from cattle ranching and coffee plantations into sugar production, light manufacturing, cement production, insurance, electric power generation, and real estate. By 1945, Somoza reportedly had a personal fortune of US$10–60 million. During the 1950s, he acquired new business interests, including a monopoly on the production of pasteurized milk, new textile concerns, the directorship of the Pacific Railway Corporation, and ownership of shipping and airline companies. To finance new acquisitions and support his growing concerns, Somoza drew on state development funds and credit, put his employees on the public payroll, and diverted state assets to the use of his private business interests. After Somoza’s assassination in 1956, his sons continued to build up the family’s business empire, moving into the manufacture of shoes, construction, food processing, automotive sales, tobacco processing, and meat packing, using state-subsidized credit and treasury monies to fund their expanding business interests. The Somozas also extorted bribes from firms seeking licenses, concessions, and public contrasts and skimmed off foreign aid monies. The family also reaped windfall profits after the 1972 Managua earthquake by embezzling aid funds and speculating in real estate. By 1974, Anastasio Somoza Debayle had built his own fortune to an estimated US$400 million. As was true in the Dominican Republic, the Nicaraguan economy grew rapidly even as the Somozas relentlessly expanded their business holdings and transformed the state into a tool of their private financial interests. Between 1928 and 1944, the economy grew 145 percent. After a recession brought on by falling commodity prices in 1956, the economy continued to expand, growing two and a half times between 1960 and 1975 (Booth 1982: 69, 78). But unlike Trujillo, the Somozas never gained true economic hegemony and even at the height of their power Nicaragua continued to be dominated by an oligarchy of powerful groups. The overall pattern of corruption was, nevertheless, the same as that found in the Dominican Republic in that the Somozas used their political power to construct a vast business empire rather than to simply loot the treasury and plunder the private economy. To the extent that they did loot and plunder, it was to secure resources to expand their business holdings and to create rents that enhanced the profitability of their business concerns.
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The case of Colonel, later Marshal and then Emperor, Bokassa in the Central African Republic/Empire replicates this general pattern. On the one hand, he siphoned off a share of the annual subsidy the French government paid to keep his bankrupt regime afloat (Titley 1997: Chapters 5, 13). He took in additional monies by skimming off part of the profits of the diamond export monopoly run by a consortium of American, French, Dutch, and Israeli firms which by the late 1960s was generating US$7.3 million in revenues for the state. It was widely understood that anybody dealing in diamonds had to “donate” money to Bokassa and that it was de rigeur that Bokassa be appointed to the board of firms engaging in diamond mining and export. When several members of the diamond export consortium refused to pay him hundreds of millions of CFA in “renewal fees” in 1969, Bokassa abolished this system and granted a new monopoly to a firm, Centradiam, owned by a Greek tycoon and of which Bokassa owned a major share. Unlike its predecessor, Centradiam paid no royalties or taxes to the government and so Bokassa’s income increased considerably. Several years later, a group of Middle Eastern businessmen, including Adnan Khashoggi, paid Bokassa handsomely to allow a new firm, SADECA, to move into the diamond export market. Bokassa also received a third of the profits from ivory exports and was widely assumed to receive a part of the profits earned by French firms engaged in hardwood exports and beer production. In addition to these sources of income, Bokassa also owned a variety of enterprises engaged in light manufacturing, coffee and cocoa processing, textiles, and real estate, as well as controlling a construction firm that received lucrative public works contracts. Much like Trujillo, Bokassa used his authority to support his firms, forcing the government to buy their products at inflated prices while also subsidizing them with free inputs such as gasoline. Bokassa-controlled firms, of course, paid no taxes. Much of Bokassa’s income was quickly exported to France, where he bought up a variety of expensive real estate, and Switzerland, where it was stashed in Swiss banks for safekeeping. In all, according to prosecutors at his 1986 trial, Bokassa pocketed US$54 million between 1966 and 1979, not a huge sum by comparative standards. When we look into the details of how corrupt leaders extract monies from the state and the economy, it becomes clear that kleptocracy, (e.g. rampant theft of public resources, extortion, and looting) constitutes only one facet of endemic corruption. Politicians such as Mobuto, the Duvaliers, Trujillo, and Bokassa systematically plundered state resources and undoubtedly stashed a considerable share of what they stole overseas. But in almost every case, they also invested part of their income at home. The pattern is, in fact, one wherein politically power is used to construct sprawling business empires that not only occupy the commanding heights of the domestic economy, but which reach into even the most mundane corners. Thus, Trujillo not only sought to dominate the highly profitable sugar export sector, he also built monopolies on slaughter of cattle and distribution of milk. The Somozas not only acquired extensive coffee and ranching interests, but were also into the manufacture of
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matches and shoes. Their business empires were so extensive that it appears that the Somozas wanted to squeeze every last penny out of the economy. More often than not, endemic corruption did not result in immediate economic crisis. In some cases, severe political instability induced both by rampant corruption and reigns of terror did result in periods of sharp economic decline as foreign capital fled to safer shores and domestic capital moved underground. For the most part, however, once the reigns of terror were ended and a modicum of political stability restored, the economy rebounded and in a number of cases actually entered into a period of robust growth, even though corruption tended to increase as these regimes began consolidated. This is very much the case in Haiti, the Dominican Republic, and Nicaragua. In all three cases, endemic corruption accompanied rapid industrialization. In the cases of the Dominican Republic and Nicaragua, in fact, corrupt leaders played a leading role in the development of new industrial sectors and to a considerable extent growth was a function of the expanding business activities of firms and sectors controlled by Trujillo and the Somozas. A closer examination of the pattern of growth and industrialization, however, reveals that endemic corruption produced short-term growth without leading to long-term sustainable development. Corrupt leaders’ business empires depended on the state for a considerable share of their profits. In many cases, they received monopoly rights from the state and hence could collect rents. In other cases, they received heavily subsidized capital or even free capital from the state, as well as other subsidized inputs such as convict labor, free electricity, etc. In many cases, a share – some times a considerable share – of the profits, and even the working capital, of these subsidized business empires was exported abroad. To maintain themselves and to continue to expand, therefore, these empires were highly dependent on constant injections of plundered public resources. The resulting combination of monopolization, subsidization, concentration, profit exports, and plunder was such that in most cases growth led to the progressive “hollowing out” of the economy. The fact that the growth of corrupt business empires often came at the expense of domestic firms and capitalists who were either forced to sell out or driven out of business exacerbated the problem. In the long run, therefore, endemic corruption and corrupt leaders’ relentless pursuit of new sources of income lead to the emergence of economies that were not only dependent on corruption for growth but which could not survive without constant injections of monies looted from the public treasury and ultimately from the economy itself.
Developmental corruption What sets the East Asian states apart from cases such as Zaire, Haiti, etc. is not the level of corruption, but rather its function. Degenerative corruption involving a combination of kleptocracy, plunder, and robber-baron-style
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empire building siphons money out of the treasury and private hands and into the hands of those with public authority, who in many cases then export these monies to foreign safe havens. Corruption thus pumps capital out of the domestic economy through the mechanisms of taxation, the corrupt allocation of public resources to private interests, monopolization, and the export of profits and rents by the recipients of plundered public resources. Developmental corruption in East Asia operates in a similar manner to the extent that public resources are siphoned out of the private economy at large and channeled into the hands of selected interests. What sets developmental corruption apart from degenerative corruption is that in most of the cases discussed previously corrupt officials channeled looted public resources to businesses which they either owned or had a considerable stake in and used their control over policy to create rents that these enterprises could easily scrape off, whereas in the case of East Asia corrupt politicians remained at arm’s length and rather than arrogate public resources to themselves, they were more likely to sell them to private businesses. As a result, corrupt politicians in East Asian were less likely to become rent-seeking robber barons. The pattern in East Asia was thus one in which corruption helped cement alliances linking the interests of those who controlled the state with business interests. As noted in the Introduction to this chapter, mainstream explanations of East Asia’s economic exceptionalism generally view corruption not as an unsavory and unintended consequence of developmental politics, but rather an integral part of the political economy of development. As articulated by Chalmers Johnson, the developmental state model posits the existence of a depoliticized state, wherein an autonomous technocracy “rationally,” but subtly, guides the allocation of economic resources in a way that optimizes developmental efficiency. In this construct, politicians “reign but do not rule,” that is they serve as a buffer between society and the bureaucracy, acting to absorb and emasculate social demands that would divert resources away from development while also serving as a barometric warning mechanism, a glorified pressure gauge, that signals technocrats when society approached its limits of toleration for pure GNPism (Johnson 1982: Chapter 2, 1986b, 1987). According to Johnson, bureaucrats and technocrats hold the real reigns of power. Recruited from the best and the brightest graduates of the top national universities, socialized to place the national interest above all else, and advanced through a system of pure meritocracy, senior bureaucrats relentlessly pursue growth by carefully forecasting future economic trends and guiding private businesses toward new emerging technologies and away from declining ones, unfettered by the demands of parochial interests. Policies emanating from the ministries are handed over to the ruling party’s politicians to formally enact. Happy to remain in the background, bureaucrats allow politicians to claim credit for policy success and carefully refrain from calling public attention to them selves. Moreover, the bureaucracy dutifully supplies the ruling party with copious supplies of pork-barrel spending which allows its
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candidates to “bring home the bacon” for their constituents while also requiring that requests for access to the bureaucracy go through the ruling party’s elected members, thus allowing them to act as the middleman between their locality and the state. Politics, including electoral politics, thus become a form of political theater. Backed by the bureaucracy and closely allied with big business, the ruling party enjoys a tremendous advantage over the opposition. Elections devolve into noisy contests, but contests whose outcomes are largely predetermined, not because the ruling party stuffs the ballot box or uses underhanded tactics to undermine the opposition, but rather because they pit a ruling Leviathan, who can not only claim credit for economic growth but can also roll out ample pork-barrel spending, against challengers who lack access to the state and who cannot provide direct benefits to their districts. Even in the unlikely event the ruling party lost, the result would make little difference because real power lies behind the doors of the ministries, not in the aisle of the parliament. Because those doors can only be opened from the inside and cannot be forced open by politicians, even a victorious opposition would soon find itself either forced to bend to the will of the technocrats or find itself undermined and sabotaged at every turn. Gomez’s political business model, by contrast, sees politicians as firmly in control of the allocation of public resources and policy-making. Not only does the political business model shift the locus of control over allocation from the bureaucracy to the leadership of the ruling party, it marginalizes the role of bureaucrats and technocrats as policy-makers, relegating them, largely by default, to the role of expert advisors and policy-implementers. Politicians thus rule and reign according to the political business model. To a certain extent, the political business model assumes that politicians have similar interests to technocrats because like their technocratic counterparts in the developmental state model, politicians are interested in promoting economic development and embrace developmentalist ideologies. But unlike their technocratic counterparts, they are also interested in maximizing their political survival. Moreover, whereas the Johnsonian model sees regimes as securely entrenched, the political business model assumes that although the ruling party may appear hegemonic, it is in fact vulnerable. This is particularly true in those cases where democracy exists, even those in which democracy has not developed far beyond a purely procedural stage. Moreover, whereas the developmental state model assumes that the political resources that the ruling party needs to maintain its grip on power come from a combination of public resources allocated to politicians by the bureaucracy and political donations from businesses who expect to benefit from the maintenance of technocratic insulation, the political business model assumes that even though politicians control the allocation of public resources, the ruling party depends on political resources provided by private business. To a certain extent, both models assume that business interests actively support the ruling party because they benefit from the distribution of
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public resources. Thus both assume a steady flow of political resources – including most prominently money – from business to the ruling party, the developmental state sees these flows as being supplemented by a significant flow of resources – primarily in the form of pork-barrel monies – from the bureaucracy to the ruling party. Political resources “donated” by private business are themselves provided to the ruling party, not because the ruling party is in a position to offer private business public resources in exchange, but rather as a form of repayment to the bureaucracy from whence private business obtains public resources. It is thus the bureaucracy that directly and indirectly funds the ruling party, with the result that the ruling party sits in a position of dependence vis-à-vis the bureaucracy. The political business model, on the other hand, sees the ruling party’s ability to maintain its hegemony as much more heavily dependent on political capital from the private sector. Thus, whereas the developmental state model assumes that the ruling party is heavily dependent on the bureaucracy for the resources needed to maintain its grip on power, the political business model assumes that the ruling party’s survival depends primarily on its ability to allocate public resources in a manner that allows it to gain access to private political monies. This means that the ruling party is dependent on the private sector, not the bureaucracy, for its survival, as is assumed by the developmental state model. According to the political business model, the ruling party’s dependence on the private sector for survival leads to a cynical pattern of interaction wherein the ruling party allocates economic assets controlled by the state to those business interests judged to be willing to provide political resources in return and able to use these resources in a way that turns a profit – a profit from whence business interests extract political resources (i.e. money) to kick back to the ruling party. In simple terms, the ruling party advances the interests of selected business, who in turn support those who control the allocation of public resources. Thus, on one level, decisions governing the allocation of public resources are made not only on the basis of some abstract economic rationality (i.e. with the goal of maximizing economic efficiency and development) but rather on the basis of political rationality (i.e. with the goal of maximizing the political hegemony of the ruling party). Political expedience is not, however, independent of economic efficiency. The political business model implicitly assumes that either public resources alone are insufficient to meet the ruling party’s demand for political resources or that even though the ruling party may control the allocation of public resources it cannot allocate these resources directly to its own coffers. Instead, public resources must be “invested” in private businesses, which then pay the ruling party political dividends out of the profits they earn from the use of these public resources. The ruling party’s ability to obtain the political resources it needs to maintain its hegemony is a function of the profitability of the firms in which it invests public resources. The ruling party maximizes its political interests therefore by investing in “winners,” that is those firms
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most capable of generating profits. Economic and political rationality, therefore, overlap and private profit becomes a means to political advantage and power. From the perspective of political decision-makers, the efficacy of state investment is not simply the economic returns – as manifest in growth and development – or direct political expediency, but a combination of economic returns and political returns. Without the former, the amount of the latter will be constrained. Growth in and of itself is not, however, desirable unless the ruling party obtains political dividends. To an extent, of course, growth indirectly benefits the ruling party by strengthening its claims to eudeamonic legitimization. But eudeamonic legitimization remains secondary to the more direct political dividends obtained in the form of political contributions and support from politically privileged business interests. Thus, even though developmentalist ideologies may predispose a ruling party to adopt progrowth policies, the ultimate goal of economic policy making is the consolidation of the ruling party’s political hegemony. Because the locus of policymaking lies not in the technocracy, but rather in the headquarters of the ruling party, regime policy is dominated by efforts to jointly maximize economic and political efficiency. Although in assuming that the ruling party’s dependence on the profitability of its business clients may provide it with incentives to pick winners the political business model suggests that policy-making will seek to achieve economic efficiency, its emphasis on politics and the ruling party’s vulnerability means that politics, not economics, is in command in the policy-making process. This suggests that when political efficiency conflicts with economic optimality, political expediency will carry the day because development without political dominance is less desirable for the ruling party than political dominance without development. In this regard, the contrast with the developmental state model is stark. Because it assumes that the locus of power over the allocation of public resources lies in the technocracy, whose goal is development, the developmental state model implies that economics will dominate politics when the two conflict. That is, although the technocracy may want to maintain the hegemony of that party or parties with which it is closely allied and who act as its shield from the demands of society, maintaining those parties in power is a means, not an end. In the case of the political business model, the opposite is true because political survival is the end of the decisive actors while development is one means to that end. Thus, whereas the politicians will be likely to sacrifice economic efficiency to political expediency according to the political business model, the technocrats may be willing to sacrifice the ruling party if it no longer serves their economic objectives and to shift its support to other parties it considers better able to provide the political cover needed to sustain the developmental state. By the same token, business has congruent interests and hence may be opportunistic in its political support. The combined leverage of the bureaucracy and business is such, therefore, that the ruling
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party’s political survival is contingent on its willingness to serve the interests of the technocratic–business alliance. In the end, however, both the political business and developmental state models assert that the ruling party’s need for politically driven allocations of public resources and political kickbacks from businesses granted access to public resources gives it powerful incentives to promote development. Development not only legitimates the party, it also generates the political funds that render the ruling party hegemonic. As a result, even if we assume that the ruling party’s fundamental goal is to retain power, corruption serves to link that goal to economic growth not only in the abstract sense that ceteris paribus a growing economy is politically preferable to growing economy, but also in the concrete sense that a growing economy generates a steady flow of political resources that help the ruling party maintain its hegemony while at the same time giving individual members of the ruling party access to a bit of “supplemental income.” Transactive corruption in its various forms thus aligns the material and political interests of politicians with the promotion of growth. By linking the interests of politicians to those of business, corruption would also help ease historic contradictions between the state and capital in many East Asian nations. Historically, the relationship between the state and capital in East Asia has not been harmonious. On the contrary, in most cases the relationship was initially hostile (Yoshihara 1988: Chapter 4; Jomo 1997: 25). In part, this hostility may have been rooted in a long-standing bias against individuals whose claim to social status was based primarily on wealth rather than political (including ascriptive claims to aristocratic status) or religious prestige. More to the point, different groups often held political and economic power. In nineteenth-century Japan, merchants were widely despised and loathed by the samurai classes who dominated the Meiji oligarchy. In South Korea, considerable hostility between the Park Chung Hee and capitalists who had prospered from their relationship with the Syngmon Rhee regime were clearly evident in the early 1960s. Park, in fact, had many of South Korea’s major businessmen arrested on charge of profiteering and corruption soon after he overthrew the Chang Myong government in 1961 (Clifford 1994: 33–44; Eun 1997: 112–17; Lie 1998: 19–54). The Kuomintang, meanwhile, not only formally espoused an anti-capitalist ideology that favored a state controlled economy, including tight controls over capital; the party was also reluctant to allow native Taiwanese to acquire a position of economic power for political reasons (Wade 1990: Chapter 9). On the mainland, of course, the post-1949 period involved a wholesale assault on private capital by the communist regime and a concerted effort to bring the economy under the direct control of the state. In Thailand, Indonesia, and Malaysia, ethnic Chinese, many of whom had immigrated to the region during the colonial period before colonial authorities blocked further immigration in the 1930s continued to remain socially and often physically apart from indigenous groups, controlled the bulk of the capital resources, while “native”
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elites controlled the state. The Chinese were seen as foreigners and exploiters, immigrants who took advantage of the locals, amassed great wealth, and then retired back to China with their booty. Left unresolved and unregulated, these deep-seated contradictions between political elites and capital could have easily resulted in predatory attacks on capital by the state and capital flight. Even absent open attacks on capital, uncertainty about the relationship and fear that the state might at some point move to expropriate capital, would have created an extremely poor climate for long-term – and hence developmental – investment but would have instead encouraged capital to seek short-term gains. Thus, rather than being invested in the construction of new productive ventures, capital would have remained more liquid, more prone to sudden panic and flight. By establishing linkages between political elites and capital, political corruption thus served to stabilize this relationship, providing political elites, on the one hand, with material incentives not to attack capital, and capital, and, on the other, with at least a tacit guarantee that the state would not turn on it. As a result, corruption not only provided connectivity between politicians and business by aligning politicians’ interests in ways that were favorable to the adoption of pro-growth ideologies and policies, but it also helped create a modus vivendi that reconciled historic hostilities between the state and capital. Establishing such a modus vivendi can be seen as both politically and economically necessary for development because given capitalist-led growth, development will necessarily cause politically marginalized groups to enjoy the immediate fruits of economic expansion. In such a context, corruption potentially serves as a means by which economically advantaged groups may buy protection from those holding political power, but it once again serves to connect the material interests of business and political interests because, in the case of states where overseas Chinese occupy a dominant role in the business community, native politicians share in the profits of “expatriot” entrepreneurs, who in turn profit from access to public resources and regulatory relief.6 The result is overtly little more than a protection racket wherein Chinese businessmen are forced to hand over a share of their profits to secure their businesses from political predation. Once established, however, political elites have a vested interest in promoting the growth of businesses willing to pay protection rents because growth translates into a large pool of profits from which they can extract protection money. Even in its crudest form, in fact, this sort of corrupt protection racket allows business to survive. The argument in the preceding pages is not one that claims corruption promotes growth. Rather it is much more modest, I simply assert that corruption in East Asia helped create and sustain connections between political elites and business that provided incentives for political elites to lessen their propensity to use public authority to plunder the business sector. At a very basic level, by lessening the threat of plunder and hence the disincentives to invest associated with unreliable property rights and the incentives to either
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export capital to safe havens elsewhere or to shift economic activity into the underground economy, developmental corruption as defined thus far would reduce the barriers to development, without necessarily creating conditions favorable to accelerated development. Clientelist ties between selected business interests and particular parties and politicians can also become the source of economic instability in the event of regime change, in which case new regimes may attack the clients of their predecessors. Thus, contrary to the most extreme claims of the revisionist school of corruption, corruption that cements ties between political and business elites need not promote development. Nevertheless, when juxtaposed with the developmentalist ideologies embraced by many East Asian regimes and their reliance on eudeamonic legitimization, corruption of this sort would reinforce politicians’ incentives to put in place a macroeconomic regime favorable to capitalist-led growth. The presence of such a reinforcing incentive structure is not, however, sufficient to explain why high levels of corruption and growth have cooccurred in East Asia. Sustained growth and development in a context of high levels of corruption will depend heavily on the existence of structures that concurrently limit politicians’ propensity to resort to looting or to squeeze their business clients too hard and limit business propensity to use corruption to obtain rents, including monopoly rents, and to transform the state into a tool for private exploitation of the economy. The fact that degenerative corruption, or what might also be termed “predatory corruption,” is arguably the dominant form of corruption, itself suggests that in most instances “bad corruption” will squeeze out “good corruption,” however we might choose to define the latter. One possible limiting factor on state predation and private rent-seeking might be the existence of a balance of power in which a relatively strong state confronts a strong business sector or a series of large conglomerates. This would seem to be the case in Japan, where the business sector has been relatively well organized not only through formal business associations such as the Keidanren but also informally through the system of keiretsu wherein corporations are grouped together in hierarchic alliances centered on major banks and key corporations. The existence of such organizations has allowed the business sector to confront the state not as individuals, but as organized collectives. Moreover, the business sector, operating through the Keidanren played a pivotal role in facilitating the formation of the alliance between the Liberal and Democratic parties in 1955 that created the hegemonic Liberal Democratic Party (LDP). A balance of power explanation for the absence of degenerative corruption during the heyday of the developmental state is, however, not applicable to most of the rest of the East Asian cases. On the contrary, in virtually every case except Japan the state has overshadowed business and for the most part business has been in a position of dependency rather than independence. In South Korea, for example, the state played an active and leading role in the genesis of the chaebol and retained direct control over the banking sector until
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the 1980s. In Taiwan, the state not only retained tight control over the financial sector but also directly, or indirectly through the Kuomintang, owned key corporations.7 In Indonesia, Chinese big businesses in the New Order were heavily dependent on a regime dominated by Suharto and the military, while in Malaysia they faced a “native” political party that had a lock on the state and which espoused an economic agenda that specifically sought to weaken the Chinese community’s dominant economic role. In the Philippines, the landed oligarchy not only dominated the commodity export sector, but the state, thus politically marginalizing the Chinese dominated retail and manufacturing sectors. Yet in none of these cases was the state in a position of absolute hegemony from which it could dictate to business. On the contrary, the state, even though it may have been in a powerful position vis-à-vis local capital, was dependent on business. In part, the states’ dependence was a direct function of their embrace of capitalist-led development and an acceptance of the need to rely on private interests as the primary engine of economic growth. Without the local capital’s cooperation, the state simply could not have forced the growth that it perceived as politically necessary to its legitimacy and longevity. In part, dependence was also a function of the fact that, with the exception of the Philippines, ethnic Chinese own the most dynamic domestic enterprises. Regimes had to beware, therefore, of the possibility of domestic capital flight if state predation became excessive. Thus, as Gomez argues, these regimes’ political vulnerability – and hence their need for a combination of eudeamonic legitimization and a steady inflow of under-the-table contributions – meant that they could ill afford to antagonize the business community. The logic of the preceding argument is admittedly circular. But recognition of the circular nature of the relationship between ruling parties and business in East Asia is arguably the primary contribution of the political business model. Like Evans’ embedded autonomy model, Gomez’s political business model highlights the extent to which regimes and business in East Asia have been interdependent. Clientelist businesses have depended on public resources, including rents, cheap capital, regulatory favors, etc. Without injections of public resources, these firms could not have expanded as rapidly as they did. Ruling parties have, in turn, depended on their clients for the money and support necessary to retain power. This pattern of interdependence, of course, lies at the heart of the corrupt relationship popularly branded “crony capitalism” because it entails the exchange of public resources for private monies in a protracted series of illicit or semi-licit transactions. So long as ruling parties and their business clients remained mutually dependent, both had incentives to keep the degenerative effects of corruption under control. Thus, ruling parties had incentives not to kill the geese whose golden eggs helped keep them in power. At the same time, however, the fact that these ruling parties were in a position of strength relative to their business clients meant that they were able to extract a “fair” price for the public resources they “sold.” Mutual dependence, therefore, created incentives for restraint.
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The distinction between degenerative corruption in the various African and Latin American cases discussed earlier and developmental corruption in East Asia is not, however, black and white. In many cases, the arm’s length relationship between political and economic power has been blurred as politicians and their families inject themselves directly into the economy. Thus for example, although corruption may have stabilized the relationship between Suharto’s New Order and Chinese capital in Indonesia, members of Suharto’s family took advantage of their political power to stake a direct claim to ownership of key enterprises or to divert public resources into the hand of enterprises under their direct control. Malay politicians have similarly used their political power to construct business empires not unlike those constructed by Trujillo and the Somozas, though never to the extent of transforming them into monopolistic empires, while successful businessmen have used their economic resources to enter politics. We find this latter pattern in Thailand as well where businessmen have colonized the state by becoming politicians and then using their authority to secure control over the state and gain access to state rents. It would also be highly misleading to imply that bureaucrats and politicians in East Asia did not engage in the sorts of predatory extortion and bribery practiced by their counterparts in Africa and Latin America, or that corrupt officials in East Asia did not salt away some of their illicit monies in foreign banks. Developmental corruption in East Asia, therefore, was hardly free from the sorts of rent-seeking and predation that we find elsewhere. The distinction between developmental and degenerative corruption lies, therefore, more in the relative balance between forms in a particular political system. The Asian Paradox of high levels of corruption and high rates of growth thus reflects the fact that whereas corruption elsewhere in the developing world has tended to be dominated by high levels of outright predation by state officials, the breakdown of the state, the emergence of anarchic corruption, and the use of state power to “privatize” the economy, in the case of East Asian these forms of corruption have been counterbalanced by a pattern of much more tightly controlled transactions between coherent ruling parties and business within the context of developmentalist ideologies. Corruption served to connect ruling parties to business by linking the political interests of the ruling party to the profitability of its business clients. Corruption thus created a channel through which public resources were allocated to businesses willing to kickback a share of their profits to the ruling party. As such, the ruling parties abused their power over the state to selectively distribute public resources and sell or “privatize” them for their particularistic gain, a pattern of behavior that is clearly consistent with the conventional definition of corruption. Unlike cases where public officials simply plundered the state and the economy, the quest for illicit or irregular private gain by both politicians and businessmen had the effect of stimulating economic activity. Whether growth would have been greater given lower levels of corruption we cannot be sure. But the structure of corruption in East Asia was such that even given high levels of corruption growth was not
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impossible. Moreover, growth was in the interest of corrupt politicians and rent-seeking businessmen because a growing pie meant that the flow of corrupt monies would increase. As a result, although degenerative corruption was present in East Asia, it had a more marginal impact than was true elsewhere in the developing world.
Conclusion Thus far, I have argued that corruption in East Asia made development possible by connecting politicians and businessmen in a mutually beneficial “developmental alliance.” The argument is not necessarily new. Proponents of the developmental state model have long recognized that corruption was part of the political economy of East Asia. Johnson, the doyen of the developmental state model, in fact, argued that the incentives for corrupt transactions between politicians and business interests were so embedded that corruption was “structural.” Corruption, in other words, was a not unintended consequence of the relationship between politicians and businessmen upon which the developmental state rested, the glue that held that relationship together. Where I depart from this conventional wisdom is in the extent to which I highlight the contrast between developmental corruption in East Asia and degenerative corruption elsewhere. In making this contrast, I have emphasized the extent to which higher levels of predation and plunder have characterized corruption elsewhere. Because we can link high levels of predatory corruption to powerful disincentives for growth, it becomes reasonably easy to see why predatory corruption tends to be highly degenerative and hence why endemic predatory corruption has tended to lower economic growth rates. My argument is that the system of kickbacks and illicit political contributions that we observe in East Asia gave ruling parties a direct political interest in actualizing the developmental ideologies that many espoused. Predation, plunder, and anarchic low-level corruption have, of course, been present in East Asia and in some cases and periods (e.g. the People’s Republic of China (PRC), Indonesia, Thailand, and the Philippines) have reached relatively high levels. On balance, however, corruption in East Asia displays a greater tendency toward transactive corruption than extortion or plunder. Moreover, high-level corruption (i.e. corruption involving senior politicians) in East Asia often involved an exchange of public resources, including rents, for political contributions. Rather than siphon off of public resources into the pockets of politicians either through simple plunder and extortion or through the construction of vast robber-baron business empires, corruption resulted in the distribution of public resources to the business sector. In many cases, of course, politicians may have sold public resources at a fraction of their economic value. Nevertheless, the public resources politicians sold ended up being used in ways that facilitated economic expansion. At the same time, a stable pattern of corrupt exchanges created a much more stable economic
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environment that did endemic predatory corruption elsewhere. As such, corruption may not have accelerated growth, but at a minimum it made growth politically desirable for ruling parties and hence gave them a much stronger vested interest in promoting economic growth than would have been the case absent a system of corruption that wedded business and political interests.8 Ironically, by placing ruling parties and their business clients in a relationship of mutual dependence, developmental corruption simultaneously created conditions conducive to both rapid growth and sudden economic crisis. In retrospect, it is clear that mutual dependence meant that ruling parties and their business clients made themselves hostages to each other and both became increasingly addicted to inputs from the other. Business became addicted to injections of cheap capital, first in the form of state subsidized loans and inflated public works contracts and then later in the form of tacit state guarantees for loans from major international banks. Heavily leveraged and often struggling to generate profits, many firms relied on injections of new capital to cover debts they could not repay and sustain further expansion. As their addiction to debt financing worsened, businesses had little choice but to redouble their efforts to buy favor from politicians both as a means to ensure that they could continue to use the impression of a tight relationship with the ruling party as a form of collateral in seeking new loans, but also to protect themselves from scrutiny that might reveal their true financial condition. Ruling parties, meanwhile, became addicted to injections of political funds from their business clients. Faced, in most cases, with credible political challenges and less able to resort to authoritarian means to repress their political opponents, ruling parties found themselves increasingly reliant on money politics to keep their grip on power. Money politics was, of course, a highly attractive option because the financial vulnerability and debt addiction of business interests meant that ruling parties had easy access to political monies and could even resort to extortion to extract money when necessary. The net result was a form of codependency wherein neither businesses nor ruling parties could afford a breakdown in the corrupt linkages that bound them together. Codependency, however, also means that neither can effectively discipline the other. Business could not afford to resist ruling parties’ increasingly voracious demands for political monies. Ruling parties could not stop their business clients from wracking up excessive debt. Moreover, as private debts began to mount, ruling parties had strong incentives to help their business clients gain access to foreign loans because the ability of their business clients to provide political contributions depended on them securing new capital. In effect, therefore, ruling parties became dependent on new debt to generate and sustain inflows of political resources. The circular flow of public resources, rents, and political monies highlighted by Gomez’s political business model, and which is also implicit in the developmental state model, thus not only serve to channel resources into the private sector where they
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could be used to fuel economic expansion. This suggests that corruption connects the ruling party to economic interests and that the resulting embedding of the state in the economy allows for the pursuit of the shared project of development. Corruption-based connectivity not only binds the regime to business, but ultimately allows business to capture the state, not by gaining control over the policy making process and perverting it to its private benefit per se, but rather by tying the state’s hands in ways that make it difficult for the state to effectively regulate business activity, particularly when businesses begin to take advantage of their connections to engage in risky behavior. In conclusion, by contrasting the pattern of corruption in East Asia with examples of obviously degenerative corruption in other regions, we uncover evidence that suggests why high levels of corruption have had different economic effects and, specifically, why East Asia has tended to outperform other regions over the long term. It was not the case that East Asian politicians and bureaucrats were necessarily more honest than others. On the contrary, the evidence show fairly convincingly that East Asian politicians frequently engaged in corruption. What was different was that corruption in East Asia has tended to cement links between the political interests of ruling parties and private businessmen and thus embedded ruling parties to a much greater extent than has been the case in Africa, Central America, and the Caribbean where corruption tended to act primarily as a pumping mechanism that drew resources out of the private domestic economy and pushed them outward to foreign safe havens. In East Asia, corruption pumped public resources into the private sector, from whence a share of the resulting gains from growth were kicked back to politicians primarily in the form of “political contributions.” Corruption thus kept in power parties willing to prime the private sector rather than allow corrupt politicians to draw resources out of the private sector. As such, the contrast between developmental corruption in East Asia and degenerative corruption in places such as Zaire, Haiti, the Dominican Republic, Nicaragua, and the Central African Empire is rather stark. In the end, however, both developmental and degenerative corruption resulted in similar economic crises because they created economic systems in which growth depended on corruption and could not be sustained without steady injections of money from the public sector into the private sector – with the important caveat that whereas degenerative corruption relied more heavily on monies plundered from the domestic economy, developmental corruption relied more heavily on monies created through debt, including external debt. This last difference has important implications because greater levels of plunder-driven degenerative corruption will tend to undermine property rights and drive economic activity underground much more rapidly than will debt-driven developmental corruption. As a result, because developmental corruption does less damage to the private sector, it follows that degenerative corruption is much more likely to trigger catastrophic economic collapse than is development corruption. Developmental corruption is thus
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not a solution to the problems of development and is like to create bubble economies vulnerable to collapse. But by giving political decision-makers a direct stake in development and providing them with incentives not to plunder the economy it helps lower potential barriers to development.
Notes 1 2 3 4 5
6
7 8
See Mauro (1995, 1998); Ades and Di Tella (1997). See Hayes (1995: Chapter 4); Hideki (1992: 303–10); Johnson (1982: Chapter 1; 1986a: 1–28); Reed (1996: 395–405). Edmund Terence Gomez, “Political Business in East Asia,” Introduction to this volume. See Levi (1981: 431–65); Chehabi and Linz (1998: 3–25). There are relatively few clear cut examples of the predatory state’s private counterpart, the “colonized state.” Perhaps the best known examples of colonized states are found in Central America where the powerful United Fruit Corporation transformed a number of states into “banana republics.” In Honduras, Guatemala, and Costa Rica, United Fruit Corporation dominated the national government by its sheer economic weight and the economy’s dependence on it and its subsidiaries, including most critically its control over these nations’ rail systems. At the peak of its power, United Fruit’s corporate resources were greater than those of the state. This enabled the company to hold the economy hostage while at the same time it built up a core of political supporters by financing various political parties and individuals, as well as allowing key politicians to become shareholders in various corporate ventures, and to thereby extract a wide range of concessions from the local government, including monopoly rights over a variety of key sectors. Gaining monopoly rights, in turn, allowed United Fruit to redouble its grip on the economy and hence on the state. Even at the zenith of its power, however, United Fruit never really “owned” any of the governments of the so-called Central American banana republics and instead had to fight a series of political battles to maintain a position of power over indigenous political elites. Thus, while United Fruit was arguably sufficiently powerful to force local governments to grant it monopoly rights on concessionary terms and hence capture of lion’s share of the resulting “political rents,” local political elites were still able to wrest a share. See Kepner and Soothill (1935: Chapter 8); Boatman-Guillan (1985: 38–43); Lainez and Meza (1985: 34–7); Doral (1993: Chapters 1 and 2). In the case of Indonesia, for example, Chinese businessmen established relationships with native bureaucrats and army officers whereby the Chinese (cukong) provided funds to their native patron, who in turn protected their Chinese clients. President Suharto, for example, patronized a circle of Chinese businessmen, many of whom had played a role provisioning units under his command during the 1950s (Vatikiotis 1993: 50–1; Schwartz 1994: 107). A similar system existed in Thailand, where Chinese companies appointed Thai politicians and generals to their boards, thus allowing them to share in the company’s profits (Pasuk and Baker 1998: 10–22). More recently, Chinese businessmen moved into politics directly, seeking election to parliament (Pasuk and Piriyarangsan 1994: 57–106). See Karl Fields, Chapter 4 in this volume. The major exceptions to this pattern are the Philippines during the Marco era and Indonesia during the Suharto era. Like Trujillo, the Somozas, and the Duvaliers, Marcos used his power to siphon out of the country a vast amount of funds and concentrated control of economic sectors in the hands of his cronies,
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factors that debilitated economic growth. Suharto, on the other hand, allowed members of his family to construct a series of business empires where much corporate wealth came to be concentrated, hindering productive use of resources. It is noteworthy in this regard that not only were the Philippines and Indonesia exceptional in terms of form, but also because both economies have evidenced much greater instability than other economies where political corruption tended to characterized by a more arm’s length alliance between politicians and business interests.
References and further reading Abbott, E. (1988) Haiti: The Duvaliers and their Legacy, New York: McGraw-Hill. Ades, A. and R. Di Tella (1997) “The New Economics of Corruption: A Survey and Some New Results,” in P. Heywood (ed.), Political Corruption, Malden, MA: Basil Blackwell. Alatas, S. H. (1990) Corruption: Its Nature, Causes and Functions, Brookfield, VT: Gower. Andreski, S. (1970) “Kleptocracy as a System of Government,” in A.J. Heidenheimer (ed.), Political Corruption: Readings in Comparative Analysis, New Brunswick, NJ: Transaction Books. Benson, B. (1990) The Enterprise of Law: Justice Without the State, San Francisco, CA: Pacific Research Institute for Public Policy. Boatman-Guillan, E. (1985) “In Honduras a Mule is Worth More than a Congressman,” in N. Perkenham and A. Street (eds), Honduras: Portrait of a Captive Nation, New York: Praeger. Booth, J. A. (1982) The End and the Beginning: The Nicaraguan Revolution, Boulder, CO: Westview. —— (1998) “The Somoza Regime in Nicaragua,” in H.E. Chehabi and J.J. Linz (eds), Sultanistic Regimes, Baltimore, MD: Johns Hopkins University Press. Chehabi, H.E. and J.J. Linz (1998) “A Theory of Sultanism I,” in H.E. Chehabi and J.J. Linz (eds), Sultanistic Regimes, Baltimore, MD: Johns Hopkins University Press. Clifford, M.L. (1994) Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea, Armonk, NY: M.E. Sharpe. Crassweller, R.D. (1966) Trujillo: The Life and Times of a Caribbean Dictator, New York: Macmillan. Crawley, E. (1979) Dictators Never Die: A Portrait of Nicaragua and the Somoza Dynasty, London: C. Hurst. de Galindez, J. (1973) The Era of Trujillo: Dominican Dictator, Tucson, AR: The University of Arizona Press. della Porta, D. and A. Vannucci (1999) Corrupt Exchanges: Actors, Resources, and Mechanisms of Political Corruption, Hawthorne, NY: Aldine de Gruyter. Doral, P.J. (1993) Doing Business with the Dictators: A Political History of United Front in Guatemala, 1899–1944, Wilmington, DE: Scholarly Books. Dupuy, A. (1989) Haiti in the World Economy: Class, Race, and Underdevelopment Since 1700, Boulder, CO: Westview. Evans, P. (1995) Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press. Fass, S.M. (1988) The Political Economy in Haiti: The Drama of Survival, New Brunswick, NJ: Transaction Books.
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Hartlyn, J. (1998) “The Trujillo Regime in the Dominican Republic,” in H.E. Chehabi and J.J. Linz (eds), Sultanistic Regimes, Baltimore, MD: Johns Hopkins University Press. Hayes, L.D. (1995) Introduction to Japanese Politics, New York: Marlowe & Co. Heidenheimer, A.J. (ed.) (1970) Political Corruption: Readings in Comparative Analysis, New Brunswick, NJ: Transaction Books. Heinl, R.D. Jr. and N.G. Heinl (1978) Written in Blood: The Story of the Haitian People, 1492–1971, Boston: Houghton Mifflin. Hideki, M. (1992) “Greasing the Wheels of Power,” Japan Quarterly 34(3). Johnson, C. (1982) MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford, CA: Stanford University Press. —— (1986a) “Tanaka Kakuei, Structural Corruption, and the Advent of Machine Politics in Japan,” Annuals of Japanese Studies 12(1). —— (1986b) “The Nonsocialist NICs: East Asia,” International Organization 40(2) (Spring). —— (1987) “Political Institutions and Economic Performance: The Government– Business Relationship in Japan, South Korea, and Taiwan,” in F.C. Deyo (ed.), The Political Economic of the New Asian Industrialism, Ithaca, NY: Cornell University Press. Jomo, K.S. (1997) Southeast Asia’s Misunderstood Miracle: Industrial Policy and Economic Development in Thailand, Malaysia, and Indonesia, Boulder, CO: Westview. Kepner, C.D. Jr. and J.H. Soothill (1935) The Banana Empire: A Case of Economic Imperialism, New York: Vanguard Press. Kim Eun Mee (1997) Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960–1990, Albany, NY: State University of New York Press. Kpundeh, S.J. (1995) Politics and Corruption in Africa: A Case Study of Sierra Leone, Lanham, MD: University of America Press. Lainez, V. and V. Meza (1985) “The Banana Enclave,” in N. Perkenham and A. Street (eds), Honduras: Portrait of a Captive Nation, New York: Praeger. Levi, M. (1981) “The Predatory Theory of Rule,” Politics & Society 10(4). Lie, J. (1998) Han Unbound: The Political Economy of South Korea, Stanford, CA: Stanford University Press. Mauro, P. (1995) “Corruption and Growth,” Quarterly Journal of Economics 110(3). —— (1998) “The Effects of Corruption on Growth, Investment, and Government Expenditure,” International Monetary Fund, Working Paper 96/98. Nichols, D. (1998) “The Duvalier Regime in Haiti,” in H.E. Chehabi and J.J. Linz (eds), Sultanistic Regimes, Baltimore, MD: Johns Hopkins University Press. Nye, J.S. (1970) “Corruption and Political Development: A Cost–Benefit Analysis,” in A.J. Heidenheimer (ed.), Political Corruption: Readings in Comparative Analysis, New Brunswick, NJ: Transaction Books. Pasuk Phongpaichit and C. Baker (1998) Thailand’s Boom and Bust, Chiang Mai: Silkworm Books. Pasuk Phongpaichit and Sungsidh Piriyarangsan (1994) Corruption and Democracy in Thailand, Chiang Mai: Silkworm Books. Pons, F.M. (1990) “The Dominican Republic Since 1930,” in L. Bethell (ed.), The Cambridge History of Latin American, Volume VII: Latin American since 1930: Mexico, Central America and the Caribbean, New York: Cambridge University Press.
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Reed, S.R. (1996) “Political Corruption in Japan,” International Social Science Journal 49(3). Reno, W. (1998) Warlord Politics and African States, Boulder, CO: Lynne Rienner. Rotberg, R.I. with C.K. Clague (1971) Haiti: The Politics of Squalor, Boston: Houghton-Mifflin. Schwartz, A. (1994) A Nation in Waiting: Indonesia in the 1990s, Boulder, CO: Westview. Summers, R., A. Heston, B. Aten, and D. Nuxoll, “Penn World Tables, Version 5.6a,” available at http://www.nber.org/pub/pwt56/. Titley, B. (1997) Dark Age: The Political Odyssey of Emperor Bokassa, Montreal: McGill University Press. Transparency International, “Corruption Perception Index,” various years, available at http://www.gwdg.de/~uwvw/. Troullot, M.-R. (1990) Haiti: State against Nation – The Origins of and Legacy of Duvalierism, New York: Monthly Review Press. Vatikiotis, M.R.J. (1993) Indonesian Politics under Suharto: Order, Development, and Pressure for Change, New York: Routledge. Wade, R. (1990) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press. Wedeman, A. (1997) “Looters, Rent-Scrappers, and Dividend-Collectors: Corruption and Growth in Zaire, South Korea, and the Philippines,” The Journal of Developing Areas 31(4). Yoshihara Kunio (1988) The Rise of Ersatz Capitalism in Southeast Asia, New York: Oxford University Press.
2
Political business alliances The role of the state and foreign and domestic capital in economic development Johannes Dragsbaek Schmidt
Most commentators have denounced the Asian financial crisis as the end of authoritarian state-directed capitalism. The crisis emerged with the devaluation of the Thai baht in July 1997 and quickly escalated to encompass most of the economies in East and Southeast Asia. There has been a profileration of explanations about the origins of the financial crisis, of which the four most common were the neoliberal view, an international conspiracy, financial panic, and changes in political and social power at both the domestic and international levels.1 The most important explanation in terms of its direct policy implications is the neoliberal view, associated with the International Monetary Fund (IMF) and the World Bank, which argues that corruption and nepotism were the central factors that contributed to the crisis. Let it be clear from the outset that this chapter does not subscribe to the explanation that one of the major factors which triggered the crisis was a unique East Asian model of statism creating distortions and inefficiencies and involving a specific mode of cronyism with the direct consequence of misallocation of resources. Although this type of explanation is the most common explanation for the crisis, it is also being used by the neoliberal “Washington consensus” to reassert US strategic power and supremacy in the region through the increasing internationalization of capital. Stephen Gill (1999: 1) argues that “there is intense interstate conflict over the form and direction of regional and global patterns of capitalist development. Central to US strategy is the imposition of a specific neoliberal model of restructuring. In the context of recent crises, state-directed and controlled forms of political economy have been, and are being, pressured to liberalize.” According to Gill, these arguments rely on a critique of the East Asian model for giving unfair advantage to local (as opposed to foreign) capital through state subsidies and political patronage. The solution is a free market system (which is ostensibly more efficient and transparent) based on investor interests and the maximization of shareholder value.2 Although I take issue with the argument that the imposition of a free market system is the panacea to the financial crisis as well as a deterent to its re-occurrence, it is also true that the large current account deficits and the loss of competitiveness, with its resulting decrease in exports and attacks on
Political business alliances 63 currencies, is an inadequate explanation for the crisis. I would argue that the pressures arising from globalization, which affected checks and balances provided by state regulation over the economy, or what Peter Evans has termed the embedded autonomy of the state, was a major contributory factor to the crisis.3 In this regard, then, the financial crisis is more related to what Peter Drucker has termed as a “social crisis.” There is no doubt that the crisis is also a crisis of neoliberal globalization, and the reinvention of nationalist economies, primarily through forms of protectionism and control of foreign capital. The resistance against neoliberal globalization and foreign control of the local economies will once again become much stronger – what Polanyi termed the “double movement” – strengthening local (democratic) control over the economies.4 The idea, then, that the concept of “political business” can offer insights into what caused the crisis has strategic as well as ideological consequences which must be taken into consideration. This, however, also questions whether the term “political business” is a unique East Asian variant of capitalism. There are historical and contemporary examples of cosy business–politics relationships in other countries, including the United States, Latin America, the former USSR, and Eastern Europe, not to mention the EU countries. Such alliances might also explain why Taiwan and China escaped the financial crisis in spite of the fact that political business is just as prevalent in these two countries as in other parts of East Asia. To contend then that the crisis occurred because dirigisme and crony capitalism was extensive is both simplistic and unidimensional. I argue here that political business is a strategy pursued by most latecomers and an universally applied type of statism deliberately applied to catch-up in the global economy. This point is well documented by several authors in this volume. What makes the strategy extremely vulnerable in East Asia is the fact that most countries, except the first-comer Japan, and to a certain extent South Korea and Taiwan, have relied heavily on foreign capital as a primary engine in capital accumulation, thus running the risk of retarded uneven development and over-reliance on external factors and actors – i.e. a classical example of dependency. In the ideal-type East Asian model as it developed first in Japan, and later on in South Korea, Taiwan, and Singapore, and to a much lesser degree in Malaysia, Thailand, Indonesia, and the Philippines, the nature of cooperative, long-term, reciprocal relations between companies, financial institutions, and state agencies had evolved significantly before the advent of the crisis. As a matter of fact, the question regarding timing is of outmost importance in this regard as political business alliances are never static. This chapter is divided into three parts. The first is devoted to a discussion on the differences between first-, second- and third-tier NIC economic development strategies in East Asia, and a distinction is made between kleptocratic, predatory, and developmental states. The second deals with the
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heavy dependence of the states in the latter category NIC countries in Southeast Asia on foreign capital to generate rapid economic growth in the 1960s and 1970s. From the mid-to-late 1980s, after massive internal and external pressures to deregulate, liberalize and privatize the financial markets, the impact of the collusion between well-connected or influential private market actors and (usually) short-term financial capital is assessed. The argument is made that extensive liberalization and deregulation of the economy had grave consequences for the nature of political business alliance which led to the ascendancy of capital over the state. The final section rounds up the often heated debate concerning which role is appropriate of the state in economic development in the future, especially taking into consideration that globalization of both markets and politics seem irreversable in the near future.
New wine in old bottles: nurtured political business alliances in East Asia When Woodrow Wilson was President of the United States, he wrote: “Suppose you go to Washington and try to get at your government. You will always find that while you are politely listened to, the men really consulted are the men who have the biggest stake – the big bankers, the big manufacturers, the big masters of commerce, the heads of railroad corporations and of steamship corporations . . . The masters of Government of the United States are the combined capitalists and manufacturers of the United States.”5 While it is true that those with economic power dominate US politics, it is also a truism that irrespective of type of regime, money plays a dominant role in politics. This, then, raises the question whether political business is a phenomenon specific to Asia or if it is an inescapable part of succesful catching-up capitalism. State intervention in the economy has been a major characteristic of all latedeveloping economies. Unlike the private entrepeneur who is conditioned to respond to market events to maximize profits, political business actors (or state entrepeneurs) simultaneously respond to three sets of incentives: market profits, the rewards structured within the party and state hierarchy, and in some cases social and communal demands from their constituencies.6 One might be tempted to use the category “bureaucratic entrepreneurs” when referring to political business actors since we are talking about party and government officials engaged in revenue-generating activities aimed at promoting economic expansion using a vast array of institutional power within the state.7 Even in the case of the United States, during the catching-up process, economic historians have shown that “American industrialization was aided significantly by the intimate association of government and business. The railroad magnates were among the most important entrepeneurs in the American industrial revolution. Through bribery, chicanery and fraud, they
Political business alliances 65 amassed great personal fortunes. The federal government responded by generously giving federal lands to the railroads . . . Toward the end of the nineteenth century, the relationship . . . became a symbiosis in which the government governed in ways big business wanted it to govern and big business furnished the money, organization, and power structure through which politicians could come to power in the federal government” (Hunt and Sherman 1972: 318–19). This form of political business has lasted until today, most manifest in the way big business funds presidential election campaigns.8 In the case of Germany, Bismarck’s bureaucracy, building on the thoughts of Friedrich List,9 created and nurtured a strong domestic business sector but one which had a symbiotic relationship with the state. Paul Sweezy (1953: 224–5) noted that, “the ruling alliance of Junckers and capitalists has combined the reactionary and military stick features of feudalism with the economic strength and expansionism of a highly dynamic capitalism.” This pattern was repeated during the Hitler regime and again with the privatization of the East German state property by the Treuhandanstalt after the demise of Soviet-type socialism. A similar pattern of state–business collusion occurred in late nineteenthcentury Japan where the Meiji government built its own factories in key industries in order to catch-up with the advanced nations of the West. These factories were then sold by the state to favoured private businessmen at ridiculously low prices. Mitsui and Mitsubishi, among Japan’s leading enterprises (or zaibatsu), were developed through such state patronage. A similar system of patronage has existed since the immediate post-WWII period.10 It can be argued that this form of state guidance of the economy in the United States, Germany, and Japan has been replicated in what is now termed “political business relationships” in the second-tier NICs in East and Southeast Asia, though with seemingly less success in Southeast Asia. However, as we noted earlier, while political business alliances can become a strategy to channel available funds to strategic industries in a late-starting and capital-scarce country, if rents are created without the enforcement of a developmental quid pro quo by the beneficiaries, the strategy will have adverse effects on the economy (Evans 1999: 69). It would also be entirely wrong to assert that the type of political business observable in late-comers does not occur in developed countries as well. Examples are legion of the privatization programmes in England, France, and Italy and in Asia’s Anglo-Saxon neighbors New Zealand and Australia which confirm the practice of a system of political patronage that has been implemented in a manner not in the national interests. For example, while the privatization policy has been heavily criticized in England,11 in Australia, allegations are rife of “over-familiarity between leading politicans and big business.”12 This suggests that the relationship between business and the state in East Asia is not as peculiar as some theorists claim. The World Bank World Development Report (World Bank 1991) identified four key features of East Asian policies and interventions that were
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important. First, these economies were noted for their outward orientation. Second, East Asia made sizeable and efficient investment in people. Third, the macroeconomic discipline of the public sector set an example for the entire economy. Public sector discipline in spending ensured that abuse of rents created through government interventions were minimized. Fourth, institutional development was crucial to the success of the “market-friendly” growth paradigm. The state, rather than supplanting the market, supported it (World Bank 1991).13 These features, collectively unique to East Asia, are used to justify support of market-oriented, outward-looking economic policies.14 In contrast to the neoclassical (and World Bank) explanation, a number of scholars have suggested that in any late-comer, state policies help to protect, promote and rationalize industry. This line of argument emphasizes the strategic elements of policy that prove critical to maintain economic growth and develop industry.15 A strategic trade policy16 (which is actually called free trade) is one whereby governments take action that gives commercial firms a credibility which they could not otherwise achieve. One can safely argue that technology stands at the center of such a policy. In a sense, we are concerned here with identifying the optimal way to combine protectionism, promote export-oriented industries, and encourage international investment. Strategic trade policy maintains that comparative advantage can be changed through learning and through government action. This has been clearly shown by a number of East Asian countries which created competitive advantage through judicious interaction of government and private business.17 Strategic trade policy is in fact the neoclassical catchword for neomercantilism or one-way free trade. During the late nineteenth century, neomercantilism referred to the management of national economic and industrial policy, a concept given its most developed expression by Friedrich List, the German political economist. List, in an argument that identified the central importance of industry, advocated systematic, if essentially temporary, protection for a country’s infant industries. The successful promotion of national industries required the preservation or development of suitable institutions and socioeconomic structures. The central idea of neomercantilism is that economic activities are and should be subordinated to the goal of state-building. The essence of both strategic trade policy and neomercantilism lies in the efforts to promote national prosperity and to safeguard national interests by shielding the national economy against outside influences and through aggressive and discriminatory policies favoring domestic capital. Therefore, by putting “politics in command,” the developmental state in the first- and second-tier NICs (Japan, South Korea, and Taiwan) was a major factor in the success of East Asian late industrialization and development. The model was based on the implementation of a specific understanding of political economy, whereby the state assumed the role of guiding the economy without disregarding the importance of the market. Government policy-
Political business alliances 67 making was organically tied to the production factors – land, labour, and capital – in actively creating comparative advantages. This type of political economy system implied an evolutionary approach to economic – and, presumably, political – development, and not a strategy of rapid radical reforms. In order to grasp the essence of the East Asian ideal-type developmental state, which has unfolded over time, with important deviations from country to country, it may be of interest to summarize some of its main characteristics: ● ● ●
● ●
●
●
autonomy of the state (vis-à-vis interest groups) state-exercised financial control over the economy coordinated or corporatized labor relations (either through the carrot or the stick) bureaucratic autonomy (in key economic sectors) administrative guidance in giving preference to some industries over others favored government treatment to private sector organizations, such as trading companies and industrial conglomerates (zaibatsu, keiretsu, chaebol, or caifa) limited and controlled role for foreign capital (Johnson 1987).
Meredith Woo-Cumings (1994: 415), after discussing these interventions, argues that: “This is an ideal-type of a statist utopia that would make Adam Smith turn over in his grave: the state wields power over society and the market at home, and holds foreign interests at bay by means of its formidable gate-keeping power.” State capacities and actions, however, never occur in isolation from the broader domestic and international environment.
The state and economic development in East Asia East Asia’s economic strength is largely based on its ability to maximize its economic growth and exports and minimize imports. Its developmental model rests on a rejection of both communist-style state ownership of the economy and the neoclassical belief that free markets and minimal state interference are the answer. In contrast to the dominant Anglo-Saxon laissezfaire point of view, neomercantilist ideals and practices shaped and fueled Japan’s economy, and was also very influential in Taiwan and Korea until financial deregulation took place in the late 1980s. Strategic industries were targetted for development and declining industries nurtured through a dynamic mixture of corporate collusion and competition. Industrial policies were implemented through a range of mechanisms, including subsidies, import barriers, technology infusions, and export promotions through successful access of East Asian companies to the large markets of North America and Europe. Japan, and later on Korea and Taiwan, used the developmental state to improve their economic position in the world by holding back consumption,
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thereby increasing savings and channeling resources into industrial investment. This was made possible through a specific institutional set-up and its related capacity to implement certain industrial and trade policies. Each of the following fundamental characteristics is also found in the Japanese, Korean, and Taiwanese institutional framework although in differing degrees, depending on pattern of historical evolution and tradeoffs arising from stressing one issue more than the other: ●
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stable rule by a political–bureaucratic elite that does not accede to political demands that would undermine economic growth or security cooperation between public and private sectors under the overall guidance of a pilot planning agency heavy and continuing investment in education, combined with policies to ensure a relative equitable distribution of national income a government that understands the need to use and respect methods of intervention based on the price mechanism; furthermore, the concept of dirigisme denotes a mix of political and economic functions where the notion is the “government that governs best governs most” (see also Table 2.1).
Japanese industrial policies, and to a certain extent those of the states of Korea and Taiwan, were characterized by “controlled competition” in which intense competition between firms in key industrial sectors was partly directed and at times limited by both state action and the formal and informal collaborative efforts between industrial and financial enterprises. The precise rules guiding the system evolved with the structure of the economy, the financial and market strength of the companies, and the political position and objectives of the bureaucracy (Borrus et al. 1988). The promotion of the state’s objectives in Japan were pursued through two sets of policies – those controlling the links between the Japanese market and international markets and those manipulating the domestic enterprises to stimulate expansion. T.J. Pempel once characterized the Japanese state as an Table 2.1 State intervention in East Asia before liberalization State policies
Outcomes
Neomercantilism Non-welfare Moderate consumerism
Import substitution/export orientation High savings/low interest rates Channeling of resources to industrial investment Exclusion of labor
State-productive/financial capital corporatism Soft authoritarianism US security umbrella
Political stability Non-defense
Political business alliances 69 “official doorman” determining what, and under what conditions, capital, technology and manufactured products could enter and leave Japan. This pattern of controlled access, until recently, characterized the functioning of the Ministry of Finance which implemented policies involving selective controls over inward investment. The Ministry of International Trade and Industry (MITI) controlled technology imports in order to force foreigners to sell raw technology in the form of patents, licenses, and expertise. The state in Japan used a system of non-compulsory indicative planning and administrative guidance to accomplish stated objectives. Government plans identified the strategic targets, provided guidance for industrial policy, and bolstered the confidence of the domestic business community. Plans were adjusted according to changes in basic trends of supply and demand. According to Sato, in carrying out indicative planning, the Economic Planning Agency had a number of policy instruments at its disposal including expenditure policy, tax policy designed to promote savings in order to finance capital formation, various extensive off-budget activities such as funds collected by the Postal Savings System, subsidizing industries through favoritism and protectionism, credit policy support, research and development policies that strongly favored strategic technology innovation and application, agricultural policy that protected Japanese farmers’ interests and solidified political support from rural constituencies, and trade policy effectively promoting Japanese exports.18 These observations are consistent with Wade’s analysis of South Korea and Taiwan where the state actively intervened in the trade regime and managed commercial relations. Tariff and non-tariff instruments of protection (for instance, permitting imports of specific products only from countries that were non-competitive suppliers) continued to be significant in influencing the direction of industrialization. In most instances, protection of the domestic market depended on the ability of companies to become competitive in international markets. During the same period, the state maintained tight control over foreign investment through industrial licensing, the imposition of local content requirements and by making protection of foreign investment conditional on performance. The state exerted tight control over the financial sector and allocation of credit, i.e. through exclusion of foreign banks. Stateowned enterprises and parastatals played a significant leadership role in the corporate sector, enabling the authorities to direct discretionary investment incentives and determine which key sectors should be upgraded or downgraded.19 The case of Japan and the second-tier NICs suggests that the achievement of high-speed economic growth depends on the state standing above vested interests to help create the social and political infrastructure for economic growth. In short, technocrats need a degree of insulation, but they cannot operate in isolation, even in an authoritarian setting (Evans 1995: 178). In Japan, for example, the importance of the autonomy of the bureaucracy rests on its pivotal position between the ruling Liberal Democratic Party (LDP)
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and big business. While the LDP had nominally controlled both the legislative and administrative branches of government for more than two decades, public policy was, until recently, made by, and largely at the discretion of, senior bureaucrats.20 The Japanese state, which has been accused of having been a free-rider in the economies abroad, also escaped to a certain degree social obligations in the domestic context.21 The transformation of the Japanese economy from a warfare to a trading state within a brief period of time can be attributed to limited resources spent by the state in the defense and social sectors. Indeed, this complements the explanations mentioned above of how Japan has managed to continously increase national capital accumulation in terms of trade surplus and other revenues-cum-profits. The gears of government and the private sector arguably do mesh better in Japan than in Southeast Asian NICs. Much of the credit for this goes to Japan’s powerful senior bureaucrats who provide the vital connection between political and business establishments on practically all important issues of public policy, and who methodically steer both sides towards national objectives. Ex-bureaucrats were until the 1990s highly prized in the corporate world because of their detailed knowledge of the inner workings of official policy-making and their wealth of personal connections in business, politics and the bureaucracy.
Southeast Asian economic development: impact of foreign capital Contrary to the acknowledged role of statism in the evolution of Japan’s economy, the ASEAN-422 have had a more dependent relationship with international capital to foster economic growth, thus creating fertile ground for another type of political business alliance. The significance of international influence on the ASEAN-4 economies was underlined by a 1996 UNCTAD report which issued a clear warning that these countries relied too heavily on foreign resources, both labor and capital: “Thus, the second-tier NIEs may be unable to sustain large current-account deficits over the longer term; they need to reduce their trade deficits so as to minimize the risk of serious balance of payments problems and a sharp slowdown in growth. Much will depend on their success in enhancing their export potential through upgrading . . . Without upgrading . . . FDI [foreign direct investments] will remain footloose and the economy would be highly vulnerable to interruptions of capital inflows. Concerns over such a possibility have been growing in Thailand and even more in Malaysia in view of their large current account deficits” (UNCTAD 1996: 102, 103). Much of the FDI in Southeast Asia since late 1980s had its origin in East Asia, first from Japan and subsequently from Taiwan and Korea. Malaysia was the main destination of FDI while Indonesia and Thailand were less important in terms of total FDI flows between 1985 and 1994. The Philippines was least important, suggesting that there is some credence to the thesis that
Political business alliances 71 an unstable political climate and a weak state with a limited capacity to impose coherent policies attracts little foreign capital. One major weakness of the second-tier NICs was noted in UNCTAD’s 1996 Trade and Development Report, that with the important exception of the Philippines, the other three Southeast Asian economies were praised for the successful policies which had helped in establishing competitive resource- and labor-intensive industries, but the easy stage of export promotion was coming to an end. Foreign direct investment moved into a number of export-oriented industrialization (EOI) sectors across the region where supply far outstripped demand. Steel, cars, petrochemicals, and semiconductors, to name but a few, were industries where massive foreign investment was made on the unquestioned assumption that record-beating growth would continue indefinitely. The extremely large inflows of productive capital did benefit high-speed growth; for example, in the second half of the 1980s, Malaysia, Thailand, and Indonesia experienced similar growth rates as South Korea and Taiwan in the 1970s, but contrary to their experience the Southeast Asian countries did not build on an experience of successful import-substitution. Unlike the case of East Asia, in Southeast Asia, export-oriented manufacturing soon came to be dominated by subsidiaries of transnational corporations (TNCs) (Bernard and Ravenhill 1995: 172). In some cases, Southeast Asia emerged as a lucrative market for TNC products. One example is Toyota, which invested heavily in the region in order to reduce its dependency on the US car market. Thailand became the company´s second largest market in 1996, and Toyota-Astra Motor accounted for a similar share of the Indonesian market (Boyd 1989: 114). Another heavyweight in terms of FDI in Southeast Asia is Seagate Technology Inc., a leading manufacturer of disk drives, and a prototype “stateless corporation,” moving first to Singapore and then to Thailand. The presence of Seagate, as well as other TNCs such as Mitsubishi, Motorola, Texas International, Intel, National Semiconductor, and Harris (formerly RCA), in the ASEAN-4 economies indicates their heavy reliance on foreign capital to generate growth. Corporate Japan has a particularly strong presence in Southeast Asia. Japanese affiliates employed an estimated 800,000 people across ASEAN economies in 1994. In a number of key industries, Japanese firms have staked out a commanding regional position, with Matsushita Electrical Co. Ltd.’s operations alone said to account for between 4 percent and 5 percent of Malaysia’s GDP. Japanese manufacturers currently control about 90 percent of the automative market in most ASEAN countries (quoted in Wade 1994: 66–7; see also Bello 1997). Yet, and more importantly, there is evidence that most of these TNCs have shown great reluctance to transfer technology to their joint venture partners in the region, an issue openly lamented by some Southeast Asian leaders. There are, however, nationalist incentives as well simple altruistic considerations which condition the view of state and policy elites to nurture and coordinate FDI. Moreover, this dependency on foreign
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capital to promote economic development creates much space for corruption in developing economies.23 Dependency theorists have noted three important points about investments by TNCs.24 First, the advantages of foreign direct investments are unequally distributed between TNCs and host countries because TNCs have the ability to absorb gains that could otherwise be reinvested. Second, TNCs create distortions in the economy by displacing domestic production, utilizing inappropriate technology, and distorting consumer tastes. In addition, their behavior leads to a worsening of income distribution. Third, TNCs may pervert, undermine or influence the political system of host countries (Bornschier and Hanspeter Stamm 1990: 206). Peter Evans has noted the different outcomes of the alliances created between TNCs and politicians in host societies (see Evans 1979, 1987, 1992). Recognition of the importance of state capacity, not simply in the sense of the power of technocrats within the state apparatus but also in the sense of an institutional structure that is durable and effective, is characteristic of what Evans terms “the third wave of thinking about state and development” (Evans 1992: 141). The East Asian states are what Evans terms “embedded states” which, in contrast to the “predatory” state such as Zaire, has a large degree of autonomy which “depends on an apparently contradictory combination of Weberian bureaucratic insulation with intense immersion in the surrounding social structure. How this contradictory combination is achieved depends, of course, on both the historically determined character of the state apparatus and the nature of their social structure in which it is embedded” (Evans 1992: 154). The institutional capacity of the state depends on the nature of the state, of which Evans has noted three different types. The “predatory state,” with Zaire as an example, lacks bureaucratic capacity and has a weak organizational structure in its domestic setting. Furthermore, the state lacks autonomy in its ties with international actors and institutions which affects its capacity to bargain effectively, especially since it is kleptopatrimonialist in the sense that it is highly corrupt and rent-seeking is widespread through a personalized rule and a more or less uncontrolled market. An example of the “intermediate state” is Brazil. The state’s internal structure is fragmented, divided, segmented, and unstable but occasionally it has had a degree of embedded autonomy vis-à-vis external forces. In contrast, the “developmental state” has a high degree of embedded autonomy and some degree of insulation and social connectedness. The state is supported by a stable, coherent and comprehensive bureaucratic organization, what Evans calls “reinforced Weberianism.” The essential argument made by Evans on the role of the state in development can be encapsulated in three points (Evans 1995: 17). First, developmental outcomes depend on both the general character of state structures and the roles states pursue. Second, state involvement can be associated with transformation even if we take sectoral policies such as labor policy, land reforms or other redistributive policies as measures. Finally, an
Political business alliances 73 analysis of states and industrial transformation can not stop with the emergence of the industrial landscape. Successful transformation changes the nature of the state’s private counterparts, making effective future state involvement dependent on the reconstruction of state–society ties. In Southeast Asia, TNCs have been more concerned with establishing ties with the domestic political elite in an attempt to penetrate the market. TNC penetration into the Southeast Asian economy has primarily been through joint ventures. The TNCs in Southeast Asia also tend to establish political business alliances which were potentially profitable for them and the domestic political elite but not in the national interest. In Thailand, for example, local businessmen have managed to develop their corporate base by establishing ties with the political elite as well as with foreign enterprises. Some businessmen have also used such ties to secure political power. For this reason, many of the decisions taken by the cabinet and ministries involved in implementation of key projects were made in a manner baffling to all but those firms that won the contracts. This situation gave rise to widespread speculation that corruption was rife within the state, and the government’s perceived failure to address this problem was considered by many as sufficient proof of extensive corruption. One example was the privatization of telecommunications services by the government, indicative of what has been referred to as the “perfect connections” required to rapidly build up an enteprise (Far Eastern Economic Review 6/12/90). Thaksin Shinawatra, a retired police colonel and scion of a prominent northern Thai family known for its silk-fabric business, who had good relations with the Thai bureaucracy, had left his job in police informationprocessing to sell and lease IBM computers to the government. As IBM’s sole agent in Thailand, Shinawatra built up a 90 percent market share of computer sales. Shinawatra also secured a deal to sell equipment to a US$6 billion project undertaken jointly by British Telecom and the Charoen Pokphand group, a leading Sino-Thai enterprise; the project involved the installation of 2 million telephone lines in Bangkok and 1 million lines in rural areas (Far Eastern Economic Review 13/12/90). Shinawatra subsequently entered mainstream politics and is now Prime Minister of Thailand. In Malaysia, the government’s liberalization polices have been primarily responsible for the surge in foreign and domestic investment which fueled economic growth, particularly after a severe recession in the mid-1980s. However, the privatization policy, part of the government’s liberalization initiatives, became an important avenue through which members of the ruling United Malays’ National Organization (UMNO) and well-connected businessmen have benefited from state patronage. Many of these privatized contracts have been implemented through joint ventures with foreign companies.25 While there is a productive dimension to FDI, i.e. they take over and control productive manufacturing enterprises in ASEAN, there has also been unproductive investments in stocks (i.e. direct portfolio investments – DPI)
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and property as well as loans from foreign banks. Like Thailand, the Philippines liberalized the foreign capital account in the mid-1990s and the banking sector with the result that between 1993 and 1997, approximately US$19.4 billion worth of net portfolio investment flowed into the country. These flows dwarfed the FDI inflows, with estimates of DPI volume ranging from 75 to 90 percent of total investment (Bello 1997). In Thailand, by 1996, local companies and individuals had loans totaling more than US$70 billion – a figure equivalent to more than half the country’s GDP. Thai companies overinvested in redundant manufacturing, and especially in property and land. By the beginning of 1997, half of the loans made to property developers were non-performing. The role of foreign funds flows into the ASEAN-4 in the form of FDI and FPI indicates the various forms in which foreign capital operates in these economies. Although dependency may facilitate increased productivity and enhance skill formation, it can also inhibit indigenous innovation. Dependency can also create political sensitivity among bureaucrats and politicians who might perceive it as an obstacle to their policy and power options.26 Besides the prominent role of foreign capital in the ASEAN-4 economies, companies controlled by ethnic Chinese have proven to be the most dynamic among domestic enterprises. Chinese ownership and control of the ASEAN-4 economies has been an issue of great sensitivity in these multi-racial societies. None of the NICs has ever had to cope with anything like this. While ethnic Chinese entrepreneurial skills have been beneficial in contributing to the opening up of the regions and societies where indigenous enterprise and capital were scarce,27 the social and political problems associated with the Chinese minorities are quite disproportionate to the numbers involved because of their high socio-economic status. All four ASEAN governments have, at times, sacrificed efficiency maximizing considerations for the imperatives of economic nationalism involving measures disadvantageous to ethnic Chinese. Measures of this kind have been blatantly discriminatory during the last 30 years or so (except in the past two decades in Thailand), and it will probably be a long time before it ceases to be a constraint upon government policy-making. Moreover, the Chinese remain open to allegations of wealth concentration which has undermined the development of indigenous capital in spite of the extensive control of the state over the economy in most of these ASEAN-4 countries. Such allegations usually arise during periods of economic crisis. For example, the significance and collusion of ethnic Chinese and foreign capital allegedly partly explains the financial crisis in the ASEAN-4, specifically in Indonesia and Thailand. Undoubtedly, however, many of the indigenous business elite have established similar corporate ties with foreign capital to promote their economic interests. The role of Chinese business in the ASEAN-4 is still limited with regard to its capacity to influence economic policy formulation and implementation. Despite the fact that there are considerable differences in the structure of political business ties among domestic players, it can, however, safely be
Political business alliances 75 claimed that ties between state and capital, from the outset, were also created by policy elites with a nation-building perspective in mind and as a means to develop indigenous capital. Such ties also served to check the growing influence of foreign capital in the ASEAN-4 economies. In Malaysia and Indonesia, political business ties were a means to check the influence of Chinese capital interests; in both countries, although capital accumulation by Chinese enterprises has been significant, Chinese capital remains very subservient to the state. An important difference can be noted here between the impact of political business ties in Southeast Asia as compared to East Asia. In early stages of development in Japan, and later on in South Korea – as was the case in the United States and Germany – political business alliances led to the development of what can be termed as “nurtured entrepeneurs.” In these cases, a strong business sector was nurtured and subsidized by an autonomous state behind protective walls. In Southeast Asia, however, the evidence suggests that what emerged were primarily “dependent comprador political business alliances,” i.e. weak indigenous capital operating in an economy characterized by the strong position of ethnic Chinese enterprises along with a dependence on foreign capital to promote economic growth.
The state, corruption, and corporate development The development of the economy in East and Southeast Asia following democratization brings into question the conventional wisdom that the free market and democracy hinder corruption in government. In their report entitled, “The New Corruption,” Barbara Harriss-White and Gordon White noted that, “in some contexts . . . the amount of corruption has increased along with and apparently as result of economic liberalization.” The replacement of discretionary controls over prices and the production and distribution of goods and services should according to theory limit the scope for rentseeking behavior within the state. A separate report, based on empirical studies in southern India suggests that deregulation may be accompanied by “mutations in relations of corruption” or it just displaces corruption to other actors and spheres of activities.28 In other words, Asia is dealing with new forms of graft that have adjusted to or are products of liberalization and deregulation. If economic reform does not automatically quell corruption, neither does democracy. Following the 1996 general election in Thailand, which was widely regarded as the “dirtiest” ever, some observers concluded that democratic politics stimulated corruption. In this environment, in the implementation of Thailand’s development plans, especially infrastructure projects, there were numerous avenues for politicians with the help of foreign and domestic capital to indulge in illegal money-raising activities. In the Philippines, bribery allegations threatened to turn the US$2.3 billion Manila Bay landdevelopment project into the biggest scandal of President Fidel Ramos’s
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tenure. Opposition senators claimed the project’s developer paid kickbacks to officials of the government agency that sold the land to Ramos’ Lakas-NUCD Party. In South Korea, Thailand and Indonesia, instances of corruption have typically come to light in the wake of political upheaval, as new leaders try to gain mileage by taking their predecessors to task for past offences. Similar allegations of corruption, involving nepotism and cronyism, were made by Malaysia’s former Deputy Prime Minister Anwar Ibrahim when he was removed from office by Prime Minister Mahathir Mohamad. The scale of political patronage in Malaysia, especially through privatization, has been significant, justified as a means to improve the efficiency of public enterprises, though it has led to numerous allegations corruption and conflicts-of-interest involving senior politicians. While most recipients of political patronage depend heavily on foreign or Malaysian Chinese companies to implement the concessions they secure from the government, questions have also been raised of the form of corporate development undertaken by those privy to much state support. One of the most important lessons of the financial crisis is that Southeast Asia’s remarkable rates of economic growth, together with the emergence of new corporate high fliers, have to a very large degree been a phenomenon that has masked the reality that many of the largest enterprises possess few of the fundamentals necessary for long-term viability. Southeast Asia’s industrial growth has, in contrast to Japan and the second-tier NICs, been too heavily dependent on foreign investment and technology, devoid of an indigenous technological culture or a domestic base of capital for long-term productive investment. Instead, a business culture has been incubated involving much short-term speculative activity in trade, finance, and property, combined with a scramble to seek profits and commercial advantage through political patronage. The dynamism of these economies is attributable primarily to foreign investors and to the ubiquitous Chinese enterprises which tend to dominate the most productive domestic side of economic activity.29 In conclusion, the state in Southeast Asia has not been successful in nurturing entrepreneurial domestic capitalists in spite of the extensive state support the latter has received. The key difference in political business ties in the ASEAN-4 as opposed to the NICs is that the former have relied to heavily on foreign capital and has not managed to develop a significant number of independent, dynamic, growth-oriented large-scale enterprises. One reason for this is that the ties between politicians and business in Malaysia, Thailand, the Philippines, and Indonesia (and to a certain degree Korea) have been far too close. This was not the case in Singapore, the one country which has a strong state and minimal corruption. In Taiwan, the KMT had been financially independent of capitalists and KMT leaders never saw the need to cultivate close ties with businessmen. The extent of autonomy of the state from business suggests that this enables the state to act in the national interest as well as keep a check on corruption.
Political business alliances 77 I have argued that the financial crisis was not triggered by a unique East Asian model of statism creating distortions and inefficiencies and involving a specific mode of cronyism or political business with the direct consequence of misallocation of resources. This study does, however, argue that economic liberalization does not necessarily lead to a reduction of corruption. In fact, the basic problem is underregulated markets, at both both the national and international levels, indicating the need to discipline markets and steer policies in a predetermined direction in the national interest.
Notes 1 For a brief and concise discussion on each of these four explanations, see Beeson and Rosser (1999). 2 The causes of the East Asian crisis cannot be explained at the ideological level alone. Other explanations for the cause of the crisis have been offered, four of which are worth mentioning: (i) global overproduction and the fact that all economies gave preference to an export-oriented development model; (ii) forced deregulation of financial and monetary control in East Asia by the IMF, World Bank, and OECD in collaboration with international capital; (iii) the revaluation of the yen and later on the devaluation of the Chinese renminbi which caused tremendous competitive pressure on the export-oriented economies adding to chronic overproduction; and (iv) the growing influence and pressures from national business sectors on policy-makers to prematurely deregulate the financial sectors. The result was overborrowing by the private market actors and a typical private sector debt crisis. Since significant segments of the private sector had become dependent on foreign finance, well illustrated by the unserviceable private sector debt problem, this also indicates that weak state regulation had allowed the private sector unrestricted access to international finance (Schmidt 2000: 236). 3 According to Evans (1989: 561), the efficacy of the “embedded autonomy” of the developmental state “depends on a meritocratic bureaucracy with a dense set of institutionalized links to private elites.” 4 A Japanese official, Eisuke Sakakibara, from the Ministry of Finance voiced East Asian frustration with the imposition of US hegemony in the region in his speech, which was well entitled, “The End of Market Fundamentalism.” See Gill (1999: 8). 5 Wilson (1914: 57–8). Quoted in Hunt and Sherman (1972: 302). 6 See also Gore (1997: 3–4, 17). 7 For a further discussion on the term “bureaucratic entrepreneurs,” see Gore (1997). 8 This was evidently clear when Bill Clinton was elected President with the aid of big capital in Wall Street as well as from Asia. See Kristoff and Sanger (1999). 9 An in-depth discussion of Friedrich List’s views on the benefits of the links between the state and business to promote economic development is provided later in this chapter. 10 Chapter 10 on Japan in this volume provides an in-depth review of the system of patronage in the post-war period. See also “Graft and the System,” Far Eastern Economic Review (6/8/76: 80). 11 For a critique, see The Privatisation Network (1996): The Multinational Bid for Public Services, The Public Services Privatisation Unit, London, January. 12 See “Labor’s Business Mates: The ‘Corporate State,’” Far Eastern Economic Review (28/7/88: 28).
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13 In a later study, the highly celebrated “East Asian Miracle Report,” the World Bank became more specific, by pointing out the occasional need for an active state role in instances where social returns exceed private gain and some degree of intervention can then make a large difference. This is a middle-ground strategy emphasizing some intervention in getting the fundamentals right and “shared growth,” but it is not laissez-faire or active industrial policy (see World Bank 1993). See also the compelling critique and discussion in Fishlow et al. (1994). 14 Neoclassical economists have attributed growth in the East Asian NICs and in Southeast Asia to government success at “getting prices right,” at letting free market-based price signals determine the most efficient allocation of resources for national economic growth. See for example, Belassa (1981); James, Naya, and Meyer (1989); and Noland (1990). For a convincing critique of the neoclassical theory, see the introductory chapter in Wade (1990: 3–33). 15 See the discussion in Wade (1988, 1992), Wade and White (1988). 16 I use “strategic trade policy” and “neomercantilist policy” interchangeably. 17 See among others, Amsden (1989). 18 A useful discussion on the nature of indicative planning is found in Sato (1990: 625–47). 19 See the two concluding chapters in Wade (1990: 297–381). 20 Since the late 1980s, the autonomy of the bureaucracy has increasingly been challenged. Fierce inter-agency competition and a push from below by local constituencies for greater involvement in policy-making has complicated this quite static set-up between the LDP and the bureaucracy. 21 Numerous complaints have been made, especially by the United States, about Japan’s ruthless attack on global markets and its bombardment of trading partners with products, disregarding local industrial or economic conditions. 22 Indonesia, Malaysia, Thailand, and the Philippines. 23 Corruption has become a widespread global problem, with TNCs sometimes paying huge bribes to win business. Bribes usually consist of approximately 10–20 percent of the costs of a deal, which may be paid to both public officials and politicians. What is most significant, however, is the fact that this amount in many cases is added to the total cost of the business deal. See, for instance, MoodyStuart (1997). 24 There is some concern over the influence of TNCs in the world economy. At the end of the twentieth century, TNCs accounted for 80–90 percent of world trade (excluding the former planned economies, though even in these economies it has acquired more than a foothold interest). The pace of capital concentration into fewer and larger corporations has been sped up to levels hitherto unimagined. For a further discussion on TNC influence in the global economy, see Clairmonte (1988). 25 See Chapter 3 on Malaysia in this volume for an in-depth discussion on UMNO patronage and the implementation of privatized contracts with the support of foreign enterprises. 26 For an excellent discussion of dependency’s impact in the region, see Bernard and Ravenhill (1995: 208–9). 27 On the early history of Southeast Asian Chinese, see Skinner (1957) and SomersHeidhues (1974). For a contemporary account of Chinese enterprises in Southeast Asia, see McVey (1992); Chirot and Reid (1997); and Gomez (1999). 28 This quotation is from Aparisim Ghosh et al., “Corruption: Reform’s Dark Side,” Far Eastern Economic Review (20/3/97: 18). 29 Richard Robison, “Doing it their way,” review of Behind the Myth: Business, Money and Power in Southeast Asia by James Clad, London: Unwin Hyman, in Far Eastern Economic Review (8/2/90: 36).
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References and further reading Akyüz, Y. (1998) “The East Asian Financial Crisis: Back to the Future,” paper presented at a seminar on “Impacts of the Asian Currency Crisis on Europe’s Growth Prospects,” EIAS, Brussels, January 20. Amsden, A. (1989) Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press. Beeson, M. and A. Rosser (1999) “The East Asian Crisis: A Brief Overview of the Facts, the Issues and the Future,” Working Paper 86, Asia Research Centre, Murdoch University. Belassa, B. (1981) The Newly Industrializing Countries of the World Economy, New York: Pergamon. Bello, W. (1997) “Addicted to Capital: The Ten-Year High and Present-Day Withdrawal Trauma of Southeast Asian Economies,” www.focusweb.org/focus/ library. Bernard, M. and J. Ravenhill (1995) “Beyond Product Cycles and Flying Geese. Regionalization, Hierarchy, and the Industrialization of East Asia,” World Politics 47. Bornschier, V. and H. Stamm (1990) “Transnational Corporations,” Current Sociology 38(2/3). Borrus, M., L. D’Andrea Tyson, and J. Zysman (1988) “Creating Advantage: How Government Policies Shape International Trade in the Semiconductor Industry,” in P.R. Krugman (ed.), Strategic Trade Policy and the New International Economics, Cambridge, MA: MIT Press. Boyd, G. (1989) Pacific Trade, Investment and Politics, London: Pinter. Chirot, D. and A. Reid (eds) (1997) Essential Outsiders: Chinese and Jews in the Modern Transformation of Southeast Asia and Central Europe, Seattle: University of Washington Press. Clairmonte, F.C. (1988) The Political Economy of Transnational Power in Partisan Scholarship: Essays in Honour of Renato Constantino, Manila: JCA. Evans, P. (1979) Dependent Development: The Alliance of Multinational, State and Local Capital in Brazil, Princeton, NJ: Princeton University Press. —— (1987) “Class, State, and Dependence in East Asia: Lessons for Latin Americanists,” in F.C. Deyo (ed.), The Political Economy of the New Asian Industrialism, Ithaca, NY: Cornell University Press. —— (1989) “Predatory, Developmental, and Other Apparatuses: A Comparative Political Economy Perspective on the Third World State,” Sociological Forum 4(4). —— (1992) “The State as a Problem and Solution: Predation, Embedded Autonomy, and Structural Change,” in S. Haggard and R.R. Kaufman (eds), The Politics of Economic Adjustment: International Constraints, Distributive Conflicts, and the State, Princeton, NJ: Princeton University Press. —— (1995) Embedded Autonomy: States & Industrial Transformation, Princeton, NJ: Princeton University Press. —— (1999) “Transferable Lessons? Re-examining the Institutional Prerequisites of East Asian Economic Policies,” in Y. Akyüz (ed.), East Asian Development: New Perspectives, London: Frank Cass. Fishlow, A., D. Rodrik, and C. Gwen (1994) “Miracle or Design: Lessons from the East Asian Experience,” Policy Essay 11, Washington, DC: Overseas Development Council.
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Gill, S. (1999) “The Geopolitics of the Asian Crisis,” Monthly Review 50(10). Gomez, E.T. (1999) Chinese Business in Malaysia: Accumulation, Ascendance, Accommodation, Honolulu: University of Hawaii Press. Gore, L.L.P. (1997) “Bureaucratic Entrepreneurs: Politically and Socially Embedded Economic Actors,” Working Paper 83, Asia Research Centre, Murdoch University. Hunt, E.K. and J. Sherman (1972) Economics: An Introduction to Traditional and Radical Views, New York: Harper & Row. James, W.E., S. Naya and G.M. Meyer (1989) Asian Development: Economic Success and Policy Lessons, Madison, WI: University of Wisconsin Press. Johnson, C. (1986) “The Non-Socialist NICs: East Asia,” International Organization 40(2). —— (1987) “Political Institutions and Economic Performance: The Government– Business Relationship in Japan, South Korea and Taiwan,” in F.C. Deyo (ed.), The Political Economy of New Asian Industrialism, Ithaca, NY: Cornell University Press. Kristoff, N., with D.E. Sanger (1999) “How US Wooed Asia to Let Cash Flow,” New York Times (February 16). McVey, R. (ed.) (1992) Southeast Asian Capitalists, Ithaca, NY: Cornell University Press. Moody-Stuart, G. (1997) Grand Corruption: How Business Bribes Damages Developing Countries, Oxford: World View Publishing. Noland, M. (1990) Pacific Basin Developing Countries: Prospects for the Future, Washington, DC: Institute for International Economics. Sato Kazuo (1990) “Indicative Planning in Japan,” Journal of Comparative Economics 14. Schmidt, J.D. (2000) “Neoliberal Globalization, Social Welfare and Trade Unions in Southeast Asia,” in B. Gills (ed.), Globalization and the Politics of Resistance, London: Macmillan. Skinner, W. (1957) Chinese in Thailand: An Analytical History, Ithaca, NY: Cornell University Press. Somers-Heidhues, M. (1974) Southeast Asia’s Chinese Minorities, Hawthorn, NY: Longman Southeast Asia Series. Sweezy, P. (1953) The Present as History, New York: Monthly Review Books. UNCTAD (1996) Trade and Development Report 1996, Geneva: UNCTAD. Wade, R. (1988) “The Role of Government in Overcoming Market Failure: Taiwan, Republic of Korea and Japan,” in H. Hughes (ed.), Achieving Industrialization, Cambridge: Cambridge University Press —— (1990) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press. —— (1992) “East Asia’s Economic Success. Conflicting Perspectives, Partial Insights, Shaky Evidence,” World Politics 44(1). —— (1994) “Selective Industrial Policies in East Asia: Is The East Asian Miracle Right?,” in A. Fishlow, D. Rodrik, and C. Gwen, “Miracle or Design: Lessons from the East Asian Experience,” Policy Essay 11, Washington, DC: Overseas Development Council. Wade, R. and G. White (1988) “Developmental States and Markets in East Asia: An Introduction,” in G. White (ed.), Developmental States in East Asia, London: Macmillan.
Political business alliances 81 Wilson, W. (1914) The New Freedom, Garden City, New York: Doubleday. Woo-Cumings, M. (1994) “The ‘New Authoritarianism’ in East Asia,” Current History 93(587). World Bank (1991) World Development Report 1991, New York: Oxford University Press. —— (1993) The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press. —— (1996) Managing Capital Flows in East Asia, Washington, DC: World Bank.
3
Political business in Malaysia Party factionalism, corporate development, and economic crisis Edmund Terence Gomez
State, patronage, and money politics State–business linkages, particularly ownership of private companies by public enterprises, in Malaysia as well as in most parts of East Asia, have been well documented (Bowie 1991, 1994; Haggard 1990; Hewison et al. 1993; MacIntyre 1994). In Malaysia, there is another dimension to such linkages, that is that political parties in the ruling coalition have owned or controlled major enterprises (see Gomez 1990, 1991, 1994). The extent of direct political party ownership of companies has, however, diminished considerably since the late 1980s. During this period, with active privatization, state ownership of companies has also been reduced, though political control over business has taken on more subtle forms. Politicians now have significant control over major firms. The concept of political business is used here specifically to analyze the evolving links between politicians and large-scale enterprises, with special emphasis on the changing pattern of ownership and control ties of politically well-connected companies. The practice of political business has been facilitated by the extent of authoritarianism in Malaysia. Since the 1980s, Malaysian authoritarianism has been characterized by the centralization of power in the executive arm of government, particularly in the hands of Prime Minister Mahathir Mohamad’s United Malays’ National Organization (UMNO), even though the government is ruled by a multi-racial, multi-party coalition, the Barisan Nasional (BN, or National Front). Through repeated amendments to the Federal Constitution with its majority in parliament, UMNO has reduced the capacity of other arms of government to enforce checks and balances within the state (Lee 1995; Crouch 1996). Uneven influence or control over the state has led to unequal access to economic rents by those aligned with the ruling elite. In spite of the repercussions of political business, the economy recorded high growth rates between 1988 and 1997, when the economy moved into a serious recession following a financial crisis which affected most of East Asia. Although one objective of political business, involving the need to raise and channel funds into the political arena, has remained unchanged since the practice first emerged in the 1970s, other goals of government leaders have
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influenced forms of state patronage. Mahathir has shown a keen determination to achieve industrialized nation status for Malaysia by the year 2020, as well as create an ensemble of dynamic, entrepreneurial Malay capitalists. Mahathir’s vision includes the creation of huge conglomerates of international repute. The high degree of autonomy that the Prime Minister has within the state has allowed him to selectively distribute government-created rents. Mahathir has justified this form of patronage by arguing that the best way to create Malay capitalists is to distribute rents to those most capable of generating wealth. As the Prime Minister actively pursued his idea of “picking winners,” this contributed to a change in the nature of political business, from a form that was institutionalized, involving a state-sanctioned policy of developing and distributing rents to the indigenous community, to one conducted through government leaders on a personalized basis to select individuals. Since political power has become an avenue to wealth, this has heightened party factionalism as other members aspire to high office. The distribution of rents to develop a grassroots base has led to greater use of money in UMNO elections, which has increased ties between business and politics. A distinctive feature of Malaysian politics is “money politics,” which includes, among other things, favoritism, conflicts of interest and nepotism in the award of state-created rents, securing votes during federal and party elections by disbursing current and future material benefits, and the direct and indirect interference of political parties or influential politicians in the corporate sector. This article focusses on the aspect of money politics that pertains primarily to the influence of politics on business, exploring how its widespread practice has evolved and its implications for the Malaysian economy.
The roots of political business The involvement of political parties in business has a long history and is partly linked to the multi-ethnic nature of Malaysia’s ruling coalition. A primary cause for ethnic tension has been economic factors, particularly those affecting the Chinese and the Malays (Hua 1983; Jesudason 1989). Economic competition precipitates ethnic tension since most political parties perpetuate ethnic identification, especially those based on and run along ethnic lines. Although the governing BN is a multi-racial coalition comprising over a dozen parties, it is dominated by the Malay-based UMNO, while its main coalition partners, the Malaysian Chinese Association (MCA) and the Malaysian Indian Congress (MIC), are also ethnically based. Even the professedly multi-racial Gerakan Rakyat Malaysia (Malaysian People’s Movement), another prominent BN member, and the main opposition Democratic Action Party (DAP) solicit and secure their support primarily from one ethnic community, the Chinese. The other major opposition parties, the Malay–Muslim based Parti Se-Islam Malaysia (Malaysian Islamic Party) and the multi-racial Parti Keadilan Nasional (National Justice Party), draw their support primarily from the Malay community.
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Political party involvement in business has been evident from the time the three main BN parties – UMNO, MCA, and MIC – were established. The MCA, launched in 1949, ran a million-ringgit prize lottery for members that helped increase appreciably its membership. UMNO, after being set up in 1946, initiated various business ventures, ostensibly to help increase Malay participation in business; all these ventures failed owing to poor management and lack of expertise. The MIC, established in 1946, promoted a cooperative in 1955 that was instrumental in garnering it much Indian support. Despite these three parties’ early involvement in business, their ownership and control of major private and public-listed companies increased considerably only from the 1970s. The extensive involvement of political parties in business from the 1970s can be traced to the watershed events of the May 1969 race riots. The riots were partly ascribed to the inequitable distribution of wealth among ethnic communities. In response, the following year, the government introduced the New Economic Policy (NEP), an ambitious 20-year social engineering plan. The NEP hoped to achieve national unity by eradicating poverty, irrespective of race, and restructuring society so as to achieve inter-ethnic economic parity between the predominantly Malay Bumiputera (or “son of the soil”) and the predominantly Chinese non-Bumiputera. The NEP entailed partial abandonment of the laissez-faire style of economic management in favor of greater state intervention, primarily for ethnic affirmative action, including the accelerated expansion of the Malay middle class, capital accumulation on behalf of the Malays, and the creation of Malay capitalists. This was to be attained by increasing Bumiputera corporate equity ownership to 30 percent and by reducing the poverty level to 15 percent by 1990. Among the measures used to achieve these goals were improving the access of the poor to training, capital and land; changing education and employment patterns among Bumiputeras through the introduction of ethnic quotas favoring their entry into tertiary institutions; requiring companies to restructure their corporate holdings to ensure at least 30 percent Bumiputera ownership; and by allotting publicly listed shares at par value or with only nominal premiums to Bumiputeras. The NEP has been rather successful in achieving these goals (see Table 3.1). In 1970, the Bumiputera share of corporate wealth (by individuals and government trust agencies) amounted to a mere 2.4 percent, Chinese equity ownership stood at 27.2 percent, while a bulk of the remaining equity was under foreign ownership. By 1990, public sector accumulation on behalf of Bumiputeras, government regulation of business and investments, and preferential policies for Bumiputera businesses all helped to augment Bumiputera equity in public-listed companies to 19.3 percent. Chinese share of the corporate sector also rose to 45.5 percent in 1990. Foreign ownership of corporate equity fell substantially to 25.4 percent. Of the 19.3 percent Bumiputera share, Bumiputera individuals held 14.2 percent and government-owned trust agencies the balance (see Table 3.1). More importantly, the share held by
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Table 3.1 Malaysia: ownership of share capital (at par value) of limited companies, 1969–95 (percent) 1969 1970 1975 1980 1985 1990 1995 Bumiputera individuals and trust agencies Chinese Indians Nominee companies Locally controled companies Foreigners
1.5 22.8 0.9 2.1 10.1 62.1
2.4 27.2 1.1 6.0 – 63.4
9.2 n.a. n.a. n.a. – 53.3
12.5 n.a. n.a. n.a. – 42.9
19.1 33.4 1.2 1.3 7.2 26.0
19.2 45.5 1.0 8.5 0.3 25.4
20.6 40.9 1.5 8.3 1.0 27.7
Source: Seventh Malaysia Plan, 1996–2000. Note n.a.: not available.
individual Bumiputeras rose from 1.6 percent in 1970 to 18.6 percent in 1995. This figure, though considerably short of the NEP’s 30 percent target, was a remarkable increase in Bumiputera corporate shareholding, achieved after only 20 years. This increase in Bumiputera shareholding appeared to justify the contention of government critics that the main emphasis of the NEP from the outset was wealth restructuring, particularly the creation of Malay capitalists. In fact, the government’s ethnic ownership figures, particularly that of the Bumiputeras, has been widely criticized, even by non-Bumiputera BN members, including the MCA and Gerakan, as being rather understated (see Malaysian Business 16/10/86). As state intervention in the economy increased, the MCA and MIC began to argue that it was important for them to participate in business to accumulate wealth on behalf of the communities they claimed to represent. These parties, stressing that in an increasingly politicized economy there was a need for the non-Malays to protect and build their own economic interests, became actively involved in business from the early 1970s. The arguments by the MCA and the MIC proved effective in mobilizing support from non-Malays, many of whom felt alienated by the NEP. The MCA rapidly developed a sprawling public-listed conglomerate, Multi-Purpose Holdings Bhd; incorporated in 1975, it had emerged by 1982 as the second largest shareholder of corporate stock (Gale 1985; Yeoh 1987). However, following many embarrassing exposes of corruption and mismanagement of MCA-controlled firms, in 1987, the party promised to stop mixing politics and business. But the MCA retained ownership of Huaren Holdings Sdn Bhd, its private holding company that controls public-listed Star Publications Bhd, publisher of a popular English tabloid, The Star. Despite similar allegations of corruption and conflicts of interest involving MIC leaders and mismanagement of companies and cooperatives under the party’s control, these enterprises remain a major avenue for the practice of patronage, usually in the form of appointments as company directors. These MIC-linked businesses, unlike those controlled by the MCA, have made little impact in the corporate sector.
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As UMNO hegemony grew, Chinese businessmen began directly supporting the Malay party as a means to secure access to state rents. Chinese businessmen had also felt threatened by the MCA’s participation in business. These factors diminished the MCA’s influence among Chinese businessmen, though a few individuals linked to the party have emerged as major corporate figures. The most prominent is Ling Hee Leong, the 27-year-old son of the MCA president Ling Liong Sik, who acquired an interest in eleven publiclisted companies between 1995 and 1996 (The Star 31/12/96).1 Most leading Chinese and Indian businessmen who have emerged since the 1980s, such as Vincent Tan Chee Yioun, Ting Pek Khiing, T.K. Lim, Joseph Chong, Tong Kooi Ong, and T. Ananda Krishnan, are directly or indirectly linked to Malay leaders, particularly Prime Minister Mahathir, former Deputy Prime Minister Anwar Ibrahim, and Finance Minister Daim Zainuddin.
Creating a politically linked “new rich” With growing state intervention in the economy, some UMNO leaders realized that the party’s hegemony allowed them access to state rents that could be disbursed to develop a powerful party base. Since UMNO had actively encouraged Malays to develop a “subsidy mentality” and to view the state as a protector of their interests (Chandra 1979), the distinction between patronage and NEP implementation became increasingly blurred. This helped justify the apportionment of state rents to a distinct minority. Eventually, although equity redistribution and patronage led to changes in ethnic ownership patterns and the creation of a new rich, it also contributed to growing intraethnic class differences among Bumiputeras. By the mid-1980s, criticism of wealth concentration, normally made by non-Malays, was increasingly coming from the new Malay middle class who were having little access to state rents. A key reason for the rapid rise of a predominantly Malay new rich was the appointment of Mahathir as Prime Minister in 1981. Mahathir had long held the view that the state was obliged to promote Malay capitalism to create parity between Malay and Chinese capitalists. For Mahathir, as he has publicly stated, if there are 10 Chinese millionaires, there is no reason why there should not be 10 Malay millionaires. Mahathir had, however, constantly reminded Malays that the NEP was only a temporary remedy to rectify past injustices and that those benefiting from state patronage had to develop the knowledge and expertise to build on these rents. In view of Mahathir’s explicit desire for the development of Bumiputera capitalists through state patronage, via policies such as the NEP – and since the mid-1980s, privatization (Jomo 1995) – a number of large business groups controlled by well-connected Bumiputeras have emerged. Table 3.2 provides a list of some of the major corporate figures, the list of companies in which they own an interest or hold a directorship, and their affiliations with UMNO or key UMNO leaders.2
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Table 3.2 Reputed political connections of some prominent business figures Name
Public-listed company
Background
Halim Saad
Renong Daim protégé. Halim publicly United Engineers (M) (UEM) admitted in 1988 that he held Kinta Kellas UMNO’s vast corporate Time Engineering holdings in trust for the party. Ho Hup Construction He worked for Daim when the Faber Group latter was in charge of FCW Holdings Peremba, then a governmentPark May owned company. Crest Petroleum
Tajudin Ramli
Malaysia Airlines Malaysian Helicopter Services Technology Resources Industries
Daim protégé; worked for him in Peremba.
Wan Azmi Wan Hamzah
RJ Reynolds Land & General Rohas-Euco Industries Bell & Order Systematic Education Group
Daim protégé; worked for him in Peremba.
Samsudin Abu Hassan Granite Industries Austral Amalgamated Dataprep Holdings
Daim protégé; worked for him in Peremba.
Ahmad Sebi Abu Bakar
Advance Synergy Prime Utilities United Merchant Group Ban Hin Lee Bank
Daim protégé, though once also associated with Anwar. Anwar’s contemporary at the University of Malaya.
Tunku Abdullah
Malaysian Assurance Alliance Melewar Corporation George Town Holdings Aokam Perdana Malayan Cement MBf Capital Bhd MBf Holdings Bhd
Former UMNO MP; Mahathir’s long-term close associate.
Yahya Ahmad (died 1997)
HICOM Holdings Diversified Resources Gadek (M) Gadek Capital Edaran Otomobil Nasional (EON) Perusahaan Otomobil Nasional (Proton) Kedah Cement Holdings Cycle & Carriage Bintang Golden Pharos Uniphoenix Corporation
Mahathir protégé. Anwar’s school contemporary.
Tengku Adnan Mansor Star Publications Berjaya Group Berjaya Singer
Former UMNO Youth Treasurer and Supreme Council member. (continued)
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Table 3.2 (continued) Name
Public-listed company
Background
Tengku Adnan Mansor Berjaya Industrial (continued) EMC Logistics Minho Dunham-Bush (M) Rashid Hussain
Rashid Hussain DCB Bank Kwong Yik Bank
Daim associate; also connected with Anwar.
A. Kadir Jasin Nazri Abdullah Mohd Noor Mutalib Khalid Ahmad
New Straits Times (NSTP) TV3 Malaysian Resources Corp Malakoff Commerce Asset Holdings
Anwar supported their takeover of NSTP and TV3 in 1993. Kadir remains a Daim associate.
Abdul Mulok Damit
Pengkalen Industrial Holdings UMNO MP; Daim associate. Construction & Supplies Jointly owns these companies House with Joseph Ambrose Lee.
Ishak Ismail
KFC Holdings (M) Idris Hydraulic Golden Plus Holdings Ayamas Food Corporation Best World Land Promet Pintaras Jaya Scientex Incorporated Gemtech Resources
Former secretary of Anwar’s UMNO division.
Mohamed Sarit Yusoh KFC Holdings (M) Ayamas Food Corporation Golden Plus Holdings Malayawata Steel Khee San Goh Ban Huat Syarikat Kurnia Setia
Former political secretary to Anwar.
Amin Shah Omar Shah PSC Industries Setron (M) Atacorp Holdings Kedah Cement Holdings Daibochi Plastic & Packaging Industry
Active in UMNO. Daim protégé.
Basir Ismail
Cycle & Carriage Ltd Cycle & Carriage Bintang Cold Storage United Plantations Fima Corporation
Mahathir close associate.
Mohd Noor Yusof
Datuk Keramat Holdings George Town Holdings
Former political secretary to Mahathir. Had majority ownership of UMBC before divesting to state-controlled Sime Darby.
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Table 3.2 (continued) Name
Public-listed company
Background
Kamaruddin Jaffar
Sabah Shipyard Wing Teik Holdings Westmont Industries Inch Kenneth Kajang Rubber plc Mercury Industries
Kelantan UMNO leader; old Anwar confidante.
Kamaruddin Mohamad Nor
Eastern & Oriental Dialog Group
Kelantan UMNO leader; old Anwar confidante.
Shuaib Lazim
Ekran George Town Holdings
Close associate of Mahathir and Daim. Former UMNO state assemblyman.
Anuar Othman
Konsortium Perkapalan
Ex-Daim protégé at Peremba; now associated with Anwar. Former UMNO business trustee.
Hassan Abas
Cycle & Carriage Bintang
Daim protégé at Peremba.
Shamsuddin Kadir
Sapura Holdings Mahathir associate. Uniphone Telecommunications
Azman Hashim
AAMB Holdings Arab-Malaysian Corporation Arab-Malaysian Finance Arab-Malaysian First Property Trust Arab-Malaysian Development South Peninsular Industries
UMNO member. Founding director of Fleet Holdings, UMNO’s main investment holding company.
Ibrahim Mohamed
Uniphoenix Corporation Damansara Realty
Mahathir associate.
Ibrahim Abdul Rahman
Industrial Oxygen Inc.
Anwar’s father. Former UMNO MP.
Mirzan Mahathir
Mamee-Double Decker Lion Corporation Dataprep Holdings Konsortium Holdings KIG Glass Industrial Sunway Building Technology Worldwide Holdings Artwright Holdings
Mahathir’s first son.
Mokhzani Mahathir
Tongkah Holdings Technology Resources Industries Parkway Holdings Pantai Hospital UCM Industrial Corporation
Mahathir’s second son.
Mukhriz Mahathir
Reliance Pacific
Mahathir’s third son. (continued)
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Table 3.2 (continued) Name
Public-listed company
Background
Ahmad Zahid Hamidi
Kretam Holdings
Anwar associate; UMNO Youth Head until Anwar’s expulsion; MP.
Ting Pek Khiing
Ekran PWE Industries Pacific Chemicals Granite Industries Wembley Industries
Close Daim and Mahathir associate.
Vincent C.Y. Tan
Berjaya Group Berjaya Sports Toto Berjaya Singer Berjaya Leisure Dunham-Bush Hospital Pantai Sun Media Group Unza Holdings
Usually associated with Daim, but also Mahathir.
T.K. Lim
Multi-Purpose Holdings Kamunting Corp. Magnum Corp. Bandar Raya Developments
Close Daim associate, believed to have become closer to Anwar.
Joseph C.A. Chong
Westmont Westmont Land Asia Samanda Holdings Wing Teik Holdings
Associated with Anwar through Kamaruddin Jaffar.
T. Ananda Krishnan
Tanjong Binariang Pan Malaysian Pools Seri Kuda
Associated with Mahathir and Razaleigh.
Source: KLSE Annual Companies Handbook 21(1–4), 1996.
Two types of politically influential businessmen can be identified in Table 3.2. The first group comprises those who own a controlling interest in companies and play an active part in their management. The second group comprises those with backgrounds in politics or the civil service. Prominent Malays with a background in politics or the civil service tend to hold nonexecutive directorships. Many are mere figureheads, appointed as a means to gain access to state rents, expedite bureaucratic decisions of business ventures, or to bypass state regulation of greater Bumiputera participation among the owners of listed companies. Some Malays, like Haniff Omar, Abu Talib Othman, Musa Hitam, and Ghafar Baba, are directors of major Chinese companies but do not appear to play a significant role in decision-making. In some cases, although they are directors of Chinese as well as Malay-controlled firms, this has not helped increase inter-ethnic business cooperation, a
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problem lamented even by senior government leaders. This could be due to limited Chinese confidence in Malay businessmen. It is also probable that some Malays do not see the need for such inter-ethnic business cooperation. A number of the businessmen in the first group are professionally qualified, have managerial experience, and are capable of acquiring the technical expertise they require to be productive, competitive, and innovative. Their links with senior politicians give them access to many rents that have enabled them to develop huge conglomerates within a short time. These men are supposed to be representative of the dynamic and entrepreneurial business class Mahathir is trying to create. One reason for limited inter-ethnic business cooperation by businessmen in this group is that a number of them, like Halim Saad and Tajudin Ramli, have control of quoted companies and play an active role in the development of these firms; there is no need for them to work with the Chinese. The government began encouraging inter-ethnic business ties after the mid-1980s economic recession revealed the extent of Chinese contribution to economic growth. The BN found it imperative to court non-Bumiputera support from the 1990s, as UMNO factionalism became serious and as intraethnic divisions among Malays in general escalated – evidenced in the 1995 and 1999 general elections (see Gomez 1996a). One means to achieve this goal has been to award rents to non-Bumiputeras, though they are usually required to apportion some of these rents to well-connected Malays. The corporate links between well-connected Malays and non-Malays like Vincent Tan, Ting Pek Khiing, and T. Ananda Krishnan are not, however, representative of the form of inter-ethnic business cooperation the government has been encouraging. Tan, widely reputed in business circles to be a close associate of Daim given his access to numerous lucrative state rents, has had little success working with Chinese businessmen, while Ting has been establishing corporate ownership ties with influential Malays after being awarded the privatized multi-billion Bakun Dam project (see Gomez 1999). Some Chinese, like Ting, appear to have links with well-connected Malays as they have the know-how to fulfill the contracts secured by their Malay partners. Since most well connected Malays belong to different UMNO factions, they prefer to work with Chinese rather with other Malays.
Political business in practice The most influential politician with a business background is Daim Zainuddin. A lawyer by training, Daim ventured into business in the late 1960s, producing table salts and plastics; both ventures failed. In 1973, an influential UMNO leader helped Daim’s holding company, Sykt. Maluri Sdn Bhd, secure a lucrative property development project. Through a reverse takeover involving Sykt. Maluri, Daim gained control of his first public-listed company, Berjaya Group Bhd, now owned by Vincent Tan. In 1979, Mahathir named Daim chairman of Peremba Bhd, a state-owned
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property development firm. In 1981, Mahathir appointed Daim chairman of UMNO’s investment arm, Fleet Holdings Sdn Bhd. Acting in his triple capacity as private businessmen, government appointee and UMNO trustee (see Figure 3.1), Daim involved these companies under his control in a myriad of interlocking business transactions. For example, in 1982, Peremba had a 33 percent stake in public-listed Sime UEP Bhd, which was involved in a major property-development project. That year, Baktimu Sdn Bhd, owned by Daim, also bought a 33 percent stake in Sime UEP for RM75 million cash. Part of the loan for this acquisition – RM40 million – was obtained from Switzerland’s Union Bank, which approved the loan only after state-owned Bank Bumiputra Bhd issued a guarantee for it on Baktimu’s behalf. Since Daim now had, through Baktimu and Peremba, almost 66 percent control of Sime UEP, assets owned by Sime UEP were sold in 1984 to a quoted company, Faber Bhd, controlled by UMNO’s Fleet Holdings. Through this shares-for-asset swap, Sime UEP obtained an 11 percent stake in Faber, but it was alleged that Sime UEP’s assets had been overvalued by more than RM56 million. This deal was only one of a number of such transactions Daim conducted in his business empire.3 Through his extensive use of obscure holding companies Daim Zainuddin
Government
UMNO
Family companies
Holding companies Peremba
Fleet Holdings Fleet Group
Sykt. Maluri Daza Holdings Seri Iras Baktimu
Public-listed companies Sime UEP
New Straits Times Press Faber TV3 Cold Storage Bank of Commerce
New Straits Times Press Faber TV3 Cold Storage Sime Bank Sime UEP Berjaya Group
Figure 3.1 Daim Zainuddin’s common directorship in his triple capacity as trustee for the government, UMNO, and his family companies, 1990. Source: Gomez (1990: 39).
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to acquire public-listed firms, and his considerable use of interlocking stock ownership involving these private and quoted enterprises, Daim appeared to channel a lot of wealth to himself. The phenomenal expansion of Daim’s family companies and the UMNO-owned concerns he controlled was through highly leveraged buyouts with financial support from state-owned banks. By 1987, UMNO’s main holding firm, Fleet Holdings and its wholly-owned subsidiary, Fleet Group Sdn Bhd, had huge debts with two state-owned banks, Bank Bumiputra and Malayan Banking (see Table 3.3). In 1990, the debtridden Fleet Group was taken over by public-listed Renong Bhd, through a reverse takeover involving a massive share-swapping exercise, maneuvered by Daim’s protégé, Halim Saad. Renong has since been privy to numerous privatized rents. Following his appointment to the Treasury in 1984, Daim divested his vast business interests, which included shares in companies involved in virtually all key sectors of the economy – banking, plantations, manufacturing, wholesaling and retailing, property development and media. In 1992, the total value of Daim’s assets was reportedly RM1 billion, which included assets in Australia, Britain, Mauritius, and the United States (see The Star 19/5/92). Daim claims that he is not active in business, but is still widely regarded as the most powerful figure in the Malaysian corporate scene. Daim’s closest business associates, Halim Saad, Wan Azmi Wan Hamzah, and Tajudin Ramli, have emerged as major corporate figures through a similar style of business. All three worked under Daim during his tenure at Peremba and had been groomed by him. While Halim, who publicly acknowledged his role as trustee of most of UMNO’s vast corporate assets, eventually secured control of the party’s most important companies through Renong, Tajudin and Wan Azmi also benefited from state patronage. Tajudin acquired 51 percent of Celcom in 1989 from state-owned telephone utility, Sykt. Telekom (M) Bhd (STM), although STM was then being prepared for privatization. Celcom had the rights to a cellular telephone network, then only the country’s second such network, making it a highly profitable concern. In 1990, Tajudin acquired a controlling 25 percent stake in publicly listed Technology Resources Industries Bhd (TRI), in which Daim once had an interest. In 1992, TRI acquired Tajudin’s interests in Celcom for RM259 million. Since the transaction was paid for through an exchange for equity, Tajudin substantially increased his stake in TRI. TRI’s first Table 3.3 Loans by government-owned banks to UMNO companies, 1990 Company
Bank
Amount (RM)
Fleet Holdings Fleet Holdings Fleet Group
Malayan Banking Bank Bumiputra Bank Bumiputra
89,102,520 155,486,910 77,869,370
Source: Gomez (1990: 171).
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acquisition under Tajudin was a controlling interest in Malaysian Helicopter Services Bhd (MHS), a quoted helicopter and air services company. In 1993, through a share-swap, MHS acquired a 32 percent stake in the statecontrolled airlines monopoly, Malaysia Airlines Bhd (MAS), a privatized divestment valued at RM1.79 billion; there was no open bid for the airline shares. State patronage has been crucial in helping Tajudin create a niche in the transportation and telecommunications sectors. By 1993, the value of Tajudin’s quoted stock alone was worth RM2.64 billion (see Malaysian Business 1/2/93). Tajudin’s meteoric rise in Malaysia’s corporate sector was achieved in less than half a decade (see Figure 3.2). Wan Azmi Wan Hamzah, through his holding company, Rohas Sdn Bhd, obtained a controlling 55 percent stake in the ailing publicly listed investment holding company, Juara Perkasa Corporation Bhd (JPC) in 1990. JPC was then so debt-ridden that its shares had been suspended from trading on the KLSE since December 1987; despite this, each JPC share was bought for a hefty RM2.53. In August 1990, the American-controlled RJ Reynolds Tobacco Company announced the reverse takeover of JPC by injecting its highly profitable Malaysian subsidiary, RJ Reynolds Sdn Bhd, into JPC. RJ Reynolds had been under increasing pressure from the government to indigenize its equity, as required under the NEP, by the end of 1990. The takeover was paid for with the issue of 250 million new JPC shares. Tajudin Ramli
100%
99.9% Arnah Murni Sdn Bhd
RZ Equities Sdn Bhd
48.5% Technology Resources Industries Bhd
100%
62%
Alpine Resources Sdn Bhd
51% Celcom Bhd
Malaysian Helicopter Services Bhd
18% Pelangi Air Sdn Bhd
40% Perbadanan Nasional Shipping Line Sdn Bhd
Figure 3.2 Tajudin Ramli’s control of the corporate sector, 1997. Source: Gomez and Jomo (1999: 151).
32% Malaysia Airlines Bhd
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Following the takeover and a restructuring of JPC, the American stake in the company was reduced to 70 percent, while Wan Azmi had 14.5 percent of equity through his direct and indirect stakes. JPC was renamed RJ Reynolds, and was relisted on the KLSE in March 1991. By the end of 1991, the restructured RJ Reynolds’ turnover had increased from a mere RM156,000 to a massive RM315.87 million, while its pre-tax profit increased a phenomenal 17,106 percent! By 1991, compared to the 350-odd companies then quoted on the KLSE, RJ Reynolds was ranked 71 in terms of sales (Corporate World July 1992). In 1992, of the 10 cigarette manufacturers in Malaysia, RJ Reynolds was listed as the third largest, with its capture of 19 percent of the market. Wan Azmi strongly insisted that the American party had approached him with the takeover and restructuring proposal, which helped convert the ailing JPC into the highly profitable RJ Reynolds, but it was not a view shared by many (see Malaysian Business 16/9/90). The estimated value of Wan Azmi’s corporate assets in Malaysia and abroad was RM800 million in 1992 (The Star 19/5/92). His rapid rise as a major corporate figure was achieved within less than half a decade (see Figure 3.3). In the case of all three men, Daim, Tajudin, and Wan Azmi, UMNO’s control over the state had permitted party leaders to channel rents into their hands, and also structure avenues to help them enhance the value of these rents. For example, lucrative rents were channeled to private companies owned by these three men, which were in turn injected into the stock market. The critical role of the holding company in developing Daim’s, Tajudin’s, and Wan Azmi’s corporate assets is obvious. All three men have used holding companies to tie together a disparate number of independent companies. While ultimate control is in the hands of the family-owned holding company, the main vehicle through which their corporate base has been expanded is one or two public-listed firms that also function as holding companies. The use of reverse takeovers involving share-swaps, almost always approved by the relevant state authorities, figures conspicuously in their business deals.
Wan Azmi Wan Hamzah and Rohas Sdn Bhd
13.5%
21% RJ Reynolds Bhd
Land & General Bhd 75% Sri Damansara Sdn Bhd
Figure 3.3 Wan Azmi Wan Hamzah’s control of the corporate sector, 1997. Source: Gomez and Jomo (1999: 147).
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There was, however, a perceptible change in the manner of business style of Daim and Tajudin and Wan Azmi. While Daim had acquired an interest in most key sectors of the economy, by the mid-1990s, Tajudin was clearly beginning to concentrate his attention on only two key sectors, transportation and telecommunications, a point he himself acknowledges. Wan Azmi has been concentrating primarily on property development, apart from his interests in RJ Reynolds. The situation was similar with other well-connected businessmen. Thus, while we could argue that the business style of many of the new rich is, to quote Yoshihara (1988), “ersatz,” that is they tend to concentrate on activities that are rentier and speculative rather than entrepreneurial, by the mid-1990s there were attempts by some of them to acquire expertise in a particular industry. However, with the possible exception of one or two businessmen, like Shamsuddin Kadir of the Sapura Group (see Gomez and Jomo 1999: 72–4), none of the new rich had managed to create a reputation for themselves, even nationally, before the onset of the 1997 financial crisis. In fact, businessmen like Shamsuddin Kadir, who had focussed on one particular industry and had invested substantial funds in research and development, appeared not to have been badly affected by the financial crisis. On the other hand, businessmen like Tajudin Ramli and Mirzan Mahathir, who had long involved their companies in a conglomerate style of growth, found themselves deeply mired in debt after 1997. In early 1998, Shamsuddin Kadir was identified by the government as a possible candidate to acquire Malay-owned companies struggling to stay afloat because of the crisis (see Far Eastern Economic Review 19/2/98). The new rich Chinese listed in Table 3.2, like their Malay – and Indian – counterparts, have also yet to create an international reputation for themselves despite securing a number of lucrative rents from the state. A few Chinese, some of whom belong to families with a long involvement in business, have managed to develop a reputation for themselves internationally after securing rents from the state. The most prominent example is Robert Kuok, who emerged as a sugar trader of international repute in the late 1960s after receiving a sugar manufacturing licence. More recently, the construction-based YTL Corporation Bhd has begun to expand its operations abroad, after securing a licence from the government to venture into power generation (see Gomez 1999). Although there is much interlocking stock ownership of companies ultimately controlled by Daim through Peremba, Fleet Holdings, and his family holding companies, there is little networking among the companies controlled by Tajudin and Wan Azmi, despite their common ties with the Finance Minister. Limited interlocking ownership ties and business networking is also obvious among companies controlled by other politically linked businessmen, which suggests a semblance of independence from their political patrons. Their patrons can, however, call on them when necessary to do their bidding. The most prominent case is Halim Saad who, in 1990, through Renong, secured control of UMNO’s interests in the construction, banking,
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and media industries. In 1993, Halim was apparently forced to relinquish to businessmen linked to Anwar Ibrahim Renong’s interest in two major media companies, TV3, then the only private television network, and the New Straits Times Press, publisher of the leading Malay and English newspapers. Anwar wanted control of these media companies to aid his bid to secure the post of Deputy President of UMNO in the 1993 party election. It was obvious that domestic political struggles and interests were determining the way in which important corporate assets were being shifted among well-connected businessmen.
Factionalism and proliferation of political business From 1990, political business ties became increasingly personalized as control of UMNO assets was transferred to individuals. There were several reasons for this change. The mid-1980s economic recession severely curtailed the number of state rents that could be disbursed, leaving UMNO deeply divided. In 1987, an UMNO faction led by former Finance Minister Razaleigh Hamzah alleged that most state rents had been distributed to a select group, particularly those associated with Daim. Razaleigh later formed a new opposition party and made a claim on UMNO’s assets. The opposition DAP also publicly embarrassed the Prime Minister by almost winning a lawsuit in which they charged the government with conflict of interest in privatizing a multi-billion ringgit highway project to an UMNO-linked company, United Engineers (M) Bhd (UEM). One response to these developments was to channel UMNO’s assets to private businessmen. By 1992, UMNO would claim that it no longer had legal control over its assets. Some leaders even went so far as to claim that the party was no longer involved in business, even though UMNO still owned a direct majority stake in publicly listed Utusan Melayu Press Bhd, publisher of the leading Malay newspaper, Utusan Malaysia, while its cooperative, Koperasi Usaha Bersatu Bhd (KUB), had a huge interest in Sime Bank Bhd. In effect, UMNO leaders had maneuvred themselves into a position where they were no longer accountable to party members for the manner in which party assets were deployed. This also meant that UMNO per se would not be the object of criticism regarding contentious political business ties. Despite denials by UMNO leaders, it is widely believed that a few party leaders still control the party’s dispersed corporate assets since Daim protégés now own most of these companies. Halim Saad gained control of Fleet Holdings’ assets, while Tajudin Ramli and Samsudin Abu Hassan obtained control of the listed companies in the Waspavest group, another of UMNO’s holding companies (see Gomez 1990). Tajudin gained control of Technology Resources Industries, while Samsudin got control of Granite Industries Bhd and Cold Storage Bhd. Some Chinese have gained control of a few companies once directly owned by UMNO. Ting Pek Khiing bought Granite Industries from Samsudin in
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1994 when the latter ran into severe financial problems. Ting also acquired ailing but quoted Wembley Industries Bhd from businessmen associated with Anwar. To aid these two ailing companies, Ting channeled to them lucrative subcontracts from the privatized Bakun Dam project that he had been awarded without open tender. Ting appeared to have been called on by UMNO leaders to help bailout well-connected Malays. Since political business links are now based mainly on personal ties between UMNO leaders and businessmen, this has increased patron–client relationships within the party. The need to cultivate a strong grassroots base in UMNO to secure access to state rents was reflected in the gradual change in the party’s leadership at divisional and branch levels. Since UMNO’s pioneering days in 1946, leaders at these levels were predominantly rural teachers. By 1995, almost 20 percent of UMNO’s 165 division chairmen were millionaire businessmen-cum-politicians. The rapid descent on rural areas by urban politicians to cultivate a grassroots base, usually by buying support, led to further monetization of politics. In the 1984 UMNO elections, in the contest for the Deputy President’s post between Razaleigh Hamzah and Musa Hitam, an estimated RM20 million was spent during the campaign (Milne 1986). In subsequent UMNO elections, aspiring candidates to all party posts, from branch leaders to party president, required access to substantial funds to secure votes. Just about a decade later, the problem of vote-buying had become so severe that the estimated sum spent during UMNO’s 1993 party election had increased more that tenfold, to approximately RM3 billion (see Gomez 1994). In this deeply divisive party election, Anwar Ibrahim contested and won the post of Deputy President, then held by UMNO veteran Ghafar Baba. Anwar had been a strident critic of the mix between politics and business but, by 1993, he was closely identified with a new group of mainly Bumiputera businessmen. Many of these ambitious new businessmen had long been frustrated by the dominance of the Malay corporate world by those like Wan Azmi Wan Hamzah, Halim Saad, and Tajudin Ramli who had emerged with Mahathir’s and Daim’s patronage. While none of Daim’s protégés were UMNO members, many Malay businessmen linked to Anwar were active in party politics. The support that Anwar enjoyed from this generally younger generation of corporate-cum-political figures was crucial in helping him to displace Ghafar as UMNO Deputy President and to consolidate his claim to succession of the party leadership. The main political-cum-business figures linked with Anwar include Ishak Ismail and Mohamed Sarit Yusoh. During the 1990s, Ishak Ismail rapidly gained control of a number of public-listed companies, including Idris Hydraulic Bhd, Wembley Industries, Golden Plus Holdings Bhd, and KFC Holdings Bhd. Ishak Ismail once served as secretary of the UMNO division headed by Anwar. Mohamed Sarit, Anwar’s former political secretary, has held shares and directorships in Golden Plus, Wembley Industries, and KFC Holdings. Other businessmen close to Anwar are Kamaruddin Jaffar and
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Kamaruddin Mohamad Nor; both men were Anwar’s schoolmates. Businessmen linked to Anwar, similar to those associated with Daim, control business groups that seldom work together and are independently run.
Evolving nature of political business The major changes of characteristics in politically linked companies in the 1970s as compared to the 1990s are listed in Table 3.4. While the number of companies controlled by UMNO tended to be rather limited, the number of companies currently linked to politicians or politically well-connected businessmen was extensive by the mid-1990s. In the 1970s, a limited number of UMNO leaders had overwhelming influence over the affairs of companies controlled by the party; presently, such control was indirect while a greater number of politicians had direct control over companies by the 1990s. Equity ownership of public-listed enterprises by UMNO’s holding companies was significant in the 1970s, but the form of equity ownership tended to be just sufficient to retain control during the 1990s. One reason for this was that the paid-up capitals of companies under political control tended to be rather sizeable, enlarged through numerous bonus and rights issues. Interlocking stock ownership was much more significant during the 1970s and 1980s while interlocking directorships do not appear to contribute to significant business cooperation. Table 3.4 Changing nature of companies linked to UMNO politicians, 1970s and 1990s Characteristics
Year 1970s
1990s
Number Form of party control Control by individual politicians Paid-up capital Equity ownership
Small Direct Insignificant Relatively small Significant
Interlocking stock ownership Interlocking directorships Managerial autonomy
Significant Significant Extensive
Business specialization Growth pattern
Limited Conglomerate; depending on the needs of the party
Inter-ethnic business ties Persons in management
Limited Most non-politicians
Large Indirect Significant Extremely large Sufficient to maintain control Rather limited Rather limited Largely majority ownership-control Significant Increasingly horizontal among new rich; vertical and opportunistic among emerging capitalists Increasing Many politicians
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While the managers of politically linked companies used to have much autonomy from politicians in the 1970s, by the 1990s most owners were actively involved in the management of companies since many of them were professionally qualified. While UMNO’s holding companies’ style of growth was quite diversified with limited business specialization, most politically linked companies were veering more towards a horizontal and vertical pattern of growth during the mid-1990s. Halim Saad was concentrating on construction, Wan Azmi was developing a strong interest in property development, Tajudin Ramli had been focussing on transportation and telecommunications, Mirzan Mahathir was keen on becoming Malaysia’s logistics tsar, while Amin Shah Omar Shah wanted to develop a reputation in shipping ports. There was, however, much evidence that companies controlled by politically linked businessmen were open to strategic change and conglomerate style of growth if opportunities were offered to them through their patrons. There was an obvious increase in the links between well-connected Malays and Chinese businessmen by the 1990s. This appears to be linked to Mahathir’s desire to distribute rents to those who had shown a capacity to build on these state concessions. For a similar reason, companies owned or controlled by well-connected businessmen began showing a greater desire to develop expertise in a particular field of business. While most businessmen in senior management of UMNO companies in the 1970s were not politicians, most politically linked companies were managed by UMNO politicians, some of who are also members of parliament or state assemblymen. A few major characteristics of political business had remained unchanged or became more serious during the period between 1970 and 1995. The channeling of funds raised in the corporate sector to political party activities, especially to fund election campaigns, had increased appreciably. Corporate maneuvers, primarily reverse takeovers and acquisitions to build business empires, and the overabundant reliance on rights and bonus issues to tap funds from minority shareholders, was still quite common. Even though businessmen who had emerged through political patronage appear to have been given a freer hand in managing companies under their control, some of them are hardly autonomous of their patrons, suggesting that they may be acting in trust or undertaking favours for some UMNO leaders. This, to some extent, has been revealed by the extent to which the government has gone to help some businessmen who have been affected by the financial crisis in 1997. Among those the government has helped , apart from Halim Saad, Tajudin Ramli, and Mirzan Mahathir, are Vincent Tan and Ting Pik Khiing. This suggests that although direct ties between politics and business had diminished by the mid-1990s, political business had become more complex, extensive, and sophisticated. The increased volume of political business ties exacerbated rent-seeking by politicians which, in turn, contributed to growing conflicts among the new rich. Such intra-elite rivalries have transpired despite admission by government leaders in 1994 that although Bumiputera capitalists have been created through state policies and patronage, genuine and
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competent indigenous entrepreneurs had failed to emerge in satisfactory numbers (see New Straits Times 28/6/94). Moreover, although there appeared to be a greater desire by well-connected businessmen to focus on a smaller number of activities, they tended to concentrate on services and other nontradeables, such as real property, construction, and infrastructure. These were all sectors badly affected by the financial crisis, necessitating government intervention in various forms to help alleviate the problems faced by wellconnected companies in these sectors. The key change that had transpired was that political business ties had become more personalized. While this is a reflection of the factionalism in UMNO, which had led to a rise of a large number of well-connected businessmen, this also permitted party leaders to spread risks from political patronage. Even before the financial crisis, some businessmen who had been privy to much political patronage had come to the brink of bankruptcy. The most prominent case is Daim’s protégé, Samsudin Abu Hassan. Since rents had been distributed by a number of politicians to a number of businessmen, including some non-Bumiputeras, when the financial crisis occurred, it allowed key leaders to deflect blame for the crisis from themselves. This meant that although those businessmen who had developed conglomerates through huge loans included Mahathir’s son, Mirzan Mahathir, and Daim’s protégés, Halim Saad and Tajudin Ramli, the Prime Minister, without any hint of irony, established the National Economic Action Council (NEAC) led by Daim, to find avenues to lead Malaysia out of the crisis. Daim, as we have seen, was primarily responsible for developing the practice of political business in Malaysia. By repeatedly stressing that the financial crisis was caused primarily by foreign speculators and by presenting it as a national problem requiring national unity, Mahathir, with the help of the governmentcontrolled media, ensured that little attention was drawn to the impact of political business on the local banking sector.
Banking crisis and bailouts The major characteristic of political business which has remained unchanged, and which was revealed by the financial crisis in 1997, is the use of financial institutions controlled by the state or well-connected businessmen to channel funds, particularly loans on favorable terms, to a privileged few. The amount of bank loans disbursed to individuals for share acquisition was massive; according to one report, of the RM39 billion loaned by banks for share acquisition, almost 45 percent were given to individuals (see Euromoney April 1998). At the end of 1997, Malaysia’s outstanding debt was 160 percent of GDP. The foreign borrowings of Malaysia’s largest quoted companies were estimated at around RM35 billion, with the three biggest accounting for three-quarters of the total. Just 15 corporate groups accounted for 20 percent of Malaysia’s entire bank loans. Finance Minister Anwar would later allege that less than 10 people linked to the top UMNO leadership were jointly
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responsible for loans worth around RM70 billion. One company, the UMNO-linked holding company, Renong, had accumulated debts of between RM20–28 billion which constituted more than 5 percent of loans by the Malaysian banking system (Asian Wall Street Journal 12/10/98). These figures indicated that a significant amount of bank loans had been channeled to a select minority. The banks later identified by the government with the most non-performing loans (NPLS) included the major government-owned banks, Bank Bumiputra, Sime Bank and Malayan Banking. In 1998, Bank Bumiputra and Sime Bank, declared huge losses. Bank Bumiputra needed a capital injection of at least RM750 million to stay afloat, while Sime Bank declared a loss of RM1.8 billion and required recapitalization of about RM1.2 billion (The Star 5/3/98). To save Bank Bumiputra, the government announced that the bank would get a capital injection of RM1.1 billion, comprising an equity portion of RM400 million and RM700 million worth of irredeemable cumulative preference shares (The Star 19/9/98). The government also bought over Bank Bumiputra’s non-performing loans (The Star 20/9/98). This was the third time the government had bailed out Bank Bumiputra.4 Sime Bank (the former United Malayan Banking Corporation Bhd) had been bought over by the government-controlled Malaysian multi-national corporation Sime Darby Bhd in 1996 from public-listed Datuk Keramat Holdings Bhd controlled by Mahathir’s former political secretary Mohd Noor Yusof. During the period when Sime Bank was in the Datuk Keramat Holdings group, numerous allegations were made of financial impropriety, including the disbursement of questionable loans (see Malaysian Business 1/8/ 94). The government disclosed that by mid-1999, of the RM28 billion in bad debts taken over by government institutions established to deal with the debt crisis, RM21 billion had come from just two big banks – Sime Bank and Bank Bumiputra. Sime Bank was eventually taken over by the well-connected financial group, Rashid Hussain Bhd. Many of the new rich businessmen, including Halim Saad, Tajudin Ramli, and Mirzan Mahathir, found that the value of the corporate stock had shrunk drastically, leaving them with severe loan gearing problems. Mirzan’s main public-listed company, the shipping concern Konsortium Perkapalan Bhd (KPB), was barely afloat with huge debts, estimated at around RM1.7 billion (see Far Eastern Economic Review 19/2/98). KPB was bailed out when stateowned, public-listed Malaysian International Shipping Corporation Bhd (MISC) acquired for cash KPB subsidiaries, mainly those saddled with loans (The Star 7/3/98). MISC then became a subsidiary of Petronas, the national oil corporation. Ways and means were sought to help Halim Saad’s holding company, Renong. New highway tolls, at high rates, were arbitrarily introduced on the highways owned by Renong, while no attempt was then made to dismantle this politically well-connected group to repay its debts.5 Meanwhile, little attention was drawn to the need for accountability for the pattern of growth undertaken by these ailing companies that had contributed to their debt
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problem, and whether the public and state-owned institutions should be used to bail them out. The methods used by the government to help ailing, but politically wellconnected companies were also questionable from another perspective. When the need arose to deal with the debt crisis involving the DRB-HICOM group, the company privy to the privatization of Malaysia’s major heavy industrialization projects, particularly the Malaysia car project, the government proposed that Petronas be used to acquire Proton Bhd, the car manufacturing concern of the group, and EON, the car distribution firm, ostensibly to sustain Malaysia’s car industry. A more innovative means that could have been considered by the government to sustain and further develop Malaysia’s car industry was to involve Chinese companies.6 A number of Chinese companies had already established a reputation in automotive component-parts manufacturing and in motor vehicle assembly and distribution. If the government was interested in creating an automotive industry that is internationally viable, avenues could have been found to incorporate these Chinese businesses, a factor which would have also greatly promoted inter-ethnic relations. Although Mahathir had recognized the dynamism of Chinese enterprise, he seemed reluctant to incorporate Chinese businessmen in the restructuring of the DRB-HICOM group, involving Proton and EON. This is probably because most Chinese involved in various sectors of the automotive industry are rather independent, for example Tan Chong Motors Bhd and the late Loh Boon Siew’s Oriental Holdings Bhd, while others like the Hong Leong and Lion groups were apparently aligned to Anwar, with whom Mahathir had evident policy disagreements. In spite of the limited desire by the government to incorporate Chinese companies in important projects that were in jeopardy, as the financial crisis deepened, the government announced that some ethnic Chinese would be allowed to take over companies owned by Bumiputeras to prevent the latter from going bankrupt. However, most of the Chinese identified as possible candidates for the takeover of Malay-owned companies were those who had benefited from state patronage. Among these businessmen were Francis Yeoh, the beneficiary of highly profitable privatized power generating licence, and Lim Goh Tong, whose gaming business relies on the renewal of his lucrative casino licence by the government (Far Eastern Economic Review 19/2/98). This, however, was not the first time UMNO leaders had called upon Chinese businessmen who had benefited from state patronage to bailout wellconnected Malay businessmen in trouble. In 1994, during the height of the economic boom, Ting Pek Khiing had acquired the public-listed and debtridden Granite Industries from Daim’s business protégé Samsudin Abu Hassan when the latter had run into severe financial and personal problems. Since the Chinese businessmen called in to save near-bankrupt Malay businessmen have also benefited from state patronage, it was highly probable that they would not be allowed to hold on to these corporate assets in the long term. Daim hinted at this: “I’d allow them [the Chinese] to rescue ailing
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companies. After they recover, they can talk about ownership” (Far Eastern Economic Review 19/2/98).7 This selective use of Chinese businessmen to help bailout some well-connected Malay businessmen reflected Chinese capital’s subordination to Malay political hegemony. As the Malaysian economy slipped into a recession, on September 1, 1998, Mahathir introduced new capital control measures. These measures included making the Malaysian currency, the ringgit, an illegal tender outside Malaysia, thus necessitating the repatriation of all ringgit held abroad and curbing trading of the currency, pegging the ringgit to the US dollar at a fixed exchange rate of RM3.80, forbidding foreign portfolio investors from withdrawing proceeds of the sale of Malaysian securities for at least a year, and requiring regulatory approval for transfers abroad exceeding RM10,000 (New Straits Times 2/9/98). Mahathir also moved to reduce interest rates and directed bank to be more “flexible” in its lending policies and redefined nonperforming loans to give businessmen affected by the crisis more time to settle their debts. The government went on to reduce the statutory reserve requirement from 6 to 4 percent, to enable banks to increase liquidity by a further RM8 billion. Since the value of loans approved had fallen following the crisis, banks were required by the government to ensure a minimum annual loan growth rate of 8 percent by the end of 1998. Such efforts to increase banks lending when most of Malaysia’s leading banks have been burdened by many bad debts was undoubtedly risky. By the government’s own admission, banking institutions required recapitalization of RM9.4 billion in the immediate short term (The Star 10/9/98) while about RM60 billion was said to be required for economic recovery in the medium term. The immediate impact of the government’s capital control measures had been positive. The stock market surged, on the return of offshore funds, estimated at RM25–30 billion, following the prohibition of ringgit trading outside Malaysia. The KLSE also rose with much support from local government-controlled institutions and because foreign portfolio investors were forbidden from withdrawing their funds for at least a year. The reduction of interest rates and the government’s directive that banks be more flexible in their lending policies helped increase liquidity appreciably.8
Political crisis and growing authoritarianism The bailouts of a few especially favored businessmen were believed to be one factor that prompted the dismissal of Anwar as Deputy Prime Minister by Mahathir on September 2, 1998, the day after the capital control measures were introduced. Anwar would later argue that he disagreed with the capital control measures introduced by the government. There had been policy differences between Mahathir and Anwar over how to respond to the crisis. While Mahathir had favored reducing interest rates and raising liquidity in the market, Finance Minister Anwar implemented cuts in government spending, introduced higher interest rates, and reduced
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liquidity from late 1997. These measures had pushed the economy into recession from early 1998 after overall growth of 7.3 percent in 1997 despite the commencement of the crisis in July. In 1998, the economy contracted for the first time since 1986, by 6.8 percent, the largest ever contraction in Malaysia’s post-Independence history. It was, however, unlikely that policy differences between the two leaders had precipitated Mahathir’s move to dismiss Anwar from the cabinet. On September 3, Anwar was also expelled from UMNO. Mahathir’s official justification for Anwar’s dismissal was not related to policy differences but to the latter’s alleged “moral impropriety.” According to the Prime Minister, Anwar was a promiscuous bisexual and sodomist. Apart from these allegations, which were widely reported in the local media (see, for example, New Straits Times 4/9/98), Anwar was also accused by the government of corruptly receiving funds for election campaigns, divulging state secrets to foreign bodies detrimental to national security, and of being in the payroll of the CIA. Although Anwar was not given an opportunity to deny these allegations in the main Malaysian media, the veracity of most of the allegations was quickly brought into question. This reinforced the view held by most observers that the Prime Minister had dismissed Anwar as he was fearful that his deputy was covertly attempting to remove him from office. In December 1997, as the crisis deepened, Mahathir’s position appeared weakened, with growing disillusionment among the business and middle classes, whose support for the Prime Minister had grown appreciably from the early 1990s with the economic boom. In May 1998, President Suharto of Indonesia was forced to resign following mass protests calling for reform and an end to corruption, cronyism, and nepotism. At the annual UMNO general assembly in June, the party Youth leader, apparently with Anwar’s backing, echoed this call for an end to corruption, cronyism, and nepotism in Malaysia. It appeared that Mahathir now no longer believed that Anwar could be relied on to protect the powerful vested interests which had emerged during his tenure. In response, Mahathir released partial lists of recipients of various contracts, privatization opportunities, and special Bumiputera allocations of public-listed equity. Apart from Mahathir’s sons, the recipients included Anwar’s father and brother, as well as the UMNO Youth leader. The disclosure was unprecedented, suggesting the extensive list of recipients of such rents from the government. After his dismissal from UMNO, Anwar alleged that he was also opposed to some of the more controversial bailouts proposed by the government, particularly those involving the Daim-linked Renong and companies owned by Mahathir’s son, Mirzan. The release of this list of rent recipients and Anwar’s dismissal revealed the intense and polarizing conflicts among factions in UMNO. This conflict among elites became a major threat to Mahathir’s position as prime minister, a threat even more significant than the challenge posed by Razaleigh in 1987 that nearly unseated him as UMNO president. The manner of Anwar’s dismissal fueled public antipathy for the Mahathir
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regime, especially among the ethnic Malay community. The public outcry against Mahathir was unprecedented. Although a large Malaysian middle class had emerged by the mid-1990s, this class had not been a force for greater democratization, as was the case in Taiwan, Thailand and South Korea. Among the reasons that impeded the emergence of a democracy movement among the Malaysian middle class was that there was still only limited interethnic cooperation among them due to continued ethnic polarization. The limited reformist orientation of the middle class was also probably because most Bumiputeras had had access to higher education through the award of state scholarships and the enforcement of ethnic quotas in institutions of higher learning. Much of the Bumiputera middle class are civil servants or are employed by public enterprises, and many of them view UMNO as the main means for upward social mobility. Many Bumiputeras also see UMNO and the state as protectors of their political and economic interests. Following the financial crisis, it appeared that a growing number of Malays had begun questioning whether UMNO served as protector of their interests. By dismissing Anwar from UMNO, Mahathir displaced the party power struggle beyond the party’s confines. In the process, the issues that came under debate moved beyond corruption in government to encompass broader issues such as the need for government accountability, human rights and democracy. Anwar, however, quickly and successfully, managed to project himself as a defender of justice and human rights as well as a critic of the extensive corruption and crony capitalism that contributed to the economic crisis. Anwar’s calls for reform helped mobilize support that transcended class divisions among Malays, and unified leaders of NGOs and opposition parties who combined forces to build on the sudden headlong momentum for change. Anwar was quickly arrested in an attempt by Mahathir to quell this momentum for change. Anwar was subsequently charged with corruption, involving abuse of his influence in government to determine the outcome of a police investigation into allegations of sexual impropriety that had been made against him in 1997. After a lengthy trail, Anwar was sentenced to six years in jail in April 1999. During this period between Anwar’s arrest and conviction, a number of demonstrations were held against the government, particularly as Anwar’s trial brought into question the independence of the police, the attorney general’s office, and the judiciary. It appeared that the legal and judicial process was being abused to discredit any opposition to the Prime Minister. In April 1999, a new party, Parti Keadilan Nasional (or National Justice Party) was formed. Keadilan, led by Anwar’s wife Wan Azizah, comprised UMNO defectors and NGO activists, including the prominent government critic, academic Chandra Muzaffar. Wan Azizah, obviously a figurehead leader, proved effective in rallying support for her jailed husband. However, in spite of the emergence of a new opposition party led – albeit in absentia – by a credible Malay leader, and despite the cooperation between Keadilan and other major opposition parties during the general election held in November
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1999, the BN managed to retain control of the government, securing even a two-thirds majority in parliament which was believed to be in jeopardy. The opposition, however, managed to secure control of two state governments, in Kelantan and Terengganu. Both these states were situated in the Malay heartland of the peninsula, indicating the extent of the intra-ethnic divisions that had emerged among the Malays.9 There were several reasons why even a unified opposition found it difficult to defeat the BN. The ruling coalition effectively used money, media, and machinery to secure support and instill fear of political instability in the event of a change of government. The UMNO and government machineries were allegedly effectively mobilized to muster support by disbursing money and promises of future benefits if re-elected. Malaysia’s subservient media was well used to discredit the opposition and play up the supposed virtues of the BN. The government also abused the media to promote nationalism, instill fear and check public dissent. Mahathir, for example, repeatedly used the media to highlight the riots in Indonesia, arguing: “Look what happened in Indonesia. Following the massive demonstrations and the overthrow of the government, Indonesia now has to open up totally, allowing unimpeded entry to foreign investors to take control of their companies” (Far Eastern Economic Review 5/11/98). Such statements heightened fear among Malaysian Chinese of what might occur in the event of political change in Malaysia. Not surprisingly, most of the demonstrators on the streets of Kuala Lumpur calling for the resignation of Mahathir were ethnic Malays, while the BN’s return to power was due to significant support from the non-Bumiputera communities. This suggests that the real political struggle will still be fought out within UMNO. Even though the BN fared very badly in the Malay heartland states during the 1999 general election, and there was quiet agreement among UMNO members that Mahathir would have to resign if the party’s loss of Malay support was to be checked, the prime minister made it clear that he would not be forced out of office. Given Mahathir’s capacity to check dissent within the party, even in the face of mounting pressure, it is unlikely that opposing UMNO factions will set aside differences and coalesce to force him out of office; moreover, there is no leader within the party that can unify these factions. Although the succession line is apparently clear with the appointment of Abdullah Ahmad Badawi as Deputy Prime Minister, in-fighting among the second echelon UMNO leaders will escalate as they struggle to secure the ascendancy, thus heightening factionalism in the party. This, in the long run, will help consolidate Mahathir’s position in UMNO and diminishes any prospect of the emergence of democracy in Malaysia in the near future.
Post-crisis political business: more of the same By the early 1990s, political business links had evolved to a situation where three key political leaders, Mahathir, Anwar, and Daim, had an overwhelming
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impact on why and how certain businessmen secured rents from the state. The different reasons why these political leaders channeled state concessions to businessmen had a bearing on the pattern of development of enterprises owned by these rent recipients. There were different dynamics involved in the relationship between each of these leaders and the businessmen involved. Anwar appeared to use his influence in government to develop his political base in UMNO. This led to the rise of a large group of businessmen whose primary motive was to use their corporate base as a means to secure ascendancy in UMNO. Their style of business was rather unproductive, many showing little capacity to build on the rents they secured. None of the Malay businessmen closely linked to Anwar has yet to emerge as a major corporate figure. Mahathir, on the other hand, was much more selective in how he distributed rents, especially during the 1990s after he had strengthened his position in UMNO. The Prime Minister had a genuine belief in his ability to pick winners who could help him fulfill his vision of creating large Malay enterprises with the capacity to venture abroad and compete in an international environment; such capitalists would later include a number of nonMalays. In the case of the Daim-linked businessmen, the situation is slightly more difficult to analyze, especially after the revelations by Anwar following his dismissal and arrest. For example, in the case of the wide range of corporate assets owned by Halim Saad, Wan Azmi, and Tajudin Ramli, it is difficult to distinguish between assets belonging to them and those being held in trust for Daim. There is a need here to make a distinction between corruption, nepotism, and patronage. Patronage could be used in the wider interests of the Malay community, thus validating some of the government’s actions. Anwar distributed rents as part of NEP patronage but also tried to dissociate himself from those who did not use the rents properly. Although Mahathir moved forcibly to discredit Anwar, there was no evidence that Anwar had benefited corruptly – by legal definition – from the patronage he disbursed, though he undoubtedly used the system to develop a strong grassroots base in UMNO. Daim usually distributed government rents in a way in which he could benefit personally, an issue well documented during the 1987 UMNO crisis (see Gomez 1990). Since Daim no longer holds assets in his own name, it is difficult to prove that he benefits from corporate maneuvers. In Mahathir’s case, there is evidence of extensive nepotism. During the award of state concessions to select individuals, however, Mahathir probably did believe that those who had secured these rents had the potential to fulfill their contractual obligations. For example, when Francis Yeoh and T. Ananda Krishnan secured power supply and telecommunications licenses, respectively, neither had the requisite experience, but both managed to develop these contracts through joint ventures with foreign firms acquiring know-how in the process. In other words, there is a need to distinguish the variety of political motives that were in play when state rents were awarded, and how the different actors
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in the game had distinct objectives. But whatever their differing political purposes, selective rent distribution, whether by Daim, Mahathir, or Anwar, has been costly in terms of its social implications. This need not have been the case if the selection process of the so-called “winners” had been more transparent and based on criteria different from that of political or personal affiliations. Moreover, Mahathir has been hesitant to discipline unproductive or incompetent rent recipients, unless they have fallen out with government leaders. Such discipline has not been imposed, probably because these rentiers include his own children and businessmen who are representative of his new breed of Malaysian capitalists. There has also been little need to discipline well-connected businessmen because manufacturing has been driven by foreign and small and medium-scale enterprises (SMEs), most of which are Chinese-owned. Following his dismissal of Anwar, Mahathir (and Daim) consolidated power in the office of the executive even further. This permitted Mahathir to introduce new policy initiatives and institute corporate reforms that appear to further benefit businessmen linked to him and Daim; the implications of this for the Malaysian economy could be quite severe. For example, the merger of Bank of Commerce with Bank Bumiputra, which finally led to the privatization of (a totally cleaned up) Bank Bumiputra, long on the drawing board, with part ownership directly in the hands of Renong, opens up the prospect of further abuse of this enlarged banking enterprise. Bank Bumiputra was not sold at a premium even though its bad debts had been removed. This merger reflected a distinct trend that had emerged following the crisis: good state assets were being transferred into (well-connected) private hands while debts and debt-ridden companies owned by these same people were being taken over by the government. The consolidation of these two banks points to another important issue: increasing wealth concentration in the hands of men linked to Daim and Mahathir. Other ostensibly sound government actions could also be viewed from this point. The decision by the authorities to act against businessmen associated with Anwar was commendable in that it helped to reduce the number of unproductive, even corrupt, rentiers. It appears, however, that companies owned by Anwar-linked businessmen will be channeled to Daimlinked men; for example, the dismantling of the Multi-Purpose group seems to be of much benefit to businessmen linked to Daim. Although the government’s decision to get Malaysia’s numerous banks to merge is sensible, most of the major enlarged banking institutions will probably be channeled into the hands of businessmen closely linked with UMNO leaders or the government, leading to their dominance over a consolidated banking sector. The concentration of bank ownership in the hands of well-connected businessmen suggests continued political intervention in decision-making in financial institutions, opening up the prospect of further abuse of this sector in future. Similarly, it is unlikely that the government’s proposed consolidation of stockbroking activities would improve the quality of the securities industry in
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Malaysia. Before the 1997 crisis, the total market capitalization of the 708 companies listed on the KLSE was RM375.8 billion. In terms of market capitalization, the KLSE had emerged as the largest stock market in Southeast Asia, the fourth largest in Asia and the 15th largest in the world. The total volume traded on the KLSE in 1997 amounted to 61.3 billion units valued at RM297 billion. Consolidation of brokerage firms will be extremely profitable to the new owners of these enterprises. Moreover, if control of the securities industry, as well as the banks, comes under the control of a small clique, they will have tremendous financial power over the corporate sector and the economy. There is little indication that significant structural impediments will be instituted to hinder politicians from abusing financial institutions for vested interest in spite of the implications of the crisis. In these circumstances, political business practices will continue in a highly personalized way. There is a need to be concerned about the long-term implications of forced mergers. In the case of the merger involving Chinese banks, there is unlikely to be much agreement among the bank owners over the management of the enlarged banking enterprise. Chinese banks that have merged in the past have failed to sustain themselves because of significant management problems, leading to a change of ownership. One example is Malayan Banking, an offshoot of Singapore’s Oversea Chinese Banking Corporation (OCBC), itself a merger of three banks. Malayan Banking eventually fell under government control because of disputes among the bank’s owners. More importantly, the manner of the proposed mergers involving banks and the securities industry indicates that property rights of businessmen are not being respected. For business to function effectively and for it to continue to invest in domestic economy, firms must be convinced that government leaders will not confiscate private wealth for their own benefit, particularly through expropriation. One outcome, however, of the financial crisis is that there is growing awareness of the need to re-assess the pattern of growth of companies. The government has been encouraging companies to invest more on research and development and concentrate on developing expertise in specific industries. The government has acknowledged the importance of SMEs and is channeling more support to this sector, even though it continues to be dominated by ethnic Chinese (see The Star 14/4/99). Unlike the case of Taiwan, where the government had encouraged the development of a “dual market structure,” that is where SMEs were encouraged to be more exportoriented while big businesses were allowed to control the domestic market (Kung 2001), the Malaysian government had not provided any encouragement to SMEs to develop their enterprise for the foreign or domestic market.10 In the short term, the Malaysian economy will probably register economic growth, mainly because of the performance of the manufacturing sector, which remains largely outside the ambit of the political business nexus. In the long term, there is much to be concerned about, especially with the developments in the financial and securities sectors. Malaysian capital remains very subservient to the government, and this subordination can bring
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into question the capacity of corporate enterprises to check wealth concentration activities. Even if Mahathir wishes to check extensive wealth concentration to inspire greater confidence in the government’s handling of the economy and to encourage greater domestic and foreign investments to generate growth, this is difficult given the economic concerns of his family members and the hegemony of other powerful vested interests in government. Events within UMNO will continue to determine the future of Malaysian capitalism. In view of UMNO’s overwhelming influence over the corporate sector, through its hegemony over the state and its direct and indirect control of key enterprises, political factionalism and divisions among the party elite will continue to have a consequential bearing on corporate activities. Anwar’s dismissal, for instance, has already led to the alienation of a large number of politician-cum-businessmen from access to the state. In spite of the exposé of political business ties involving senior government leaders following the split in UMNO, it is unlikely that patronage and distribution of government rents will diminish. Mahathir continues to protect well-connected businessmen who have been groomed by the government.11 As faction leaders fight to secure ascendancy in the UMNO hierarchy, it is unlikely that they will advocate the adoption of democratic norms, an increase in political participation, or the promotion of greater transparency and accountability in government. Democracy will not emerge because all factions have particularistic agendas, which are not conducive to the organization of consensus and majority support. Most factions leaders will continue to need to find access to state rents and money that can be disbursed to develop strong support in UMNO. Moreover, because of the close links between top UMNO leaders and businessmen, and since access to patronage and money remains important in party elections, it is unlikely that these politicians will be compelled to introduce transparency and accountability in government. In these circumstances, it is unlikely that unproductive political business practices will be curbed in Malaysia.
Notes 1 The meteoric rise of Ling’s son in the corporate sector, within just about a year through a rapid succession of takeovers, was reportedly financed primarily by the politically well-connected brokerage firm Rashid Hussain (see Far Eastern Economic Review 19/2/98). 2 Politicians from other political parties in the BN are also directors or shareholders of quoted companies. Their appointments to these posts do not guarantee access to state rents, but usually help to get past bureaucratic red tape. Prominent former MCA leaders who serve as directors of public-listed companies include former deputy presidents Lee Kim Sai, who is chairman of Metro Kajang Holdings Bhd, and Richard Ho, who is a director of DMIB Bhd and Malayan Banking Bhd. Among the former MCA vice-presidents, Chong Hon Nyan is a director of Asia Pacific Land Bhd and Tractors (M) Holdings Bhd, while Liew Sip Hon is chairman of Wing Tiek Holdings Bhd and the Long Huat group. Former
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MIC vice-president K. Pathmanaban is a director of DMIB and Pembinaan YCS Bhd. Among the former Gerakan leaders, ex-president Lim Chong Eu is chairman of Suiwah Corporation Bhd, while a former vice-president, the late Alex Lee, was a director of Amalgamated Industrial Steel Bhd. Even Lee Lam Thye, a prominent MP who left the opposition DAP, is a director of Arab-Malaysian Corporation Bhd, Sime-UEP Properties Bhd, and MBM Resources Bhd. Most of these Chinese and Indian former party leaders are non-executive directors and probably do not play an active role in decision-making. This is suggested by the fact that despite some interlocking directorships among them, there is seldom any business cooperation between the companies concerned. For a detailed discussion on the numerous business transactions that Daim was involved in during the late 1970s and 1980s, which contributed to his emergence as Malaysia’s leading business figure, see Gomez (1990). In 1984, the government had to provide the bank over RM2 billion through Petronas, the state-owned national oil corporation, when Bank Bumiputra declared enormous losses after its Hong Kong-based subsidiary, Bumiputra Malaysia Finance Bhd (BMF), chalked up huge bad loans, most of which had to be written off. The BMF scandal implicated a number of top UMNO leaders. In 1989, Bank Bumiputra declared a loss of RM1.06 billion, necessitating another capital injection of about RM980 million through Petronas. One justification used by government leaders to help Renong was that this large diversified enterprise was a symbol of the development of Malay capital, a weak argument given that it was evident that this private company did not represent the interests of all Bumiputeras. Chinese companies had managed to develop their enterprise in spite of state policies like the NEP, mainly by conforming to most regulations, for example by redistributing part of their equity to Bumiputeras. Some Chinese felt that they could be privy to state patronage by accommodating the state and influential Malays in their projects. Yet, there was much dissatisfaction among the Chinese over selective distribution of rents, especially to those Chinese linked closely to ruling politicians. There has been little redistribution of these rents on an intraethnic level, say through subcontracts, nor do many Chinese believe that rent recipients have productively deployed these rents. A similar argument is being made by more independent Malay businessmen, reflecting the growing resentment in the private sector that disbursement of state-generated business opportunities is far too limited to an elite minority. Such resentments have grown following disclosures of poor management of these rents after the onset of the financial crisis, particularly privatized rents. It is still unclear why the takeover of some Malay companies by well-connected Chinese was not implemented. It could have been owing to the scale of debts accumulated by the Malay-owned companies. It probably was also owing to the politics of ethnicity. With a general election then imminent, it was imprudent to allow Chinese firms to take over Bumiputera enterprises, since Malay support for UMNO had already eroded appreciably. Mahathir was reluctant to let Lim Goh Tong’s gaming firm, Genting, bail out his son Mirzan for fear of the political consequences among the Malay electorate. There were, however, possible repercussions to the introduction of these measures. One of the biggest fears was that the capital control measures would impair the inflow of new long-term foreign direct investment (FDI) badly required to generate growth. Malaysia’s remarkable economic growth between 1988 and 1997 had been achieved through a significant amount of FDI. Manufacturing output by foreign investors is mainly for markets abroad, with trade worth more than 160 percent of Malaysia’s GNP (Far Eastern Economic Review 24/9/98).
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9 During this general election, the opposition managed to secure much more support in Mahathir’s home state, Kedah, and made some significant inroads in Pahang and Perlis; all three states are Malay-majority states situated in the northern and eastern parts of the peninisula. 10 As mentioned, earlier, the Malaysian government’s primary concentration had been on creating big businesses which would have a dominant presence in the domestic market, but which were encouraged to develop their operations and become more competitive by venturing abroad. 11 Some businessmen, like Samsudin Abu Hassan, a Daim protégé who had left the country, has returned and has admitted that he intends to develop a new, and large, corporate base in Malaysia (see The Star 17/5/99).
References and further reading Bowie, A. (1991) Crossing the Industrial Divide: State, Society and the Politics of Economic Transformation in Malaysia, New York: Columbia University Press. —— (1994) “The Dynamics of Business–Government Relations in Industrialising Malaysia,” in A. MacIntyre (ed.), Business and Government in Industrialising Asia, St Leonards: Allen & Unwin. Callen, T. and P. Reynolds (1997) “Capital Market Development and the Monetary Transmission Mechanism in Malaysia and Thailand,” in J. Hicklin, D. Robinson, and A. Singh (eds), Macroeconomic Issues Facing ASEAN Countries, Washington, DC: International Monetary Fund. Chandra Muzaffar (1979) Protector? An Analysis of the Concept and Practice of Loyalty in Leader-Led Relationships within Malay Society, Pulau Pinang: Aliran. Crouch, H. (1996) Government and Society in Malaysia, Ithaca, NY: Cornell University Press. Gale, B. (1985) Politics and Business: A Study of Multi-Purpose Holdings Berhad, Petaling Jaya: Eastern Universities Press. Gomez, E.T. (1990) Politics in Business: UMNO’s Corporate Investments, Kuala Lumpur: Forum. —— (1991) Money Politics in the Barisan Nasional, Kuala Lumpur: Forum. —— (1994) Political Business: Corporate Involvement of Malaysian Political Parties, Cairns: James Cook University Press. —— (1996a) The 1995 Malaysian General Elections: A Report and Commentary, Singapore: Institute of Southeast Asian Studies. —— (1996b) “Electoral Funding of General, State and Party Elections in Malaysia,” Journal of Contemporary Asia 26(1). —— (1999) Chinese Business in Malaysia: Accumulation, Accommodation and Ascendance, Honolulu: University of Hawaii Press. Gomez, E.T. and K.S. Jomo (1999) Malaysia’s Political Economy: Politics, Patronage and Profits, Cambridge: Cambridge University Press (revised edn). Haggard, S. (1990) Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press. Hewison, K., R. Robison, and G. Rodan (eds) (1993) Southeast Asia in the 1990s: Authoritarianism, Democracy and Capitalism, Sydney: Allen & Unwin. Hua, W.Y. (1983) Class and Communalism in Malaysia: Politics in a Dependent Capitalist State, London: Zed Books. Jesudason, J.V. (1989) Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia, Singapore: Oxford University Press.
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Jomo, K.S. (ed.) (1995) Privatizing Malaysia: Rents, Rhetoric, Realities, Boulder, CO: Westview. KLSE (Kuala Lumpur Stock Exchange) (1996) Annual Companies Handbook, 21(1–4). Kung, I.C. (2001) “Taiwanese Business in Southeast Asia,” in E.T. Gomez and H.H.M. Hsais (eds), Chinese Business in Southeast Asia: Contesting Cultural Explanations, Kingston: Curzon. Lee, H.P. (1995) Constitutional Conflicts in Contemporary Malaysia, Kuala Lumpur: Oxford University Press. MacIntyre, A. (ed.) (1994) Business and Government in Industrialising Asia, St Leonards: Allen & Unwin. Malaysia (1991) Sixth Malaysia Plan, 1991–1995, Kuala Lumpur: Government Printers. —— (1996) Seventh Malaysia Plan, 1996–2000, Kuala Lumpur: Government Printers. Mehmet, O. (1988) Development in Malaysia: Poverty, Wealth and Trusteeship, Kuala Lumpur: INSAN. Milne, R.S. (1986) “Malaysia – Beyond the New Economic Policy,” Asian Survey XXVI(12). Montes, M.F. (1998) The Currency Crisis in Southeast Asia, Singapore: Institute of Southeast Asian Studies (ISEAS). Ostry, J.D. (1997) “Are Current Account Imbalances in ASEAN Countries a Problem?,” in J. Hicklin, D. Robinson, and A. Singh (eds), Macroeconomic Issues Facing ASEAN Countries, Washington, DC: International Monetary Fund. World Bank (1996) Managing Capital Flows in East Asia, Washington, DC: World Bank. Yeoh, K.K. (1987) “A Study of the Malaysian Chinese Economic Self-Strengthening (Corporatisation) Movement – With Special Reference to MPHB, Other Communal Investment Companies and Cooperatives,” unpublished MEc. thesis, University of Malaya. Yoshihara, K. (1988) The Rise of Ersatz Capitalism in Southeast Asia, Singapore: Oxford University Press.
Newspapers and periodicals Asian Wall Street Journal Corporate World Euromoney Far Eastern Economic Review Financial Times Malaysian Business New Straits Times Newsweek The Star
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KMT, Inc. Liberalization, democratization, and the future of politics in business Karl J. Fields
Introduction The March 18, 2000 election of Democratic Progressive Party (DPP) candidate Chen Shuibian brought to an end over half a century of Guomindang (KMT) rule of Taiwan. This watershed event is a tribute to this island nation’s remarkable process of economic liberalization and political democratization over the past 40 years. While tribute should be given to the opposition, the election victory has much more to do with processes occurring within the KMT itself, particularly the problems that have emerged out of the party’s active involvement in the corporate sector. One of the most challenging aspects of post-KMT Taiwan will be to sort out the entangling threads of state, party and even private interests that in the past were largely fused. This chapter explores the nature of the ties between politics and business in Taiwan. More specifically, it examines “KMT, Inc.,” the complex network of Nationalist or KMT-owned enterprises (guomindang dangyingshiye). KMT, Inc. was built and has prospered, at least in part, on a foundation of nepotism, insider trading, political patronage, and financial sector abuse for vested political interests. And yet, before and since the 1997 financial crisis, Taiwan’s political business alliance has not only overcome or avoided the predatory consequences of corruption revealed elsewhere in post-crisis Asia, but has had decidedly productive, and even developmental outcomes at times. This chapter argues that the regime’s discipline over time allowed Taiwan to avoid debilitating corruption in key political business ties, but not all marginal ones. An evolution has occurred in Taiwan’s form of political business chiefly because of the evolution of party–state relations, from one of fused unity to increasing separation, first at the mid- and local levels, but now even at the top as the KMT’s hegemony over the state has been severed. This is a result of shifts toward liberalization and democratization, and probably because of the adaptability of both a pragmatic leadership and a relatively nimble set of institutions. This is seen in the leadership transitions of KMT, Inc., as well as in the shifts in the functions of firms from patronage to profit. It is also seen in the levels of transparency, as competition within both the economic and political
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marketplace have compelled the KMT to gradually remove the politics from its extensive money making operations and remove the money – or at least bring it above board – in its politicking. Yet, while the KMT has had to be responsive to the discipline of democracy, this has in fact enhanced the role of money in politics and the demands for profits from KMT, Inc. “Money politics” is certainly part and parcel of Taiwan’s recently pluralized electoral system and the politico-bureaucratic distribution of contracts and other rentseeking opportunities in Taiwan, just as it remains in the rest of Asia.1
Institutional structure and economic development In the developmental state literature, bureaucratic autonomy – the ability of policy-makers to depoliticize key economic decisions – has been considered an essential element for formulating and implementing developmental industrial policies. Evans (1995) and others have modified this notion of autonomy, arguing that the key to East Asia’s economic success has been the “embedded autonomy” of the developmental states.2 In other words, bureaucratic insulation from particular private interests is combined with collaborative linkages with large private capital serving as handmaiden, if not vanguard, of this developmental process. However, under these dual imperatives of essential autonomy and crucial connections, the developmental state is posed with the challenge of not becoming “the captive of its major clients, who are representatives of big, privately owned businesses” (Johnson 1987: 156). Although Taiwan, like Korea, has had its own share of problems with corruption scandals and unproductive rent-seeking, its authoritarian one-party regime has avoided Japan and Korea’s political dependence on the large private business sector as developmental agents and campaign financiers. Moreover, historical experience and situational imperatives over time imposed a degree of both distance and discipline on those agents capable of abusing rent-seeking opportunities and exposing Taiwan’s political economy to the most harmful aspects of the financial crisis. In short, the historical discipline of a revolutionary ideology and heroic mission to retake the Chinese mainland has given way to an even more effective discipline of a substantially liberalized economic and political marketplace. We can note several key domestic factors that have distinguished Taiwan from its Asian neighbors:3 ●
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A strong independent central bank and a financial system dominated by the party-state (fear of inflation) which managed to effectively supervise a managed-float currency, retain key formal and informal controls on capital account convertibility, maintain a current account surplus, and stockpile a large foreign exchange reserve (political/security motivations). An active industrial policy that has effectively promoted a nimble and
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competitive high-tech manufacturing sector (whose markets lay largely beyond Asia) exposed to international competition and open to foreign direct investment (FDI). A dual industrial structure with a trade regime dominated by small and medium-scale enterprises (SMEs) that are funded largely internally (through equity and informal curb market loans) and a second tier of state, party, and private enterprises clustered in the upstream, capitalintensive and oligopolized sectors that lend crucial support to the SME export regime (Fields 1998). A stable domestic political situation with a long history of consistent and largely respected macroeconomic policy-makers that have instiled confidence in both foreign and domestic investors.
Significantly, however, the complex of party-owned enterprises residing at the center of the institutional structure of the state has never been displaced. Not surprisingly, the KMT regime’s dominance of the financial sector has been crucial to the nature of its control of political business and will make any dismantling of KMT, Inc. particularly challenging. Xu (1997) argues that the financial sector has been the “primary target” of KMT investment and control, for at least four reasons. First is the central influence of the financial sector on the larger economy and the concomitant power that control of the former through party-owned firms gave the party over the latter. Second, the fact that some 90 percent of Taiwan’s bureaucrats, including financial bureaucrats, have been members of the KMT, has guaranteed varying levels of privileged access to financial information. Such privileged access and personal connections to policy-makers can be particularly valuable in the financial sector and has assured party-owned financial firms a disproportionate share of profits, even as their monopolist positions have been undermined by liberalization. Third, Xu notes that the complex nature of cross investments among financial firms and other financial agents has made public scrutiny in this sector much more difficult than in other sectors (a virtue that has certainly not been lost among private conglomerates either). Finally, the relative liquidity and ease of transferability of financial assets has made them an investment priority for a regime historically threatened by both cross Strait invasion and internal dissent (and more recently electoral defeat, it might be added). However, the specific nature and practice of political business is different in Taiwan when compared to other Asian countries which has had an impact on both the levels of corruption and democratization. To this we now turn.
The KMT Taiwan’s Nationalist Party, whose Chinese-language ideographs are romanized in Taiwan as Kuomintang (KMT), has its roots in the Revive China Society (xingzhonghui), founded by Sun Yat-sen in 1894 as a vehicle for organizing opposition to the ruling Manchu dynasty of China. Sun permanently
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renamed its successor organization the Nationalist Party in 1919 and in the following year began a four-year reorganization of the party under the tutelage of Lenin’s Communist International and along the lines of Lenin’s principle of democratic centralism. With Sun’s death in 1925, Chiang Kai-shek assumed leadership of the party and then nominal control of China in 1927. The KMT party-state survived Japan’s 1937 invasion of China, but not the civil war waged against the Chinese communists for control of the mainland. Chiang and the KMT were forced to relocate with nearly 2 million supporters and hangers-on to Taiwan in 1949. The KMT ruled over Taiwan’s 7 million subethnic Taiwanese with an iron fist for over three decades, exerting extensive control over society and penetrating and dominating all forms of social organization. Authoritarian rule gradually softened during the 1980s and dramatically disintegrated during the 1990s. Major benchmarks in Taiwan’s completed democratic transition and steps toward consolidations include Chiang Ching-kuo’s lifting of martial law in 1987, Lee Teng Hui’s election as the first native Taiwanese president in 1990, the democratic election of parliament in 1992, and Lee’s re-election in a fully-democratic presidential contest in 1996. The crowning event in this process was certainly the March 2000 presidential election in which the opposition DPP ended over 50 years of KMT rule on Taiwan. Organizationally, Taiwan’s KMT party-state system was and in many ways remains decidedly Leninist in its democratic centralism within the party and its organizational parallellism between the party and the state. In its relations with society, the regime adopted an “authoritarian corporatist” approach, creating a social support base by creating wealth and coopting potential allies (Hsiao 1993: 155; Gold 1986: 65). Cheng (1989: 476) describes the KMT as “an elitist party using mass organizations to mobilize support” led by “party cadres . . . socialized as revolutionary vanguards.” Historically, the party cadre were able to control the education system, labor organizations, mass media, and, through the political commissar system, even the military. Such activity and capacity do not come cheaply. Although increasing political liberalization and social pluralism have greatly reduced these functions of mobilization and control, the organization and staffing of the KMT still reflect these earlier missions and the party’s revolutionary legacy. The party retains a paid staff of some 4,000 party personnel and also funds the pensions of some 1,000 retired party cadre. These salaries, pensions and other benefits are estimated to cost the KMT some US$200 million each year, 20 times the annual expenses of the British Conservative Party.4 The party spends an additional estimated US$40 million in annual operating expenses5 and many times that amount annually funding election campaigns at the national, provincial, and local levels. In 1996, the KMT had a registered membership of 2.2 million members, compared to roughly 70,000 registered as members of the largest opposition party, the DPP (Free China Journal 10/5/96).
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The party, the state, and politically-linked enterprises The KMT not only dominated society, it also controlled the state through party organs located in administrative units at all levels of government and party commissars positioned in military units. For the period of martial law from 1949 to 1987, little distinction was made between party and state interests. Nearly all senior government officials and military officers were also members of the KMT and many held high party office as well, which led to a “constant blurring of the distinction between party and state at the top” (Wade 1990: 236). The gradual process of political liberalization began to sever this linkage, particularly at the mid- and lower levels of government administration. At the top, however, the party and state remained tightly linked through Lee Teng Hui who was both president of the Republic of China and chairman of the KMT. While party–state linkages did become more tenuous, particularly in areas such as foreign affairs (where the party has much less influence on state decisions), the bond remained close in financial and economic policies and in the state- and party-owned business sectors, despite increasing pressure to separate the two.6 During the 40 years of martial law, virtually all top-level management positions in the state-owned enterprises (SOEs) remained in the hands of loyal party members and the KMT made “little distinction between the party and the state in business affairs” (Time 23/8/93). In Taiwan’s version of the Japanese amakudari (descent from bureaucratic heaven) almost all partyowned enterprise (POE) managers are former government officials or military officers who in their former posts were in a position to assist these firms in one way or another.7 Foreign banks lent to businesses run by both the SOEs and POEs on equal terms and multi-national corporations perceived both state- and party-owned firms as preferred partners for establishing joint ventures. Even more frequently, party- and state-run enterprises jointly invested in a variety of start-up ventures or assumed ownership of ailing private firms, creating “entangled interests in many enterprises” (Chen et al. 1991). Political liberalization since the lifting of martial law increased legislative oversight over the SOEs, but this oversight has not extended to the POEs, allowing them to continue to operate largely free of public, or opposition, political scrutiny and to profit handsomely in many areas. The regime that arrived on Taiwan was still smarting from its disastrous relationship with private capital on the Mainland during the Chinese civil war and was a transplanted mainlander minority seeking to dominate a subethnic Taiwanese majority. The KMT party-state, however, found itself in the early 1950s with a great deal more productive capacity. With the retrocession of Taiwan in 1945, the KMT regime inherited all assets and enterprises previously owned by both the Japanese colonial government (sotokufu) and the private Japanese conglomerates (zaibatsu). The defeated regime also brought with it from the Mainland several enterprises that it resurrected on
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Taiwan under its own auspices. Moreover, many new industries, particularly in the financial and other strategic developmental sectors, were either beyond the reach of the private sector or deemed too politically risky to turn over to private, chiefly Taiwanese, entrepreneurs. These, too, were established as state- and party-owned and operated firms. Many of these were already, or soon became, state monopolies or oligopolies (da Silva 1993: 949). In fact, during the early 1950s, SOEs accounted for nearly 57 percent of industrial production, 43 percent of domestic capital formation, and nearly 20 percent of all civilian employees (Hsiao 1993: 151). This likely placed “a larger share of the industrial output in the hands of the Taiwanese government than in any developing country at the time.”8 Despite substantial privatization efforts over the next four decades, in 1990, the three largest firms measured in terms of sales were all SOEs and six of the top 10 were SOEs when measured in terms of assets. In 1992, 60 SOEs still accounted for 15 percent of aggregate capital.9 Less well known, and at the time largely and understandably indistinguishable from the state-owned and operated firms, were the party-run firms that now comprise KMT, Inc. The initial fusion between state and party meant little distinction between a large SOE sector and an equally formidable POE sector; both were used interchangeably to meet the multiple demands of the party-state. Liberalization and democratization have forced the separation of party and state and also altered the primary purposes and functions of the POE. Significantly, however, while economic liberalization and political democratization has led to the privatization of many SOEs and much greater legislative scrutiny over the operations of those remaining in state hands, this has not been the case with the POEs. Although the separation of party and state has forced the KMT to give up most of the sheltered privileges and rents enjoyed by many of its firms, the party has successfully reorganized the POEs as “private” firms beyond the inspection and control of both the public and the opposition. This has allowed the party to employ the capacities and profits of these ostensibly private firms in a variety of ways, some decidedly public. The ties between private business and the party and the POE include both joint ventures and substantial donations from the private sector to the party. Alliances with the private sector had initially been forbidden because of subethnic cleavages, which gave the impetus for the creation and maintenance of a huge state and party enterprise system. The Taiwanization of politics and even the KMT, however, has all but dissolved that gap. The KMT has permitted joint ventures involving party holding companies, SOEs and big private firms which have “even further empowered the party’s penetration in Taiwan’s private sector. The POEs have also actively established joint ventures with large private business groups among them Ruentex and Tuntex, as well as with foreign investors. Out of this has emerged a new kind of partystate–private capital bloc. This bloc has been free of bureaucratic supervision and has enjoyed a great deal of the state’s special favorable privilege through political manipulation” (Hsiao 1993: 151).
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Many of Taiwan’s largest privately owned enterprises were also willing to invest with KMT in new ventures because of the expectation that the party would not be investing in a project if the government was not behind it. This has also allowed private enterprises the advantage of having access to a wide range of rents created by the government (Asian Wall Street Journal 7/12/92). The case is similar with foreign firms. One example was the joint venture between Central Investment Holding Company, Grand Cathay Securities Corporation, and the multinational securities firm Morgan Stanley which established an investment trust firm to cultivate investment opportunities in Taiwan’s stock market. It was alleged that Morgan Stanley sought out KMT firms as a means to secure greater access to Taiwan’s burgeoning securities industry (see Free China Journal 6/22/96). Numazaki (1992) has noted that the corporate interconnections between POEs, SOEs, private firms, and foreign companies have been quite significant, unlike the more distinct boundaries that are to be found among such enterprises in Korea and Japan. To some extent it is understandable why private firms as well as foreign enterprises seek out business ventures with state- or party-owned companies; according to unofficial estimates approximately half of total Taiwanese corporation assets are controlled directly or indirectly by the state and party (see Asian Wall Street Journal 9/10/89).
KMT, Inc.: politics in business The KMT’s own published account of the firms owned and/or invested in by the party in 1994 divides the historical development of the POE into five decade-long phases.10 During the 1950s, or the “Initial Formation” (chuchuang) period, several firms under Nationalist control on the Mainland were salvaged, transferred and re-established in Taiwan. These included Chiloo Enterprises (munitions, rubber) and Yutai Corporation (import and export trade). During the 1960s, or the “Laying Foundation” (zunji) period, KMT, Inc. was still rather small. Keeping pace with (and in many cases anticipating) government industrial policies, the KMT developed Jiantai Cement, acquired Jingde Pharmaceuticals, founded Chung Hsing Electric and Machinery, and, with state-owned concerns, jointly established Taiwan Jianye (land developing). During the 1970s, or the “Development” (kuozhan) period, KMT, Inc. began to take off in terms of scope, scale, and organizational complexity. The party established a large number of new firms (see Appendix 4.1) and began to make comprehensive investments in a wide variety of industrial sectors. The two largest of the seven KMT holding companies, Central Investment and Kuang Hua Investment, were established during this period and began investing heavily in areas of particular importance to government industrial policy, particularly petrochemicals (Donglian, Zongmeiheshiyou, Yongjia, and Taiwan Polystyrene) and the financial markets (Chung Hsing Bills Finance).
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During the 1980s, or the “Transition” (zhuanxing) period, the party established and promoted a number of insurance and other financial service enterprises and invested heavily in engineering, construction, and energyresource firms. During this period, Kuang Hua Investment Holding Company was established, as an energy resource division, bringing together all of the provincial propane gas companies. Once under military auspices, these monopoly licenses to dispense propane have been lucrative cash cows that the KMT has been able to divvy out to local bosses in exchange for political support. During the 1990s, or the “Expansion” (kuozhang) period, KMT, Inc. expanded into the areas of environmental protection (Weiyu huanbao, Weiyu keji, Qingyu huanbao) and added to its stable of engineering, construction, design, and development consulting firms (Fengshui yingzao, Hangu kaifaguwen, Jauling gongchengguwen, Datong jianjujingli, Xingye, Yongchang, Hanxiang), forming in essence a vertically integrated construction conglomerate within KMT, Inc. In finance and securities, the party established Dahua Securities and Bank Sinopac, and in life insurance, Xinfu Life Insurance (serving both party personnel and the public). Serving both developmental and diplomatic purposes, as well as making tidy profits, the party also made investments during the 1990s in support of government efforts to promote regional economic cooperation and the establishment of an Asian-Pacific regional operations center (APROC). In recent years, with the Yueh Sheng Chang Holding Co. taking primary responsibility, the POEs have initiated investments in Japan, India, Vietnam, Singapore, The Philippines, South Africa, and Australia. Moreover, during the tenure of economics professor and presidential confidant Liu Taiying (see Table 4.1), the POEs have experienced dramatic internal management and organizational changes. Liu has promoted entrepreneurial management, appointed professional managers, strengthened the decision-making powers of the board of directors, established systems of corporate auditing, and expedited the public offering and listing of affiliate companies. He has also formed strategic alliances both among the POEs and between the POEs and private domestic and foreign capital in an effort to acquire technology and expand economic scope and scale. Increasingly sensitive to public criticism of KMT, Inc.’s privileged past and recognizing the political capital to be garnered when perceived as a good corporate citizen, KMT, Inc. began setting aside an increasing proportion of its earnings to reinvest in socially beneficial projects, including hospitals, elderly care centers and, low-cost housing for the military and poor. Such investments are also an adroit manner of securing electoral support. If KMT, Inc. was once secretive, monopolistic and grossly inefficient, since the ending of martial law in 1987 and under the tutelage of the entrepreneurial Liu Taiying (and his predecessor Xu Lide), dramatic changes have been made in the orientation and management of the enterprises under the party’s control. While Chen Cheng, who had charge of KMT, Inc. during the
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Table 4.1 Leadership of KMT, Inc., 1945–2000 General manager
Tenure
Primary focus
Chen Cheng Yu Guohua Xu Lide Liu Taiying
1945–65 1965–83 1984–93 1993–2000
Recover Mainland Patronage, party power Development, patronage Profit, development
“Initial Formation” period, concentrated on salvaging and re-establishing enterprises brought over from the Mainland, his primary preoccupation was not the development of these enterprises to promote economic growth in Taiwan. With the passage of time, however, KMT, Inc. became increasing important as a means for party leaders to dispense patronage and consolidate their hold over the republic. It was only under Xu and Liu that the conglomerate came to resemble in many ways Taiwan’s private business groups, or guanxi qiye, with whom it competes and collaborates in both the domestic and international marketplaces. Historically, loyal party cadre presided over and staffed a hodge-podge of propaganda organs, munitions and basic manufacturing firms, and financial, construction and other service enterprises (see Appendix 4.1). Many of these firms had monopolistic or oligopolistic privileges in market sectors often reserved exclusively for the party and state. These firms were interconnected primarily by politicized vertical connections to the KMT and secretive, complex, and personalized cross shareholdings among core members of the party elite. By the end of the 1990s, KMT, Inc. consisted of over 150 party-invested enterprises, with the KMT retaining over 50 percent ownership in roughly one-fourth of these firms. Given the secrecy of much of their operations, it is not surprising that much controversy and confusion surround their net worth (and the KMT itself). In 1994, the party registered its corporate holdings under the KMT’s own name for the first time. This registration listed some NT$36 billion (US$1.44 billion) in assets, but included only the party’s own evaluation of just the book value of the seven holding companies. By the party’s own admission, this figure excluded cash, real estate held by the party’s finance committee, and overseas properties often held in the name of local Chinese societies but controlled by the party (Free China Journal 11/3/94). Moreover, Liu Taiying has admitted that the actual market value of the KMT’s corporate holdings may be three times that of the book value (see Far Eastern Economic Review 11/8/94). Other estimates include that of a respected local business magazine which placed the 1991 book value of the party’s assets in its registered corporations at NT$112 billion (US$4.5 billion), while that of a group of university economists sympathetic to the political opposition was NT$500 billion (US$20 billion). The total assets of firms invested in by the party was valued in 1993 at some NT$900 billion (US$36 billion), though the degree over which
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the KMT exercises control of these firms varies (China News 20/9/93). Another business journal has consistently ranked KMT, Inc. as Taiwan’s largest private business conglomerate in terms of assets in its annual rankings and sixth largest in terms of sales. This places KMT, Inc. well within the top 100 of Fortune magazine’s global 500 ranking. These firms are managed through seven holding companies owned outright by the party and directly controlled by the KMT’s Party-Owned Enterprise Management Committee, of which Liu Taiying is chairman. This committee is one of the 12 standing committees of the KMT’s all-powerful Central Standing Committee (see Figure 4.1). Table 4.2 includes the 24 KMTinvested enterprises listed on the Taiwan Stock Exchange (which is also a KMT-invested firm), noting sales, asset, employee and industry information. Table 4A.1 in Appendix 4.1 (pp. 141–9) offers a first attempt to provide this same information, as well as other data (founding year, affiliated holding company, percent of KMT ownership) for over 100 KMT-invested firms. Table 4.2 Public-listed KMT enterprises, 1992 Company Taiwan Fibre Taiwan Polystyrene Baosheng Chemicals Zhongxing Electric Jiantai Cement Qingyu Enterprise SinoPac Bank Zhonglian Investment Yutai Enterprise Central Trade Shenze Enterprise Zhongxing Securities Zhonghua Securities International Securities Central Insurance International Investments Dahua Securities Fuhua Securities China Development Stock Exchange (TSE) TSE Administration Xingye Construction China Television Taiwan Cable Total (NT$ million) Total (US$ million)
Sales
Employees
Industry Synthetic fibre Petrochemicals Chemicals Electric Cement Manufacturing Private bank Trust Export/import Export/import Export/import Finance Finance Finance Insurance Investment Finance Finance Finance Finance Finance Construction Service Service
391 2,209 303 7,395 4,659 n.a. 1,606 7,113 939 130 19 2,814 1,766 208 5,737 19 978 6,126 2,625 1,220 519 1,851 4,535 115
1,010 3,792 822 8,710 7,456 432 29,722 81,482 n.a. 434 144 15,426 8,035 457 3,822 588 11,725 61,650 23,907 11,241 948 4,884 4,320 397
n.a. 198 111 1,682 341 n.a. 350 375 308 n.a. n.a. n.a. 200 n.a. 420 n.a. 228 n.a. 236 590 460 25 752 140
53,285 2,131
281,413 11,257
6,416 315
Source: Juoyue (September 1993: 214). Note n.a.: not available.
Assets
Youth Affairs
Social Affairs
Cultural Affairs
Source: Shangye Zhoukan (Business Weekly) (1994: 25).
POE Management
Women’s Activities
Chi Sheng Industrial Holding Company Qisheng shiye gongsi
Ching Teh Investment Holding Company Jingde touzi gongsi
Secretariat
Yueh Sheng Chang Corporation Yueshengchang gufen gongsi
Evaluation Yangming Finance and Institution Discipline
Jen Hua Investment Holding Company Jianhua touzi gongsi
Seven POE Holding Companies Hua Xia Investment Holding Company Huaxia touzi gongsi
Organization
Kuang Hua Investment Holding Company Guanghua touzi gongsi
Mainland Operations
Figure 4.1 Organizational structure of the Kuomintang, 1994.
Central Investment Holding Company Zhongyang touzi gongsi
Overseas Affairs
Twelve Standing Committees
Central Committee
Central Standing Committee
Chairman
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Despite the incomplete nature of these tables, the horizontal breadth and vertical integration of this conglomerate is readily apparent. KMT, Inc. member firms are involved in everything from steel, plastics, and electronics to insurance, banking and construction. They make computer chips and table fans, and produce both Peking opera programs and slick campaign videos. KMT, Inc. is, in many ways, the functional equivalent of the Japanese keiretsu or kigyo shudan, the Korean chaebol, or as noted above, Taiwan’s private related enterprise groups or guanxiqiye. KMT, Inc. does more, however, than simply perform the role of a profit-seeking enterprise. It is to these multiple functions we now turn.
Functional and dysfunctional roles of KMT, Inc. In his landmark study of political parties, Sartori (1976) developed a typology of 10 party systems in Western societies. Discussing this typology, Tien (1989: 9) rightly concludes that no one of these categories fully accounts for the nature and function of the KMT. Likewise, the POEs, as agents of the KMT, have performed a variety of functions and endowed the regime and party with a particular set of benefits and burdens. Based on interviews and careful study of the historical and current activity of the POEs, this study has distilled six roles or functions (jineng) that KMT, Inc. has performed on behalf of the Nationalist party-state. These functions have included (in descending order of significance) funding and profit sources, patronage outlets, propaganda organs, developmental agents, market regulators, and diplomatic envoys. In this section, each of these is examined briefly in turn. It should be noted that each of these functions could have been performed by other institutions, and in fact typically are in other societies. In Japan and elsewhere, large private capital is the predominant source of party funds and the primary venue for patronage appointments through the institutional arrangement known as the “descent from [bureaucratic] heaven” (amakudari). In many developing but still capitalist countries, such as Singapore, Indonesia, and even Taiwan, the SOEs serve as developmental agents for promoting strategic industrial policies and regulators of the market. Most nation-states, enjoying full diplomatic relations with other members of the international community, can rely on governmental envoys, rather than business enterprises with discrete ties to the regime, to carry out diplomatic functions. Significantly, political parties in other countries, including Malaysia, Zaire, and South Africa, have chosen party-owned enterprises to perform some of these very same functions, but with different results. For historical, ideological and situational reasons, Taiwan’s ruling KMT chose, by both design and default, its own retinue of capitalist enterprises to perform these functions. This choice has brought with it, as with any other institutional choices or legacies, a distinct set of trade-offs. In the case of Taiwan, while KMT, Inc. has facilitated both Taiwan’s economic ascent and democratic transformation, it may also hamper the country’s prospects for
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both full market liberalization and democratic consolidation and contributed to the KMT’s defeat at the presidential polls in 2000. Funding and profit sources (lirun) Even without subscribing to a Marxist analysis of capitalism, few analysts of contemporary liberal capitalist democracies would disagree that successful political parties in capitalist democracies must bow to the “special interests” of private capital in exchange for the political funds necessary to fund political campaigns, recruitment, and other operating costs. Such exchange is widely seen as part and parcel of the democratic process. In Taiwan, however, the KMT chose to internalize a significant portion of these financial resources, opting for hierarchy over markets with distinct tradeoffs. The KMT has done so by bringing the “commanding heights” of the economy in-house, thereby resolving collective action problems through hierarchy and securing political autonomy by retaining or capturing its own profit-producing clients. This entailed circumscribing the emergence of large private capital and substituting state-owned and party-owned capital for private capital as developmental agents, patronage outlets, and sources of regime finance and campaign funds. History and ideology both shaped and facilitated this strategic response. The KMT is Leninist in organization and remains informed by a quasi-socialist Sun Yat Sen ideology that has uniquely qualified it for the task. This ideology and organization allowed the KMT regime to justify and carry out the proscription of private capital and assume ownership and management of its own set of industrial enterprises. However, the dual impact of economic and political liberalization has substantially altered the environment of Taiwan’s political economy. An increasingly open and competitive marketplace has compelled the managers of KMT, Inc. to professionalize the management and rationalize the operations of these firms. The search for legitimate profits both at home and abroad has replaced the previous reliance on monopoly rents in formerly protected markets. KMT, Inc., already listed in Taiwanese business magazines as the island’s sixth largest private conglomerate, looks and acts increasingly like these private “related enterprise” (guanxiqiye) conglomerates with whom it alternately competes against and participates with in joint ventures. At the same time, these profits have taken on new political significance to the party as it competes in an increasingly open political marketplace. Total assets of the KMT have been valued at US$42 billion, making it undoubtedly the richest party in the world. These assets include over US$25 billion in property both in Taiwan and abroad, and income is generated both in the form of rents (the building housing the national headquarters for the rival DPP in Taipei is in fact a KMT-owned property) and sales. In addition, profits from KMT, Inc.’s productive enterprises were valued at US$500 million in 1996.11 These profits include monopoly rents from government contracts.
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Historically, Taiwan’s military and governmental offices purchased everything from medicine and gunpowder to cement and air conditioners exclusively from the POEs. Many strategic and lucrative sectors of the financial industry were also initially reserved for state and party-owned enterprises, and POEs have reaped huge windfalls in the insurance, trust, and securities markets. While many of these POEs were set up in name of development, they became over time embarrassing monopolies as Taiwan’s economy has liberalized. Since 1987, financial liberalization and opposition whistle-blowing have compelled POE management to rationalize many of these firms, making many of them genuinely competitive in the open market and forcing other inefficient firms into bankruptcy. Critics still claim that POEs exert unfair influence and retain undue privilege in the marketplace.12 Opposition parties also assert that the KMT can exert greater influence over the electorate because of its access to large amounts of funds. Party coffers undoubtedly fund increasingly costly political campaigns, as the following section discusses. As in the rest of Asia, political campaigns are highly personal and outrageously expensive and are estimated to be more expensive in Taiwan than either Japan or Korea. This is because of Taiwan’s retention of a voting system of single, non-transferable votes in multi-member constituency districts (SNTV/MMCD). Candidates for national and even local offices can spend well over US$1 million for a single political campaign, with a significant portion of these expenses funded from party coffers. While the KMT has been forced to be responsive to the discipline of democracy, this has in fact enhanced the role for money politics and the demands for profits from KMT, Inc. Profit sources fund campaigns, but also provide perks and jobs for potential opponents to democratization. Patronage outlets (chouyong) In view of the KMT’s historical status as a transplanted minority regime, it was understood that those Mainlander officials and other party personnel who had remained loyal to the KMT and served it dutifully would be well cared for with both employment opportunities and generous retirement pensions and perquisites. In addition, the factionalized nature of the KMT and the SNTV/ MMCD electoral system has meant that the KMT has had to broker among rival KMT candidates in determining who will ultimately receive the party’s endorsement. One way the KMT has been able to winnow the field of candidates has been to offer sinecures in party-owned enterprises in exchange for candidates’ willingness to bow out of the race and swing their support to the party’s favored choice. The KMT has also been very successful at capturing local political machines by awarding lucrative POE construction and other types of contracts and local monopolies, such as natural gas delivery, to local party bosses. These patronage awards explain much of the KMT’s continuing electoral strength at the local level even as it begins to falter at the national level (see below).
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Finally, Chiang Kai-shek brought with him over a million Nationalist troops from the Chinese Mainland in the late 1940s, most of whom left families, friends and – to the extent they had any – property behind. Faced with the task of employing and appeasing these effectively banished and potentially restive soldiers, a number of firms within KMT, Inc. were reserved exclusively for retired military personnel. Anxious to retain what was previously referred to as the “iron” vote of these Mainlander veterans, KMT, Inc. is now investing in retirement condominiums and villages for their benefit. These investments will likely simultaneously earn profits, votes, and good will for the KMT. Propaganda organs (wenxuan) The propaganda organs of KMT, Inc. have increased in significance relative to its essential role as source of campaign funds. The propaganda role of party-owned companies, as well as the other functions of diplomacy and development that KMT, Inc. performs, remind us that it is much more than just a set of profit-seeking firms. It remains a quasi-public hybrid with multiple opportunities, historical burdens and motivations. Until 1987, the private sector was largely, and new entrants were completely, banned from participating in the audio, video, and print media. At the same time, the KMT’s radio and television holdings gave the party more control of both newspapers and the airwaves than the government itself. This “cultural” sector of KMT, Inc. has been hit hard by the liberalization of the media over the past decade. The fact that KMT, Inc. remains invested in newspaper, radio, television, and cable companies despite mounting losses demonstrates that functions beyond profit are at work. Developmental agents (kaifa) KMT, Inc. retains an important role in selling Taiwan abroad, employing the services of foreign consulting and public relations firms and distributing glossy print, video, and even internet information on Taiwan. KMT, Inc. has invested in a trade and development center in Tokyo to promote products made in Taiwan, particularly the products of Taiwan’s host of small- and medium-sized industries (SMEs). Those championing the project insist the motivation is to promote Taiwan’s SMEs and to reduce Taiwan’s trade deficit with Japan; national goals pursued through party agents beyond the purview of legislative oversight. Similarly, POEs have been the vanguard of President Lee Teng Hui’s “go south” initiative in encouraging investments in Southeast Asia, and away from an over-reliance on foreign investment in the Chinese mainland. In fact, KMT enterprises were the first to return to (communist) Vietnam after all of Taiwan’s investments were run out of South Vietnam following the fall of Saigon in 1975. KMT, Inc. has also been a primary and relatively astute investor in a wide variety of high-risk investments and strategic joint ventures in areas that the
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private sector was unwilling to support and where legislative opposition stymied the participation of state-owned enterprises. Market regulators (shichang kongzhi) The disastrous consequences of inflation on the Chinese mainland in the 1940s and the linkage between these events and the Nationalists’ loss to the Chinese Communists has instilled in KMT officials an almost irrational fear of inflation and led to the institutionalization of conservative fiscal programs in Taiwan. It is no coincidence that the POEs were granted the first (and typically exclusive) rights to offer new financial instruments and were often charged with the financing, control, and monitoring of newly created financial markets. Although KMT, Inc. has lost its monopoly control in many of these sectors, the financial firms owned and operated by the KMT remain the conglomerate’s most profitable. Diplomatic envoys (waijiao) In the absence of official diplomatic relations with all of its major trading partners and strategic allies (and for that matter, with most countries in the world), the KMT party-state has had to rely on corporate emissaries to carry out many of its foreign policy objectives. Although the party and government are largely separated now, the party has not given up on its habits of utilizing its own stable of firms to carry out strategic goals. KMT, Inc. has been linked to the campaign for seeking a seat for Taiwan in the United Nations, laying the groundwork for President Lee’s controversial visit to Cornell University – his alma mater – in 1996, and even allegedly offering donations to the Democratic National Committee for the Clinton campaign.
Factionalism and its impact on political business As is the case with single-party dominant systems elsewhere, the KMT too has been prone to factionalism, at both the central and local levels.13 Perhaps ironically, the patronage and profits of KMT, Inc. have played essential but opposite roles at each of these two levels in the party. At the center, factionalism, and certainly defection, have been held in check by effective central control of the assets, profits, sinecures, contracts, and other patronage opportunities associated with the KMT-owned enterprises. Straying too far from the center on policy issues or attempting to create a power center or fiefdom separate from the party hierarchy has meant forgoing access to these fruits. At the local level, the KMT has long employed a “divide and control” strategy of encouraging factions and then balancing these factions by providing campaign funds and other resources to those local candidates favored by the central party. Historically, neither the strategy of central corporatism nor that of local
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clientelism has been cheap, but both have been effective. Liberalization of the political process has, however, altered the stakes by introducing new opportunities for electoral success without the blessings and beneficence of central party leaders at both local and national levels and both within and without the party. Predictably, this has made organized factionalism and even desertion more pronounced at the center, and has led to the disarray of the KMT’s carefully orchestrated local factionalism. This section discusses this evolving process and examines the particular role of the POE in facilitating local factionalism. Factions at the center Since factionalism challenged central KMT unity following the party’s establishment in China, Chiang Kai-shek arrived in Taiwan committed to eliminating intra-party factional disputes that were seen as instrumental in the party’s loss of China. Chiang and his son did not eradicate factionalism among central party leaders during the four decades in which they controlled Taiwan and ruled the party.14 Nonetheless, their unquestioned dominance of the party and its various organs, including party and state-owned enterprises, allowed them to limit authoritatively and effectively any divisive impact of factionalism on both internal politics and external policy. The ending of this Chiang dynasty with Chiang Ching-kuo’s death in 1988 inevitably led to disputes over who would command the party and the government. Although Lee Teng Hui’s joint positions as KMT vice-chairman and vice president of the republic assured his ascendancy to the presidency, factional squabbles began almost immediately over long-term regime control. One of the first signs of this division came in the aftermath of the KMT’s poorer-than-expected showing in the 1989 legislative elections. Guan Zhong, a supporter of Lee and the reformist head of the KMT’s organization department, was assigned responsibility for the loss and was removed from his position. Like other fallen comrades and defeated politicians, Guan was well cared for, assuming a sinecure at the KMT-owned Yu Tai Industries.15 This factionalism came to a head in 1990 in preparation for the first democratic presidential election and the predictable struggle for power between those within the party who supported Lee and conservatives opposed to his bid for the presidency. Reformers loyal to Lee, including James Song Chuyu, comprised a “Mainstream” faction (zhuliupai) opposed by the “Non-Mainstream” faction (feizhuliupai) that was more conservative and of mainlander origin. A parliamentary factional division along the same lines emerged as well, with the “Wisdom Coalition” supporting the Mainstream faction and the “New KMT Alliance” challenging Lee (Wu 1995; Hood 1997). Lee won the party’s chairmanship and therefore earned its presidential nomination, and despite growing opposition strength, handily won the national presidency as well, but factional disputes within the KMT grew. Intra-party disagreement over precinct slates of candidates for the 1992
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legislative elections led to unprecedented disorganization, defection, and in some cases defeat for KMT candidates. As animosities grew, the legislative faction New KMT Alliance (non-Mainstream) cooperated with the opposition DPP in passing the Office-Holders’ Personal Assets Disclosure Law, or the so-called “sunshine” law, despite Lee’s opposition. This step was a watershed since hiding KMT assets in the personal accounts of party loyalists was a long-standing practice. This alliance between the KMT faction and the DPP also demonstrated a willingness by those within the KMT opposed to Lee’s Mainstream faction to strike at the financial heart of the party by forcing top officials to disclose personal assets.16 Finally, in 1993, the non-Mainstream faction broke from the KMT, establishing a third “New Party” of its own, outspoken in its castigation of the growing corruption and money politics (jinquan zhengzhi) of the KMT and its associated financial empire (Wu 1995; China Times 12/11/93). After some initial electoral success running on a clean government platform with high profile defectors from the KMT, the New Party has since stalled and begun to wither. But both factional divisions at the center and further defections from the party have persisted. Most notable among these defectors is James Song Chuyu, who like Guan Zhong was compelled to take responsibility for a poor KMT electoral showing in 1992. But in Song’s case neither a patronage appointment as provincial governor nor a transfer of millions of dollars from KMT coffers to Song’s own political war chest – in accounts registered in the name of Song’s close relatives – were sufficient to prevent him from leaving the KMT and declaring his candidacy as an independent in the 2000 presidential race. This case is examined in more detail below. Local factions These central factions, however, by and large have no influence at the local level. As Bosco (1994: 118) argues, local factions (difang paixi) are a very different type of institution from those found in the central party organization. Moody (1992), drawing a comparison between KMT factionalism and the factions within Japan’s ruling Liberal Democratic Party (LDP), notes that whereas both Japan’s political factions and business subcontracting networks are linked hierarchically to central institutions, Taiwan’s political factions and its subcontracting networks both tend to be loose, shifting, pragmatic, but still based on personal connections. These KMT factions have, nonetheless, served the party very effectively in “mobilizing votes, distributing patronage, and assisting the KMT to control the island” (Bosco 1994: 118). In fact, this local clientelism has historically been the key to the KMT’s capacity to dominate the countryside. The KMT’s early strategy to coopt Taiwanese farmers by introducing local pluralism required the party, despite its overwhelming concentration of power and authority, to deal with local village leaders whose wealth and vote-getting abilities quickly gave them some
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leverage over the KMT (Bosco 1994: 121). Political liberalization and increased partisan competition at the local level has served to further strengthen the hand of local elites, which in turn has increased the expense of securing support, lessened the predictability of electoral outcomes, and ultimately weakened the hand of the KMT. More importantly, as political campaigns as well as control of local party marchineries became more expensive, the KMT had allegedly resorted to “less legitimate income to cover campaigning costs and even crude vote buying” (Financial Times 19/1/00). Although no one would deny the essential role of vote-buying in securing success in most local electoral contests in Taiwan, the key to the KMT’s dominance of local politics has been organization, not fraud (Bosco 1994; Wu 1995). The KMT maintains a large staff of paid cadre at the county and village level which works alongside local faction leaders.17 Although the party cadre ultimately choose which factional nominees earn KMT nomination and support, they rely upon the faction leaders to recruit, train, and select the various candidates. Faction leaders rely in turn on their counterparts at the village and neighborhood levels to tell them how many votes they can deliver. Faction leaders then ask party cadre to nominate candidates they believe can win. Just before the polling, the faction then distributes money and other gifts to village heads who distribute the booty to “firm up” the vote (Wu 1995: 87). An accurate measure of voter support is therefore equally or more important than actually drumming up support, because the faction leader, and party, need to know if additional last minute vote-buying will make a difference (Bosco 1994: 128). The tie that binds voters to their respective factions, and local factions to the party, is patronage. Not surprisingly, voters support factions out of selfinterest, expecting in exchange for their votes patronage in the form of assistance with bureaucratic red tape, employment opportunities, and local infrastructural improvements. Next up the food chain, the neighborhood and village faction leaders deliver collections of votes in exchange for favors from candidates once elected. Bosco (1994: 122) notes that “government and state company jobs, construction contracts, government benefits, public works and non-monetary favors are all part of a politician’s store of patronage.” One plum that Bosco (1994) neglects, or probably conflates with “state company jobs,” is the capacity of local KMT cadre and politicians to dispense jobs and monopoly contracts through the party-owned enterprise sector. The KMT owns and invests in a wide variety of locally operated firms and is able to protect the monopoly status of other privately owned firms, which earns rents and provides patronage positions and contracts for local politicians and faction leaders (Wu 1995: 87). These include, among others, credit cooperatives, local vegetable and fruit markets, Farmers’ Associations, and local bus companies.18 The most effective of these KMT-invested local monopolies has perhaps been the natural gas provision and supply companies. Through the Guanghua Investment Holding Company, which is wholly owned by the KMT, the party
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holds more than 16 percent of the shares of the Xinxin Natural Gas Company, an island-wide supplier of propane, the fuel of choice for cooking and heating for virtually all households in Taiwan. In addition, the party holds between 20–25 percent of the shares of the 10 county-level propane distributors.19 This network of firms provides both numerous positions and lucrative profits that can be bestowed upon faction leaders and both successful and unsuccessful candidates. In local electoral contests, the KMT can either support the likely winner in order to enhance party influence and prestige or, if one faction is becoming too powerful, party cadre may choose to support the underdog in a strategy of divide and rule. In fact, it is often times the loyalty of the unsuccessful candidate that is most carefully cultivated. Winkler notes that “the party’s main problem is preventing those party politicians denied nominations from sabotaging the nominee or running as mavericks” (cited in Bosco 1994: 135). Patronage appointments within the stable of POEs have been an important preventative of such sabotage. In addition to using KMT, Inc. patronage, the party has often used its ample funds to sway local election outcomes and assist favored candidates.20 It is important to point out that in Taiwan’s political culture, this vote-buying is often viewed by both the giver and receiver as not so much a bribe as it is a gift, given as confirmation of loyalty among friends or acquaintances. Nonetheless, there are also numerous instances of the outright solicitation of votes in locales beyond a candidate’s traditional area of support and by giving sums far in excess of conventional amounts (Bosco 1994: 128–9; Hood 1997: 106). Although election laws dictate campaign-spending limits and prohibit votebuying, it has been very difficult to prosecute even egregious violators. Hood (1997) notes that in the 1992 legislative race, despite campaign spending limits of US$300,000, candidates routinely spent US$4 million, and one candidate from Zhanghua spent more than US$20 million. Bosco (1994: 130) notes that in a 1990 township race, each KMT faction spent roughly US$370,000 in purchasing votes alone, or more than US$12 per vote. Wu (1995: 87) indicates that the price of a vote in the early 1990s was between US$10 and US$30, depending on the kind of election and competitiveness of the campaign. He further notes that while faction leaders admit that no KMT candidate would win without vote-buying, most voters sell their votes to more than one candidate (yielding a return rate of roughly 3 to 1), which in turn weakens the effectiveness of vote-buying and increases expenditures in order to improve prospects of victory. The money is typically delivered privately, discreetly, and frequently after dark. Few individuals are willing to testify against their patrons, and the KMT’s control of the local courts and its huge resources and dependence on vote-buying have given it little incentive to enforce election laws too stringently (Bosco 1994: 128–2; Wu 1995: 88). Political liberalization has, however, both complicated and ultimately weakened party patronage. Since the early 1990s, local factions have been less willing to abide by the party line on controversial issues and are more confident in their ability to win elections without party endorsement. This has
KMT, Inc.
135
led many local candidates not nominated by the party either to run as independents or to remain in the race as alternative KMT candidates. This intra-party competition has in turn benefited opposition parties, by diluting the organizational discipline of the KMT voting machine. This increased competition, both inside and outside the party, also increased campaign expenditures and vote-buying, increasing the popular distaste for the pernicious influence of “money politics.” Rent-seeking and political crisis: the Song–KMT, Inc. finance scandal On December 9, 1999, KMT legislator Yang Jixiong publicly disclosed that in 1992 a single deposit of over NT$100 million (US$3.1 million) had been placed in an account, in a party-owned bank, registered in the name of the son of independent presidential candidate James Song Chuyu. The legislator noted that an account in this same KMT-owned financial institution had also been opened in the name of Song’s sister-in-law. Yang charged that the money in these accounts was probably used in that year’s hotly contested legislative election, when Song played a pivotal role in the campaign as then secretary general of the KMT. Over the next few weeks, a scandal unfolded that shook the campaign of frontrunner Song for the presidential election that was to be held in March 2000. More significantly, it also shed light on the linkages between the ruling party and business and the ways in which the KMT utilized both its vast financial resources and personal connections to influence politicians and win elections. The fallout from the scandal also revealed the growing, and increasingly unbridgeable, factional divisions within the ruling party. More importantly, while under authoritarian rule, KMT, Inc. had managed to bind the party together, as it served as an effective centralized source of funds and other types of patronage, there was now growing realization among party candidates voter support could be influenced by exposing secrets of party patronage and vote-buying. This scandal began as an effort to discredit and thereby weaken the electoral prospects of the charismatic independent presidential candidate Song. Mainland born and with graduate degrees from Berkeley and Georgetown, the 57 year-old Song had long been groomed for leadership within the KMT. He served in numerous party positions since the mid-1970s,21 including personal secretary to both presidents Chiang Ching-kuo and Lee Teng Hui and then from 1989–93 as secretary general of the party. Song’s fall from grace began in 1993 when his strategy for centrally controlling the slate of KMT candidates in 1992 legislative elections backfired, contributing to the party’s worst performance to date.22 Song stepped down from his position as secretary general and accepted the appointment as Taiwan’s provincial governor. Popularly elected to the post in 1995, and despite his widespread personal appeal, Song’s position fell victim to long-overdue streamlining of Taiwan’s four layers of redundant
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government in 1997.23 Song resigned his governorship in 1998. In November 1999, he was expelled from the KMT when he insisted on running in the 2000 presidential election as an independent candidate after being passed over for the KMT ticket. Song consistently led most electoral polls until the scandal emerged in December. It is therefore far more than coincidence that a KMT legislator should discover evidence of questionable accounts and transactions in the names of Song’s relatives in the KMT-invested Chung Hsing Bills Finance Company (CHBFC). CHBFC, Taiwan’s largest underwriter of short-term money market securities, is listed on the Taiwan Stock Exchange and is 45 percent owned by the KMT and controlled directly by the KMT finance committee. In a flurry of dramatic December 1999 press conferences, public disclosures, and formal complaints, KMT legislator Yang provided incontrovertible evidence, including copies of transaction records, of the existence of CHBFC accounts opened in 1992 in the names of Song’s sister-in-law and son. These totaled more than US$3.1 million, including a single injection of over US$3 million in his son’s account. Yang also revealed an additional account in the name of Song’s sister-in-law at the Bank of Taiwan which received four separate cash deposits totaling over US$15 million between December 1994 and January 1995. These funds were then used to buy bonds through her CHBFC account, where she worked as a high-ranking executive (see China News 14/12/99, 16/12/99, 21/12/99; Taiwan Headlines 13/12/99, 20/12/99). In total, Song was asked to account for nearly US$32 million in questionable funds in the accounts of close relatives (Agency France Presse 29/12/99).24 Song initially claimed that a “family elder” had lent money to his son to start a new business, but in the face of mounting evidence,25 he revised his story. Signaling an unprecedented willingness to break ranks with his former patron, Song claimed that in fact President Lee put the money in his charge to carry out various “party assignments.” These assignments allegedly included providing care and assistance to the family of former president Chiang Chingkuo and the financing of “special political assignments” at Lee’s bidding (Central News Agency 29/12/99). Song explained that the funds were disbursed to relatives” accounts because these accounts were “safe, dependable and confidential” (Agency France Presse 29/12/99). Predictably, President Lee, leading KMT officials, and family members of Chang Ching-kuo all vigorously denied these claims. Responding to Song’s implication of him in the formation and use of the slush funds, Lee called his former protégé “shameless” and “a liar” and challenged Song to show evidence of his complicity. Song responded in a press conference by producing a seal, or “chop,” of the KMT’s Central Committee that he claimed he used to access the accounts. The KMT charged that the seal was quite different from the official committee seal and that Song had the seal privately carved in order to open these accounts through “irregular channels” (see Central News Agency 30/12/99, Taiwan Headlines 20/12/99). Although Song was willing to implicate the KMT, he did not identify the specific sources of the funds he received when he was secretary general. In all
KMT, Inc.
137
likelihood, these funds are a combination of profits from KMT-owned enterprises and contributions from private firms with close ties to the party, including conglomerates such as Tuntex and Ruentex.26 Song’s office disclosed that additional funds flowed into the accounts some three years after the initial activity while he was provincial governor. These included a donation of nearly US$10 million by the Qixing Irrigation Society in Taipei to set up a foundation (the purpose of the foundation was not disclosed) as well as another US$3 million left over from his gubernatorial campaign that was used to set up scholarships at the University of California, Song’s alma mater, and to support Lee’s 1996 presidential campaign. Song also clarified somewhat the usage of the funds, claiming his assigned tasks included subsidizing the electoral campaigns of even opposition candidates, an allegation denied by the opposition DPP (see China News 16/12/99, 21/12/99; Taiwan Headlines 20/12/99). In the meantime, the government pursued inquiries through both the Finance Ministry and the Bureau of Investigation, and called on the Prosecutor’s office to open a criminal investigation against Song for tax evasion. The KMT also announced that it would consider filing a suit against Song for embezzlement, with suspicion of forgery, breach of trust, and misappropriation of funds. Song for his part announced that he had authorized his attorney to return some US$7.5 million to the KMT and terminate his commission relationship with Lee. Far more significant than any potential – and clearly biased27 – criminal findings from the scandal, were the political consequences. Although the popular Song’s ratings in presidential electoral polls declined precipitously in the days following the outbreak of the scandal, it took little persuasive effort to convince voters in Taiwan of the general complicity of the KMT in this latest chapter of “money politics,” despite continued uncertainty about specifics. KMT candidate Lian Zhan, already trailing in popularity polls, suffered as much as Song from the revelations. In a dramatic effort to boost his candidacy by definitively distancing his campaign from the corrupt image of the KMT’s past, Lian pledged in a campaign rally to cease the profit-making business operations of the party and turn party assets over to a private foundation. Lian also promised to eradicate the “black and gold” (heijin) politics, or gang and money connections, that have tainted local, and even national, political contests in Taiwan. In order to bring about these changes, Lian called for the swift revision of current laws to regulate political contributions, eliminate vote-buying, and prevent those with criminal records from running for office (Central News Agency 2/1/00). He also called for the passage of two new laws: a Political Party Law that would preclude political parties from running profit-making businesses,28 and a Trust Enterprise Law outlining practical guidelines for transferring assets from the KMT to a private trust. Lian and the KMT also pledged to speed these laws through the legislative prior to the March election (Agency France Presse 10/1/00). Although the announcement was dramatic, calls for legislating an end to party-run businesses and the transferring – even nationalizing – of KMT
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assets were certainly not new. Since the lifting of the ban on opposition parties in 1986, opposition politicians and scholars had identified these moves as essential for leveling democratic contests in Taiwan. In fact, promulgating a political party law that addressed these issues was deemed a top priority by the influential 1996 non-partisan National Development Conference (China Post 14/1/00). The fact that more was accomplished towards this end in the 10 days following Lian’s announcement than the 10 years prior speaks to the KMT’s continued dominance of the political process. Given this reality, it also reminds us that internal KMT politics is often more significant than inter-party rivalries, and Lian’s dramatic proposals can be usefully viewed in this light. Even if he had been elected as president in March as Lee’s successor, Lian would still have been overshadowed by Lee, whose tenure as chairman of the KMT did not expire until August 2000. Lian’s move to divest party assets could be seen as a first step aimed at reducing the long-standing influence of the party over the government. Centralized control over the huge assets and other patronage resources of KMT, Inc. have been the linchpin of continued loyalty to the center and the political dominance of the KMT. If financial control could be neutralized, Lian’s prospects for governing independently were enhanced. In such a calculus, appealing to voters as a politician bent on cleaning up corrupt political practices might have been a conveniently parallel, but nonetheless secondary, consideration. If these measures genuinely succeed, it would be an astounding “going out of business” sale for the KMT. As mentioned, estimates of the value of KMT assets range from a conservative US$2 billion29 to US$20 billion. But even if the mid-range figure of US$7 billion, put forward by a government spokesman, is accepted, this would require of the party an unprecedented opening of the accounts and operations of KMT, Inc. In fact, opposition politicians are calling for a full investigation of the extent and origins of all KMT assets prior to putting them in a private trust, alleging that much of the party’s enormous portfolio has been illegally acquired or misappropriated and therefore ought to be nationalized (see Agency France Presse 3/1/00).30 The ruling party has countered that KMT, Inc.’s profits have been fairly obtained in an increasingly open and competitive marketplace and that the POEs have repeatedly forged paths into crucial but costly strategic sectors that have allowed private investors to follow.31 Nonetheless, perhaps in anticipation of some kind of forced divestiture, however unlikely, there is evidence the party has already begun to sell off overseas properties and dump local assets at below market prices rather than subject them to such scrutiny (Agency France Presse 11/1/00, Financial Times 19/1/00). Growing popular dissatisfaction with the KMT’s corrupt political behavior in an increasingly democratic environment has presented opposition politicians, disaffected KMT politicians, and now even the KMT candidate for president himself, a mandate to shed unprecedented light on the origin, operation and workings of KMT, Inc. and to press the KMT to engage in
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139
thorough financial restructuring and political reforms. However, the looming presence of KMT, Inc. and the vested interests of those dependent upon its fruits, including thousands of party employees and conservative party cadre suspicious of change, virtually guarantee that neither the nationalization of party assets nor even the substantial weakening of the party’s financial cum political influence is on the cards. Even if a substantial portion of KMT, Inc. were to be placed in a private trust beyond political influence, thereby limiting opportunities for the party or its invested enterprises to seek rents or pursue political favors, and even perhaps legitimize to some extent in the eyes of voter party-owned assets, it will not level the playing field. Entrusting party assets will do nothing to limit the revenue stream from these investments to the party. In fact, some contend that the KMT could profit even more by entrusting its assets to professional managers because its only residual function would be profit, not patronage outlet or developmental vanguard, or the other responsibilities it has historically shouldered. The process of professionalization of management and privatization of assets begun under Xu Lide and carried forward by Liu Taiying had gone far in enhancing the efficiency and reducing the monopoly profits of the POEs and ultimately legitimizing this odd marriage of politics and business in Taiwan. It will not quickly disappear. This campaign finance scandal and subsequent revelations demonstrated that in spite of political liberalization in the late 1980s, this had had little profound impact on the conduct of free and fair elections as well as the promotion of a more democratic environment. Instead, although democratization had increased electoral competition, this had contributed to greater abuse of funds by politicians to sustain themselves and the KMT in office. Political liberalization had also exacerbated factional divisions within, and defections from, the KMT and increased the willingness of those vying for office to expose long-standing corrupt party practices, though this was usually a means to advance their own political prospects. Reforms associated with this liberalization have, however, greatly enhanced the willingness and capacity of the media to seize on these scandals and deliver them to an increasingly savvy and democratically minded public. The scandal also tells us much about KMT, Inc. The sheer magnitude and broad influence both past and present of the party-owned conglomerate has insured that few politicians, ironically even many opposition candidates, could declare themselves free from its patronage, and thus its taint. The scandal does suggest that past functions of the POEs, such as patronage outlets and discrete caches for political funds, are not only no longer prudent, but perhaps even foolhardy, as they have emerged as an effective means to discredit election candidates.
Conclusion: restructuring KMT, Inc.? Even though the KMT has lost power, it is, however, quite probable that
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KMT, Inc. and its many functions will persist. While much information about money politics was disclosed by Song and KMT officials during the scandal, which served primarily to discredit politicians by revealing how elections were funded, little was disclosed about how firms under KMT, Inc. were abused to deploy funds into secret accounts. In short, in spite of the exposes, little is still know about KMT, Inc., including the actual value of its assets, or of how the links between politics and business actually work. It is unclear how much autonomy the POE Management Committee has in the deployment of assets owned by KMT, Inc. Nor it is clear to whom the POE Management Committee is accountable, an important issue in the post-Lee era, and if Lian wishes to pursue his proposal to delink the KMT from business. While it is clear that the form of political business ties will need to be reconstituted because of widespread public criticism, it is uncertain how KMT, Inc. will be restructured. There is another reason why the party will have to tread its path carefully in any reconstitution of KMT, Inc. The funds raised from the party’s assets have been used to sustain KMT’s massive party machinery. It is unlikely that the KMT will be able to fund its organizational support base without continued access to a large source of funds. Funds from and patronage through firms in KMT, Inc. have also been used to keep factions under control. Without access to similar sources of patronage and funds, it is improbable that KMT leaders will be able to contain an already deeply factionalized party. Under these circumstances, the sustainability of the party itself could be jeopardized with the dismantling of KMT, Inc. In any event, the deposing of KMT, Inc. assets is difficult to enforce effectively, given the volume and structure of its corporate holdings, the remarkably direct fungibility of these financial assets in Taiwan’s electoral process, not to mention the many other advantages the KMT holds at this stage of the game. The KMT has been very adept at converting old assets in the old political game into new assets in an increasingly pluralist and democratic one. The POEs have developed joint ventures involving partyowned holding companies, state-owned enterprises, and big private firms that will prove difficult to dismantle. The inter-penetration of KMT, Inc. into enterprises that are owned by domestic and foreign firms will also make the nationalization of these firms difficult to implement as it will raise important questions about property rights over these assets by KMT’s private sector which may have serious implications within Taiwan’s corporate sector. This raises new important questions: How will KMT, Inc. fare? How will it both influence and weather Taiwan’s ongoing process of democratic consolidation and further integration into global capitalism? How will its functions change given widespread public dissatisfaction with the mixing of politics with business? KMT, Inc. will undoubtedly continue its move away from patronage toward profit, further distancing itself from its revolutionary Leninist heritage and further embracing its capitalist tendencies, but it is uncertain whether it can continue to do this under the auspices of a now-deposed KMT.
1979 1975 1988
Kuang Hua Investment Holding Guanghua touzi gongsi
Hua Hsia Investment Holding Co. Huaxia touzi gonsi
Chi Sheng Industrial Holding Co. Qisheng shiye
1928 1931
Central Daily News Zhongyang rbaoshe
Chen Chung Book Co. Zhengzhong shuju
Danbu Lode
Hua Hsia
Hua Hsia
Yue Sheng 100
Asia Pacific Holding Co. Yueshengchang touzi gongsi
99.99
99.99
100
100
King Dom
King Dom Investment Holding Co. Jingde touzi gongsi
100
100
100
Jen Hua
Chi Sheng
Hua Hsia
Kuang Hua 100
100
% KMT Listed owner- on TSE ship
Jen Hua Investment Holding Co. Jianhua touzi gonsi
1991
1971
Central Investment Holding Co. Zhongyang touzi gongsi
Central
Year Holding founded company
Company
Book publishing
Newspaper publishing
Investment holding company: overseas investment arm of Central Investment
Investment holding company: insurance (Shin Fu Life and London Life Insurance)
Investment holding company: manages Grand Cathay Securities
Investment holding company: construction, land development
Investment holding company: media, communications
Investment holding company: gas, technology, finance groups
Investment holding company: financial services, petrochemicals, overseas investment
Industry and products
(continued)
726 (1994)
1,279
7,000 (1995)
40,800 (1995)
Sales Assets mil. NT$ mil. NT$ (1993) (1993)
Table 4A.1 KMT, Inc.: firms invested in by the Kuomintang, 1928–96, arranged in descending order by percent of KMT ownership (NT$25 = US$1)
Appendix 4.1
1928 1950 1975 1987 1951 1951 1966 1969
Broadcasting Corp. of China Zhongguo guangbo
China Culture Service Co. Zhongyang wenwu
Hua Hsia Intern’l Investment Co. Huaxia guoji touzi gongsi
Guoji I
Yu Tai Industrial Co. Yutai qiye
Chiloo Enterprise Qilu qiye
Hong Kong & Taiwan Trading Co. Xianggang taiwan maoyi
Da Shing Co. Daxing
87.45
1965 1982
Kingdom Pharmaceutical Co. Jingde zhiyao
Feng Shui Construction Co. Fengshui yingzaogongcheng
85
90
90.08
95
99.80
99.84
99.90
99.93
99.98
% KMT Listed owner- on TSE ship
Xing jian dong King Dom
Central
Hua Hsia
Hua Hsia
Hua Hsia
Year Holding founded company
Company
Table 4A.1 (continued)
Civil engineering, interior design
Medicine, chemicals, health supplies
Import/export (Singapore)
Import/export
Explosives, rubber products
Import/export
Manages Hua Hsia Building (Hong Kong)
Stationery supplies, gifts, souvenirs
Radio broadcasting
Industry and products
904
Sales Assets mil. NT$ mil. NT$ (1993) (1993)
Zhonglian xintuo
1990
Global Entech Co. Weiyu huanbao
Central 50.03
50.50
53.30
56
1986
Central
Datum Real Estate Mgmt. Co. Datong jianzhu jingli
Central
60
62.31
1967
1996
Ming Hsing Enterprises Minxing shiye
Hua Hsia
Taiwan Chien Yeh Construction Taiwan jianye
1954
Central Motion Picture Co. Zhongyang dianying shiye
66.66
66.72
59
1991
China Investment and Dev. Corp. Huaxin zhengquantouzi guwen
Hua Hsia
68
1962
1946
China Daily News Taiwan zhonghua rbaoshe
Hua Hsia
70
Central Insurance Co. Zhongyang chanwu baoxian
1968
China Television Co. Zhongguo dianshi shiye
King Dom
60
1993
Shin Fu Life Insurance Co. Xinfu renshou baoxian
75
Taiwan Trade Development Co. Taiwan maoyikaifa zhushi huishe
1989
Central Trading & Dev. Corp. Zhongyang maoyikaifa
TSE
Environmental protection engineering consulting
Construction management
Land development (former SOE; now joint venture with Yutai and Taiwan Sugar)
Property insurance
Marketing Taiwan products in Japan
Importing liquefied petroleum products
Motion picture production
Securities investment consulting (consulting service for financial POEs)
Newspaper publishing
Television broadcasting and programming
Insurance (joint venture with London Life of Canada)
Import/export and investment arm of Central Investment (Vietnam)
7,113 (1992)
9,571
4,535 (1992)
65
(continued)
81,482
4,764
4,320 (1992)
715
1980 1988 1989 1976 1987 1990 1976 1980s 1980 1956 1991
Yung Chia Chemical Industries Yongjia huaxue gongye
Central Link Investment Consult. Zhongjia touzifazhan
Shing Yeh Construction Company Xingye jianshe
Joint Engineering Consultants Co. Jauling gongchengguwen
King Tay King Construct. & Dev. Jintai jianshe
Han Ku Dev. Engineering Co. Hangu kaifaguewen
Chung Hsing Bills Finance Zhongxing piaoquan jinrong
Shin Chia Gas Co. Xinjia shiyouqi
Fu Hwa Securities Finance Co. Fuhua zhengquan jinrong
Chung Hsin Electric & Machinery Zhongxing diangong jixie
Environmental Wastes Mgmt. Co. Qingyu huanbao
44.87
45
45
45
45
45.39
49
Central
Central 40
40.24
Kuang Hua 42.88 TSE
TSE
TSE
% KMT Listed owner- on TSE ship
Kuang Hua 44.75
Chi Sheng
Central
Year Holding founded company
Company
Table 4A.1 (continued)
Waste processing
Public works design and engineering
Securities finance and margin lending
Propane gas provision and supply (joint venture with locals in Jiayi)
Short-term securities finance
Land development, architectural design, urban planning
Construction
Architectural and structural design
Construction design, management and investment
Investment and investment consulting
Petrochemical importing and processing (joint venture with Formosa and CPC)
Industry and products
7,708
6,251
3,219
652
573
10,854
123,458
19,431
2,296
Sales Assets mil. NT$ mil. NT$ (1993) (1993)
1993 1992 1988 1987 1980s
Po-Hsin Multimedia, Inc. Boxin Duomeiti
Grand Cathay Venture Capital Co. Dahua Chuangye touzi
World Trade Center Building Co. Shisjie maoyi zhongxin
Guardforce Security Co. Weifeng baoquan
Shin Ping Gas Co. Xinpin shiryouqi
1980s 1980s 1980s 1980s 1980s 1980s
Shin Ying Gas Co. Xinying shiyouqi
Shin Ying Gas Co. Xinyun shiyouqi
Shin Nan Gas Co. Xinnan shiyouqi
Shin Kao Gas Co. Xingao shiyouqi
Shin Tai Gas Co. Xintai shiyouqi
Shin Hsiung Gas Co. Xinxiong shiyouqi
Fuhe Plastics Fuhe gongcheng suojiao
1989
Taiwan Telecom. Network Co. Taiwan dianxun ganglu
30.30
31.25
33.33
Kuang Hua 27.55
Kuang Hua 27.69
Kuang Hua 28.01
Kuang Hua 28.2
Kuang Hua 28.8
Kuang Hua 28.8
30
Kuang Hua 30
Central
Central
Kuang Hua 35
38.24
Propane gas provision and supply (joint venture with locals in Gaoxiung county)
Propane gas provision and supply (joint venture with locals in Taishan)
Propane gas provision and supply (joint venture with locals in Gaoxiung city)
Propane gas provision and supply (joint venture with locals in Tainan)
Propane gas provision and supply (joint venture with locals in Yunlin)
Propane gas provision and supply (joint venture with locals in Zuoying)
Plastic composite materials
Propane gas provision and supply (joint venture with locals in Pindong)
Security services, security accessories, armored transport
Property management, conference services, catering
High-technology venture capitalist investment (joint venture with several POE)
Satellite cable television broadcasting and leasing
Computer networking
75
206
(continued)
417
1990 1978 1982 1991 1976
World Wiser Electronics Xinxing dianzi
Hwa Tech Industrial & Develop. Huayu shiye
Taiwan Styrene Monomer Corp. Taiwan benyixi gongye
Ruen Fu New Life Corp. Runfu shenghuo shiye
China-American Petrochemical Zhongmeihe shiyouhuaxue
1983 1975 1988
Intern’l Securities Investment Co. Guoji zhengquan touzixintuo
Oriental Union Chemical Corp. Donglian huaxue
Universal Venture Capital Invest. Huanyu touzi
Central
1966
Chien Tai Cement Co. Jiantai shuini,
20
21.51
22.4
22.92
25 25
1992
Han Yang Construction Co. Hanyang jianshe
25
25
25.15
26.15
27.53
TSE
TSE
% KMT Listed owner- on TSE ship
Weixing qiye
Central
Chi Sheng
Year Holding founded company
Company
Table 4A.1 (continued)
Investment
Petrochemical processing (joint venture with Far Eastern)
Mutual fund investments
Cement production
Construction (public housing)
Petrochemical processing (joint venture with CPC, CIHC, and Amoco)
Retirement centers (joint venture with Ruentex Group)
Petrochemical processing
Anti-pollution equipment
Semiconductors
Industry and products
204
3,013
2,892
490
8,293
3,673
Sales Assets mil. NT$ mil. NT$ (1993) (1993)
1979 (1959) 1969 1970 (1989)
CTCI Corporation Zhongding gongcheng
Shin Shin Natural Gas Xinxin tianranqi
Walsin Technology Corp. Huaxin keji
1986 1986 1955 1987 1972 1975
Lin Yang Global Co. Linyang shiye
An Feng Steel Co. Anfeng gangtie
Yu Foong Spinning Mill Taiwan yufeng shachang
International Investment Co. Guoji chuangyetouzi
Xinlong tianranqi
Zhongyang zulin
Central
10
Kuang Hua 10
10.96
11.62
12
12.23
15
1992
Sinopac Commercial Bank Huaxin shangye yinhang
Jen Hua
15.38
Taiwan shihua
16.4
Kuang Hua 16.41
17.48
18.31
1963
Guohua haiyang qiye Central
20
Yongjin shengwu
TSE
OTC
TSE
TSE
Leasing
Natural gas supplier
High-technology venture capitalist investing
Textile production
Steel production
Glass and window manufacturing
Commercial banking
Engineering equipment (joint venture with Walsin Lihua)
Natural gas supplier
Engineering
Deep-sea fishing
206
362
13,700 (1994)
3,032
(continued)
708
974
45,634
6.98
1988 1987 1980 1952 1976
Quanqiu chuangyetouzi
Taiwan Semiconductor Taiwan jitidianlu zhizao
United Microelectronics Lianhua dianzi
Housheng
Acer Sertek Hongji keji
3.33
3.41
3.49
3.68
7.14
Huade dianzi
7.91
China Steel Structure Zhongguo gangtie jiegou
1978
8.04
Baosheng Chemicals Baosheng zhiyao
8.82
Lianya dianji zhizao
Central
9.38
9.58
TSE
TSE
TSE
TSE
TSE
TSE
% KMT Listed owner- on TSE ship
Nanzhen tianranqi 1955
1959
China Development Corp. Zhonghua kaifa xintuo
Central
Year Holding founded company
Company
Table 4A.1 (continued)
Personal computers and work stations (joint venture with Acer)
Plastic accessories (provided variety of equipment to ROC military)
Semiconductors, integrated circuits
Semiconductor manufacturing
High-technology investing
Steel structures
Chemicals
Electric machinery
Natural gas supplier
Investment, merchant banking
Industry and products
650
1,520
1,930
303 (1992)
2,961
822 (1992)
25,685
Sales Assets mil. NT$ mil. NT$ (1993) (1993)
0.14
Taisugar Co. Taiwan tangye
OTC
Sugar production
Securities trading and investment (joint venture with several banks)
Financial services
Property management
Cement production
Stock exchange
Television programming and broadcasting
Investment
1,671
1,652
20,895
11,692
Sources: Peng Xingshu, Dangyingshiye yilinger jiazhi qiaoguo sibaiyi (Value of the 102 Party-Owned Enterprises Exceeds NT$40 Billion), Shangye Zhoukan (January 3, 1994: 18–22); Laurie Underwood, “KMT, Inc: How Big is Big?” (Dangtouzishiye jiujing you duoda), Topics (May 1997: 29–32); Zhongguoguomindang (Chinese Nationalist Party), Canyu touzishiye jianjie (Introduction to KMT-Invested Enterprises), Taipei: Party-Owned Enterprise Management Committee, 1995.
0.57
Xinxin dazhong
1.22
Jen Hua
Grand Cathay Securities Dahua zhengquan
1988
1.22
China Trust Zhongguo xintuo
1.58
Jiehe jianshe
1978
1.8
2
2.77
3.31
Hsin Hsin Cement Co. Xinxin shuini
Central
Taiwan Stock Exchange Taiwan zhengquan jiaoyisuo
1962
Hua Hsia
1988
Taiwan Television Co. Taiwan dianshi shiye
Zhongxin touzi
150
Karl J. Fields
Notes 1 Similar forms of money politics have also been noted in the United States, Italy, and Germany, suggesting that in a pluralized system the links between politics and business, specifically the influence of the latter over the former, has impaired the quality of democracy, particularly during elections. For a further discussion on this point, see the Introduction to this volume. 2 See also Fields (1997). 3 See Lim (1999). 4 Information obtained during an interview with Liu Weiqi, President of the KMTowned Central Investment Holding Company in January 1994. See also Yang (1993: 20). 5 Information from Diane Ying, editor of Tianxia (Commonwealth) during an interview held in January 1994. 6 Interviews with Wu Yushan, professor, National Taiwan University and Zhang Shuijiang, editor, Jingjirbao (Commercial Times) in August 1996. 7 In 1988, for instance, the chairman of the KMT finance committee, Chung Shihyi, was the former director of the government’s budget office and was still in charge of reviewing the federal budget for the government’s watchdog agency (the Control Yuan). Wang Ping-an, the vice chairman of the KMT finance committee, also serves as the chairman of the party-owned Kuang-Hwa Investment Holding Company and was formerly president of the KMT-owned Central Insurance. Shen Pe-ling, former chairman of Taiwan’s Securities and Exchange Commission, served in 1988 as the chairman of party-owned Fu Hwa Securities. C.W. Wang, the chairman of Chung Hsing Bills Finance Corporation (also a POE), was the former deputy director of the government’s budget office (Asian Wall Street Journal 11/7/88). 8 M. Shahid Alam, Governments and Markets in Economic Development (New York: Praeger, 1989: 60) as cited by da Silva (1993: 949). 9 The figures for the SOEs are from Free China Journal (6/8/93). Some estimates are even higher. A 1990 study produced by scholars sympathetic to the opposition DPP valued state-owned assets at eight times that of the top 500 firms in 1988 and estimated the combined revenues of state- and party-owned enterprises that year at nearly US$80 billion, fully 30 percent of GNP (Economic News 5/21/90). 10 The following section draws heavily on this KMT study (Zhongguo guomindang [Chinese National Party] 1995). 11 Party profits are used to fund the salaries, pensions and other benefits of over 5,000 full-time party employees. As mentioned earlier, the annual salary expenses borne by the KMT are estimated at over US$200 million. 12 For example, in 1990 the government announced plans to issue private bank charters to a limited number (five or six) of new commercial banks. A former finance minister informed me that of the 19 applicant investor groups, the KMT’s proposal ranked 15th in terms of its fiduciary and operational soundness. Fifteen licenses were ultimately granted, and the KMT’s Bank SinoPac (Huaxin) has been among the most rapidly growing, amid charges of favoritism (Lu Runkang interview January 1994; Fields 1995: 149–50; Xu 1997: 405). 13 Beller and Belloni note that the “less competitive the party system (i.e. a oneparty system), the greater will be the tendency toward factionalism in the main party” (cited in Bosco 1994: 117). 14 Tien (1989: 149–50) identified five factional groups among legislators elected in China prior to 1949, each of which had “nominal leaders recognized by both its members and the KMT,” but all the factions have consistently supported government policy; in Taiwan, however, elected legislators have been prevented from forming factions. Bosco (1994: 122) notes that from the 1950s, the KMT
KMT, Inc.
15
16 17
18
19 20
21 22
23
151
“ruthlessly suppressed” any efforts to amalgamate local Taiwanese factions into national factions as was done in Japan. This included the dissolving of a legislative “mutual assistance club” formed by Taiwanese in 1981 and the squelching of the “Thirteen Brothers Group” organized by the ambitious Taiwanese politician–tycoon, Cai Zhenzhou, in 1984 and ending in the “Tenth Credit Scandal” in 1985 (Fields 1995: Chapter 5; Tien 1989: 150). Information obtained from a personal interview with Guan. Yu Tai is one of the oldest KMT firms, founded in 1951, but in fact salvaged from earlier military-run operations and still dominated by retired military personnel. Yu Tai engages in a diverse set of businesses reflecting its heritage, including the export–import business, the distribution of western pharmaceuticals, and the printing and publishing of many government publications (Zhongguo Guomindang; Asian Wall Street Journal 11/7/88). This alliance was also a watershed in its creation of an unprecedented cooperation between conservative mainlanders and progressive opposition Taiwanese. Bosco (1994: 133) notes that while these local party cadre are generally perceived to be government employees, they in fact are paid about 30 percent more than local government officials in order to “elevate their status and facilitate their leadership work.” Chu, as cited in Bosco (1994: 131). Chu also notes that other privileges that have kept local politicians tied to the party have included preferential access to loans from provincial banks, procurement budget, and construction contracts that can be passed on to firms owned by faction members in exchange for a broker’s commission, and the capacity to profit personally in the course of carrying out the duties of office, including such things as property speculation or providing protection for the operation of illicit business operations. Zhongguo Guomindang; Time (August 1993: 33). These Xinxin enterprises have also been important over the years as sinecures for retired military and government personnel. This information was obtained from personal interviews. Bosco (1994: 130) identifies three sources of the money used by the factions, including: (1) funds provided by the KMT, which are given most generously in politically significant elections, typically at the level of county executive, or national legislative yuan and national assembly or when an election is close. Since the opposition has strengthened in the last decade, this has meant an increase in the funds required for such payouts; (2) a relatively small amount donated by core faction members; and (3) businessmen, including many with KMT contracts or investments and those seeking special favors or protection, give the bulk of the money. These positions included director of the party’s Department of Cultural Affairs (in charge of party propaganda) and managing director of the KMT-invested firms China Television Company and Taiwan Television. Hood (1997: 106–7) notes that under Song, central KMT leaders planned to reign in increasingly independent local factions, which had been buoyed by their success in the 1991 national assembly elections, in an effort to maintain the party line on the issues of Mainland reunification and Taiwan independence. Many local factions and local candidates ignored these endorsements from the center and ran their own candidates, significantly diluting the KMT vote. This disorganization and uncertainty led to increased vote-buying and other forms of corrupt electoral influence, increasing voter contempt for “money politics” which they associated chiefly with the KMT. The KMT won only 53 percent of the seats, with very strong showings by both the DPP and the breakaway New KMT Alliance. Under earlier authoritarian rule, the provincial tier of government was an important coopting device and “transmission belt of patronage” for local elites (Cheng
152
24
25
26 27
28
29
30
31
Karl J. Fields
and Liao 1998: 55). With democratization, this provincial government structure was not only functionally redundant, but prohibitively expensive to maintain. In addition, a December Ministry of Finance investigation charged that Song had transferred US$36.6 million from local bank accounts in the United States over the years, despite claims by his sister-in-law that only US$4.09 million was remitted (China News Agency 2/1/99). Yang called Song’s “family elder” explanation a lie, noting that none of the account transactions were in whole numbers, the son was only 23 and barely out of college at the time of the deposits, and that there were more than 100 transactions in all. Although CHBFC claimed it had no part in the felonious leaking of this remarkably specific data, it is noteowrthy that POE chairman Liu Taiying’s niece is the audit chief of the firm (China News 14/12/99). This information was obtained from a personal interview. See also Taiwan Headlines (13/12/99), China News Agency (3/1/00). There is evidence of governmental bias in the investigation. The Ministry of Finance and the Bureau of Investigation moved quickly to launch inquiries into Song’s alleged wrongdoings, but no investigation was undertaken of the allegations made against both the other presidential candidates. Lian Zhan was accused of repeatedly embezzling funds, laundering money, and evading taxes over 12 years, while Chen Shuibian was accused of accepting bribes. The draft of this law puts few strictures on how political parties run internal matters, but bans party-owned businesses and imposes stringent checks on party finances. The law includes a grace period of six months after its passage for the KMT to hand over its assets to a private trust (China Post 14/1/00). This figure, put forward by the KMT’s POE management committee, probably includes the book value of firms with greater than 50 percent KMT ownership, those the party defines as “owned,” not just “invested.” In fact, by one estimate, the KMT holds a majority position (over 50 percent) in only 20 of the POEs (though my data shows 33 firms), and that these would be the only firms entrusted to professional managers (Agency France Presse 5/1/00). The DPP has charged, among other things, that the KMT illegally acquired property from the Japanese after retrocession in 1945 by either confiscating it from the colonial administration (sotokufu), purchasing it at below market prices, or having it “donated” by Nationalist government agencies. Critics of the KMT claim that the Broadcasting Corporation of China (100 percent owned by the party) and some 19 movie theaters were seized directly from the Japanese and that the KMT’s Taipei county offices were simply given to the party by the local government (Agency France Presse 11/1/00). Emphasizing this developmental role, POE Management Committee Secretary General Liu Dabei argues that “KMT-owned business acted as a behind-thescenes hero in the development of Taiwan’s economy. The KMT existing in business is not a crime, it is not a sin; it is a natural product of Taiwan’s political and economic system” (Financial Times 19/1/00).
References and further reading Baum, J. (1994) “The Money Machine,” Far Eastern Economic Review, August 11. Bosco, J. (1994) “Taiwan Factions: Guanxi, Patronage, and the State in Local Politics,” in M.A. Rubinstein (ed.), The Other Taiwan: 1945 to the Present, Armonk, NY: M.E. Sharpe. Burton, S. (1993) “Backlash against Money,” Time (Asia edition), August 23. Chang, F.S.Y. (1970) “China Development Corporation in Ten Years,” Industry of Free China 33, January.
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Chen Shimeng et al. (1991) Jiegou dangguo zibenjuyi: lun taiwan guanyingshiye zhi minyinghua (Disintegrating KMT–State Capitalism: A Closer Look at Privatizing Taiwan’s State- and Party-Owned Enterprises), Taipei: Taipei Society. Cheng Tun-Jen (1989) “Democratizing the Quasi-Leninist Regime in Taiwan,” World Politics, July. —— (1990) “Political Regimes and Developmental Strategies: South Korea and Taiwan,” in G. Gereffi and D.L. Wyman (eds), Manufacturing Miracles, Princeton, NJ: Princeton University Press. Cheng Tun-jen and Yi-shing Liao (1998) “Taiwan in 1997: An Embattled Government in Search of New Opportunities,” Asian Survey 38, January. Clark, C. and D. Kin-Kong Lam (1995) “Taiwan’s Experience with Privatization and Its Implications for the Former Soviet Bloc,” Business & the Contemporary World 1. da Silva, D.S. (1993) “Transferring the ‘People’s Livelihood’ to the People: An Evaluation of Taiwan’s Privatization Drive,” Law and Policy in International Business 24. Durdin, T. (1975) “Chiang Ching-Kuo’s Taiwan,” Pacific Community 7, October. Evans, P. (1989) “Predatory, Developmental and Other Apparatuses: A Comparative Political Economy Perspective on the Third World State,” Sociological Forum 4. —— (1995) Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press. Fields, Karl J. (1995) Enterprise and the State in South Korea and Taiwan, Ithaca, NY: Cornell University Press. —— (1997) “Strong States and Business Organization in Korea and Taiwan,” in S. Maxfield and B.R. Schneider (eds), Business and the State in Developing Countries, Ithaca, NY: Cornell University Press. —— (1998) “Is Small Beautiful? The Political Economy of Taiwan’s Small-Scale Industry,” in Eun-Mee Kim (ed.), The Four Asian Tigers, Economic Development, and the Global Political Economy, San Diego: Academic Press. Gold, B. (1986) State and Society in the Taiwan Miracle, New York: M.E. Sharpe. Gregor, A.J. (1981) Ideology and Development: Sun yat-sen and the Economic History of Taiwan, Chinese Research Monograph 21, Berkeley: Institute of East Asian Studies. Haggard, S. and A. MacIntyre (1998) “The Political Economy of the Asian Economic Crisis,” Review of International Political Economy, Autumn. Hood, S.J. (1997) The Kuomintang and the Democratization of Taiwan, Boulder, CO: Westview. Hsiao Hsin-huang (1993) “The Political Economy of State–Business Relations in Taiwan,” Acta Oecnomica 45. Johnson, C. (1987) “Political Institutions and Economic Performance,” in F.C. Deyo (ed.), The Political Economy of the New Asian Industrialism, Ithaca, NY: Cornell University Press. Juoyue Zazhi (1994) “Yibai dajituan guanxiqiye zonglan” (Overview of the One Hundred Largest Related-Enterprise Groups), Juoyue Zazhi, September. Kingjing (1965) “The Economy-Controlling System of the Nationalist Government,” Independent Formosa 4, Spring. Li Mingxuan (1994) “Dangyingshiye Touminghua” (Making the Party-Owned Enterprises Transparent), Tianxia Zazhi (Commonwealth Magazine), March.
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Lim, L.Y.C. (1999) “The Challenges for Government Policy and Business Practice,” in F.L. Ching and B. Villegas (eds), The Asian Economic Crisis: Policy Choices, Social Consequences and the Philippine Case, Asia Society, February. Lin, J. (1991) Taiwanqiye yuanli guannian, jingyan yu xianshi (Business Facts and Principles for Taiwan Experience, publisher’s translation), Taipei: World Economics Society. McGregor, J. (1988) “KMT Business Empire Assailed as Democracy Takes Hold in Taiwan,” Asian Wall Street Journal Weekly, July 11. Moody, P.R., Jr. (1992) Political Change on Taiwan: A Study of Ruling Party Adaptability, New York: Praeger. Numazaki, I. (1992) “Networks and Partnerships: The Social Organization of the Chinese Business Elite in Taiwan,” PhD dissertation, Michigan State University. Peng Xingshu (1994) “Dangyingshiye yilinger jiazhi qiaoguo sibaiyi” (Value of the 102 Party-Owned Enterprises Exceeds NT$40 Billion), Shangye Zhoukan, January 3. Pye, L.W. (1997) “Money Politics and Transitions to Democracy in East Asia,” Asian Survey 37, March. Sartori, G. (1976) Parties and Party Systems, Cambridge: Cambridge University Press. Shieh, M.J.T. (1970) The Kuomintang: Selected Historical Documents, New York: St Johns University Press. Tann Hong-num (1970) “Chiang Regime’s New Financial Overlord,” Independent Formosa, Fall. Tien Hung-mao (1989) The Great Transition: Political and Social Change in the Republic of China, Stanford, CA: Stanford University Press. Underwood, L. (1997) “KMT, Inc.: Inside the Ruling Party’s Moneymaking Machine,” Topics (American Chamber of Commerce in Taipei), May. Wade, R. (1980) “East Asia’s Financial Systems as a Challenge to Economics: Lessons from Taiwan,” California Management Review 27, Summer. —— (1990) Governing the Market: Economic Theory and The Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press. Wu, J.J. (1995) Taiwan’s Democratization: Forces Behind the New Momentum, New York: Oxford University Press. Xu Dianqing (1997) “The KMT Party’s Enterprises in Taiwan,” Modern Asian Studies 31. Yang Tai-Shuenn (1993) “Party Regime or Administrative Regime: Factors Behind Taiwan’s Economic Success Before 1990,” unpublished manuscript. Zhang Qingxi and Chen Shimeng (1991) “Taiwan dangyingshiye de yanbian” (The Evolution of Taiwan’s Party-Owned Enterprises), Zili Zhoukan (The Independence Weekly Post), October 4. Zhongguo guomindang (Chinese Nationalist Party) (1995) Dangyingshiye zhi fazhan yu qianzhan (Development and Prospects of the Party-Owned Enterprises), Taipei: Party-Owned Enterprise Management Committee.
5
State predation and rapid growth Politicization of business in China Andrew Wedeman
Introduction The utility of the concept of political business, with its emphasis on politicization of business and the importance of a symbiotic relation between ruling parties and cliques of clientalist business interests in solidifying political hegemony in developing states, might appear somewhat irrelevant in the case of the People’s Republic of China (PRC). After all, the Chinese Communist Party (CCP) claims a monopoly on political power based on a transcendent ideological mandate and its 1949 revolution victory, which it supplements with the might of the People’s Liberation Army (PLA) and a party apparatus that penetrates the “commanding heights” of society and the economy. The party thus not only does not depend on political resources contributed by members of business community to maintain its grip on power, through its control of the state it effectively owns most of the major corporations and the banks. As such, political power and business power overlap to a considerable extent, with the holders of political power claiming direct control over key segments of the economy. Moreover, because the CCP does not compete with other parties, except at the village level, it has no need to maintain a steady siphon of funds from the business section to fill extensive electoral war chests. Nor does the party need slush funds to pay off members of the “opposition” and buy the loyalty of “dissident” factions within the ruling party. The party, therefore, has no political rationale for channeling public resources to selected business allies to insure a steady income of “political monies.” The lack of overt political dependency on the part of the CCP would thus appear to negate the political business flow of public resources and rents from the ruling party to its business allies and of private resources from business interests in the coffers of a hegemonic ruling party delineated by Gomez in the Introduction to this volume. The CCP’s formal monopoly on political power notwithstanding, an analysis of the interaction between the state, the party and business – herein defined as all economic actors, including those nominally owned by the state – quickly reveals that even though the CCP may have something approaching a
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monopoly on power, the relationship between the state and business in China is highly – and inexorably – political. On a very basic and broad level, the political–business relationship is political because the party depends in large part, particularly since Tiananmen, on business to produce the high rates of economic growth needed to wrest some degree of eudaemonic legitimation from society. More generally, an examination of the interaction between the state and enterprises – state-owned enterprises (SOEs), collective enterprises, including township and village enterprises (TVEs), and private enterprises – shows that relations between business and the party-state involve a series of political relationships wherein business and the party-state negotiate a series of deals whereby the state either provides businesses with positive rewards or eschews engaging in damaging regulatory action in return for a share of business profits. These “contributions” prove critically important, not only in sustaining the operation of the party-state but also in providing the party-state with incentives to further economic reform and, therefore, to expand the opportunities for businesses – particularly those allied with the party-state – to engage in profit-making ventures. Thus, rather than a master–servant relationship, the CCP and business are in fact locked into a symbiotic relationship similar to that which bound South Korea’s ruling parties and the chaebol together or that linked Japan’s Liberal Democratic Party (LDP) to big Japanese business. In this chapter, we examine political–business relations in China by looking at how the advent of reform changed the relationship by modifying the bonds between the state and SOEs and allowing for the expansion of the collective and private industrial sectors and by altering the way in which the party-state interacted with different forms of enterprises.
State–enterprise relations in the Maoist era Prior to the advent of reform, political business relations were primarily characterized by state domination. Most urban industrial enterprises were formally owned by the state, with managers acting primarily as agents of the centrally planned economic system. In reality, the system was fragmented into multiple hierarchies. An individual enterprise might, therefore, “belong” to a variety of central ministries, bureaus of a provincial government, or the People’s Liberation Army, but might, at least in the case of light industry, operate under the direction and control over local authorities (Donnithorne 1967: 149–51). Profits earned by enterprises belonged to their parent state organization, generally the organization that provided the enterprise’s startup capital, which also controlled the enterprise’s capital but were subject to division between the owning organization and the central treasury (Donnithorne 1967: 154). Smaller rural enterprises, on the other hand, were owned the commune or county government, with their profits channeled into local coffers in the form of “extra-budgetary” revenue (Blecher and Shue 1996: Chapter 5).
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In addition to the property rights relationship that assigned ownership and income rights to the state, enterprises were under the dual supervision of the state and party, with the party maintaining a system of cells and small groups incorporating both management and workers (Walder 1986). To make matters still more complex, enterprises were also under the dual supervision of their owners and the territorial government within whose jurisdiction they were located. Thus, even though an enterprise might be formally owned by a central ministry, it might be under the direction of a provincial or subprovincial government. Under these circumstances, “ownership” was inherently ambiguous and an enterprise’s relationship with the political superstructure highly complex. Thus, for example, in the early 1980s the Qingdao Forging Machinery Plant – originally a military machine repair unit that had been repeatedly reassigned to different civilian bureaus – was a “local state enterprise” under the Qingdao Municipal Machine-Building Bureau, which had authority over wages, bonuses, and personnel, but not the appointment and dismissal of midand senior-level cadres over which the Jiaoxian County Party Committee had authority (Byrd et al. 1984: 75–7). The plant remitted profits and taxes to the Qingdao Municipal Finance and Tax Bureau, which deposited them into unitary budget accounts controlled by the central Ministry of Finance. The Qingdao branch of the People’s Bank of China managed the plant’s operating capital funds and provided capital inputs when needed. The central Ministry of Machine-Building, the Shandong Provincial Machine-Building Bureau, the Qingdao Municipal Materials Bureau, and the Jiaoxian County Commercial Bureau supplied various inputs. Under these conditions, enterprises lacked significant autonomy and generally operated at the behest of the political interests that “owned” or supervised them. This is not to say that enterprise management operated as a simple and perfect agent of their supervisors. Quite the contrary, the existence of multiple owners and a lack of clarity in the assignment of supervisory powers meant that enterprise managers operated in an environment in which considerable supervisory slack afforded them a degree of tacit autonomy from their formal owners. Even so, their dependence on their owners for capital and lack of income rights to their profits, combined with the interjection of the party directly into the enterprise, limited this autonomy. Thus, the managers of enterprises had sufficient tacit autonomy to siphon off a small percentage of revenues into slush funds (or into their pockets) used to finance enterprise welfare activities and the feting of the enterprises owner and other cadres who could influence the enterprises’ access to capital, inputs and exchanges with other enterprises.
Impact of reform With the advent of reform, the structure of China’s business sector became increasingly complex and new types of enterprises emerged alongside the
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state sector. Communal industries and smaller state-owned firms under the control of local governments became the collective sector, which was then subdivided into urban collectives, township and village-owned enterprises (TVEs), and cooperatives. The new private sector consisted of individualowned household firms (geti hu), which could by law employ no more than seven workers, and, later, privately owned (siying) firms employing eight or more workers (Hamilton and Rawski 1999: 23–4). The opening of China to foreign investment, meanwhile, spawned a foreign-funded sector consisting of foreign-funded joint ventures, foreign-owned enterprises, foreign-funded cooperatives, and an overseas-funded sector made up of overseas-funded joint ventures, overseas-owned enterprises, and overseas-funded cooperatives. The distinction between “foreign” and “overseas” lies in the origins of the outside capital. Capital from ethnic Chinese outside the mainland, i.e. firms based in Hong Kong, Taiwan, and Macao is classified as “overseas,” while capital from other external sources is classified as “foreign.” Finally, some enterprises were set up as domestic joint ventures while others have become shareholder firms. The state sector was also transformed by reforms, particularly in the early 1990s that enabled firms to raise capital on newly emerging equity markets or to establish subsidiaries overseas, where they frequently raised capital either through direct borrowing or by being listed on the local stock exchange, a practice that has earned these firms the name “Red Chips” (see De Trenck 1998). As a result of this proliferation of ownership forms, the relative size of the state sector shrank, in terms of the number of enterprises falling under direct state ownership, but also in terms of SOEs’ share of gross value of industrial output (GVIO). In 1981, 22.07 percent of industrial enterprises were stateowned and 77.80 percent were collectively owned. State-owned enterprises (SOEs), however, accounted for 77.47 percent of GVIO, while collectives accounted for 21.76 percent, and other all other types of enterprises just 0.77 percent (Zhongguo Tongji Nianjian 1981: 204, 208). Just four years later, in 1985, private enterprises accounted for 64.56 percent of industrial enterprises while SOEs accounted for just 1.81 percent (see Table 5.1). Over the next two decades, the relative number of SOEs would remain in the order of just 1 percent of the total, while urban collectives accounted for an average of about 2 percent, TVEs 12 percent, cooperatives 8 percent, private enterprise 72 percent, and joint ventures about 0.25 percent. Despite the dramatic drop in the relative number of SOEs, these enterprises nevertheless still accounted for 64.86 percent of GVIO, while the numerically large but small-scale privately owned enterprises accounted for a scant 1.85 percent (see Table 5.2). In 1992, SOEs’ share of GVIO dropped below 50 percent and by 1996 the state sector accounted for only 31.04 percent of GVIO. The private sector’s share of GVIO meanwhile increased to 6.76 percent in 1992 and then 16.87 percent in 1996. The collective sector rose from 33.93 percent in 1985 to a peak of 56.15 percent in 1994, before dropping back to approximately 50 percent in 1996. Foreign and overseas funded joint
1986
1987
1.81 2.91 16.39 14.30 64.56 0.03
1.19 1.90 10.80 9.79 59.03 0.03
Note JV: joint venture.
Sources: Zhongguo Tongji Nianjian, various years.
Percentage of enterprises SOE Urban collective TVE Coop Private Other, including JV 1.22 1.93 11.85 9.01 69.58 0.05
Number of enterprises (× 10,000) SOE 9.37 9.68 9.76 Urban collective 15.07 15.41 15.42 TVE 84.97 87.51 94.59 Coop 74.17 79.38 71.92 Private 334.78 478.45 555.33 Other, including JV 0.17 0.24 0.39 Total 518.53 810.56 798.07
1985
1.25 1.98 12.21 9.10 77.26 0.07
9.91 15.77 97.15 72.38 614.81 0.54 795.78
1988
Table 5.1 Distribution of forms of enterprise, China, 1985–96
1.27 2.00 11.83 7.79 75.80 0.09
10.23 16.16 95.59 62.95 612.42 0.72 807.96
1989
1.21 1.89 10.56 6.93 71.71 0.10
10.44 16.24 90.95 59.66 617.6 0.88 861.21
1990
1.30 1.97 11.20 6.35 79.05 0.13
10.47 15.94 90.48 51.3 638.67 1.08 807.96
1991
1.20 1.80 10.91 6.34 79.59 0.16
10.33 15.5 93.92 54.64 685.4 1.42 861.21
1992
1994
1.06 1.74 9.96 6.50 77.40 0.32
1.02 1.67 10.05 6.88 79.94 0.44
10.47 10.22 17.23 16.74 98.71 100.64 64.42 68.92 767.12 800.74 3.21 4.45 991.16 1001.71
1993
1.61 2.52 12.51 5.06 77.48 0.82
11.8 18.47 91.87 37.16 568.82 6.03 734.15
1995
1.42 2.41 11.03 6.49 77.76 0.88
11.38 19.25 88.07 51.86 621.07 7.02 798.65
1996
1.30 2.06 11.61 7.88 74.10 0.26
Average
62.27 15.05 16.25 2.21 2.76 1.46
11,194
9,716
64.86 16.28 14.24 1.56 1.85 1.21
6,971 1,684 1,820 248 309 163
6,302 1,582 1,383 152 180 117
1986
59.73 14.59 17.73 2.29 3.64 2.02
13,812
8,250 2,016 2,450 316 502 279
1987
Note JV: joint venture.
Sources: Zhongguo Tongji Nianjian, various years.
Percentage of gross value of output SOE Urban collective TVE Coop Private Other, including JV Shareholder Foreign JV Overseas JV Other
SOE Urban collective TVE Coop Private Other, including JV Shareholder Foreign JV Overseas JV Other Total
1985
56.80 26.15 7.59 2.41 4.34 2.72
18,224
10,351 4,765 1,383 439 790 495
1988
56.06 13.85 19.58 2.25 4.80 3.44
22,017
12,343 3,050 4,312 496 1,058 758
1989
54.60 13.16 20.21 2.25 5.39 4.38
23,924
13,064 3,148 4,835 539 1,290 1,048
1990
52.94 12.67 21.01 2.02 5.70 5.66
28,248
14,955 3,580 5,935 569 1,609 1,600
1991
Table 5.2 Gross value of industrial output by ownership, 1985–96 (RMB 100 million) 1993
48.08 11.54 24.16 2.35 6.76 7.10
3.02 3.83 3.64 0.57
46.95 9.51 21.77 2.73 7.98
17,824 22,725 4,277 4,605 8,957 10,537 870 1,322 2,507 3,861 2,634 1,461 1,853 1,761 277 37,068 48,402
1992
43.85 10.21 29.72 4.37 11.85
59,755
26,201 6,101 17,760 2,611 7,082
1994
3.46 5.80 5.86 1.45
3.61 7.29 5.97 1.27
30.24 3.71 16.87
31.04
3,302 6,658 5,459 1,163 91,380
3,183 5,326 5,388 1,334 91,895
33.97 8.39 25.88 2.32 12.86
27,630 3,387 15,420
28,361
1996
31,220 7,710 23,779 2,134 11,821
1995
50.93 13.76 20.70 2.54 7.07 3.50 3.37 5.64 5.16 1.10
Average
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ventures’ contribution of GVIO increased dramatically over these years and by 1996 accounted for 13.26 percent of GVIO. Along with these changes in relative numbers and relative contributions to GVIO, reform also fundamentally altered the ways that each type of enterprise interacted with the state, giving rise to a variety of different forms of state–enterprise relationships. State-owned enterprises (SOEs) Two distinct waves of reforms transformed SOEs from agents of the economic bureaucracy to quasi-autonomous actors. In the early 1980s, Deng Xiaoping and his allies tried to stimulate industrial productivity and efficiency by allowing SOEs to retain a share of their profits. Whereas all profits had been handed over to the state, which might then decide on how much would be returned to the enterprise in the form of wages, bonuses, benefits, and investment capital, in the early 1980s SOEs were placed under one of two types of enterprise responsibility system whereby management negotiated a division of profits with the “owners.” In 1983, after it became clear that early reforms had significantly reduced state revenues, a new system of substituting taxes for profits (ligaishui) was introduced. Under this system, an enterprise paid an enterprise income tax equal to approximately 55 percent of profits. The remaining 44 percent where then split between the state and enterprise using a secondary “adjustment tax” system (Lee 1991: 32–3). At about the same time, the old system of collective management was replaced by a system of unitary management with the enterprise’s party secretary often assuming the role of general manager. A new contract management system was then introduced, under which managers signed contracts with the enterprise’s formal state owner defining profit and growth objectives which management had to fulfill if they were to receive specified performance bonuses (Lee 1991: 52–3). From the outset it became clear that reform had given rise to a highly political relationship between the central government, local governments, and SOEs as each competed to maximize its share of enterprise profits (Walder 1989: 253–60). Both the central government and local governments were reluctant to see their share of enterprise profits fall. Early on managers entered into a relationship of “dual collusion” with both representatives of the enterprise’s employees and the local government designed to sharply limit the amount of profits which were handed over to the center. Local governments, thus, granted firms special tax breaks, thereby reducing their exposure to formal taxation, but then collected a variety of ad hoc fees and “donations” that were then deposited into institutional slush funds (xiaojinku) out of which cadres drew a variety of irregular pay and benefits (Walder 1989; Wedeman 2000). This allowed local governments to siphon off a share of the enterprise’s real profits while concurrently reducing the enterprise’s formal tax liability, which permitted the generation of under the table profits that were then
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channeled into slush funds out of which management drew illicit income and paid illegal bonuses and benefits. Managers also reduced their exposure to profit-sharing through taxation by colluding with workers to maximize wages and bonuses, thus ensuring that the enterprises retained a larger share of its gross income (Walder 1986: Chapter 7). Collusion between SOE managers and local governments and between managers and workers to minimize the amount of profits remitted to central coffers represents just one aspect of the political nature of business–state relations in the reform era. Perhaps more significant than these collusive relationships has been the ability to SOEs and their bureaucratic owners to hold the state politically hostage. Despite the growth in the collective and non-state sectors, the state sector remains important, particularly in terms of industrial employment. Over the years, employment in state-owned units has actually increased, rising from 74.51 million in 1978 to 112.61 million in 1996, even though as a percentage of total employment the state sector has declined from 78 percent of urban employment in 1978 to 59 percent in 1996 (Zhongguo Tongji Nianjian 1997). Despite their size and importance, a considerable percentage of SOEs have bled red ink. Between 1978 and 1997, SOE losses increased from RMB4.2 billion (US$1.68 billion) to RMB74.4 billion (US$8.97 billion). The percentage of SOEs losing money, meanwhile, rose from a low of 9.6 percent in 1985 to upwards of 44 percent in 1995 (Lardy 1998: 35). In 1996, total SOE losses exceeded total SOE profits for the first time since 1949 (Steinfeld 1998: 18). Mounting SOE losses were not simply an economic problem. They were a fundamentally political problem because in the minds of the leadership mounting losses in the state sector had the potential to trigger mass unrest among the urban working class, the group that in Marxist ideology constituted the foundation of socialism. Seeking to avert enterprise failures, the reformers repeatedly shied away from enforcing bankruptcy regulations and instead opted to prop up failing SOEs with budgetary subsidies and initiating a search for reforms that would somehow stimulate them to become more profitable. Early on, SOE loses were covered primarily by subsidies from the unitary budget. Prior to 1986, in fact, subsidies to money-losing SOEs were considered a form of negative revenue and debited from the budget’s income side rather than treated as a form of expenditure. As SOE losses increased during the late 1980s, state subsidies rose steadily, rising from RMB32.5 billion in 1986 to RMB57.9 billion in 1990. In 1990, however, the state shifted from a system of budgetary subsidies to bank financing. As a result, budgetary subsidies to money-losing SOEs fell from RMB51.0 billion in 1991 to RMB33.7 billion in 1996, thus opening a widening gap between mounting SOE losses and state subsidies (see Figure 5.1) (Lardy 1998: 37). In theory, the switch was to eliminate the “soft budget” constraint that allowed SOEs to ignore market forces and operate without regard to profits and losses (Walder 1989: 255). In reality, the banks simply replaced the state as a source of endless bailouts for money-losing SOEs. As a result, SOEs’
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80
RMB billion
60
40
20
0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 SOE losses
State subsidies
Figure 5.1 State subsidies and SOE losses, 1985–96.
debts increased dramatically during the early 1990s, and as of 1995, SOEs owned a total of RMB3.36 trillion (Steinfeld 1998: 20). Much of this increase in lending was not channeled into new productive capacity, but was rather used to cover enterprises loses with the result that non-performing loans to SOEs increased to close to a third of their total obligations. Although hard data on bad debt are lacking, Lardy and Katz suggest that by 1995 state-owned banks were carrying between RMB860 billion (US$ 102.99 billion) and RMB1.36 trillion (US$162.9 billion) in bad debts, most of it in the form of non-performing loans by SOEs (Lardy 1998: 119, Katz 1998: 104). Over the next two years, according to Dornbusch and Giavazzi, total non-performing loans held by Chinese banks increased substantially, reaching an estimated RMB 1.54 trillion (US$187 billion) to RMB2.31 trillion (US$278.65), with total unrecoverable debt possibly totaling between RMB800 billion (US$96.50 billion) and RMB1.68 trillion (US$202.65 billion).1 The problem was not simply that SOEs were inefficient or that they had to shoulder extensive welfare costs, including paying out pensions for retired workers, providing schools, housing, medical facilities, and other benefits for both current and retired workers. The major problem, according to Steinfeld, was that SOEs sat at the base of an inverted bureaucratic pyramid composed of a host of public agencies with some sort of de jure or de facto claim on their revenues. In theory, because the state claims a share of SOE profits, it ought to have a vested interest in the maximization of SOE profits. In reality, although they are owned by the “state,” nobody in fact owns SOEs because there is no “state.” Rather, the state consists of a confused collection of
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disarticulated bureaucratic claimants, including local governments, each of whom has a “fuzzy” property rights relationship with a firm and most of whom have a vested interest in wringing as much as they can out of the SOEs without direct concern about the consequences of their predatory “looting” (Granick 1990: Chapter 2; Walder 1994: 8; Steinfeld 1998: 61, 91; Broadman 1999). Yet, in the end all these rival claimants have a vested interest in ensuring that the SOEs do not collapse and that the constant inflow of resources continues. Their real interest is in keeping the patient alive so that they can continue to suck up the steady transfusions of “life-sustaining” loans. In short, bureaucratic claimants view money-losing SOEs as “cash cows,” according to Steinfeld (1998: 96). Singh and Zheng (1998: 121), on the other hand, find that high rates of local taxation and collusion between local governments and SOEs to hide profits serve to transfer bank-derived subsidies into the coffers of local governments and enterprise slush funds. Capital for loans to money-losing SOEs must, however, come from either more profitable sectors or from inflationary monetary policies. Given the regime’s political fear of inflation, most of the money comes from individual savings and hence from wages and profits earned in the more profitable collective and private sectors. The banks thus soak up money from these sectors lend it to money-losing SOEs, who in turn end up passing them along to bureaucratic agencies and local governments, as well as funneling them into the pocket of enterprise managers and workers in the form of wages, bonuses and benefits (see Figure 5.2) (Steinfeld 1998: 6, 46, 49, 75). Because the state-owned banks drew in money from depositors, with the larger share coming from more prosperous areas dominated by collective and private industries, the result was the reallocation of monies to “rust belt” areas dominated by money-losing SOEs (Steinfeld 1998: 96).2 Some of these monies are then illicitly exported to Hong Kong and then “round-tripped” back into China in the form of “foreign investment” or re-channeled into the collective and private sectors (Gunter 1996: 84). The banks themselves were surprisingly indifferent to this constant draining of funds and the steady build-up of bad SOE debt because they too faced a soft budget constraint. Thus, rather than curtail lending to debt-ridden, money-losing SOEs, the state-owned banks, according to Katz (1998), developed a relationship with their debtors similar to that found in the Japanese keiretsu system wherein banks continue to lend debtors money because otherwise the debtors cannot minimally service their loans and would thus actually default on them (Katz 1998: 108). The banks used each round of new loans to “evergreen” outstanding bad loans, using new loans to “pay” outstanding interest on earlier loans. Evergreening allowed the banks to not only cover up the extent of non-performing loans but to even claim profits based on the payment of interest (Lardy 1998: 101–4). The banks thus also managed to milk the SOE cash cow. Even when some SOEs were transformed into joint stock firms, with equities listed on the Shanghai, Shenzhen, or – in the case of the Red Chips – the Hong Kong stock exchanges, the SOEs’
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TTVEs, VEs, Private
Wages W ages
Hong Hong Kong Kong
Taxes Taxes and profits Profits
Individuals Disguised investment Investment
Savings StateState owned O wned Banks banks
Capital flight Capital Flight
Round-tripped Round Trippedinvestment Investment Loans Loans
State OSOEs wned Enterprises
Wages Wages Wages W aand ges and and a n dbonuses Bonuses benefits Benefits
Workers W orkers
Managers Managers
TTaxes axes
Ad hoc hoc fees Fees
Central Government Government
“Profits” "Profits"
Local Local Government governments s
Central Bureaus Bureaus
Figure 5.2 Political business fund flows, China, 1998.
owners continued to milk them as monies raised through the sale of stock were extracted from the firm in the form of ad hoc extractions by the various claimants (Steinfeld 1998). In the end, of course, the milking of money-losing SOEs was possible only because the leadership was too afraid of the political risks associated with widespread bankruptcy in the SOE sector and was thus rendered hostage to the predatory looting of the SOEs by various elements of the state itself.3 Attempts to force money-losing SOEs into bankruptcy have generally fallen victim to bitter resistance, not only from enterprises’ managers and workers, but also the “rubber stamp” National People’s Congress (NPC). After years of bureaucratic wrangling, opposition from the ministries of Labor, Finance, Light Industry, and Foreign Economic Relations and Trade, as well as the Bank of China, was finally overcome in 1986 and the State
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Council accepted a draft bankruptcy law. The law, however, ran into stiff opposition in the NPC Standing Committee and was – in an unprecedented move – voted down (Tanner 1999: 159–62). Only after additional legislation providing for unemployment insurance for discharged workers and a new State-owned Industrial Enterprises Law was bulldozed through the NPC was the bankruptcy law finally passed in 1988. Even then, however, the law was allowed to lapse in abeyance as the state shied away from forcing SOEs into bankruptcy. It was not until a decade later, in fact, that the regime began to force significant numbers of SOEs to either fold or reduce their bloated workforce in a series of policy shifts that would, if fully implemented, cut the stateowned sector to a 1,000-odd major conglomerates and would result in the dismissal of over 30 million state workers (see Washington Post 11/8/98).4 Zhu Rongji’s bold restructuring plan, however, fell victim to a wave of worker unrest after over 11 million workers were laid off during 1998 (Agency France Press 19/9/98, 6/1/99). In September 1998, workers at the Shizuishan Electrochemical Factory in Yinchuan (Ningxia) blockaded the provincial government building and at the China Number One Metallurgical Company in Wuhan (Hubei) workers staged a sit-down demonstration after their employers were forced to shut down (Agency France Press 19/9/98). In January 1999, 5,000 furloughed (xiagang) workers staged a protest in Changde (Hunan) after local textile mills failed to pay wages for three months and in January 1999 were police authorized to fire on protestors after repeated demonstrations in Wuhan and Changsha by workers angry over layoffs (Agency France Press 1/6/99, 18/1/99). In March, laid-off miners demonstrated in front of the Chengdu City Hall (Agency France Press 14/3/99). The following month, demonstrations were reported in Xi’an, where workers at the Xi’an Iron and Steel Works blocked streets after it was announced that the factory planned to layoff 1,700 workers (Agency France Press 1/4/99, 30/4/99). In August, retirees from the state-owned Velveteen Textile Factory in Xi’an protested over unpaid pensions and benefits (Agency France Press 3/8/99). A month later, laid-off workers from the Huanggang City Wool Factory and the Huanggang Bedsheet Factory in Hunan took to the streets to protest over two years of unpaid wages (Agency France Press 18/9/99). In November, employees of the Tian Qiao Department Store in Beijing occupied the store after hearing rumors that it would shut down, while workers at the Hunan Rubber Factory marched into downtown Changsha after failing to receive their wages for three months (Agency France Press 27/11/99). The next month, workers at the Hong Jiang Silk Factory and 2,000 retired workers at the Chongqing Special Steel Factory demonstrated over unpaid wages and pensions (Agency France Press 12/9/99, 2/12/99). Soon thereafter, laid-off workers at the Chengdu Automobile Production Factory clashed with police over after the factory failed to pay unemployment benefits (Agency France Press 13/12/99). In all, according the dissidents based in Hong Kong, over 215,000 actions, including 60,000 demonstrations, 627 violent protests, and 459 protests that ended in clashes between police and demonstrators,
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occurred as a result of the wave of layoffs and enterprises failures in 1998 (Agency France Press 24/3/99, 9/12/99). Not only have some furloughed workers managed to use the threat of collective violence to wrest concessions from the state and their former employers, primarily in the form of wages equal to about half of their regular wages and continued access to company benefits, including housing, many SOEs have also used the threat of furloughs to leverage money from the state. To reduce the number of furloughed workers who end up unemployed, Beijing has urged money-losing SOEs to set up subsidiary collective enterprises (COEs) capable of absorbing workers laid off from the parent SOE. Unlike the parent SOE that is owned of a variety of bureaucratic agencies, these subsidiary COEs are owned by the SOE itself. A number of large SOEs have, therefore, been able to get considerable grants and loans from the state to set up COEs and, in the process, have managed to transform themselves into semi-independent conglomerates (Qiu and Zheng 1998: 241–2). While money-losing SOEs and state workers capitalized on regime fears of unrest to extract – or perhaps one should say extort – public resources from the state, others have sought to capitalize on their connections to the leadership. During the 1980s, many of the sons and daughters of China’s political elite, known in China as the princelings (taizi), opted for careers in the state-owned business sector. As reform progressively loosened the state’s grip on SOEs and expanded the range of economic activities open to them, members of the princes’ party (taizidang) quickly transformed their firms into a new form of political conglomerate. Deng Xiaoping’s eldest son Deng Pufang, for example, built a business empire around the China Fund for the Handicapped between 1984 and 1989.5 To obtain funds for China’s handicapped, Deng, with the support of various government ministries and the People’s Liberation Army, set up the Kang Hua Industrial Corporation in 1984. The firm was to earn money by investing in various trading corporations and was granted tax-exempt status as a charity organization. Over the next several years, Kang Hua spawned a host of subsidiary firms and in 1987 was reorganized into a new conglomerate, known generally as “Big Kang Hua,” which at its zenith had a reported 58 major subsidiaries – which themselves had 133 “grandson” subsidiaries – many of which were themselves headed by the sons and daughters of powerful communist functionaries. Kang Hua’s close connection to Deng (the elder) allowed its operatives to engage in a form of freewheeling business that included illegally dealing in foreign currency, speculation and profiteering, and tax evasion. By late October 1988, the extent of Kang Hua’s shady dealings had reached such levels that the State Council was forced to revoke the firm’s right to engage in commercial activity and order that it henceforth limit itself to investment-related activities (Ho and Gao 1993: Chapter 2). Beijing Capital Steel and Iron (Shougang) provides a second example of how politically well-connected SOEs have taken advantage of their links to the state. Headed by Zhou Guanwu, an old comrade and close friend of Deng
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Xiaoping, Shougang was able not only to negotiate a highly favorable deal over the sharing of its profits with its various bureaucratic owners in the early 1980s, Zhou’s political clout helped shield the firm from repeated predatory demands for ad hoc fees and contributions. Between 1980 and 1992, Shougang operated profitably and expanded steadily. In 1992, however, Zhou’s son, Zhou Beifang launched the firm on a two-year binge of “insane” investments. Zhou the younger, who headed Shougang’s Hong Kong subsidiary and had links to Deng Xiaoping’s son Deng Zhifang, Li Peng’s son Li Xiaopeng, and Hong Kong tycoon Li Ka-shing (whose Cheung Kong group was concurrently tied up in a real estate scandal), invested heavily in Hong Kong real estate, bought a Peruvian iron mine and an aging American steel mill at several times their estimated value. In the process, Shougang “essentially decapitalized itself by permitting long-term investment to thoroughly crowd out working capital” (Steinfeld 1998: 208). Between 1992 and 1994, it sank RMB13.5 billion into new investments, even though its retained profits, depreciation funds and long-term loans totaled only RMB5.36 billion. To cover the difference, Shougang took out some RMB8.26 billion in short-term loans. As Shougang expanded its steel and iron operations in Beijing, Shandong and Liuzhou, developed a new diesel fuels operation in Jilin, and set up a new propane plant, it continued to enjoy the active support of senior statesman Deng Xiaoping and was thus able to brush aside resistance from the Ministry of Metallurgical Industries (Steinfeld 1998: 208). Ultimately, however, Zhou’s son became ensnared in a complex financial scandal that led to the sacking of Beijing First Secretary Chen Xitong in the spring of 1995 and Zhou Beifang’s conviction on charges of bribery and embezzlement (Wedeman 1996: 61–94). Zhou Beifang’s downfall, combined with the increasingly poor health of Deng Xiaoping, left Zhou Guanwu politically exposed and he was forced to retire shortly thereafter, leading to a general decline in Shougang’s fortunes. In looking at the relationship between state agencies and the SOEs, we observe a pattern of fairly serious predatory behavior, with state agencies treating some SOEs as cash cows. We also find some SOEs using their political clout to engage in profiteering and speculation. Taken by themselves, these data give the impression of the state sector as corruption-riddled and bankrupt. In reality, a majority of SOEs are not money-losing cash cows. Most are profitable and – despite mounting financial losses – the state sector has grown considerably throughout the reform period, albeit as a slower rate than the collective and private sectors. International trust and investment corporation The problems associated with close relations between business and the state also manifest themselves in the non-bank financial institution (NBFI) sector, where links between investment enterprises and local governments gave rise to serious moral hazard problems akin to those documented elsewhere in
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Asia during the 1997 Asian economic crisis. The non-bank financial sector had grown up rapidly since the advent of reform. In 1979, the central government set up the China International Trust and Investment Corporation (CITIC) as a means of raising investment capital to promote creation of joint ventures and to coordinate the development of infrastructure needed to attract and sustain foreign direct investment (FDI). Headed by Rong Yiren, China’s “Red Capitalist” and another long-time associate of Deng Xiaoping, CITIC quickly grew into a conglomerate with total assets of some RMB25 billion worldwide by the early 1990s (Gang 1994: 246–7). Encouraged by the People’s Bank of China, state-owned banks and local governments began setting up their own international investment and trust corporations (ITICs) during 1980, and by 1981 there were approximately 600. After it became clear that the ITICs were being used by local governments and enterprises to evade investment controls and regulations, the State Council imposed new restrictions in 1982 and 1984. Nevertheless, the number of ITICs expanded rapidly after 1986, peaking at a total of around 1,000. By 1988, there were 745 ITICs with total assets of RMB73.55 billion. With the advent of the 1988 austerity program, the number of ITICs was reduced to 300, as all those not affiliated with either state-owned banks or local governments were shut down (Dipchand et al. 1994: 104–5). The ITICs were primarily supposed to raise capital domestically by attracting deposits of surplus SOEs funds. ITIC funds were then generally re-lent, most often to enterprises with which the ITIC had a patron–client relationship. Over time, many of the large ITICs evolved into vast holding companies, with diverse interests in a wide range of TVEs, real estate development, tourism and transportation. At the time of its collapse in 1998, Guangdong International Trust and Investment Corporation (GITIC) had at least 105 domestic subsidiaries and 135 foreign subsidiaries (AFX News 3/2/99). Guangdong Enterprises (GDE), another ITIC backed by the Guangdong provincial government, had interests in a sprawling net of industries, brewing including textiles, construction and food processing (Agency France Press 15/3/99). To finance their investment portfolios, ITICs increasing turned to the international capital market, where they borrowed heavily on the short-term commercial loan market and raised equity capital by selling stock on the Hong Kong stock exchange. At the time of the Asian economic crisis in 1997, China’s ITICs and their “Red Chip” subsidiaries reportedly had total registered foreign debts of US$30 billion and an additional US$30 billion in unregistered foreign debt (Reuters 12/1/99). The ITICs were able to borrow freely on international capital markets because it was widely assume that as government-backed institutions, the state stood behind them and would guarantee repayment of all loans. Many localities had, in fact, provided “comfort letters” to lenders, implying – but not necessarily promising – that they stood behind local ITICs (Ludman 1999).6 Individual investors, meanwhile, quickly became caught up in a “Red Chip” fever that pushed ING
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Baring’s “Red Chip Index” from 170 points to 310 points between August 1996 and March 1997 (Businessweek 7/4/97). Behind all the hype, however, many ITICs were in poor financial condition. Many had invested poorly, re-lending to insolvent enterprises or speculating in real estate development. The quality of ITIC investments was not, however, important because, as an official of GITIC explained: “The banks used to lend to us because they thought this was a government organization. So they had confidence . . . Then we made investments without really thinking about it. We would lend to a friend or a local company so they could pay off their debts to the bank” (Financial Times 28/10/99). Another stated: “This was a statebacked business. So the attitude on all sides was: ‘Who cares?’” (Financial Times 20/10/99). An investment manager in London admitted: “the problem was that no one stopped to ask if the businesses of the red chips were investing in were worthwhile.”7 Another said that investors “have no idea what [a Red Chip’s] assets may be, or what comes with them” (Businessweek 7/4/97). Shortly after the Asian economic crisis began, the roof began to fall in on the ITICs. In 1997, the State Council ordered several major ITICs to be shut down owing to insolvency. In October 1998, GITIC, one of the leading ITICs, was also shut down by the State Council. Backed by the Guangdong provincial government, GITIC had accumulated approximately RMB39.8 billion in liabilities by 1998. With the crash of the Hong Kong real estate market, much of GITIC’s paper assets disappeared, leaving it with nominal assets of RMB21.5 billion, but only RMB7.69 billion in recoverable assets (Financial Times 23/10/99, 23/4/99; International Herald Tribune 14/1/99). GITIC was not alone; at the time of its closure, many of China’s 249 ITICs were reportedly either insolvent or on the verge of insolvency assets (Financial Times 19/4/99). As of 1997, China’s various ITICs had total liabilities of RMB267.27 billion and foreign liabilities of US$14.59 billion (Kobayashi et al. 1999). By and large, local governments came to the aid of insolvent local ITICs, providing bailout loans or transferring profitable locally-controlled SOEs to them as a way of building up their assets (Asia Pulse 14/6/99, Agency France Press 15/3/99). Beijing, however, elected to single out GITIC as part of a larger power play aimed at forcing a radical consolidation of the ITICs and the virtual elimination of all ITICs except those controlled by the state-owned banks and a few “core” investment groups (Agency France Press 17/2/99).8 In the end, Beijing succeeded in clipping the wings of the ITICs but failed to wrest effective control from their local government allies, who continued to back their financially shaky ITICs because they represented an important means of raising capital independently of the formal banking system, which remained more tightly controlled by the center. Collective enterprises Formally owned by the local community, much of the collective sector, including TVEs, are in fact controlled by the local government and party
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apparatus, with the “collective” having only residual property rights (Chen 1997: 131, Putterman 1996: 90). To a considerable extent, therefore, the collective sector actually consists of enterprises whose property rights relationship with the state parallels that of the SOEs, many of which are also controlled by local governments and bureaus. The key difference between the SOEs and COEs lies in the fact that collective enterprises have much more limited access to state and bank funds and in many cases have been contracted out to their management. Like their SOE cousins, COEs, including TVEs, rely heavily on bank loans for capital. During 1989–90, over 40 percent of TVE capital came from bank loans, with the state and local governments providing approximately 10 percent of fixed investment funds and enterprise capital accounting for about 30 percent (Yuan 1994: 99). However, bank lending to the collective sector accounted for less than 5 percent of total lending, even through the collective sector accounted for approximately 40 percent of industrial output (Tong 1999: 88). Moreover, although some localities may covertly subsidize local COEs, for the most part the collective sector does not face the same soft budget constraint faced by SOEs. Instead, COEs face a relatively hard budget constraint, with the result that while they too rely heavily on debt financing, they cannot expect to have their debts forgiven or evergreened. This implies that in general COEs must operate much more efficiently that their SOE cousins. It also means, in turn, that local governments and other state agencies cannot look at COEs as the same sort of cash cows as SOEs. Like SOEs, COEs are frequently the target of predatory taxation and revenue extraction. In Jiangsu, a silk filature owned by the village industrial cooperative, for example, remitted 50 percent of its pre-tax profits to the village government and then had to pay an educational surcharge of 0.6 percent of its sale revenues, an administrative fee of 0.1 percent of sales revenues, a 10 yuan per employee contribution to the local agricultural fund, and a 50 yuan per employee contribution to the local water conservancy fund. Moreover, the filature was expected to donate money to local construction projects and actually carried 11 local cadres on its payroll. Other cadres derived a considerable share of their net income from “special allowances” determined by the performance of local industries, of which the filature was the most significant, and funded out of the profit handed over to the village government (Wang and Liu 1995: 209–10). The terms of contracting out vary from one of quasi-agency (or tenancy), in which enterprise managers are essentially hired to run the enterprise on behalf of the local government, to one of profit-sharing (or share cropping) in which managers split profits with the local government, according to some contractual agreement, or one in which managers lease the enterprise from the local government in return for a fixed payment (Chen 1997: 140). Not only do income rights vary, so does the extent of a TVE’s dependence on the local state. In general, enterprises in which managers act as agents depend most
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heavily on local governments for capital and assistance, while managers who lease enterprises are most likely to depend on non-state sources for capital. In some cases, “leased” TVEs may actually be private firms that have sought regulatory protection and tax benefits by “putting on a red hat” (dai hong maozi) (Pearson 1997: 112). That is, affiliating themselves with the local government through the payment of a “leasing fee” in return for being designated a “collective enterprise.” Because collective enterprises are liable for higher taxes and more likely to be subject to “ad hoc expropriation” (luan tanpai) – that is unauthorized surtaxes and outright demands for funds – the practice of putting on red hats may appear odd. By affiliating with the local government, however, private firms buy protection from arbitrary state action and often receive tax breaks. Red-hatting also allows private entrepreneurs better access to bank loans and credit. More importantly, because many firms misreport their profits in order to avoid paying taxes, affiliation allows redhatted firms to avoid tax audits. By paying a lease fee – and often bribes either in the form of up-front cash payments or an agreement to split their profits with local cadres – red-hatted firms are thus able to boost their profits (see Whiting 1993). In some cases, however, a private firm may find itself redhatted by force as local governments in effect expropriate profitable private firms as a way of maximizing the flow of local profits into their coffers (Zweig 1997: 268). Regardless of the leasing arrangement, the ownership structure of COEs is generally much simpler than that of SOEs. Whereas SOEs are often “owned” by a confusing collection of bureaucratic “grandmothers” (po po), most COEs are owned either by a bureau of the county, township or village governments (Zweig 1997: 262–3). As a result, whereas SOEs often face the problem that a lack of clear ownership leaves them vulnerable to uncoordinated revenues’ extraction and expropriation, the fact that a single governmental agency owns a COE gives that agency a greater vested interest in ensuring long-term profit streams, rather than short-term “profit”-taking. Moreover, the cadres who form the “board” of COEs are typically locals, rather than outsiders as is the case with SOEs, and hence have a social stake in ensuring the survival and growth of local COEs. Since a considerable part of local cadres’ salaries are also paid out of COE profits rather than the state budget, they also have a vested interest in expanding the local industrial base and increasing local COEs’ profits (Pei 1998: 111–12, 127). Thus, even though COEs are frequently forced to hand over part of their profits to local governments in the form of ad hoc “taxation,” their owners are less likely to bleed them white in the process, as occurs in the case with some money-losing SOEs. Private enterprises (POEs) Even though private firms are not owned by the state and the state legally has only the right to levy taxes against private enterprises’ profits, in practice the relationship between POEs and the local party-state is similar to that of the
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relationship between local governments and local COEs. Private firms, both small-scale getihu family firms and but even more so large privately owned firms, also find it advantageous to form a relationship of “vertical clientalism” with local cadres.9 Unlike the SOEs or COEs, private firms rely primarily on private capital. According to one survey of private enterprises in Zhejiang, Hebei, and Shaanxi, only 15 percent of enterprises capital came from bank loans, while 65 percent came from managers and workers of the firms themselves (Yuan 1994: 104). Although POEs do not depend on state cadres for access to capital to the same extent that SOEs and COEs do, they face extreme uncertainty associated with an underdeveloped regulatory system and are thus extremely vulnerable to arbitrary local actions. At the same time, POEs are also highly dependent on local governments to help them obtain financing, land and supplies, as well as help in evading legal limitations on the number of workers who can be employed by a private firm. Under these conditions, private businessmen find it advantageous to enter into private understanding with local authorities and to contribute a share of their profits in return for the protection of the local government. In return for protection from heavy-handed state regulation, access to state resources such as cheap inputs or bank loans, or perhaps even an overlooking of illegal activities, private businessmen may provide local cadres with a steady stream of gifts or invitations to banquets. They may also kickback a share of their income in the form of “management fees” and “donations” paid either to the local government or to individual cadres. In some areas, in fact, successful private businesses are expected to contribute 10–15 percent of their profits, approximately the same share the collective enterprises hand over, to local authorities (Young 1995: 109). Alternatively, they may hire relatives of local cadres (Pearson 1997: 112). To some extent, the vertical clientalism that characterized the relationship between many POEs and local governments may be a polite cover for extortion. In many areas, private businesses have faced considerable harassment by local governments seeking to levy ad hoc taxes (luan shoufei) and fines (luan fakuan), as well as demanding that non-governmental organizations (NGOs) pick up the cost of various local governmental activities (luan tanpai) (Solinger 1983: 203–4). Known collectively as the “three disorders” (san luan), these practices have been a consistent problem, particularly in rural China and less developed regions where local governments facing fiscal starvation frequently resort to predatory taxation to make ends meet. Individual cadres also take advantage of their considerable discretionary power to shake down private businesses, threatening to withhold needed licenses or interfere with a firm’s operations unless certain “considerations” are paid. In extreme circumstances, cadres might resort to outright robbery, plunder, or expropriation (Solinger 1983: 204; Odgaard 1992: 104–5; Malik 1997: 147–8). In many cases, however, Pearson and Wank found that entrepreneurs see irregular payments to local government and cadres not as extortion, but rather as a way of building a cooperative relationship between business and
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holder of political power (Pearson 1997: 113). In the early reform period in particular, state control over capital, productive inputs and market access, as well as the ability of cadres to manipulate a highly ambiguous regulatory regime, necessitated accommodation by business (Solinger 1992: 121–41). Under these conditions, sensible businessmen were often willing to give local governments a cut. Wank, in fact, concludes: “Capitalist entrepreneurs see capitalist growth as possible because of, not in spite of, the involvement of state officials” (quoted in Pearson 1997: 113). In extreme cases, such as those involving red-hatting, the connections between private businesses and public institutions may become so close that the boundaries between them are blurred (Wank 1995: 68–9). Some private businessmen, for example, elected to establish “joint” ventures with local governments wherein the local government became co-owner in return of injections of capital (Odgaard 1992: 105– 6). Thus, according to one Chinese professor of economics: “[Corruption] is the grease that can lubricate the political machine in a changing society” (quoted in Malik 1997: 147). Similarly, cadres in some areas have been quite willing for form alliances with local businessmen. In Zhejiang province, for example, cadres in Wenzhou have long been supportive of private enterprises (Liu 1992: 293–316). To a considerable extent, therefore, POEs tend to form relationships with local governments similar to those formed by COEs. Like COEs, POEs face a highly uncertain regulatory environment in which local governments have considerable discretion in deciding how the rules laid by the center and province are interpreted and enforced. As capital markets have remained underdeveloped and POEs face considerable difficulty in obtaining loans from the formal banking sector, local governments also exercise considerable control access to investment and working capital, as well as having the ability to manipulate access to new business opportunities. This near-monopolistic power of local governments therefore creates incentives for POEs to share part of their profits, either in the form of “contributions” to the local government or in the forms of bribes to local cadres.
Political business in post-Mao China Although the People’s Republic of China presents us with a case that is unique in some sense in that the ruling party exercises a de facto monopoly on political power and is hence not directly dependent on the support of the local business community for its survival, the interaction between state and business in China closely resembles that found elsewhere in Asia. Chinese firms, whether they are state-owned, collectively owned, or privately owned, generally form a symbiotic relationship with elements of the party-state. In the case of SOEs, the relationship often become highly predatory as an enterprise’s state “owners” tend to treat the firm as a cash cow, milking it for money in the form of ad hoc fees, taxes, and forced contributions. The relationship is not, however, one-way. Money-losing SOEs survive because
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their “owners” provide them with steady infusions of capital in the form of cut-rate policy loans, most of which they will never repay, without which they would be forced into bankruptcy. Collective enterprises and private firms, on the other hand, frequently find it advantageous to hand over part of their profits to local governments in return for a combination of protection and assistance without which they could not continue to operate. The collusive nature of political–business relations in contemporary China have led various Sinologists to argue that reform has led to a merger of political and business interests. In Zouping country, Shandong and other relatively developed areas, Oi (1999), found local governments constructing what she describes as “corporatist” relationships with local enterprises, including not only collective enterprises in which they have an ownership interest, but also private firms in which they have a more indirect fiscal interest, whereby the local government serves as a de facto corporate headquarters involved in the promotion of local business. Thus, according to Walder (1998: 63–85), the Zouping county government has actively promoted the growth of enterprises in which it has the greatest stake and which it believes are likely to prove the most profitable, while either divesting itself of enterprises that are failing or forcing them to reorganize in ways the enhance their prospects for profitability. Blecher (1991: 265–91) argues that the government of Xinjy City, Shulu County, Hebei, adopted a “developmental state” approach whereby it channeled extra-budgetary revenues into the development of local market infrastructure, rather than promoting the development of specific enterprises. In Guanghan County, Sichuan, on the other hand, Blecher argues that local governments have adopted a more direct “entrepreneurial state” role by using local monies to actively invest in the setting up new industrial ventures. Duckett (1990: 180–98), on the other hand, argues that while local governments in rural areas may engage in local corporatism, or act as local developmental states, bureaus of the central government and municipal governments have also responded to profit making opportunities by engaging in “state entrepreneurialism,” using departmental monies to set up new collective enterprises. Chen (1999: 71–2) goes so far as to assert that reform has given rise to “village conglomerates” which he defines as “a comprehensive economic organization under unified leadership . . .” Similarly, Zweig (1997: 306–7) sees “developmental communities” emerging in the parts of the lower Yangzi region as local governments in parts of Sunan (Jiangsu) mobilize and organize local resources in support of export-led industrialization. Although concepts such as “local state corporatism,” “state entrepreneurialism,” etc., suggest that the merger of political and business interests created an environment in which state and business collaborated in pursuit of development, in reality the nature of political business in China includes a high degree of state predation and corruption. The role of the state has been far from benign. State agencies, local governments, and individual cadres have exploited the CCP’s monopoly on political power and the state’s control
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over capital markets to extract and even extort monies, often virtually at will, from firms. In the case of some SOEs, their predation has effectively bankrupted firms and diverted considerable sums of capital into directly unproductive rent-seeking. Powerful firms, most of them state-owned, have also used their political connections to engage in a form of freewheeling business that in many cases ends up effectively defrauding state-owned banks – which were more than tacit accomplices in the “theft” of bank funds – and individual investors. State agencies have thus diverted vast sums out of the economy and into their private slush fund or personal pockets. What is perhaps most remarkable about the Chinese case is not that we find ample evidence of extensive state predation and corruption, but rather that the economy has performed as well as it has. Between 1982 and 1999, the China GDP grew at an average annual rate of 9.6 percent according to the International Monetary Fund (IMF). At that rate, China grew 40 percent faster than Asia as a whole, three times as fast as world’s advanced economies, nearly four and a half times faster than the average rate for Africa and over five times faster than Latin America.10 China, in other words, confronts us with the paradox of rapid economic growth despite extensive state predation and official corruption, a combination that economists suggest should not be possible (Munro 1995: 681–712). To explain how this is possible we must first recognize that China’s rapid growth has been primarily a function of significant increases in productivity. Between 1979 and 1994, productivity in China increased at an average rate of 3.9 percent, compared to 1.1 percent during the pre-reform period. Four percent productivity growth in China was nearly 10 times as great as that in the United States between 1960 and 1989 and double that of the “Asian tigers” between 1966 and 1991. Growth in productivity accounted for over half of total growth in output (Hu and Khan 1997: 3–4). Most of the growth in productivity has come from the movement of labor from relatively low-productivity agriculture into the greatly expanded collective sector and the newly formed private sector and from imports of foreign technology (Hu and Khan 1997: 5). More recently, however, growth has slowed and become increasingly dependent on increasing injections of capital from the state and export earnings. Although it is difficult to quantify the burden of state predation, the available data suggest that whereas dysfunctional state predation tends to fall most heavily on the state-owned sector, where state agencies have in many cases bled SOEs nearly to death, the pattern of state predation in the collective and private sectors tends to conform more closely to one of “dividend collecting” (see Wedeman 1997: 457–78). The SOEs’ access to cheap capital, state subsidies, and political protection from bankruptcy makes them ready resources for “looting” by government agencies; on the other hand, monies can be scraped off collective and private firms only if they generate profits. Government agencies and cadres, particularly those in areas that lack a sizeable state sector, thus have incentives to foster the growth of COEs and POEs and to help bolster their profitability. The more profitable these firms
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are, the more money local governments and cadres can leverage out of them. Moreover, the fact that most COEs and POEs do not face the problems associated with multiple ownership but are instead most often owned by a single principal, reduces the range of state agencies with a claim in their profits while also providing their principal owner with incentives to limit excessive ad hoc extraction. The fact that many local governments have acquired a vested interest in local industrialization and development, largely as a result of fiscal decentralization and their increasing dependence on the local tax base for revenues, has given them an added interest in allowing local firms to pursue profits – if only for the crass purpose of increasing the size of the local economic pie from which they can extract a slice. There is, therefore, an underlying logic to the overtly contradictory pattern of excessive milking of money-losing SOEs and nurturing of COEs and POEs that we observe in many localities. Nevertheless, the lack of effective political and institutional constraints on predatory behavior – beyond that embedded in Chinese criminal law and party disciplinary statutes – means that only those governments and cadres who are willing to focus on long-term income streams rather than short-term maximization are likely to adopt a collaborative attitude toward industrialization and development and to eschew excessive and potentially debilitating looting of the collective and private sectors. Moreover, because the milk they squeeze out of SOEs tends to originate in the collective and private sectors, looting of SOE funds ultimately imposes financial burdens on COEs and POEs, including both direct costs in the form of higher levels of taxation, but also indirect costs in the forms of opportunity costs resulting from the diversion of capital into the state sector. On balance, therefore, high levels of state predation in the state-owned sector have unquestionably imposed significant costs on the Chinese economy. Yet, the fact that high levels of state predation have tended to fall on only part of the economy, with money-losing SOEs apparently bearing the brunt of state extractions, has meant that sectors where productivity gains have been greatest have been able to grow at rates sufficient to counterbalance the negative consequences of state predation and to propel China’s spectacular growth during the post-Mao era. In conclusion, China differs from the prototypical model of political business. As defined by Gomez in the Introduction to this volume, political business refers to a relationship in which ruling parties and politicians manipulate state policy in ways that allow them to control the allocation of public resources to select business interests, which kickback a share of the profits and rents they obtain from privileged access to public resources in the form of political funds.11 The key difference in the case of China lies not in the symbiotic relationship between political power and business activity. Rather it lies in the disposition of the funds that the business sector kicks back to those in positions of political power. Whereas these monies end up being split between the ruling elites’ political coffers and their private purses elsewhere in East Asia, in China they end up being split between slush funds, from which
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governmental agencies fund irregular and illicit benefits for their staff and cadres’ private purses. The simple fact that the CCP does not require political monies to secure its political hegemony enables those wielding political power to divert a greater share of monies extracted from the business sector to their personal use. The need, however, to generate a base from which such monies can be extracted has meant that government agencies in China have not resorted to looting, but have instead allowed – and even encouraged – sustained economic growth.
Notes 1 Rudi Dornbusch and Francesco Giavazzi, “Heading off China’s Financial Crisis,” available at http://web.mit.edu/rudi/www/: 4. 2 Lardy (1998: 86–90) also finds evidence of significant regional reallocation by way of bank lending. 3 In 1998, the central leadership finally began to allow some SOEs to cease operation and to begin to lay off workers. Although the total extent of layoffs is not clear, perhaps as many as 20 million state workers have lost their jobs or now work only part-time. 4 Since early 1994, the central government has pushed profitable large-scale SOEs to absorb other firms, including money-losing SOEs, and to reorganize themselves along lines similar to the diversified South Korean chaebol. See Shieh (1999). 5 Deng Pufang had been crippled during the Cultural Revolution. 6 Stanley Ludman, “Through a Glass, Dimly: Perceptions of China in the American Business Community,” paper delivered at the conference on “Trends in China Watching,” The Sigur Center for Asian Studies, George Washington University, October 1999, available at http://www.hfni.gsehd.gwu.edu/~sigur/ lubman99.htm. 7 Businessweek Online (1/27/99), available at http://www.businessweek.com/ bwdaily/dnflash/jan1999/nf90127a.htm. 8 The Guangdong provincial government in fact tried to bailout GITIC by providing it with US$1.7 billion after cash-strapped Japanese and Korean banks called in short-term loans (Businessweek 10/26/98); available at http:// www.businessweek.com/1998/43/b3601021.htm. 9 According to Young, local governments tend to ignore very small businesses and to concentrate instead on squeezing large firms. See Young (1995: 109). 10 International Monetary Fund (2000) World Economic Outlook 2000, Washington, DC: International Monetary Fund: 121. 11 Edmund Terence Gomez, “Political Business in East Asia,” Introduction to this volume.
References and further reading Blecher, M. (1991) “Development State, Entrepreneurial State: The Political Economy of Socialist Reform in Xinji Municipality and Guanghan Country,” in Gordon White (ed.), The Chinese State in the Era of Economic Reform: The Road to Crisis, Armonk, NY: M.E. Sharpe. Blecher, M. and V. Shue (1996) Tethered Deer: Government & Economy in a Chinese County, Stanford, CA: Stanford University Press.
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Broadman, H. (1999) “The Chinese State as Corporate Shareholder,” Finance & Development 36(3). Byrd, W., G. Tidrick, Chen Jiyuan, Xu Lu, Tang Zongkun, and Chen Lantong (1984) Recent Chinese Economic Reforms: Studies of Two Industrial Enterprises, Washington, DC: World Bank. Chen Hongyi (1997) “The Transition in TVEs’ Ownership Structure: A Valuable Reference for the Reform of SOEs,” in G.J. Wen and D. Xu (eds), The Reformability of China’s State Sector, Singapore: World Scientific Publishing. Chen Weixing (1999) The Political Economy of Rural Development in China, 1978– 1999, Westport, CT: Praeger. De Trenck, C. (ed.) (1998) Red Chips and the Globalization of China’s Enterprises, Hong Kong: Asia 2000. Dipchand, C.R., Zhang Yichun and Ma Mingjia (1994) The Chinese Financial System, Westport, CT: Greenwood. Donnithorne, A. (1967) China’s Economic System, New York: Praeger. Duckett, J. (1990) “The Emergence of the Entrepreneurial State in Contemporary China,” The Pacific Review 9(2). Findlay, C., A. Watson, and H.X. Wu (eds) (1994) Rural Enterprises in China, New York: St Martin’s Press. Gang Yi (1994) Money, Banking, and Financial Markets in China, Boulder, CO: Westview. Granick, D. (1990) Chinese State Enterprises: A Regional Property Rights Analysis, Chicago: University of Chicago Press. Gunter, F.R. (1996) “Capital Flight From the People’s Republic of China, 1984– 1994,” China Economic Review 7(1). Hamilton, G.H. and T.G. Rawski (1999), “Ownership Change in Chinese Industry,” in G.H. Jefferson and I. Singh (eds), Enterprise Reform in China: Ownership, Transition, and Performance, New York: Oxford University Press. Ho Pin and Gao Xin (1993) Princes and Princesses of Red China, trans. A. Lee, Toronto: Canada Mirror Books. Hu Zuliu and M.S. Khan (1997) “Why is China Growing So Fast?,” International Monetary Fund, Economic Issues 8. Katz, C.A. (1998) “Financing Chinese Conglomerates – the Banking System,” in C. De Trenck (ed.), Red Chips and the Globalization of China’s Enterprises, Hong Kong: Asia 2000. Kobayashi, S., Jia Baobo, and Junya Sano (1999) “The ‘Three Reform’ in China: Progress and Outlook,” Sakura Institute of Research, Inc. RIM 45, September. Lardy, N.R. (1998) China’s Unfinished Economic Revolution, Washington, DC: Brookings. Lee Keun (1991) Chinese Firms and the State in Transition: Property Rights and Agency Problems in the Reform Era, Armonk, NY: M.E. Sharpe. Liu Ya-ling (1992) “Reform from Below: The Private Economy and Local Politics in the Rural Industrialization of Wenzhou,” China Quarterly 130, June. Ludman, S. (1999) “Through a Glass, Dimly: Perceptions of China in the American Business Community,” paper delivered at the conference on “Trends in China Watching,” The Sigur Center for Asian Studies, George Washington University, October. Malik, R. (1997) Chinese Entrepreneurs in the Economic Development of China, Westport, CT: Praeger.
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Munro, P. (1995) “Corruption and Growth,” Quarterly Journal of Economics 110, August. Odgaard, O. (1992) “Entrepreneurs and Elite Formation in Rural China,” The Australian Journal of Chinese Affairs 28, July. Oi, J.C. (1999) Rural China Takes Off: Institutional Foundations of Economic Reform, Berkeley, CA: University of California Press. Pearson, M.M. (1997) China’s New Business Elite: The Political Consequences of Economic Reform, Berkeley, CA: University of California Press. Pei Xiaolin (1998) “Township-Village Enterprises, Local Governments and Rural Communities: The Chinese Village as a Firm During the Economic Transition,” in E.B. Vermeer, F.N. Pieke, and Woei Lien Chong (eds), Cooperative and Collective in China’s Rural Development: Between State and Private Interests, Armonk, NY: M.E. Sharpe. Putterman, L. (1996) “The Role of Ownership and Property Rights in China’s Economic Transition,” in A.G. Walder (ed.), China’s Transitional Economy, New York: Oxford University Press. Qiu Zeqi and Zheng Yingnian (1998) “Xia-Gang and its Sociological Implications of Reduction Labor Redundency in China’s SOEs,” in Wang Gungwu and John Wong (eds), China’s Political Economy, Singapore: Singapore University Press. Shieh, S. (1999) “Is Bigger Better?,” China Business Review 5. Singh, I.J. and Zheng Decheng (1998) “How Financially Viable are the Chinese SOEs: Findings of a Survey of Five Chinese Municipal Cities,” in T. Fulton, Li Jinyan and Xu Dianqing (eds), China’s Tax Reform Options, Singapore: World Scientific. Solinger, D.J. (1983) Chinese Business Under Socialism: The Politics of Domestic Commerce in Contemporary China, Berkeley, CA: University of California Press. —— (1992) “Urban Entrepreneurs and the State: The Merger of State and Society,” in A.L. Rosenbaum (ed.), State and Society in China: The Consequences of Reform, Boulder, CO: Westview. Steinfeld, E.S. (1998) Forging Reform in China: The Fate of State-Owned Industry, New York: Cambridge University Press. Tanner, M.S. (1999) The Politics of Lawmaking in Post-Mao China: Institutions, Processes and Democratic Prospects, New York: Oxford University Press. Tong Daochi (1999) The Heart of Economic Reform: China’s Banking Reform and State Enterprise, Doctoral Dissertation, Santa Monica, CA: Rand Graduate School. Walder, A.G. (1986) Communist Neo-Traditionalism: Work and Authority in Chinese Industry, Berkeley, CA: University of California Press. —— (1989) “Factory and Manager in an Era of Reform,” China Quarterly 118, June. —— (1994) “Evolving Property Rights and Their Political Consequences,” in D.S.G. Goodman and B. Hooper (eds), China’s Quiet Revolution: New Interactions between State and Society, New York: Longman Cheshire. —— (1998) “The County Government as an Industrial Corporation,” in A.G. Walder (ed.), Zouping in Transition: The Process of Reform in Rural North China, Cambridge, MA: Harvard University Press. Wang Han Sheng and Liu Shi Ding (1995) “Silk Mill,” in J. Wong, R. Ma, and M. Yang (eds), China’s Rural Entrepreneurs: Ten Case Studies, Singapore: Times Academic Press. Wank, D.L. (1995) “Private Business, Bureaucracy, and Political Alliances in a Chinese City,” The Australian Journal of Chinese Affairs 33.
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Wedeman, A. (1996) “Corruption and Reform,” in Kuan Hsin-chi (ed.), China Review 1996, Hong Kong: Chinese University of Hong Kong Press. —— (1997) “Looters, Rent-Scrapers, and Dividend-Collectors: Corruption and Growth in Zaire, South Korea, and the Philippines,” The Journal of Developing Areas 31(4). —— (2000) “Budgets, Extra-Budgets, and Small Treasuries: The Utility of Illegal Monies,” Journal of Contemporary China 9(25). Whiting, S.H. (1993) “The Comfort of the Collective: The Political Economy of Rural Enterprises in Shanghai,” paper delivered at the Association of Asian Studies Annual Meeting. Young, S. (1995) Private Business and Economic Reform in China, Armonk, NY: M.E. Sharpe. Yuan Peng (1994) “Capital Formation in Rural Enterprises,” in C. Findlay, A. Watson and H.X. Wu (eds), Rural Enterprises in China, New York: St Martin’s Press. Zweig, D. (1997) “Rural Industry: Weathering the Storms of Central State Policy,” in D. Zweig (ed.), Freeing China’s Farmers: Rural Restructuring in the Reform Era, Armonk, NY: M.E. Sharpe. —— (1997) “‘Developmental Communities’ on China’s Coast: The Impact of Trade, Investment, and Transnational Alliances,” in D. Zweig (ed.), Freeing China’s Farmers: Rural Restructuring in the Reform Era, Armonk, NY: M.E. Sharpe.
6
The political business of development in South Korea Peter Wad*
State, business, and economic development The transformation of South Korea in the post-Second World War period is significant for at least five reasons: the country went through an industrial revolution and, by 1996, had joined the ranks of the OECD. This spectacular economic development occurred under a system of authoritarian rule and through the use of chaebols (big conglomerates). With economic development, a democratic system emerged, replacing authoritarian rule. Under democratic rule, Korean big business has not managed to capture control of the state. Finally, in spite of its economic strength, Korean chaebols have been targeted by the state for corporate restructuring and downsizing. In view of Korea’s exceptional economic success, the “Korean model” held a pivotal place in the enduring debate on the proper drivers of economic development – state versus market – until the onset of the East Asian financial crisis in the late 1990s. The Korean model, characterized by a strong authoritarian state, selective industrial policies, a tightly controlled financial system providing resources for massive upgrading of industrial investments, and an oligopolistic market economy dominated by huge diversified conglomerates, became the quintessence of a successful developmental political economy. During the 1990s, the debate on the Korean model divided analysts into at least three camps. First, the Korean model was exceptional, but with in-built structural weaknesses and the economy performed well only owing to a unique combination of conditions (World Bank 1993). Second, the model was efficient for developmental purposes in a situation of backwardness and catching-up (Chung et al. 1997; Kim E.M. 1997; Matthews 1998). Third, the model was appropriate, but it was partly dismantled during the 1990s, and this deregulation contributed to the 1997 debacle (Chang et al. 1998; Shin 2000). The contention we make here is slightly different. We argue that although the form of the Korean model had changed with the emergence of democracy, political business – that is, the basic pattern of links between politicians and capitalists – continued during the 1990s. Under authoritarian rule, highly leveraged chaebols were selectively created and sustained with state support.
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This pattern of political business ties was built on political trust, involving a situation where influential politicians and the state guaranteed risky investments by chaebols. With the rise of democracy, two important transitions occurred. First, the financial system was reconstituted, enlarged with a subsystem based on commercial trust, where capital mobilization was legitimated by commercial expectations. Second, the nature of political business ties changed, with capital securing greater autonomy from the state and more influence in determining executive decisions by funding politicians. Since political business ties remained in place, the restructuring of chaebols, to deal with their high debt–equity ratio and to get chaebols to focus on core business, was not effectively implemented. The state’s ineffectiveness in dealing with these structural problems within chaebols coupled with civil protests over political business collusion, resulting in uncertainty of state support for insolvent big businesses in 1997, rapidly undermined confidence in the Korean economy. We propose to trace, through the evolution of the Korean model, the changing nature of the links between the state and capital.1 Our main concern is a comparison of the role of political business during the transformation of the Korean model, from an authoritarian, protective, and interventionist state to a democratic, regulatory, and competitive system. Our methodology is an analysis of industrial policy during authoritarian rule, as implementation of this policy best reflects the interaction between politics and business during that era. We also provide case studies of the largest chaebols, as the development of these huge enterprises best highlights how political business ties have evolved following the transition to democracy. We contend that while the rise of big business posed a serious threat to the democracy emerging in Korea, the chaebol business system also appears as one core factor behind the scale of the 1997 crisis. The downsizing of the chaebols into more competitive businesses and less powerful actors is the decisive resolution to the economic crisis and the precondition for the emergence of a viable Korean democracy. We begin our study by tracing the history of the Korean model of economic growth, before dealing specifically with the development of the ties between the state and the chaebols; in the process, we outline the rise and decline of the authoritarian developmental state. We then provide a critical examination of Korean industrial policy and its effectiveness, addressing also the evolution of the chaebol business system. In the penultimate section, we deal with what we see as the main issue of contemporary political business in Korea: the character and effectiveness of Korean business policy, that is the policy addressing the issue of corporate governance which is more or less identical with the so-called “chaebol issue.” Finally, we review the criticism of the collusive and corrupt practices within the Korean model and the impediments to chaebol restructuring due to corruption and concentration of economic power, and the implications of this for the promotion of democratic politics and effective industrial and business policies.
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Politics of the Korean model History of the Korean model The Korean model evolved during the 1960s and 1970s. The model rests on three pillars: ●
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A strong authoritarian state with centralized agencies in charge of economic and industrial policy formulation, implementation, and supervision, aimed at promoting rapid economic growth and industrialization. A state-controlled financial system providing “policy loans,” that is loans at highly favorable rates, and other financial support, together with policy guidance to selected sectors, industries and companies. Big privately owned industrial conglomerates (chaebols) with aggressive and diversified investment policies, developed through state concessions and debt financing, without cross chaebol business relations but socially related and coordinated through business associations and informal networks.
The Korean model was created during the Park Chung Hee regime (1961– 79). The model was based on a strong state characterized by an authoritarian political system that had power over the financial system to influence the pattern of growth of chaebols. Although such a model, where political power was concentrated in the office of the executive, was presumably crucial for promoting rapid economic growth, the economy was not crisis-free. Around 1970, the Korean economy faced severe financial problems involving massive corporate insolvency and bankruptcies. The Korean government, with the support of the International Monetary Fund (IMF), rescued the ailing firms by bailing out troubled chaebols and restructuring their debts. These bailouts were followed up with a reorganization of the financial sector – it came close to a nationalization of this sector – which led to a strengthening of the formal sources of capital (banking, stock market, and other formal financial institutions like insurance, investment, and finance companies) at the expense of the informal curb market. This initiative also created precedence for bailouts that caused a serious moral hazard in the chaebol economy, a phenomenon baptized “too-big-to-fail” (Clifford 1994; Yoo 1998). A second crisis occurred in 1979, owing to the accelerated investment policy under the Heavy and Chemical Industrialization (HCI) Program, undertaken in a global context of stagflation (which affected Korean exports) and the second oil crisis. This economic crisis evolved into a political crisis with the assassination of President Park. Apart from requiring IMF intervention for a second time, this change of power in government in Korea took place in an international era of neoliberal economic policy. The Chun Doo Hwan regime (1980–87) appeared to lean towards the stabilization and structural adjustment programs recommended by the IMF, the World Bank, and the US government. Beneath the rhetoric, however, the Korean government relied
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primarily on a non-conventional approach to stabilization and adjustment, involving once again governed and investment-driven rapid economic growth (Casse 1985: 80–2). Having resolved the crisis, the regime introduced a more stringent financial and monetary policy, conceding to the pressure from international actors, especially the United States. In the early 1980s, the government launched a privatization program that involved the financial sector. Commercial banks were privatized in the early 1980s, but the government continued to control these banks indirectly (Fields 1995: 94–5). The government moved to support small and medium-sized enterprises (SMEs) and to rationalize or merge chaebols that had either not performed well or were located in six “overinvestment” industries. The SME initiative crumbled (Casse 1985: 82). The chaebol rationalization exercise, involving the government’s decision that 26 chaebols divest 166 of the 631 firms they owned and that the 30 largest chaebols each choose three industries as their core areas of business, was not implemented in full or backfired (Kim Y.T. 1998: 105–6). The chaebols responded with a two-way process of selling and buying, divesting or merging 190 companies while acquiring 120 new companies. In the end, the government abstained from using its financial clout to dismantle chaebols, except in one outstanding case, the dissolution of the Kukche chaebol in 1985.2 The second half of the 1980s was marked by persistent pressure on the state by labor movements and social reform groups to regulate the business practices of the chaebols. The chaebol issue was addressed by the Roh Tae Woo administration (1988–92). Apart from increasing state pressure on the chaebols to narrow their business portfolio, Roh attacked the practice of cross shareholdings and cross investments among chaebol subsidiaries while the use of holding companies by business groups was made illegal in 1987 (Fields 1995: 126–7; Yoo 1998). Roh also introduced the “real-name” policy in order to prevent hidden transactions and to disclose ownership patterns of the chaebols, which had been using straw men to hold equity in order to shield extent of wealth concentration. Except for the government’s land reform policy, which was also furiously opposed by the chaebols that owned large tracts of land that was used for speculative purposes, the Roh government lost momentum in dealing with these issues involving chaebol reform. The Kim Young Sam administration (1993–7) continued to advocate chaebol specialization and dispersion of ownership (Lee 1997: 158). In the mid-1990s, however, Kim dropped this policy, along with his attempt to separate ownership and management in the chaebols. The mantra of the Kim government became “globalization,” most significantly implemented through liberalization of the financial markets and the increasing openness of product markets to foreign competition. Kim also abolished the five-year planning process and merged the powerful Economic Planning Board (EPB) with the Ministry of Finance. Curtailing the interventionist Korean state and promising to abstain from intervening in the market, Kim deregulated the Korean model of developmentalism while simultaneously introducing a new regulatory framework to monitor state–business relationships.
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The Kim Y.S. administration marked an era of state–business segregation. The interaction between the government and the corporate sector was now mediated via the financial system. This meant that access to funds by the corporate sector was now increasingly interlocked with international financial flows. The chaebol-dominated business system was also still based on political trust (“too big to fail”), although business transactions increasingly assumed commercial trust.3 When the government was prevented from or chose not to bail out ailing chaebols in 1997, the following uncertainty in a moment of regional financial turmoil triggered the financial crisis in Korea. The economic meltdown in Korea by the end of the year forced the government to request for IMF intervention to rescue the economy. The Kim Dae Jung administration, which came to power in 1998, inherited an insolvent chaebol community.4 In alliance with the IMF and the United States, the new government obtained the leverage to re-introduce an interventionist policy with the objective of restructuring the corporate sector within a market-oriented regulatory framework. The Kim D.J. government aimed at downsizing the chaebols in order to create a more balanced state– business relationship, with an independent financial system and more internationalized market institutions. The Kim D.J. government decided on a four-pronged reform process involving the restructuring of the corporate, financial, public, and labor sectors. The reform process was to be undertaken through mutual help and negotiation while only relying on certain extreme measures, for example retrenchment, as a last resort (The Korean Herald 22/2/ 99). Although this political strategy of social corporatism within a democratic and market-oriented framework fell apart in 1999, the Korean economy subsequently bottomed out and resumed rapid growth. The jury is still out on whether the economic upswing is sustainable without profound economic reforms. In brief, we contend that the Korean model is basically understood as an authoritarian developmental model, which prevailed from 1961 to 1987 and peaked during the 1970s with the promotion of state-driven heavy and chemical industrialization (HCI) under the Park regime. The evolution and devolution of this model took place over five periods: ● ●
● ● ●
The authoritarian predatory regime of Syngman Rhee (1948–60). The authoritarian developmental regimes of Park (1961–79) and Chun (1980–7). The democratizing developmental regime of Roh (1988–92). The democratic deregulatory regime of Kim Y.S. (1993–7). The democratic re-regulatory regime of Kim D.J. (1998– ).
Politics of the authoritarian developmental model The core actor behind the establishment of the authoritarian developmental model was the state and the outcome of economic and industrial policies
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rested on the capture and use of state power. The emergence of the nationstate and the roots of the chaebol system took place during the Syngman Rhee regime (1948–60). Rhee proclaimed the First Republic of Korea (ROK or South Korea) in 1948, triggering off the Korean War, from 1950 to 1953. This was a period of political appropriation of assets that had been nationalized by the Japanese during colonial rule. Several of today’s chaebols were established during this period, and these companies accumulated wealth through fraud, rentier behavior, and speculative transactions. With the government’s promotion of light import-substitution industrialization (ISI) and through economic protectionism, these companies prospered. With rising socioeconomic problems, the Rhee regime collapsed, replaced by Chang Myon’s short-lived Second Republic, from 1960 to 1961. Political power was seized by a group of younger officers from poor rural families during the May 16 coup in 1961. The coup paved the way for the establishment of a military dictatorship from 1961 to 1963, during which time the regime consolidated their political power by establishing the Korean Central Intelligence Agency (KCIA), the secret police. The new military regime, among other things, purged Rhee’s cronies of their illicitly appropriated wealth, an issue that had become public during the Second Republic. Following much external pressure and internal resistance, the military dictatorship turned itself into a civilian autocracy, constitutionalized through the Third Republic (1963–72) and the Fourth (“Yusin”) Republic (1972–9). General Park Chung Hee held the presidency of both republics. Although the office of the president was a very powerful institution within the constitution of the Third Republic, the president was allowed to hold office for a maximum of only two terms. In order to continue to hold office as president, Park amended the constitution, but he defeated Kim Dae Jung, the opposition candidate in the presidential election in 1971, only through fraud.5 Since Park faced recurring political and civilian opposition in the Third Republic, in order to strengthen his grip over power he declared martial law and drafted a new (“Yusin”) constitution for the Fourth Republic, which curtailed civil and political rights even more. However, even under the more repressive Yusin regime, the ex-military rulers could not eliminate all political and social resistance. When the economy declined in 1979, rifts among key power holders, over how to handle student demonstrations supporting labor protests against retrenchment, evolved into open intra-elite conflict. The KCIA director assassinated Park, martial law was declared, and the Prime Minister took over as Acting President, from 1979 to 1980. A new military dictatorship under Chun Doo Hwan seized power during a two-staged coup d’état between 1979 and 1980. Chun, the head of the military’s intelligence, first took control of the military, and after having bloodily repressed an uprising in Kwangju in 1980, acted against hundreds of politicians, bureaucrats, and businessmen affiliated with the Park regime. Chun then partly lifted martial law and established the Fifth Republic with himself as president, serving a seven-year tenure, from 1981 to 1988. On
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paper, the constitution was more democratic than the Park constitutions, but in reality suppression prevailed and dissident and student demonstrations continued. Although Chun launched an anti-corruption campaign, advocating the “real-name” policy to prevent hidden illegal transactions and illicit embezzlement, within a short period his family was caught up in a financial scandal, increasingly tarnishing his administration and highlighting the illegitimacy of his rule. Democratizing the authoritarian developmental model: 1987–92 The impact of the international detente between the superpowers in the middle of the 1980s and the fall of the Marcos regime in 1986 had an impact on the Chun regime. Domestically, this regime never overcame the stigma of the Kwangju incident, and when Chun announced that he might consider staying on as president after 1988 – he had promised to stay as president for only one seven-year term, as the new constitution dictated – the opposition against him was mobilized. During the ensuing political turmoil, Roh, Chun’s heir apparent to the presidency, saw no other way than to take the lead in the process of democratization. In June 1987, Roh announced democratic reforms and the enactment of a new constitution.6 By seizing the banner of democracy, Roh was able to win the election to hold the office of President for the period 1988 to 1992 in the Sixth Republic (Kim S. 1997: 1135–6). Although the political elite in the Chun regime returned to power through Roh, the democratization process that the new government was forced to adhere to led to the liberalization of the press and opened up more space for groups to participate in public opinion formation and electoral politics. When the opposition secured a majority in the National Assembly, the parliament, the Roh government was forced to institute investigations into the abuses of power and illicit appropriation of wealth that had occurred during the Chun regime. Roh’s victory in the presidential election in 1987 was secured because of the cleavages within the opposition and its main leaders, Kim Dae Jung and Kim Young Sam. The ruling elite managed to overcome their minority position in the National Assembly by merging the governing party, the Democratic Justice Party, with two opposition groups, the Reunification Democratic Party led by Kim Young Sam and the New Democratic Republican Party of Kim Jong Pil, a Park loyalist. The new merged party, the Democratic Liberal Party, was formed in 1990 and proved an affective alliance during the presidential election in 1992. The Democratic Liberal Party’s candidate for the presidency in the 1992 election, Kim Young Sam, ran against, among others, Kim Dae Jung of the Peace and Democratic Party and won the contest, considered the first free and fair election in Korea. In 1992, for the first time, a businessman, the founder of the chaebol Hyundai, contested the presidential election. During the long period of political struggles and move towards democrat-
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ization in the 1980s, the relationship between politics and business had evolved from one of collusion into one of conflict. Big business increasingly voiced dissent in public over government policies and called for deregulation. Eventually, the growing friction between big businesses and the government contributed to the desire by capitalists to enter party politics and contest elections at the parliamentary and presidential levels. Democratic regulatory models: 1992– The Kim Y.S. government purged the old guard within the military and put more effort than expected into dealing with corruption. The government endorsed the “real-name” policy, unveiling in the process the wealth of politicians and top bureaucrats and irregularities in the chaebols business practices. These disclosures led to mass resignations, legal suits, arrests, and convictions. Even the two former military presidents, Chun and Roh, were convicted of mutiny and corruption and sentenced to death and more than 20 years imprisonment, respectively (Kim S. 1997: 1140–1). In 1995, to mark a break with the past, the ruling party transformed itself into a new party, the New Korea Party, prompting Kim Jong Pil to leave the governing camp and establish his own party, the United Liberal Democrats. However, Kim Y.S.’s moral crusade reached an impasse in 1997 with the Hanbo scandal, which involved bribery of close presidential advisors and implicated even his son (Hahm 1997: 74). The Kim Y.S. administration ended in disgrace. Korea faced an impending presidential election when the financial crisis occurred in late 1997. This crisis became an important factor for the ascendance to power of a coalition of opposition parties and social movements calling for an end to corruption and political business collusion, primarily by restructuring the chaebols. The new anti-establishment government that took power was headed by the dissident par excellence, Kim Dae Jung, who was elected as president in December 1997 and took power in February 1998 for a five-year term.7 The Kim D.J. administration took power during an economic crisis. The scale of the crisis necessitated a government bailout of ailing firms. The government became the biggest domestic creditor, and two core agencies, the Financial Supervisory Commission and the Corporate Restructuring Coordination Committee, were established to deal with insolvent financial institutions and corporations (Shim 2000: 416; Yoo 1998: 26, 30). Kim D.J.’s administration established a tripartite advisory forum, comprising the government, two labor centers, and business associations, for consultation on reform policies. The first tripartite committee came to an agreement on reforms in early 1998 through the so-called “Grand Compromise.” While the public sector reform involved major reorganization and retrenchment, with the consent of the labor centers, labor market reform entailed retrenchments in combination with corporate restructuring of chaebols, the largest employer of domestic labor. With the consent of the chaebols, financial and corporate
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restructuring was launched under the control of the government (Yoo 1998). The “Big Deal” policy proposed business specialization by chaebols through mutual swaps of assets, that is subsidiary companies. Although the Kim D.J. model of tripartism involved the government, private sector employers, and labor movements, the trade unions became widely disappointed with the outcome of the “Grand Compromise” as they felt that they alone were burdened with all the pains of the reforms. With restructuring of the labor market, unemployment rose, reaching 2 million, or 9 percent, in the first half of 1999. Fierce struggles against retrenchments erupted with increasing employment insecurity related to “Big Deals” involving Hyundai (between mid-1998 and early 1999) and Samsung Motor Corporation (between end of 1998 and early 1999), and concomitant retrenchments, for example among Seoul subway workers during early 1999. The government responded fiercely to illegal strikes, arresting and jailing union leaders and activists. The two labor centers withdrew from the tripartite committee in 1999. However, when the Kia division of Hyundai struck a collective agreement between management and labor for three years, hopes emerged of the possibility of industrial peace and security of employment (Korea Herald 19/3/ 99). But strikes resumed in 2000, ahead of the national assembly elections, when the (state) creditors of the insolvent Daewoo Motor Co. voiced their intention to sell the company to foreign auto manufacturers. In January 2000, three months prior to the national assembly election, which was held on April 13, Kim D.J. reorganized his party to form the Millennium Democratic Party (MDP). Through the MDP, Kim D.J. secured control of 11 more seats in the national assembly, but his party’s total of 115 seats fell far short of a majority in the house. Out of a total of 273 seats, the MDP won only 115; no party, however, secured a majority in parliament (Keesing’s Record of World Events, April 2000). The election was taken to be a mid-term referendum of Kim D.J.’s economic reforms and the results were interpreted as a setback for the President. Changing politics of the Korean model It has been argued that the political culture in Korea is authoritarian, centralistic, and nationalistic, rooted in the legacy of the Chosun dynasty, while political parties are nothing more than a group gathered around a strong or charismatic leader (see Helgesen 1998; Steinberg 2000). Our brief history of Korean politics has indicated, however, that the political culture is not harmonious, characterized by subcultures and countercultures. A tremendous public concern for social justice, political legitimacy, and constitutionalism exists, and this has fueled the recurring dissent against authoritarian regimes. This conflict between state and society has been articulated in two ways. First, authoritarian regimes have sought legitimacy by shaping the constitution to their ends, by securing electoral confirmation of their govern-
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ment, and by purging former power holders and their clients after victory. Second, through the recurring conflicts within political institutions, for example between the president and the bureaucracy, and in parliament, between political parties and the executive. This conflict within political institutions has opened up political space for dissent while also contributing to the rise of factionalism which has undermined the ruling administrations, paving the way for a change of government. The need to promote rapid economic development has been the basic rationale for the existence of an authoritarian Korean developmental state. When this justification for authoritarian rule became redundant with economic development, Roh was compelled to embark on democratizing the political system. The politics of the old Korean model had outlived its day. Koreans, however, have since sustained dissent, owing mainly to the differentiation based on class and regionalism that has emerged. A major threat to Korean democracy at present is regionalism, which highlights deep-seated political cleavages in Korea, and which has been exploited by political parties and presidential candidates. Although an agreement on a transformation of the political system to parliamentarism had been reached between Kim D.J. and another prominent politician, Kim J.P., implementation of this political reform did not take place, probably because this reform would have resulted in a more decentralized political system. Moreover, a parliamentary system would probably have increased the influence of Korean political parties, which have been notoriously weak in the past, organized around strong political leaders and transformed at will. The paradox of the politics of the Korean model is that the strategy of authoritarian development generated a group of wealthy big businesses that posed a threat to democratic governance. In a political situation where national parties are weak, divisions based on regionalism provide ample opportunities for capitalists and corporate groups to influence parties, politicians, and state agencies. In the medium and long term, the consolidation of Korean democracy depends not only on political reforms but also on the effectiveness of the government’s business policy, involving restructuring of the chaebols. To understand why reform of the chaebol economy is fundamental to the consolidation of democracy, an analysis is required of Korean industrial policy and the development of big business.
Korean industrial policy State-led industrialization During the Park regime, the state introduced a tightly controlled economic policy to promote economic growth and industrialization. The state bureaucracy was subordinated to the Economic Planning Board (EPB) where planning, budgetary, and supervisory authority was centralized and which was, in turn, tightly controlled by the president. The EPB designed industrial,
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trade, and financial policies and was responsible for selecting and supervising specific sectors, industries, and chaebols as vehicles for rapid economic development. The industrial policies were packed in Five-Year Plans (FYP), a tradition started and aborted during the Second Republic. The FYPs emphasized export-oriented industrialization, taking textiles and garments as the prime industry, while various programs were introduced for sequential development of import-substituting industries (ISIs), which were encouraged to move towards exporting their products after capturing the home market.8 The Park regime took full control of the banking sector, capital flows and external exchange. The government then used the financial system to subsidize selected companies through policy loans with low or negative real interest rates, export subsidies, and import licenses for raw materials, technology, and machinery. Financial support was provided in accordance with developmental objectives and corporate competence (Moon 1999: 21). Restrictions were also placed on foreign direct investment (FDI) and the access of foreign transnational companies to the Korean market. Besides nationalizing commercial banks and controlling them administratively, the government established new state-owned financial agencies like the Korean Exchange Bank, the Bank of Medium and Small Firms and the Ex-Im Bank. In addition to these banks, the Bank of Korea (the central bank) and the Korean Development Bank had been established during the Rhee regime, but the Park regime subordinated the central bank to the minister of Finance through the Monetary Board (Moon 1999: 21). The Korean Stock Exchange (KSE) was established in 1956, but traded only shares of state-owned manufacturing firms and banks during the 1960s, until it took off during the 1970s (Fields 1995: 118). Private non-banking financial institutions (NBFIs) were delimited to assurance, insurance, security and corporate bonds. The economic development policy primarily benefited the chaebols that grew by leap and bounds into diversified conglomerates, forming an oligopolistic business structure. The financial reform in the early 1970s and again in the 1980s benefited the chaebols because they were better able to explore new opportunities and deliver collateral for credit from banks. The big business community, although subordinated to the state in many ways, was able to influence the formulation and implementation of policies, leading to what Kim Y.T. (1998: 64–6) called the creation of the “politics–economy collusion” between the state and the chaebols. Through government-arranged conferences or business associations, big businesses were able to voice their concern and the government sometimes listened. The state-led economic development strategy was inspired by Japanese corporatism, mercantilism, and even Marxist political economy, giving priority to economic growth, based on high levels of productive investment, economies of scale, and avoidance of social waste through elimination of excess competition. The overall strategy evolved into a form of “guided capitalism” with a vision of an “independent economy” (Chang 1994: 125–6). The vision of Korean state corporatism involved mobilization of the people in
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the war against economic backwardness, the reward of businessmen successful in export battles, the organization of factories into military-like units with workers as industrial soldiers and the reorganization of rural villages into the New Village Movement (Chang 1994: 126–7).9 In order to assess the success of the state’s capacity to implement its industrial policy, we focus on the passenger car industry, which was selected by the government for rapid development under its HCI policy and which involved some of the biggest chaebols. Industrial policy of the automobile industry Although passenger cars had been assembled from semi-knocked-down parts since 1962, the chaebol Daewoo had established the National Motor Company as early as 1937, renamed Saenara Motor in 1962, which was acquired by Shinjin Industrial Co. in 1965 in compliance with a state directive (Chang 1994: 154–5). Hyundai and Asia Motors joined the industry in 1968, but new entries were banned until 1972, when Kia was allowed to add passenger cars to its production of lorries. The Korean companies assembled knocked-down kits imported from Toyota, Ford, General Motors (GM), and Fiat. Shinjin had forged technical cooperation ties with Toyota from 1965, and when Toyota withdrew from Korea in 1972, Shinjin formed a joint venture, Saehan, with GM that same year. In order to develop genuine Korean models and brands, the state presented the Long-Term Plan for the Promotion of the Automobile Industry in 1974. When Asia Motors did not present any suggestions on how it would support this Plan, it was forced by the government to transfer its production facilities to Kia. New models were developed by Kia in 1974, Hyundai in 1976, and Saehan in 1977. Daewoo entered the industry in 1978 by acquiring the Shinjin shares owned by Saehan from the Korean Development Bank, which had bought the Shinjin equity when the firm faced a sales crisis. The Daewoo–GM joint venture, named Daewoo Motor Co. from 1983, was terminated in 1992 when GM withdrew from Korea, while Daewoo continued without foreign equity participation as the only Korean car-maker (Storey 1998). During the economic crisis in 1980, the state wanted to restructure the industry into one company to achieve economies of scale (Kim, L. 1997: 117). Hyundai and Daewoo were targetted for merger, while Kia was to be eased out from passenger car production to concentrate on commercial vehicles. However, while Hyundai and Daewoo managed to avoid the merger, and Kia was allowed to re-enter the passenger car production industry in 1987. Kia went on to form a minority equity relationship with Mazda in 1983 and Ford in 1986. If the Daewoo–Hyundai merger had been implemented, Daewoo had wanted to stop producing Korean model cars to concentrate on the production of GM model cars. In 1991, Daewoo Shipbuilding & Heavy Machinery produced a mini-car model. Hyundai Precision and Industrial went on to produce utility vehicles under license from Mitsubishi.
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Samsung decided to enter the automobile industry in the 1990s. To speed up its entrance into the industry, Samsung tried to implement a hostile takeover of Kia, but the authorities rejected it – a law forbidding hostile takeovers was in force until 1997. Perceiving a possible collusion between the Kim Y.S. government and Samsung, Kia offered other friendly companies minority equity participation. In addition to Ford and Mazda owning a combined total of 17 percent of Kia’s equity, Hyundai eventually took up another 10 percent stake in the company. Along with the equity owned by its employees, Kia ensured that friendly parties held at least 50 percent of its equity (Storey 1998: 120). Kia’s debt rose, however, owing to, among other things, diversified investments. In mid-1997, Kia defaulted on its loans. Although the creditor banks demanded that the Kia management step down, the senior managers declined to do so for months – Kia was not an ownermanaged chaebol. Finally, the government was forced to step in, putting Kia under receivership. The Korean Development Bank took a controlling 30 percent stake in Kia via a debt-for-equity swap and threw out the management (The Economist 22/11/97; Storey 1998: 120). Before any solution could be found to resolve Kia’s debt crisis, either through a merger with or acquisition by domestic or foreign companies, the new Kim D.J. government that had replaced the Kim Y.S. administration decided that Kia was to be sold by auction. Samsung made the highest bid for Kia in the first round, but the deal did not materialize owing to Samsung’s request for higher debt write-offs than the creditor banks could accept. In the second round, only the three Korean chaebols participated in the bidding, but still an agreement could not be reached. In the third round, Hyundai finally managed to acquire Kia. Samsung Motors was incorporated in 1995 to start production in 1998 with technical assistance from Nissan. Since the annual total sales of Korean cars in 1998 was the worst ever recorded, production of cars by Samsung never took off. The proposed deal between Daewoo and Samsung, encouraged by the government in 1998 and involving Daewoo obtaining Samsung Motors in exchange for another company, failed. Samsung threatened to put Samsung Motors under receivership, and it was subsequently nationalized. Daewoo itself was ailing, and when it defaulted on its loans in 1999, the creditors took control of the chaebol in order to sell the company’s various subsidiaries, including Daewoo Motor Co. As the sale of Daewoo Motor Co. to Ford and GM failed in 2000 owing to, among other things, trade union resistance against mass retrenchment, the company went into receivership. Hyundai Motor Co. emerged as the only viable Korean car manufacturer and strengthened its capability by allying with DaimlerChrysler. Hyundai, however, will not gain a monopoly in the automobile industry in Korea – as originally envisaged in 1980. Samsung Motors has been acquired by French Renault which also holds a controlling share in Nissan. This ensures the presence of a significant player in the Korean auto market besides Hyundai, and another one may enter, if the creditors finally manage to sell Daewoo Motor Co. to a foreign auto company. This event would mark a decisive break
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with the economic nationalism that has for decades legitimized the production of Korean model automobiles. Effectiveness of Korean industrial policy Our review of industrial policy through a study of the automobile sector indicates the major role played by the state in developing this industry, and that chaebols involved in this business had fared quite well until the crisis in the late 1990s. Since the state had played a major role in promoting certain chaebols in this sector, it was evident that implementation of industrial policy had been affected by regime change, thus possibly impairing the effectiveness of the policy. Kim E.M. (1997) argues that the Korean developmental state changed from being comprehensive during the Park regime to becoming limited during the Chun and Roh regimes, because of the internal contradiction of developmental policies and the shifting power relation between the state and the chaebols. Lee (1997) held that the Korean state under Kim Y.S. both decreased and increased business regulations in a confusing and ineffective way. The leap forward in the motor vehicle sector, through aggressive expansion and with the aid of FDI, helped Korean auto makers develop their expertise in the industry and later to capture foreign markets. Our review also suggests that the chaebol crisis occurred because of excessive investments undertaken through loans, precipitating the collapse of Daewoo in 1999. Kia’s debt crisis was similarly caused by excessive investments in unrelated diversification and tough competition at home and abroad. There is little evidence that the policy to upgrade productivity and quality during the early 1990s contributed enough to greater intra-firm and inter-firm efficiency, although it did increase internal performance of chaebol car manufacturers (Jeong 1999). The industrial policy was not monolithic in its choice of sectors to be developed. The electronics sector was also part of the HCI drive, but this industry was considered more advanced and difficult to develop without foreign direct investments. In spite of this, chaebols, like Samsung, without close relations to the Park and Chun regimes, managed to develop rapidly with little government support and guidance (Kim E.M. 1997). And within the electronics industry, industrial deepening took place based on international modes of business collaboration (original equipment manufacturing (OEM) and joint ventures) (Cyhn 1999). Cyhn’s argument, similar to that by Amsden (1989), is that late industrialization is a technology-learning process, and this will be based on transfer of technology, learning how to use and adapt technology and eventually learning how to learn and innovate. Some Korean chaebols, like Samsung, managed to develop this learning process. Korean industrial policies were partly successful, partly a failure. While some chaebols developed rapidly with much state support, other did so without similar assistance. Such support, or lack of it, depended on, among other things, the industry involved, the type of technological development,
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and the links between the political regime and the chaebol families. When industrial policy and bureaucratic capacity devolved during the 1990s, this benefited certain chaebols but weakened others. The core question now is how much of the positive and negative outcomes of industrial policy were caused by the corporate structure of the chaebols. In order to answer this question, an assessment is required of the chaebol business system.
The business of the Korean model Chaebol business The roots of the chaebol system emerged during the Rhee regime. Like the Japanese zaibatsu, ownership and management of the Korean chaebols was concentrated in the hands of a small number of families. The chaebols followed an aggressive growth strategy, based on economies of scale and diversification into related and unrelated industries, but they were not constituted around a general trading company or a bank, as was the case in Japan. On the contrary, the early chaebols were blocked from entering the banking sector with the nationalization of the banks during the Park regime. When the Chun administration privatized the financial system, the chaebols were prevented from securing majority control of commercial banks. Since the rapid, capital-intensive and diversified growth strategy adopted by chaebols during the 1970s and 1980s was financed primarily through loans and state support, not external risk capital or self-generated savings, this pattern of growth made them highly leveraged firms. Given their strategy of rapid growth and in view of the need to achieve economies of scale, the chaebols favored huge concentration of productive assets and export of their goods owing to the limited size of the domestic market. Their strategy of upgrading through sequential selection of more technological complex industries meant that the chaebols evolved into huge diversified business groups or conglomerates. The chaebols pattern of diversification was usually not in related technological and production areas, since their growth strategy was conditioned by the rationale behind the state’s industrialization policy. Moreover, in view of the limited autonomy of the financial sector and given the chaebols’ level of indebtedness, this made them highly susceptible to creditor influence, that is the state. The chaebols tried to counteract their financial dependence on the state by turning to non-bank financial sources when this was permitted, for example by increasingly securing funds from the stock market and by sourcing loans from abroad. Since the overriding concern of the chaebol families was to secure independent control of their business, they developed an intricate pattern of cross shareholding, which also permitted cross guaranteeing and cross financial transactions. This led to the emergence of an organized capital market outside the control of the financial institutions that became a crucial source of funds for chaebols. This pattern of ownership control and capital mobilization
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developed by the owner-managers of chaebols was virtually impossible to decipher from the outside, for example by banks and the state authorities. Moon (1999) presents data for the period 1970 to 1993 that shows that the private firms moved from informal financial sourcing (curb market) in 1970 to indirect financing (bank credits) in the middle of the 1980s before opting more for direct financing (stock market) in 1993. While informal financing went down from 64 percent of total financing in 1970 to 16 percent in 1993, credit financing moved from 26 percent in 1970 to nearly 50 percent in 1985 and down to 31 percent in 1993. Direct financing rose from 10 percent in 1970 to 26 percent in 1985 to peak at 53 percent in 1993 (Moon 1999: 13). Since the 1970s, the level of indebtedness of the chaebols was high in comparison to US but not Japanese firms (see Fields 1995: Table 4.5; Shin 2000: Figure 9, Table 4). The debt–equity ratio of Japanese manufacturing firms was 4:1 during the 1970s, while the ratio of Korean manufacturing firms was 3:1 and US firms below 2:1. While the debt–equity ratio among Japanese firms went down to 3:1 during the early 1980s, before falling further to below 3:1 in 1985, the ratio of the Korean firms peaked at nearly 490 percent in 1980, returning to the 3:l level during the following years. Except for the crisis years 1980 to 1981, Korean firms maintained a stable debt–equity ratio of between 300 and 400 percent. From 1989 to 1996, the debt–equity ratio of the leading 30 chaebols was around 400 percent, but this figure increased in 1997, the year of crisis, to 450 percent before escalating further to 600 percent in 1998 (Yoo 1998: Table 9). The state’s use of a limited group of companies to promote its industrialization drive, and its requirement that big business ultimately be involved in mass production of goods for export, resulted in a partnership between the state and chaebols as well as concentration of income and asset in the hands of a select minority. Since the wealth accumulated by the chaebol families was partly subsidized by state, the collusion between these families and the state came to be seen by the public as an arrangement that was highly dubious, if not illegal. Public pressure increased for the separation of ownership from management, and for public incorporation of these firms and dispersion of chaebol shares. As the chaebols had developed into huge conglomerates where much economic power was concentrated, these large enterprises were able to resist and challenge state policies that sought to reform corporate ownership patterns. The emergence of chaebols and consolidation of their economic power can be illustrated through case studies. The top four chaebols, according to assets in 1997, that were also noted for their influence on business associations and the political system were Samsung, Hyundai, LG, and Daewoo. We concentrate our study on the two most prominent chaebols, Samsung and Hyundai. Samsung Lee Byong Chull founder of Samsung, the oldest chaebol, was from the same region – Taegu-North Kyongsang – as Presidents Park, Chun and Roh. Lee
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came from a landlord family and was educated in Japan. He started a small rice mill in Taegu in 1938, but lost his fortune during the Korean War. Lee reappeared in the 1950s, when he set up the Samsung Trading Company and acquired Cheil Sugar and Cheil Wool Textiles through government favors. By exploiting the opportunities that opened up during the government’s exportled drive in the 1960s, Lee’s business group became the largest chaebol (Kim Y.T 1998: 83–4). Lee, however, managed his group in a more conservative manner and was less risk-prone than Hyundai and Daewoo. Daewoo, incorporated in 1967 under Park, managed to secure close ties with succeeding political regimes (Chun and Roh), contributing to its rapid rise and emergence as one of Korea’s leading chaebols. Samsung clashed with the Park regime in 1966 when one of its subsidiaries, the Hanguk Fertilizer Company, was accused of illegally importing forbidden goods for production (Kim E.M. 1997: 132). In response to public outcry, Park forced Samsung to hand over Hanguk to the state by arresting Lee’s son. After this incident, Lee resigned as chairman of Samsung, and the company decided to keep the state at arm’s length; consequently, Samsung lost close contact with the ruling elite. In the 1970s, even though Samsung joined the HCI drive later than other chaebols, it managed to capture a strong position in the shipbuilding and heavy machinery sectors. During the high-technology drive of the 1980s, Samsung took the lead in the semiconductor and electronics sectors, although it relied more on foreign equity participation than the other chaebols (Kim E.M. 1997: 132). The founder died in 1987, and his third son, Lee Kun Hee, became the leader of the group. Lee Kun Hee introduced Western-oriented management reforms (the “Second Foundation”) and spun off several companies to relatives, but the family controlled the entire group by way of foundations, cross shareholding and management of core companies (Far Eastern Economic Review 13/5/1993). During the 1992 presidential election, Samsung contributed heavily to Kim Y.S.’s campaign. After Kim Y.S. was elected president, in 1995, Samsung finally obtained government permission to enter the automobile sector. As already mentioned, Samsung had been denied entry into the automobile sector by the government through illegal bureaucratic obstruction (Koo 1998: 38). Samsung, however, had to agree to locate its manufacturing plant in Pusan, the home town of the president. The project began production in 1998, just before the onset of the worst auto market contraction in decades. The venture, Samsung Motors, inevitably, ran into serious problems, and the company was acquired by Renault. Samsung retained 20 percent of Samsung Motors’ equity while creditor banks held another 10 percent of the shares (Far Eastern Economic Review 4/5/2000). In line with the business policy of the Kim D.J. government, the Samsung group moved to reduce its debt–equity ratio. The group’s main business area is electronics, being the world’s leading manufacturer of memory chips, but it is still very diversified, having affiliates in numerous economic sectors, including shipbuilding, chemicals, insurance, publishing, and broadcasting.
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The development of Samsung had been achieved through a combination of exploiting opportunities provided by the state for rapid industrialization, avoiding extensive state–business collaboration under regimes which were hostile to the Samsung owner-family, and by forging joint ventures with foreign firms in technologically sophisticated business areas such as consumer and industrial electronics. Hyundai The Hyundai group, also one of the older chaebols, is owned and managed by the Chung family, headed by Chung Ju Yung, who founded the company as Hyundai Construction Company in 1947. Chung came from a poor peasant family, and after completing his education at primary school level, he established a small rice retail shop in Seoul in 1937 and an auto repair shop in 1940. He developed his enterprises through construction contracts in Korea from the US military and the government during the 1950s, before venturing abroad to Vietnam in the 1960s. The Hyundai group grew tremendously during the HCI period of the 1970s, taking on huge heavy industry projects at home and construction projects in the Middle East on the request of the Park regime. Although Hyundai was not among the top 10 chaebols in 1965, by 1975 it was listed at number 3, moving up a notch in 1985, before achieving the status of the largest chaebol in 1993 (Fields 1995: Table 2.2). The Hyundai group was part of the “TK Mafia” (Fields 1995: 40). The group built its manufacturing base in Ulsan, also named “Hyundai city.” Chung was close to Park, but lost his access to the state when Chun became president. Chung eventually came under some pressure from Chun to give up some of his assets, which Chung handed over to his kinsmen. Chung subsequently stepped down as managing director in 1986, delegating power in leading firms in the Hyundai group to his family. His younger brother, Chung Se Yung, became group chairman and took management control of Hyundai Motor Company (Fields 1995: 40). Under the Roh regime, the relationship between Chung and the president worsened over Roh’s chaebol-bashing policy and especially over land ownership legislation. In 1988, Chung testified that he had donated huge amounts of money to the funds set up by Park, Chun, and Roh which was used for election campaigns and other political campaigns as well as for personal expenditures. Unlike the owners of other chaebols, Chung’s family was active in politics. One of Chung’s sons, Chung Mong Jun, was re-elected to the National Assembly in 1988. Chung Ju Yung himself ventured into politics, establishing the Unification National Party (UNP), which won 10 percent of the seats in the National Assembly in 1992. With Chung emerging as an opposition politician, the government soon began intimidating him, acting through the tax authorities. The Hyundai group was also fined nearly US$180 million for illegal stock transactions, while commercial banks stopped providing loans to the company in August 1991 (Lee Y.H. 1996: 164–6). When Chung became a
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candidate in the 1992 presidential election, the authorities mobilized additional agencies to investigate Hyundai. The Office of Bank Supervision and Examination, the Korea Foreign Exchange Bank, and the Public Prosecutor’s Office all commenced investigation into the group’s activities. Chung’s son and the vice-chairman of the Hyundai chaebol were subsequently detained on charges of tax evasion. During the presidential election, Chung received only 16 percent of the votes, and withdrew from active politics. Before this defeat, the government had abstained from dismantling his chaebol, but the Kim Y.S. administration continued to harass Hyundai until 1995 (Kim Y.T. 1998: 142–3; Lee Y.H. 1996). The situation improved under the Kim D.J. administration, when Chung had the opportunity to pursue business opportunities in North Korea in the wake of President Kim’s “sunshine” policy towards its northern neighbor. The Hyundai chaebol eventually launched a strategy to split the conglomerate into several mini-chaebols, run by different lines of the Chung family. The brother of Chung Ju Yung and his family were removed from the core business of Hyundai group which were to be managed by two of his sons: Chung Mong Koo became chairman of Hyundai Motor and Chung Mong Hun became the head of the electronics and construction units. These two heirs apparent battled for Hyundai’s core financial unit, Hyundai Securities, and the battle was settled unilaterally by Chung Ju Yung, appointing Mong Hun as the chief executive of the entire Hyundai chaebol (Far Eastern Economic Review 6/4/2000). One of the core companies of the Hyundai group Hyundai Engineering & Construction, is, however, heavily indebted and came close to receivership in 2000. Changing business of the Korean model The case studies and other evidence indicate four things. First, response to government initiatives and state support had a bearing on the rate of growth of chaebols. Second, being too closely associated with one president made the chaebol an easy target for the next regime, but then again a potential ally for the third regime, and such shifting alliances might also be influenced by the generational succession of owner-managers within the chaebols. Third, when adopting strong opposition against a regime, a chaebol encountered obstacles, risks, and uncertainty in business, and no chaebol leader succeeded in securing direct or indirectly control of the state. The chaebol ownerfamilies suffered from a devastatingly poor reputation among the Korean people. Fourth, the pattern of growth of chaebols led to the emergence of highly leveraged businesses that depended heavily on formal bank and nonbank financial institutions, including the stock market, for financing of its activities. Kim E.M. (1997: 68–77) argues that although the largest chaebols diversified from a core business to every important sector as a response to government industrial policy, diversification also became an important
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strategy to increase their independence from the state. Moreover, during the rise of the chaebols, unrelated business diversification was not viewed as a bad business strategy. On the contrary, it was mainstream thinking, with diversification being seen as sound risk dispersion. It was only during the 1980s and 1990s that this pattern of corporate growth came under heavy criticism; the new mantra called for core business strategies, based on the core competence of the firm (Davis et al. 1994; Ludvigsen Associates 1998). As the economic power in the chaebols increased, the main legal framework developed to check their influence was the Fair Trade Act, enacted in 1980 but remaining ineffective until amendments to this Act were introduced from 1986. The amendments prohibited the use of holding companies, restricted the practice of cross investments and cross debt guarantees and regulated internal transactions among companies in the chaebol groups. Restrictions were also placed on investments in non-chaebol, independent companies and on the voting rights of stocks in subsidiaries owned by the chaebol’s financial and insurance companies (Lee and Lee 1996: 34–5). Other important regulations were introduced: for example, the credit rationing system was tightened against the chaebols, to exclude chaebol general trading companies from obtaining policy loans.10 The specialization policy, introduced to control diversification of the chaebols, required these firms to select two or three core industries depending on chaebol size. Professional corporate management of chaebols was encouraged, with demands on dispersion of corporate ownership, separation of ownership from management control, and increased transparency of corporate management. Under the privatization policy, chaebols were prevented from acquiring state-owned enterprises (SOEs) (Lee and Lee 1996: 36–7). In spite of these attempts to check the activities of the chaebols during the recession in the early 1990s, the government was compelled to limit these reforms until the economy resumed high growth. This stop–go policy of chaebol containment revealed the inability of the state to deal effectively with big business. The chaebols continued to grow and diversify, increasing their level of economic power causing growing concern among the ruling elite and the population. Although Kim Y.S. tried to enhance his popularity by charging chaebol leaders with corruption, bribery, and illegal transactions, few were convicted because, as the attorney general explained, “the imprisonment of leading businessmen could endanger the economy and jeopardize Korea’s position in overseas markets” (quoted in Kim Y.T. 1998: 145). The inability of the government to deal with corrupt chaebol owners reinforced the extent of these firms influence over the Korean economy. The 1997 financial crisis created an opportunity for trimming the power of the mighty chaebols. With the support of the IMF, the Kim D.J. administration embarked on a policy to enforce corporate governance in Korean business (Matthews 1998). The policy deals with eight aspects of the chaebol business group (Koo 1998; Yoo 1998):
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Peter Wad increased transparency (for example, combined financial statements of the entire group of companies) protection of minority shareholder rights strengthening of corporate boards and participation of outside directors elimination of the use of holding companies on certain conditions and the institution of the “Chairman’s Office” (non-existent in legal terms) opening up possibilities for mergers and acquisitions involving domestic and foreign capital as a means of corporate control restrictions on intra-group transactions like cross shareholdings and debt-payment guarantees reduction of corporate liabilities to equity ratios through increased equity capital and sale of subsidiaries increased chaebol specialization through “Big Deals,” involving company swaps between chaebols to concentrate industrial capacity in specific industries.
The government’s implementation strategy involved a two-pronged process: the government, besides delivering the regulatory framework, took charge of the restructuring of both the financial and the corporate sectors. Following the restructuring, the government would be responsible for regulating the financial sector, while the financial sector would monitor the corporate sector. However, the restructuring of the financial sector would make financial institutions quasi-shareholders of the (indebted) companies. The potential danger of corporate restructuring in this manner was that given the burden of debts of some companies, the takeover of these companies by banks could endanger the financial sector. The conduct and outcome of the restructuring of these sectors so far has been mixed, far from the sweeping transformation of the financial and corporate landscape heralded by the Kim D.J. government. The financial restructuring proceeded quite well, including dealing with the problem of bankruptcies and implementing mergers, but the acquisitions to be undertaken by foreign financial institutions have by and large failed. The authorities have been unable to privatize three large commercial banks (Hanvit, Cho Hung, and Seoul Bank) and the 16 banks lost US$4.5 billion in 1999 owing to the collapse of the Daewoo chaebol (Far Eastern Economic Review 20/4/2000). Moreover, although Korean financial institutions differ greatly in terms of financial strength, they all have a fragile financial base and recorded huge net losses in 1998. Apart from this, the net losses of the 10 largest chaebols doubled in 1998 compared with 1997, though these groups’ debt–equity ratios declined by a third from 1997 to 1998 (Korea Herald 16/3/99, 17/3/99). The total debt of the more than 400 public-listed companies had increased by 50 percent in mid-1999 compared to the pre-crisis level, while the debt–equity ratio of larger firms had declined to the politically stipulated level of around 200 percent (Far Eastern Economic Review 20/4/2000). While the government claimed that 11 of the 30 biggest chaebols have been dismantled (Korea Herald 22/2/99), the chaebols have resented the
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government-led restructuring process, viewing it as a return of government intervention in the corporate sector. The chaebols seem to perceive the government’s policy as an attempt at depriving the chaebol families of management control of their enterprises or even totally abolishing the chaebol institution. The families of several “reform-shy” top 10 chaebols, especially SK, Kumbo, Hyundai, LG, and Samsung, appear to have tightened their control of their firms by increasing their equity ownership, mainly through cross shareholdings within the group (Korea Herald 13/3/99). A notable exception is the owner of Ssangyong, who reduced his ownership equity from 36 percent to 9 percent, but this chaebol has also been hard hit by the bankruptcies of its subsidiaries. The government-led restructuring of the financial and corporate sectors would probably never have been implemented if the financial crisis had not pushed the chaebols to the brink of collapse. Having established new legal instruments, the government has been able to overcome the resistance by chaebol families to the government’s corporate restructuring endeavors, especially regarding ownership and management control of these business groups. Moreover, the collapse of the Daewoo chaebol in 1999, which has proved that no chaebol is “too big to fail” any longer, has legitimized the government’s restructuring policy, giving hope for the emergence of a new, more just political and economic environment.
Corruption, “cronyism,” and party politics State, business, and democracy The authoritarian developmental Korean model provided very little space for political parties, civic groups, and labor organizations to mobilize or articulate themselves effectively. The two core actors, the state and the chaebols, operated as clearly separated social groups in the sense that businessmen very seldom turned into high-ranking politicians. State officials usually took up positions in the financial and corporate sectors after leaving the public sector (Hwang 1997; Kim Y.T. 1998). This exclusion of businessmen from politics was caused by a number of factors. The image of the chaebols had been tarnished by the experiences of the 1960–1 student “revolution” because of “the illicit wealth accumulation” episode. The collective decision of the Federation of Korean Industries (FKI), the association of big business, to stay away from politics in the early 1960s was similar to the position adopted by the Japanese Keidanren. Finally, capitalists were aware of the lack of political clout among political parties and other state bureaucracies compared to the office of the president and the EPB (Hwang 1997; Kim Y.T. 1998: 172–3). However, a set of formal and informal networks of communication and exchange of resources and services evolved between this state–chaebol border, facilitating the mutually beneficial ties that subsequently evolved. Analysts have noted that the chaebols achieved greater leverage vis-à-vis
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the state during the democratization process. Lee Y.H. (1996) argues that an authoritarian regime is not necessarily more insulated and autonomous from society than a democratic state, and that a democratic state therefore can be even more effective in dealing with big business. However, when analyzing the state–chaebol relationship during the transition from authoritarian rule to a democracy in the period 1980–93, Lee Y.H. notes that Chun’s anti-chaebol policy became “enfeebled” along the way, not because of a changing industrial policy, but “due to the need of the ruling party for the support of the chaebol in preparing for the forthcoming elections and the economic euphoria which pervaded Korean society during the latter part of the Chun regime” (Lee Y.H. 1996: 159). Yoo (1998) also argues that the balance of power between the state and the chaebols shifted in favor of the latter because of the extent of economic influence of big business. With the decline of the strong state, government leaders were also increasingly subject to public criticism by businessmen (Yoo 1998: 9–10). For example, Yoo (1998: 10) points out that leading businessmen, including Samsung’s Lee Kun Hee, had “warned politicians of potential retaliation through discretionary use of political contributions.” Undoubtedly, the chaebols represented a new challenge to democratization because they possessed sufficient economic means to influence the mass media via ownership, advertisements, etc. (Steinberg 2000: 221); to bribe politicians and bureaucrats if necessary; to fund political campaigns of political parties; or to establish and sustain their own political party. The potential that chaebols had to transform economic power into political power account partly for the resilience of the chaebols during the Chun, Roh, and Kim Y.S. regimes from the 1980s until the onset of the crisis in 1997. Interestingly, however, the issue which triggered off the democratization process, and which continues to have an impact on Korean society, is the legitimacy of the Korean form of political business, popularly referred to as the “politics–economy collusion” or “Jongkyong yuchak” (Kim Y.T. 1998: 173). This term is a euphemism for widespread corruption, fraud, and bribery, at least according to public perception. The “politics–economy collusion” debate has raised two pertinent issues. First, the legitimacy of the chaebols, given this “collusion” (Janelli 1993). Second, whether corruption is part and parcel of the Korean model, or whether it declined with the rise of the authoritarian developmental model and recurred with the demise of that model. There are at least two major opinions on this issue of corruption and the Korean model among researchers. One group of researchers (Han 1995; Kim B.S. 1998; Chang K.S. 1999; Yoo 1997; Steinberg 2000) argue that corruption is part and parcel of the Korean model and is not a recent phenomenon that has emerged with the dismantling of this model. According to a study by Han (1995, cited by Kim B.S.1998), corruption has been massive during Korea’s contemporary history, including in the 1990s, as suggested by the collapse of the Seongsu Grand Bridge and the Sampung Department Store in this decade. Other corruption cases cited by Han include the Hanbo scandal which
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implicated Kim Young Sam, the Uijongbu district court scandal and the Seoul National University professors’ scandal. Han attributes the rise in corruption to being a consequence of the “rush-to industrialization” process. Kim B.S. (1998) holds the view that corruption was not pervasive during the early Park regime, but during the rise of the chaebols in the 1970s, these business groups coopted and bribed state officials to secure access to policy loans. By the mid1980s, political business relationships had impaired national industrial policy or had become counterproductive (Kim B.S. 1998: 51). Kim B.S. (1998) pays tribute to Kim Y.S.’ attempts to weed out corruption in the early years of his presidency, but points out that anti-corruption policies have to deal systematically with all aspects of corruption: the incentives, the opportunities, and the risk of corruption. In this regard, Kim Y.S. did not undertake effective implementation of anti-corruption measures. Chang K.S. (1999) takes “political collusion” between chaebols and politicians as a structural characteristic of what he terms Korea’s “compressed modernity.” According to Chang K.S. (1999: 18), chaebol’s risky political collusion with authoritarian politicians, usually decided in clandestine meetings of the owning head, his family members, and some loyal managers, caused unavoidable costs of political and legal punishment by each subsequent political regime as each new leader tried to purify himself from the wrongdoings of his political predecessors. . . . Nonetheless, chaebol’s collusion with political dictatorship and familybased despotic corporate control, among others, have left South Korea’s capitalist economy totally devoid of cultural legitimacy, and this moral defect in turn strengthens chaebol’s reliance on authoritarian politics and bureaucracy in dealing with public criticism and challenges. Yoo (1997) describes the cobweb of government regulations developed during the 1960s and 1970s as “a hotbed of corruption” (Yoo 1997: 19). Finally, Steinberg (2000) argues that corruption is an institutionalized part of Korean political business: “Payments by business to individuals or parties either in or out of power are endemic and twofold: they are informal taxes on doing business and insurance of good relations with future leaders. In a sense, they are tithes – institutional offerings to secular organizations for divine intervention from those on high. Corruption becomes endemic under such circumstances” (Steinberg 2000: 216). The second group of researchers (Chang et al. 1998: 741–5) points out that political business collusion was not pervasive during the heyday of state-led tripartism involving the state, banks, and the chaebols. They argue that although huge amounts of money flowed from the chaebols to the political leaders, no one chaebol was selected for particularly greater patronage, and although the chaebols were designated the engines of the Korean growth strategy under Park and Chun, the government did, from time to time, bail out chaebol subsidiaries, but not failing chaebols on a whole. Chang et al. (1998)
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contend that corruption rose with democratization: “Under the Kim [Y.S.] government, there was a fundamental transformation in the state–business relationship in Korea, which meant that the major manufacturing sectors became less insulated from corrupt political exchanges than they had been previously . . . contrary to common perception, it was only under the Kim Young Sam government that genuine ‘crony capitalism’ was born in Korea” (Chang et al. 1998: 741). They argue that “crony capitalism” was caused not by the existence of the Korean industrial policy, but by the abolition of that policy. The withering of a general framework for selective interventions made it easier to “bend the rules” by favoring specific chaebols than it had been under the strong industrial policy regime. Track record of corruption The basic differences in the two positions taken on the issue of corruption pertain primarily to the changing character and “quantity” of corruption during the rise and fall of the authoritarian developmental model. There is insufficient empirical evidence to assess accurately the extent of corruption in the authoritarian period as opposed to post-authoritarian period. However, various researchers have provided evidence of several cases of corruption which merit some review for the insights they reveal on political business collusion. Clifford (1994: 30) argues that “graft was pervasive” during the Rhee regime, known as the age of political appropriation, where everybody with political connections was stealing what was left after the Japanese occupation and appropriating opportunities that had emerged during the US involvement in the Korean War. The period just prior to independence was the formative era of many major chaebols. During this time, even language skills counted, illustrated by the history of Hyundai where the founder’s brother spoke English, providing the Chung brothers with a comparative advantage relative to many other Koreans. Unlike the peasant background of the Chung brothers, nearly half of the new businessmen originated from large-tomedium landowning families (Cumings 1997: 327). The father of the founder of Daewoo was a teacher, while both Lee Byung Chull, the founder of Samsung, and Ku In Whoi, the founder the Lucky Chemical Company (which was to become half of the Lucky Goldstar chaebol), were sons of landlords (Cumings 1997: 328–9). The Park regime was born in a situation of chaos and pervasive fraud and stealing: “Everyone is in it. Privates steal on foot. Officers steal in jeeps. Generals steal by trucks” (Clifford 1994: 91). Although the new regime promoted itself under the banner of anti-corrupt economic nationalism, Clifford (1994: 90–1) points out that Park was more preoccupied “with controlling and channeling corruption than with eliminating it,” and that because “the system was at its heart corrupt, virtually everyone was vulnerable to punishment.” Park used this situation to reinforce his political position,
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from time to time running anti-corruption campaigns, purifying his image, and targeting political enemies, but along the way exploiting and subsidizing select businessmen and firms to achieve his ultimate aim of rapid economic development. During the 1960s, foreign companies, especially Japanese and US firms, also contributed to Park’s political activities, directly or indirectly, via donations to public projects like national defense development.11 During the Chun era, in order to bolster the legitimacy of his military regime after taking power and the bloody crushing of the Kwangju uprising in 1980, Chun declared war against corruption, arguing that “all forms of corruption must be cleaned up and old social order must be reformed to eliminate a sense of incongruity” (cited in Clifford 1994: 193). In 1982, however a scandal was traced back to Chun and his family. It emerged that Chun’s wife, Lee Soon Ja, was a money lender in the curb market. Her relatives were involved in the same business, conducting illegal activities in the name of the Lee family. These criminal activities were uncovered when a company complained that its promissory notes were still in circulation although the loan had been repaid to Lee’s relatives. Two companies went bankrupt and the government had to rescue four others because the fraud was enormous and threatened the financial market (Clifford 1994: 195). Several other scandals followed under the Chun regime, but the most notorious cases were related to the establishment and management of public funds and the handling of “donations” from businessmen and companies.12 Chun’s regime eventually generated opposition not only among ordinary people but also among businessmen. Chun tried to accommodate the business community by loosening the state’s strong control of the economy through deregulation and attempted to appease the population with liberal political initiatives, but resentment against the corrupt, autocratic, and repressive regime turned into a popular uprising in 1987 after the torturous killing of a student. Chun gave in to calls for democratic reforms, and his relatives were subsequently arrested and convicted. Chun was also later charged and convicted of corruption. Roh’s presidential campaign voiced the now common anti-corruption rhetoric, but as soon as he was installed in office in 1988 he ordered that approval for all projects valued at above 3 billion won be obtained from his office (Far Eastern Economic Review 30/11/1995). Through covert pressure on companies for money, Roh managed to amass 500 billion won (650 million USD) for a personal political slush fund during this presidency. The money came probably from the chaebols in return for licences, public contracts, tax breaks, credit, etc.; Hyundai and Samsung were apparently the largest contributors. In 1992, Roh channeled money to candidates contesting the presidential elections. While the ruling Democratic Liberal Party received the largest volume of funds, even Kim D.J. admitted that he obtained 2 billion won from Roh. Yet such funding did insulate him not from criminal investigation, and Roh was eventually jailed in 1995. Both the Roh and the Kim Y.S. regimes were implicated in a scandal
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involving the same chaebol, Hanbo. The first of the Hanbo scandals became known in 1991, through the “Suseo house building” controversy. This scandal started under Roh, when the Korean hockey team won a gold medal in the Seoul Olympics in 1988. The president of the Hockey Association was the owner of Hanbo, and he exploited the situation by obtaining permission to start a housing project in Seoul’s greenbelt area. This permission was secured by bribing politicians and a member of the presidential office (Kim Y.T. 1998: 164). In 1992, he secretly donated a large sum of money to Kim Y.S.’ presidential campaign, which was headed by Kim’s son. Kim Y.S. maintained that the money was given without any conditions. But when Hanbo sought permission to enter the steel industry, the company succeeded although Hyundai’s application to enter the same sector had been turned down, based on concerns about overinvestment and overcapacity. The Korean steel industry had grown tremendously during the HCI drive with the leading firm being the state-owned enterprise Pohang Steel & Iron Company (POSCO), today the world’s largest steel manufacturer. In early 1997, the Hanbo Steel venture failed, adversely affecting the entire conglomerate. The bankruptcy was postponed for a while because top politicians and bureaucrats, including the son of the president, were bribed to support the chaebol, persuading banks and financial institutions to continue the provision of loans and credit (Yoo 1998: Table 9; Mathews 1998: 751, n. 1). The Hanbo chairman was subsequently sent to jail along with other culprits, including the son of the president, tarnishing the legitimacy of the Kim Y.S. presidency (Hahm 1997). The Hanbo scandal revealed another aspect to corruption in Korea, that is one aspect of funding of politicians by capitalists. Kim Y.T. (1998) has described how contributions flowed from the chaebols to the ruling elite, both officially and unofficially: One of the most important features of Korean politics has always been the great dependence of the ruling party on big business contributions for its political funds and the secrecy of the sources and amount of political donations. This extensive, illegal financing of most politicians and the political parties became an integral part of the Korean political system . . . Political financing of government and political parties often caused serious trouble when a regime or individual faction collapsed because of political disruption. But the chaebols could not turn down the requests of the elite groups for political financing, not only because of strong (almost coercive) pressures from top elites but also because of significant mutual benefits between them. (Kim Y.T. 1998: 169) Official donations also went into the ruling political party’s coffers via the active participation of businessmen in the party’s financial committee and after companies received favors from the government. Kim Y.T. (1998: 170)
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cites the case of Dongkuk Steel’s donation of 6 billion won to the ruling party after it was allowed by the government to buy three subsidiaries of the bankrupt Kutche chaebol and the 10 billion won contribution by Kumbo when it secured government consent to run the country’s second airline service. The unofficial contributions often went directly to the president, and these funds were collected in a covert, usually illegal manner. In the early 1990s, the citizen movement had focussed its attention on business and political corruption, but during the late 1990s, began concentrating on corporate governance issues, especially the rights of minority shareholders of chaebol equity (Korea Herald 19/3/99).13 Although the movement grew to encompass a wide variety of groups, becoming increasingly professionalized and bureaucratized in the process, it was soon wracked with internal problems (Korea Herald 18/3/99). The movement, however, still made a difference in economic and political affairs, and the anti-corruption movement had an impressive revival when more than 400 civic groups formed the “Citizens’ Alliance for the General Election 2000” and the “Citizens’ Coalition for Economic Justice,” ahead of the general election for the National Assembly in April 2000. These civic coalitions aimed to scrutinize the deeds of politicians and political candidates in order to weed out corrupt elements. The list eventually included more than half of the existing members of the National Assembly, including Kim Jong Pil, the leader of the United Liberal Democrats (ULD), Kim Bong Ho, vice-speaker of the National Assembly and supporter of Kim D.J., and Pak Kwan Yong, a senior politician from the Grand National Party, the opposition party (Far Eastern Economic Review 17/2/2000). We believe that there is sufficient evidence to argue that corruption was pervasive during the prelude to the Park regime, during the heyday of the Korean model in the 1970s and the 1980s, and during the decline of the model in the 1990s. By implication, the thesis that corruption was not widespread under authoritarian rule is flawed, while democratization had not helped to eliminate corruption. Corruption, particularly that involving the illegal funding of politicians and political parties by big business in return for state concessions has remained the norm. What is particular about corruption in the Korean case is that while ruling politicians had hegemony in the political business collusion with chaebols during the authoritarian period, with the decentralization of financial institutions since the 1980s and the consolidation of democracy during the Kim Y.S. administration, the chaebols had secured ascendancy in this relationship. Politicians, however, had become more exposed to public scrutiny and criticism which increased the political risk of being involved in corrupt activities. The political–business collusion had changed from a centralized and politically directed system of exploitation to a more decentralized and interdependent system of corruption. This conclusion should not take us by surprise. Corruption of this nature is evidently a universal problem. The most recent example is the case of the covert funding that the Christian Democrat Union in Germany received during the long rule
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of Helmut Kohl. However, the continuity of corruption, and its changing form, in Korea demands an explanation. The crucial factor seems to be the persistence and resilience of the Korean “politics–economy collusion,” which nurtured and was nurtured by corruption. The ruling elite and the chaebol families, through a division of power, sustained this collusion: the military and politicians centralized political power, while economic power was concentrated in the hands of the chaebols. State support for the chaebols was channeled through financial institutions and state-generated concessions, while the chaebols mobilized resources for political campaigns, especially during presidential and parliamentary elections. The structure of this “politics–economy” collusion was not dismantled with the rise of democracy. The nature of the collusion developed between politicians and big business was constantly in a state of flux because the position of the client depended on his business performance and compliance with the wishes of the ruling politician. His chaebol was also subject to political attack with every change of government, as indicated in the case of Samsung, Samhak Distillery, Kutche, and Hyundai. With democratization, corruption has been increasingly led by the chaebols owing to the changed power relations between the state and big business and the increased need for funds by political parties and politicians. The changing nature of political–business collusion was partly the reason why chaebols could still develop their enterprises through the practice of debt financing. In fact, in a more liberalized environment, they also had greater access to international financial system, entrenching further the chaebols’ influence over the domestic economy. The political environment after the Hanbo scandal, however, made it very difficult to sustain the old practice of bailing out ailing chaebols. It is still uncertain whether corruption will be reduced during the Kim D.J. administration. Greater transparency, improved legislation and enforcement, a more liberal press, and better informed citizens – and voters – might help to limit corruption. The structure of the political and economic system still, however, continues to encourage corrupt practices. This raises the question: why has the emergence of democracy not helped to stem corruption? First, democratization brought more transparency under Kim Y.S., and this paved the way for greater disclosure of corrupt practices among politicians, bureaucrats, and businessmen. The apparent rise in incidents of corruption may be an outcome of democratization, but not necessarily because democracy nurtured more corruption but because it made it easier to unveil corruption. Second, political parties need access to funds to run their activities in a democratic political system. The Korean state does provide political parties with modest financial support, based on their electoral performance in the presidential, National Assembly and local elections (Korean Overseas Culture and Information Service 1998: 156). Political parties can also operate a support committee that is entitled to receive contributions from individuals and organizations, but only up to a certain
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limit. The amount of funds required by political parties, however, is usually much more than the amount of money they are permitted by law to accept. Third, more open electoral competition also provides the chaebols with numerous opportunities for lobbying and securing concessions from parties in return for political funding. Businessmen can also influence policies and determine outcome of decisions in cabinet and in parliament by funding particular parties and politicians, as we see occurring in Western countries like Germany, France, and Italy. With the introduction of more checks and balances in government, it has, however, become less viable for chaebols to seek specific political influence. It is improbable, however, that the business community will participate more actively in party politics in an attempt to seize political power; nor will they attempt to organize business-oriented political parties. Since the chaebol families do not enjoy much popularity in Korean society, it is doubtful they will secure much support during elections.
Conclusion This brief history of Korean political business partly explains the rise and fall of the Korean model of authoritarian developmentalism. The power and conduct of core actors, the state, the financial sector, and the chaebols, conditioned the effectiveness of the Korean model. The state’s industrial policies sparked rapid economic growth and industrialization, which was aided by the financial system and implemented through the chaebols, making them into huge diversified conglomerates under family owner-management control. While the state had played a key role in ensuring implementation of industrial policy, when regimes changed, power relationships were affected and had a bearing on the effectiveness of the policy. Our political business history of Korea also does suggest that chaebols can be reorganized and their ownership changed without disrupting the productiveness of their assets. The economic virtues of the chaebols have been described as comprising economies of scale, financial capacity, growth and investment-oriented strategy, and centralized managed diversification, while the weaknesses include a high debt–equity ratio, low profitability, and the risk of bankruptcy. During the phenomenal economic growth and industrialization that occurred between 1961 and 1996, the collapse of big business during the 1997–9 crisis, and the subsequent return to growth, both the merits and demerits of chaebols were revealed. In other words, for both the authoritarian state and the chaebols, the success of the authoritarian developmental Korean model paved the way for the demise of the strong state and a check on the influence of big business. This was evident in the changing nature of economic policies during the 1980s, seen in some cases as “chaebol-bashing,” as well as in the inability of big business to secure control of the state through direct participation in politics during the process of democratization in the decade 1987–97. With
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deregulation and internationalization of the chaebol economy, the power relations between the state and the chaebols changed from one where politicians had hegemony to a relationship where capital secured dominance. While the conduct of the executive was increasingly conditioned by its implications on party politics and civil society, the chaebols were able to secure greater control of the domestic economy and were able to promote their interests via arguments, threats, or bribes. Following the financial crisis, and the election to power of a former dissident with little or no links to big business, the Korean state recaptured more autonomy from capital. And with domestic support from civil society and in alliance with international forces, the state has been able to target the “politics–economy collusion” that had continued to thrive in spite of the rise of democracy. The crisis has provided new opportunities for effective business policy, that is chaebol restructuring and downsizing and the promotion of small and medium-sized businesses, deemed necessary in a domestic and welfare-oriented development perspective. The restructuring of the big business is being implemented, and with the end of the “too-big-to-fail” syndrome – confirmed with the collapse of Daewoo – the chaebol families are being forced to adapt to the emerging democratic and international-oriented regulatory regime. The challenge for the government now is to learn the lessons of the past and institutionalize a regulatory framework that delinks politics from business to ensure the emergence of a more autonomous and democratic state.
Notes * The research for this article was primarily undertaken during a trip to Korea in February–March 1999, financially supported by the Danish Council for Development Research (RUF). Jooyeon Jeong, of Korea University, with whom I did a joint comparative study of Korean and Malaysian automotive firms, provided professional and social support. I have benefited from the comments made by the participants at the International Workshop on “Political Business in East Asia,” held at Aalborg University in June 1999, specifically from the critique delivered by the editor, Terence Gomez. Any mistakes remain my own responsibility. 1 We have excluded in our analysis an assessment of organized labor and the labor system in Korea. 2 For a detailed case study on the Kukche chaebol, see Fields (1995) and Kim E.M. (1997). 3 A slightly different trust analysis is provided by Moon (1999). Moon argues that the shift to commercial trust took place during the 1980s. We, however, contend that the financial system, during the 1990s, consisted of two inter-related subsystems, based on political and commercial trust, and that the domestic financial system was basically sustained by political trust. 4 Shin (2000: 403–4) argues that the pre-crisis debt–equity ratio of Korean chaebols was not exceptional from an international perspective and that the ratio did not worry these firms because their assets were undervalued. But Shin also provides data (Table 2) for 1995 that indicates that total borrowings compared to
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total assets of corporate enterprises were much higher in Korea than in Japan, Taiwan and the United States. The debt–equity ratio of the 30 largest chaebols subsequently rose to 449 percent in 1997 and 603 percent in 1998 (Yoo 1998: Table 9). Kim Dae Jung’s campaign was supported financially by Kim Sang Du, the founder of the Samhak Distillery, then Korea’s largest producer of a potatobased liquor. Seven months after Park’s victory, the tax authorities investigated the Samhak Distillery and fined it for tax evasion. The company went bankrupt (Far Eastern Economic Review 30/11/1995). The government and the opposition agreed to a constitution that, among other things, reintroduced direct presidential elections by universal suffrage for a single five-year term and prevented military officers for holding government positions. The victorious opposition coalition, based on an alliance between Kim D.J.’s party, the National Congress for New Politics, and the conservative party of Kim Jong Pil, the United Liberal Democrats, was partly supported by labor and civic groups and citizen movements (Kim S. 1997). The electoral triumph of this coalition was also due to the split within the ruling party, when a leading figure, Rhee In Je, who was defeated at the nomination convention, went ahead with his own presidential campaign, by forming his own party, the New Party by the People (Park 1998: 4–5). Among the ISI industries that were developed under the FYPs for export were fertilizer, cement, and oil refining (1FYP 1962–66); chemicals, steel and machinery (2FYP 1967–71); non-ferrous metals, shipbuilding, and electronics (3FYP 1972–76 and 4FYP 1997–81), accelerated by the drive for heavy and chemical industrialization after 1973 (Chang 1994: 113–14). The New Village Movement (NVM, or Saemaul Undong) was initiated by Park under the Fourth (“Yushin”) Republic in order to mobilize and integrate the rural population in the national development. It comprised an ideology involving community projects for village development, for example improved infrastructure, housing, education, etc. These projects were very much carried out by volunteers from the local community under the direction of NVM leaders. The establishment of general trading companies by chaebols was encouraged by the state during the HCI drive of the 1970s. The political racketeering went under the pseudonym “juice” among foreign businessmen, but it was equally rampant among Korean businessmen. In fact, the “J-factor” became institutionalized during the Park regime: “Typically, the Blue House decided how much money was to be collected and would give the orders to the major business organizations, the Federation of Korean Industries, the Korean Traders Association, and the Korea Chambers of Commerce and Industry. The leaders of these organizations would meet with the heads of companies and associations and set quotas for donations. These generally would be parceled out on the basis of a company’s ability to pay. There was no accountability for these funds after they were collected” (Clifford 1994: 93). Among the notable examples were the Ilhae Foundation, established for the surviving relatives of victims of the Rangoon bombing in 1982, which Chun abused, the Saesaedae Foundation, which Lee Soon Ja managed, and the Saemoul Dong movement, initiated by Park Chung Hee, but mismanaged by Chun’s young brother (“Baby Chun”) in the 1980s. One of the most successful groups is the People’s Solidarity for Participatory Democracy (PSPD), which focusses on illicit management transactions between cross subsidiaries, illegal wealth inheritance, transparency, and minority shareholder rights. The group managed to get Korea First Bank’s board of directors fined for managerial failures (for example, the illegal funding of the bankrupt
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Hanbo Steel & Iron Company) and took the Samsung Electronics’ management to task for secret financial transactions to aid Samsung Motors, Inc. (Korea Herald 19/3/99).
References and further reading Amsden, A. (1989) Asia’s Next Giant. South Korea and Late Industrialization, Oxford: Oxford University Press. Casse, T. (1985) “The Non-Conventional Approach to Stability: The Case of South Korea,” CDR Research Report 5, Copenhagen: Centre For Development Research. Chang Ha Joon (1994) The Political Economy of Industrial Policy, New York: St Martin’s Press. Chang Ha Joon et al. (1998) “Interpreting the Korean Crisis: Financial Liberalisation, Industrial Policy and Corporate Governance,” Cambridge Journal of Economics 22: 735–46. Chang Kyung Sup (1999) “Compressed Modernity and its Discontents,” Economy and Society 28: 1. Chung Kae H., Yi Hak-Chong, Jung Kyu Hyun, and Lee Hak C. (1997) Korean Management. Global Strategy and Cultural Transformation, Berlin: Walter de Gruyter. Clifford, M.L. (1994) Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea, London: M.E. Sharpe. Cumings, B. (1997) Korea’s Place in the Sun: A Modern History, New York: W.W. Norton. Cyhn, J.W. (1999) “Technology Development of Korea’s Electronics Industry: Learning from Multinational Enterprises through OEM,” paper presented at the EADI Conference, Paris, September. Davis, G.F. et al. (1994) “The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form,” American Sociological Review 59: 547–70. Fields, K.J. (1995) Enterprise and the State in Korea and Taiwan, Ithaca, NY: Cornell University Press. Hahm Chaibong (1997) “The Confucian Political Discourse and the Politics of Reform in Korea,” Korea Journal 37(4): 65–77. Han Sang Jin (1995) “The Rush-to-Industrialization and its Pathological Consequences: The Theme of the ‘Risk Society’ in the Asian Context,” paper presented at the 6th International Conference of Asian Sociology, Beijing, November 2–5. Helgesen, G. (1998) Democracy and Authority in Korea: The Cultural Dimension in Korean Politics, Kingston, UK: Curzon. Hwang Jong Sung (1997) “Analysis of the Structure of the Korean Political Elite,” Korea Journal 37(4): 98–117. Janelli, R.L. (1993) Making Capitalism: The Social and Cultural Construction of a South Korean Conglomerate, Stanford, CA: Stanford University Press. Jeong, J. (1999) “Business Relations in Crisis? The Case of the National Auto Manufacturers in South Korea During the East Asian Crisis – Part II: The Korean Auto Industrial Networks in a Netholder Perspective,” Occasional Paper 101, IKL/CBS, Copenhagen. Kim Byong Seob (1998) “Corruption and Anti-Corruption in Korea,” Korea Journal 39(1): 46–69.
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Kim Eun Mee (1997) Big Business Strong State: Collusion and Conflict in South Korean Development, 1960–1990, New York: State University of New York Press. Kim Linsu (1997) Imitation to Innovation: The Dynamics of Korea’s Technological Learning, Cambridge, MA: Harvard Business School Press. Kim Sunhyuk (1997) “State and Civil Society in South Korea’s Democratic Consolidation,” Asian Survey 37(12): 1135–44. Kim Yun Tae (1998) “Capitalist Development, the State and Big Business in Korea: A Sociological Study of the Korean Chaebol,” unpublished PhD thesis, London School of Economics. Koo Bonchun (1998) Corporate Restructuring and Financial Reform in Korea, Seoul: Korean Development Institute Korean Overseas Culture and Information Service (1998) A Handbook of Korea, Seoul. Lee Kyu Uck and Lee Jae Hyung (1996) Business Groups (Chaebols) in Korea: Characteristics and Government Policy, Seoul: Korea Institute for Industrial Economics & Trade. Lee Yeon Ho (1996) “Political Aspects of South Korean State Autonomy: Regulating the Chaebôl, 1980–93,” The Pacific Review, 9(2): 149–79. —— (1997) The State, Society and Big Business in South Korea, London: Routledge. Ludvigsen Associates (1998) “Deconglomerate and Refocus: Vehicle Manufacturers Return to Their Roots,” FT Automotive Quarterly Review: 94–101. Matthews, J.A. (1998) “Fashioning a New Korean Model Out of the Crisis: The Rebuilding of Institutional Capabilities,” Cambridge Journal of Economics 22: 747–59. Moon Chung-in (1999) “Social Trust, Institutions, and Economic Crisis: Credit Allocation System and Non-Performing Loans in South Korea,” paper for the international conference on “Social and Economic Structures and the Origins of the Asian Crisis,” Lund University, November. Park Tong Whan (1998) “South Korea in 1997: Clearing the Last Hurdle to Political– Economic Maturation,” Asian Survey 38(1): 1–10. Shin, J.S. (2000) “Globalization, Over-Investment and Over-Adjustment. Policy Implications for Corporate Restructuring from the Financial Crisis and Recovery of South Korea,” paper presented at the international conference and business forum “Industrial Policy, Innovation and Economic Growth,” Copenhagen, March 13–14, SAMS, CBS. Steinberg, D.I. (2000) “Continuing Democratic Reform: The Unfinished Symphony,” in L. Diamond and B.K. Kim (eds), Consolidating Democracy in South Korea, London: Lynne Rienner: 203–38. Storey, J. (1998) The World’s Car Manufacturers: A Strategic Review of Finance and Operations, Vol. I, London: Financial Times Management Report. World Bank (1993) The East Asian Miracle, Washington, DC: Oxford University Press. Yoo Seong Min (1998) Corporate Restructuring in Korea: Policy Issues Before and During the Crisis, Seoul: Korean Development Institute.
7
Politics, business, and democratization in Indonesia Stefan Eklöf *
Political business in the Suharto era One of the main characteristics of Indonesia’s political economy under President Suharto’s long rule (1966–98) was the intimate connections between politics and business. As the Indonesian economy underwent an unprecedented development from the 1970s up to 1997, with growth averaging almost 7 percent and real GDP per capita more than trebling, the president’s and other senior officials’ patrimonial distribution of favors served to maintain the regime’s dominance at least as much as crude force or attempts at symbolic legitimation of power (see Liddle 1985). Although the direction of economic policy altered on several occasions during Suharto’s more than three decades in power, the state all along maintained its role as the central actor, and the “rise of capital,” to use Richard Robison’s (1986) term, remained highly dependent on personalized relations with leading members of the government and the bureaucracy and senior military officials. As a consequence, the Suharto era saw the rise of three major groups of politically connected companies, who between them came to control most of the formal economy. These were the Sino-Indonesian conglomerates, state-owned enterprises (SOEs) and indigenous Indonesian, or pribumi (literally meaning “sons of the soil”), firms. Sino-Indonesian conglomerates When Suharto and the military-dominated New Order regime came to power in 1966, one of their main priorities was to halt the economic decline inherited from the previous regime of President Sukarno and to engineer economic growth. For this purpose, President Suharto employed a group of Westerntrained economists from the University of Indonesia, the so-called “technocrats,” who initiated liberal foreign investment and trade regimes and cut back spending on SOEs. These generally successful policies not only managed to attract foreign investment which helped resume economic growth, but also created lucrative opportunities for a number of able and politically wellconnected Sino-Indonesian businessmen. Many of the New Order’s military leaders, including President Suharto, had long-established business relations
Politics, business, and democratization in Indonesia 217 with ethnic Chinese businessmen, which served both to finance the operations and maintenance of military units and to supplement the generally meager salaries of officers at various levels. As the New Order initiated liberal trade and investment policies, Sino-Indonesian businessmen typically teamed up with senior military officers in joint ventures, where the military officer typically provided little in terms of capital or skills, but instead was able to provide the venture with the necessary state licenses, contracts, concessions, access to state bank credit, and protection. The Sino-Indonesian businessman, called cukong (literally meaning “financial backer”), generally kept a low public profile, but provided the venture with capital and access to established business networks and markets. In addition, foreign investors were often involved in tripartite arrangements with military officers and SinoIndonesian businessmen. The favoring of Sino-Indonesian tycoons was partly owing to the apparent belief on behalf of senior government officials, including President Suharto himself, that the culture of the ethnic Chinese was particularly suitable for doing business. The business cooperation with Sino-Indonesian businessmen also provided senior military officials with large extra-budgetary funds, for both financing military operations and for political activity, as well as personal consumption (Crouch 1993: 273–303). The man who rose to become Indonesia’s foremost tycoon was Liem Sioe Liong, an ethnic Chinese immigrant and trader in Central Java. He had come to know Suharto in the 1950s when the latter commanded Central Java’s Diponegoro Division and Liem supplied various goods, including foodstuffs, textiles, and spare parts, to the army. When Suharto came to power, Liem greatly benefited from his relationship with the president, and from the late 1960s his business expanded rapidly, aided by state contracts and licenses, and often in joint ventures with members of the Suharto family.1 For example, in 1968, his company P.T. Mega, together with another company owned by Suharto’s half-brother Probosutejo, was granted the monopoly on the clove import, a very lucrative business owing to the vast amounts of clove used in the manufacturing of the Indonesian kretek cigarettes. In 1970, Liem set up a flour milling company, P.T. Bogasari, together with another half-brother of Suharto’s, Sudwikatmono, which received a state license to mill flour for the whole of Western Indonesia, including Java and Sumatra. Twenty-six percent of the profits were to be set aside for “charitable” foundations (yayasan), including a foundation headed by Suharto’s wife, Tien Suharto, and one foundation controlled by the Army’s Strategic Reserve, Komando Strategis Angkatan Darat (Kostrad). Parts of the profits from the clove monopoly were also deposited with the state as non-budgetary revenue for special projects (Robison 1986: 232, 302). For Suharto, the association with Liem and other Sino-Indonesian businessmen thus provided him with funding for extrabudgetary projects, many of which served political purposes, enabling the president to distribute material favors in exchange for political loyalty and support. All over Indonesia, local development projects, such as new roads, schools, health clinics, and irrigation works, were initiated by direct presidential
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decrees and funded by the yayasan controlled by the president, thus boosting Suharto’s public image as the nation’s “Father of Development.” Liem expanded and diversified his business operations throughout the Suharto era, and in the mid-1980s, his Salim Group (named after Liem’s Indonesian name, Sudono Salim) had become Indonesia’s largest conglomerate by far, controlling hundreds of companies dealing in automobiles, textiles, cement, flour-milling, property, construction and finance, only to mention some of the most important areas. In 1994, the group’s turnover reached US$9 billion, accounting for 5 percent of Indonesia’s GDP (Naisbitt 1996: 24). In addition to Liem Sioe Liong, several other ethnic Chinese businessmen profitted from their association with the president and senior members of the military and the bureaucracy. In first years of the 1970s, however, public resentment over the government’s favoring of ethnic Chinese businessmen increased, and in 1973 and 1974, riots occurred in Bandung and Jakarta, respectively, prompting the government in 1974 to introduce a number of regulations aimed at strengthening the economic position of the indigenous Indonesians. The new policies coincided with a sharp increase in world oil prices which provided the government with revenues on a previously unprecedented scale and enabled it to embark on a more nationalist and interventionist economic policy. However, in spite of the attempts to strengthen the economic position of the indigenous Indonesians, the structure of many of the government’s economic policies continued to favor Sino-Indonesian businessmen over pribumi businessmen, and private domestic investment continued to be heavily dominated by politically well-connected ethnic Chinese tycoons. The increasingly central role of the state, together with the politicized allocation of state privileges, including state contracts, licenses, and credit, in combination with restriction on foreign penetration, consequently enabled a number of Sino-Indonesian businessmen with political connections to build huge and diversified conglomerates (Robison 1988: 63– 5). Ethnic Chinese businessmen with political connections who were favored by the government’s economic policies and who built large conglomerates under the New Order included William Suryajaya, whose Astra Group came to dominate the automobiles business, Mochtar Riady and the Lippo Group, which was active in finance, Tan Siong Ke, who owned a number of various manufacturing companies, Ciputra, who worked together with Liem Sioe Liong in the property sector, and Mohammad “Bob” Hasan, a close business associate and golfing partner of the president, who controlled much of Indonesia’s timber industry. In the 1980s, two slumps in world oil prices, first in 1982 and then again in 1986, precipitated another shift in the government’s economic policy away from nationalist and interventionist economic principles towards deregulation and liberalization. The loss in oil revenues prompted the government to facilitate private sector manufacturing and non-oil exports which could provide a broader tax base to make up for the loss in oil revenues and act as an engine of continued economic development. In order to nurture the manu-
Politics, business, and democratization in Indonesia 219 facturing industry, it was necessary to loosen up the restrictions on foreign investment, and to get rid of at least some of the import regulations which raised production costs for Indonesian manufacturers. The deregulation policies were thus driven largely by necessity rather than by ideological conviction on the part of the Indonesian leaders (Soesastro 1989). In addition, there were domestic political economic factors which favored the shift towards liberalization. Many of the large Sino-Indonesian conglomerates had by the mid-1980s developed to a stage where economic nationalism and state intervention had started to become a constraint in certain areas. State monopolies in banking, infrastructure, and communications, for example, hindered private corporate groups from moving into these areas, and many of the major conglomerates also increasingly became active outside the borders of Indonesia (Robison 1997: 35; Loveard 1999: 170; Prospek 22/7/98). Although the deregulation policies affected many politically well-connected companies which had some of their monopolies, licenses and other privileges revoked, the large Sino-Indonesian conglomerates were also in general those who were best placed to take advantage of the new business opportunities offered by the deregulation (Robison 1997: 36). As a consequence, several of the large conglomerates continued their expansion and diversification in the second half of the 1980s and up to the onset of the East Asian economic crisis in 1997. A consequence of the business connections between Indonesia’s military and bureaucratic rulers and the ethnic Chinese tycoons was that the economic fortunes of Indonesia’s indigenous political elite became closely integrated with those of the Sino-Indonesian economic elite. There was little cooperation between the ethnic Chinese tycoons, however, and it is therefore incorrect to say that Chinese Indonesians collectively controlled the economy. Moreover, although most of Indonesia’s large conglomerates were controlled by ethnic Chinese tycoons, equity ownership was more dispersed, also including pribumi ownership. There was thus considerable cooperation and common interest between leading pribumi and ethnic Chinese economic elites. However, as the economic success of these elites mainly depended on their personalized and clientelistic relations with centers of power within the state, they had little incentive to undertake collective action in order to influence economic policy (MacIntyre 1994: 253). Furthermore, the Chinese Indonesians, as an ethnic minority, were politically weak and vulnerable to racist sentiments. They would therefore be unlikely to be able to translate their economic power into political power and thus threaten the regime. State-owned enterprises There was never among the New Order’s leaders a strong commitment to liberal economic ideas. The liberal policies adopted by the regime in the late 1960s aimed primarily at import-substitution industrialization (ISI) and at attracting foreign investment rather than economic liberalization for its own
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sake. There was also among most of Indonesia’s political leaders and intellectuals a long-standing aversion to and suspicion of capitalism, foreign economic influence and private, especially ethnic Chinese, ownership (Hill 1994: 62, 1996: 93; Robison 1988: 61; see also MacIntyre 1994: 249). The ideology of economic nationalism had its roots in the nationalist movement and widespread resentment against the predatory effects of Dutch colonial laissez-faire capitalism. There was also strong resentment against the Dutch policy of favoring Sino-Indonesian entrepreneurs over indigenous, pribumi, businessmen, most of whom were Muslims, in contrast to the mainly Catholic or Buddhist Chinese Indonesians. These sentiments continued to be prominent in post-independence Indonesia, and as already mentioned, in the first years of the 1970s resentment against the government’s favoring of ethnic Chinese flared up in riots. The regime also came under increasing criticism from indigenous middle-class groups, including businessmen, professionals, students, and intellectuals, for its economic policies which were perceived as selling out Indonesia’s wealth and resources to foreigners and ethnic Chinese capitalists. After 1974, the rise in world oil prices enabled the government to embark on an ambitious program of building an integrated industrial base under state control and ownership. From the mid-1970s and through to the early 1980s, there were massive state investments in petrochemicals, steel, metal engineering, fertilizers, and infrastructure, which aimed not only at national economic independence through import substitution, but also at strategic autonomy, as expressed in the concept of “national resilience” (Robison 1988: 63). These policies saw a sharp expansion of the scope and activities of the SOEs in various sectors, including manufacturing, forestry, mining, agriculture, shipbuilding, construction, and distribution. The proponents of economic nationalism centered on Minister of Research and Technology Bacharuddin Jusuf Habibie, a German-trained aeronautical engineer and a long-standing protégé of Suharto. Habibie headed several high-tech projects which he hoped would spearhead Indonesia’s technological development and create spin-off effects for the whole economy. Habibie exercised great influence with the president, and in 1989 his position was strengthened as 10 of the largest state enterprises were placed under the minister’s control through the establishment of the Strategic Industry Board, Badan Pengelola Industri Strategis (BPIS) (Hill 1996: 105). Probably all of the strategic enterprises were unprofitable, however, including Habibie’s flagship, the aircraft manufacturer Industri Pesawat Terbang Nusantara (IPTN), and the government spent large sums of money to cover their deficits (Shiraishi 1996, McKendrick 1992). Privatization, meanwhile, was not politically viable, as the buyers of state enterprises would be likely to be SinoIndonesians or foreigners. By contrast, many pribumi saw a strong economic position for the state as a vanguard against the domination of private nonpribumi capitalists and as a defense for indigenous Indonesian economic interests (Hill 1996: 106).
Politics, business, and democratization in Indonesia 221 Pribumi firms For many pribumi capitalists who had been prominent in the 1950s and 1960s, President Sukarno’s fall from power was disastrous (Robison 1986: 330). Those who had relied heavily on patronage from figures within the previous regime had great difficulties in adapting to the new political constellations, and the liberal trade and investment policies initiated by the New Order brought increasing competition from Sino-Indonesian businessmen and foreign interests. The New Order instead saw the rise of several new indigenous business groups centered on the families of leading politicobureaucrats and military officials. From 1967 to 1975, the President Director of the state-owned oil company Pertamina, Ibnu Sutowo, built the largest private indigenous business group in Indonesia. The boundaries between Sutowo’s private business interests and those of the public companies which he controlled were often blurred. Moreover, there emerged around Sutowo several pribumi capitalists who thrived as a result of Sutowo’s patronage. His fortunes declined after Pertamina defaulted on its debts in 1975, prompting the government bailout of the company, and he was eventually discharged from his position as head of Pertamina (Glassburner 1976; McCawley 1978). Many of the indigenous businessmen who had grown under Sutowo’s patronage, however, continued to thrive, favored by the continued boom in construction owing to increased government spending. These businessmen included Siswono Judo Husodo, Fahmi Idris, and former President Sukarno’s oldest son Guntur (Robison 1986: 350–8). After Sutowo’s fall, indigenous capital came to be heavily dominated by the Suharto family. As already mentioned, two of the president’s half-brothers, Probosutejo and Sudwikatmono, were active in business from the early years of the New Order. As for the president himself, it is uncertain how far his business interests extended. He controlled a number of social and charitable foundations, yayasan, which generally were not required to disclose any information about their holdings or economic activities. For Suharto, the main purpose of the yayasan and his control over large flows of money was political, allowing him to preside over an extensive system of distribution of patrimonial favors which reached all the way down to local village elites and traditional community leaders.2 In the 1980s, moreover, Indonesia saw a strong expansion of the business interests of the Suharto children, all six of whom founded conglomerates active in various businesses. Suharto’s second son, Bambang Trihatmojo, was first, forming the Bimantara Group in 1982 together with several school mates and a brother-in-law. The group quickly expanded, aided by state contracts and monopolies, and in 1987, only five years after its founding, the Bimantara group ranked as number 13 among Indonesia’s conglomerates (Hill 1996: 111). In the late 1980s, Bimantara quickly diversified into electronics, shipping, food production, plywood manufacturing, telecommunications, television, aircraft, construction, real estate, plantations, and food
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retailing. The year after Bimantara was formed, Bambang’s sister and Suharto’s eldest daughter, Siti Hardiyanti Rukmana, also known as Tutut, founded the Citra Lamtoro Gung Group, together with her husband and her two younger sisters. In 1989, the group got a favorable contract for building a number of toll roads in Jakarta, and for collecting the tolls, which turned out to be very lucrative. In 1984, Suharto’s youngest son, Hutomo Mandala Putra, also known as Tommy, founded the Humpuss group, starting off with contracts for the exclusive distribution of petrochemical products manufactured by Pertamina. In 1989, Tommy together with Suharto’s close associate and golfing partner Bob Hasan, went in to the airline industry and the two founded Sempati Air, which became the first privately owned airline to break the monopoly of the national carrier Garuda (Schwarz 1994: 141–3). The businesses of the Suharto family expanded explosively from the second half of the 1980s, aided by various politically allocated privileges and often through joint ventures with foreign investors or in partnerships with one or several of the major Sino-Indonesian conglomerates, particularly the Salim Group. A consequence of the emergence of the business interests of the Suharto family was that the connections between business and politics became further integrated and embedded in the prevailing structure of power from the middle of the 1980s, creating an unprecedented politicization of the economy. As the economic success of individual capitalists depended on their relations with various political patrons within the regime, the political strength of the bourgeoisie was limited in spite of their domination of the economy. This weakness of the bourgeoisie was not only a by-product of the development policies of the New Order, but an important precondition for the maintenance of the military’s political domination (MacIntyre 1991: 370–1). The ruling elite thus tied the economic power of individual capitalists, most of whom were ethnic Chinese, to their own individual centers of power, and as Robison (1988: 65) has observed, the “political strength of capital in this period derived from a combination of nationalist ideologies and alliances of individual capitalists with specific centers of politico-bureaucratic power.”3 Moreover, as suggested in Gomez’ model in the Introduction to this volume, revenues earned by private companies, owing their business success to favors granted by the government and the president, were channeled back into the political system and used to maintain the political regime and the political economy which it represented. However, cracks were already appearing in the regime before the onset of the East Asian economic crisis in 1997. As mentioned, several of the largest conglomerates had passed the stage where they were dependent mainly on political favors and state contracts, and in some fields of business, the strong economic interests of the state worked as a constraint. Furthermore, a growing middle class and oppositional students, intellectuals, and NGO activists started to demand more government accountability and an end to the endemic corruption and nepotism. Together with Suharto’s advanced
Politics, business, and democratization in Indonesia 223 age – he turned 76 in June 1997 – and the lack of credible mechanisms for a presidential succession, these factors contributed to a general feeling of uncertainty over the country’s mid- and long-term political and economic prospects in the years before the onset of the East Asian economic crisis.
State, politics, and policy implementation Parallel with the growth of the large Sino-Indonesian conglomerates in the 1980s and 1990s, resentment against the ethnic Chinese domination of the economy rose among the mainly Muslim pribumi middle class and pribumi businessmen. At the same time, the high levels of state spending had brought about the rise of several pribumi businesses, apart from those of the Suharto family, especially in the engineering and construction sectors (Schwarz 1994: 118; Winters 1996). However, although a few large pribumi-owned conglomerates emerged, most were relatively small compared with their large SinoIndonesian counterparts. It was widely believed in Indonesia that Chinese Indonesians controlled between 70 and 80 percent of the economy, and that the Suharto family controlled most of the remaining part. The estimations were probably roughly accurate as regards the private domestic-controlled sector of the formal economy. Of Indonesia’s 20 largest conglomerates in 1993, all except two (Bambang’s Bimantara Group and Tommy Suharto’s Humpuss Group) were Sino-Indonesian owned, and an estimation in the same year concluded that 80 percent of the companies listed on the Jakarta stock exchange were owned by ethnic Chinese Indonesians (Sjahrir 1993: 24 n. 3; Hill 1996: 111; cf. also Wibisono 1995). Meanwhile, income disparities increased considerably from the end of the 1980s to the mid-1990s, especially in the bigger cities, while social tolerance toward economic disparities declined, resulting in widespread resentment against inequalities (Booth 1998: 38; Thee Kian Wie 1998: 134).4 Much of this resentment focussed on the Sino-Indonesian domination of the economy and on the major ethnic Chinese tycoons, but it also reflected on Chinese Indonesians in general. Just as on earlier occasions in Indonesian history, Islam provided a focus for the resentment, especially, it seems, for parts of the urban pribumi middle class. Since the 1970s, the Islamic identity of Indonesia’s Muslim middle class had strengthened, and in some quarters the Islamic message also involved strident anti-Chinese and anti-Christian rhetoric (Liddle 1996: 266–89). Although probably only a small minority of Indonesia’s pribumi middle class overtly subscribed to extremist and racist sentiments, it seems that resentment against the Sino-Indonesian domination of the economy increased as more and more pribumi professionals and smallscale businessmen joined the modern economy and came into direct contact with the ethnic Chinese domination of the corporate world from the 1980s and after.5 From the late 1980s, President Suharto also started to court the Muslim middle class for support in the face of waning support from sections of the
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military. The conflict between the president and the military mainly concerned issues of economic policy. There was widespread resentment in the officer corps over Suharto’s economic favoritism of his children and other family members. Moreover, the political and economic influence of the military had begun to wane in favor of the president and a number of politicobureaucratic families who dominated the state apparatus, including the Habibie family (Robison 1995: 49–50). Against this background, and in order to seek a new political constituency among the burgeoning Islamic middle class, Suharto in 1989 sponsored the formation of the Association of Indonesian Muslim Intellectuals, Ikatan Cendekiawan Muslimin se-Indonesia (ICMI) and had Minister of Research and Technology Habibie elected as its chairman. ICMI meant a new and much-improved role for Islam in Indonesian political life, and Suharto also tried to strengthen his personal Muslim credentials, most overtly by going on a well-publicized Hajj in 1989. Suharto’s venture to seek political support from the pribumi middle class also involved an effort to initiate economic policies to diminish the SinoIndonesian domination of the economy. In his budget speech in January 1990, Suharto appealed to private companies to transfer up to 25 percent of their equity to cooperatives, and to follow up the initiative, the president gathered the leaders of Indonesia’s top 31 conglomerates, all but two of whom were ethnic Chinese, at his ranch in Tapos in West Java two months later. The wellpublicized exercise, with the president lecturing the ethnic Chinese tycoons, sent a message to the nation that in the president’s view, the Sino-Indonesian business community was responsible for the large social and economic gap. Although the meeting may have served the president’s propaganda purposes, it was of little consequence for decreasing the social gap or for evening out the economic differences between ethnic Chinese and pribumi. It was quietly agreed that the companies would transfer 1 percent, not 25, to cooperatives, a regulation which then was little implemented (Schwarz 1994: 100–1; MacIntyre 1993). Suharto assembled another two similar meetings in the 1990s, none of which had any practical effect for redressing the problem of the unequal distribution of wealth and income (Loveard 1999: 200–1). Although little came out of Suharto’s PR exercises, pribumi economic interests strengthened their position during Suharto’s last years in power, largely through cooperation with the economic nationalists centered on Habibie. There were two main organizational vehicles for pribumi economic interests under the New Order: the state-sponsored Association of Young Businessmen, Himpunan Pengusaha Muda Indonesia (Hipmi) and the Chamber of Commerce and Industry, Kamar Dagang dan Industri (Kadin) (Schwarz 1994: 118–19).6 The voice of pribumi interests in Kadin strengthened in 1994 when Aburizal Bakrie, who was one of Indonesia’s leading pribumi businessmen and a vocal proponent for larger pribumi influence in the economy, was elected chairman of Kadin, reportedly with the support of Habibie and against the will of Suharto (Prospektif 19/10/98; Liddle 1999: 34). The election of Bakrie showed that Suharto, for all his dominant position in
Politics, business, and democratization in Indonesia 225 the government, did not reign in supreme control, and that other centers of economic and political power were able to press effectively for their interests from time to time. As popular ill-will towards the Sino-Indonesian domination of the economy and the increasing income disparities increased, resentment towards the widespread corruption and nepotism in general in government circles also rose. Much of this resentment focussed on the increasingly blatant nepotism of the Suharto family. As already mentioned, all of Suharto’s six children controlled large conglomerates, with Bambang and Tutut heading the largest businesses. Tommy Suharto, meanwhile, was the most controversial of the Suharto children because of his arrogant and playboy-like image and because of his involvement in several high-profile cases of nepotism. A prime example was when, in 1996, a presidential decree gave Tommy Suharto’s company, P.T. Timor Putra Nasional, the task of setting up the production of a national car, even though Tommy Suharto and the P.T. Timor had no previous experience with car manufacturing and did not seem able to put together an assembly line or any other necessary facilities to produce a car. Instead, Tommy’s company was granted a license to import Kia cars from South Korea, exempt from luxury tax and other import duties, and to sell them with the Timor badge on; this allowed P.T. Timor to sell its cars for around half the price of its competitors. The car did not sell well, however, probably because it was so strongly associated with the nepotism of the Suharto family in eyes of the general public (Manning and Jayasuriya 1996: 18–21, Loveard 1999: 183– 5). The Timor car case and other similar deals bred public cynicism well before the onset of the Asian economic crisis, and the issues of corruption and nepotism seriously eroded the president’s personal legitimacy, especially over his last decade in power.
Economic crisis and the “KKN” factor In the first half of August 1997, the Indonesian rupiah came under increasing pressure as a result of contagion from the currency crisis in Thailand, and on August 14 the Bank of Indonesia allowed the currency to float, resulting in an immediate devaluation against the US dollar of around 15 percent. In the early stages of the economic crisis, however, most observers seemed to agree that the Indonesian economy overall was in good shape. The government, moreover, quickly followed up with higher interest rates, cuts in government spending and a deregulation package in early September (Soesastro and Basri 1998). President Suharto, meanwhile, did not seem to think that the crisis was so serious that it would need to affect the interests of his family and close business associates. The deregulation package did not affect the cartels and monopolies held by the Suharto family or other politically well-connected businessmen. Only a few days after the float of the rupiah, the president publicly declared his support for a plan to build the world’s longest bridge
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between Sumatra and West Malaysia, a project in which his second daughter, Siti Hediati Hariyadi, looked set to play a major role. Although the government later announced that the project would be postponed, the president’s initial stance raised doubts about his, and thus the government’s, commitment to deal effectively with the economic crisis.7 Throughout September, the rupiah continued to depreciate, largely as a consequence of the high demand for US dollars among Indonesian companies, many of which held high short-term debts in dollars. Owing to the apparent stability of the rupiah’s managed exchange rate before the crisis, few companies had bothered to hedge their debts and thus protect themselves from currency fluctuations. Easy access to cheap credit, mainly from international lenders, furthermore, had resulted in a high debt–equity ratio for many companies, thus making them more vulnerable to interest rate shocks and currency fluctuations (cf. Linnan 1999: 108–11). As the rupiah started to depreciate, moreover, many Indonesian companies and wealthy private individuals moved their capital offshore, fearing a further decline of the currency. An important factor in the domestic capital flight was a proposed move, announced on July 15, of the world’s largest instant noodle producer, Liem Sioe Liong’s Indofood, to Singapore (Lindblad 1997: 12; Johnson 1998: 12). The possible move of a major part of the largest and politically wellconnected conglomerate in Indonesia seemed to hold a symbolic value for many Indonesian businessmen, and in the context of the currency crisis, the proposal served to illustrate the declining prospects for the Indonesian economy with its embedded corruption and cronyism. In early October, The Economist (11/10/97) observed: The government seems to have lost the confidence not so much of the international markets, as of its own businessmen. Many of them believe that the web of patronage, cronyism and corruption that binds the economy together prohibits effective government action.8 Several high-profile cases of corruption and mismanagement linked to the regime in the preceding years also contributed to domestic loss of confidence in the government’s ability to deal effectively with the crisis (see, for example, Robison 1997: 48–51). The national car policy was illustrative; another matter which was still being deliberated in parliament in the early stages of the rupiah crisis was Indonesia’s first broadcasting bill. The bill had originally been passed in parliament in December 1996, but had then been inexplicably stalled for six months awaiting President Suharto’s signature. In June 1997, however, immediately after the general election, the president removed Minister of Information Harmoko, who had led the deliberation of the bill in parliament half a year earlier. The president then instructed his successor, General (ret.) Hartono, to take the bill back to parliament for reconsideration, describing it as “technically difficult to implement.” To most observers, however, it was obvious that the president had rejected the bill because its
Politics, business, and democratization in Indonesia 227 regulations affected the business interests of his children and crony businessmen. All of Indonesia’s five private TV stations were owned in large part by people close to the president, including Suharto’s daughter Tutut, his son Bambang Trihatmojo and Liem Sioe Liong. In September 1997, as the rupiah continued to depreciate, Hartono, who was known to be close to members of the Suharto family, led the deliberations in parliament which resulted in the scrapping of a number of regulations limiting the operation of private TV stations and the elimination of a provision which would have allowed the state-owned television company to run commercials (Far Eastern Economic Review 4/9/97; Jakarta Post 19/9/97). The affair with broadcasting bill once again demonstrated the lengths to which Suharto was prepared to go in order to favor his family, and the fact that the private economic interests of his close business associates and family took precedence over national economic interests even in a time of crisis. The debacle around the broadcasting bill thus bred cynicism and skepticism over the government’s competence in matters of economic policy and its commitment to deal seriously with the financial crisis. The ills of corruption, collusion, and nepotism thus quickly became a focus of interest in public discussions around the government’s handling of the crisis and, from the end of 1997, also a rallying point for the opposition against President Suharto. Students coined the abbreviation KKN (korupsi, kolusi dan nepotisme), which gained widespread use, to denote the economic malpractices associated with the president and the government and the bureaucracy in general. These ills, however, were by no means new, and Indonesia had for several decades up to 1997 experienced strong economic growth in spite of endemic corruption. The KKN factor, however, carried a great symbolic value, and as mentioned, it had inspired widespread public resentment in Indonesia for several years before the onset of the crisis. With the gradual deepening of the financial crisis, and its subsequent transformation to a general economic crisis, market participants also started to focus their interest on the practices of KKN. Consequently, forceful government action in these fields became necessary for restoring market confidence and thus a sine qua non for economic recovery in general. Although corruption and nepotism did not cause the economic crisis, the widely held perception, first among the domestic business community and then among international investors and analysts as well, that these ills were responsible for the economic troubles contributed significantly to the severity and prolonging of the crisis (cf. Hill 1998: 99–100; Johnson 1998: 14). In October 1997, as the rupiah continued its downward slide, Indonesia was forced to seek assistance from the IMF, and on October 31 a package was announced which meant to restore confidence in the rupiah. In contrast to earlier IMF agreements, including the one for Thailand in August 1997, the Indonesian agreement included structural reforms, including the elimination of import and marketing monopolies and the privatization of state enterprises. These measures seem to have been inserted in the agreement in a bid to strengthen its credibility and to demonstrate the Indonesian government’s
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commitment to dealing with the issues of corruption and cronyism. However, several symbolically important arrangements did not seem to be covered by the agreement, including Tommy Suharto’s national car project, the costly state aircraft manufacturer IPTN, and Liem Sioe Liong’s monopoly on wheatmilling and distribution, a lucrative business in which Tutut also had a stake (Far Eastern Economic Review 13/11/97).9 The IMF package also included a restructuring program for Indonesia’s troubled financial sector. Deregulation of the financial markets in the 1990s paired with lax banking supervision had led to extensive overlending, intracorporate lending and mountains of bad debt among most of Indonesia’s over 200 banks. In order to restore confidence in the financial sector, the government in early November announced its decision to close down 16 troubled banks. According to Finance Minister Mar’ie Muhammad, the banks were “insolvent to the point of endangering business continuity and disturbing the whole banking system.” It was not clear, however, what criteria had been used to single out the 16 banks, and several other banks appeared to be at least as troubled as the ones affected by the closures. Instead of restoring confidence, the bank closures triggered a loss in confidence in the banking system and a run on several banks which forced the government to provide large sums in liquidity support. Moreover, it was conspicuous that several of the 16 banks were owned by politically well-connected people, including Bambang Trihatmojo, Siti Hediati Hariyadi, and Suharto’s half-brother Probosutejo. The normally low-key Bambang reacted furiously to the decision and publicly claimed that Mar’ie Muhammad had closed the banks in order to discredit his family and, indirectly, to topple his father. Both Bambang and Probosutejo filed law suits against the minister. A few days later, however, President Suharto ended the public row by announcing that the banks would remain closed, and Bambang withdrew his law suit, as did later Probosutejo. Instead, Bambang transferred the assets and staff of his bank and reopened under a new name and on the same premises. Once again, the precedence of vested economic interests over national economic interests had been demonstrated, and the issue triggered a further loss in public confidence of the government’s ability to handle the crisis (Cole and Slade 1998: 63).10 In early January 1998, President Suharto presented the government’s budget for the fiscal year 1998–9 which was widely seen as unrealistic and not in line with the IMF agreement. As a consequence, the rupiah collapsed under the psychological level of 10,000 to the dollar (compared with 2,450 before the crisis), and in Jakarta people started hoarding food, as well as consumer durables which were seen to represent a more stable value than the rupiah. The government responded by initiating a so-called “Love the rupiah movement,” Getar (Gerakan Cinta Rupiah), which encouraged Indonesians to exchange their savings in dollars into rupiah. Tutut, who had acquired something of a populist image, especially in her campaigning for the government’s electoral vehicle Golkar (Golongan Karya, Functional Groups) in the 1997 election, was a major public proponent of the initiative. Cynics, however,
Politics, business, and democratization in Indonesia 229 commented that no-one loved the rupiah more than Tutut. The campaign tried stopping the rupiah’s fall by appealing to nationalist sentiments, but it also carried racist connotations. In early January, military leaders accused Sino-Indonesian businessmen of being unpatriotic for not repatriating their overseas assets, and 13 executives, most of them Chinese Indonesians, received threatening phone calls from military officials, urging them to support the campaign (Far Eastern Economic Review 19/2/98). Meanwhile, the IMF sent a rescue team to Jakarta, and within a few days, a new agreement had been negotiated and was signed by President Suharto on January 15. The new agreement attended to several of the weaknesses in the first agreement, and it contained a far-reaching deregulation package which aimed to abolish virtually all restrictive government regulations on the economy, which in reality would mean taking on most of the vested interests of Suharto’s cronies and close family.11 The new package failed to restore market confidence in the economy, however, mainly because it was rumored that the president had accepted the agreement grudgingly and therefore was little committed to its implementation. Furthermore, the deal was seen domestically as humiliating to national dignity. The footage of the signing ceremony showed the IMF’s director Michael Camdessus standing imperiously over the seated president with his arms folded across his chest. Although Camdessus’ posture seems to have been unintentional, it was widely interpreted in Indonesia as signaling an arrogant and superior attitude.12 Tommy Suharto called the IMF agreement a “manifestation of neo-colonialism by developed countries” (EIU Country Report Indonesia, 1st quarter 1998: 22). Under the new agreement, all privileges extended to his national car project were to be revoked immediately, as would a marketing board for the clove trade which he controlled. Many other symbolically important arrangements would also be abolished, including Liem Sioe Liong’s wheat-milling monopoly and a plywood cartel controlled by Bob Hasan. The IMF agreement envisioned a far-reaching deregulation of the Indonesian economy which was bound to upset the whole politico-economic system which President Suharto had carefully designed during three decades in power and which served maintain the regime and the political dominance of the president. What was at stake, thus, was not only a threat to powerful vested interests, but also the continued domination of President Suharto over the Indonesian state.
Ethnic conflagration and political change Shortly after the signing of the second IMF agreement, signals came that President Suharto wanted to see Minister of Research and Technology B. J. Habibie elected as vice-president in the upcoming presidential and vicepresidential elections in March 1998. With his nationalist and interventionist economic ideas, including high spending on state-owned enterprises, this prospect was seen by market analysts and investors as portending disaster for the Indonesian economy and rupiah tumbled further, hitting a low of 17,000
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to the dollar exactly a week after President Suharto had signed the second IMF agreement. In Indonesia, criticism against Habibie came from J. B. Kristiadi at the research institute CSIS (Center for Strategic and International Studies), who said that Habibie would not be accepted by the market, and that the rupiah might fall to 20,000 to the dollar if he were elected. Sofyan Wanandi, an ethnic Chinese businessman and former student politician who was one of the directors of the CSIS, was also reported to be campaigning behind the scenes for the re-election of the incumbent Vice-President Try Sutrisno. In addition, Sofyan Wanandi publicly criticized the Getar campaign, questioning the use of exchanging a few thousand dollars to rupiah, as this would not be enough to overcome the crisis (Panji Masyarakat 9/2/98). The critical attitude of Sofyan Wanandi and the CSIS precipitated a counterattack from the regime, involving sections of the military and radical Muslim groups backed by the president. In the end of January, Sofyan Wanandi was implicated in a bomb explosion in Jakarta, and he was on several occasions interrogated by civilian and military authorities, as was his brother, Jusuf Wanandi, who chaired the CSIS. The commander-in-chief of the military, General Feisal Tanjung, accused Sofyan Wanandi of not being a good citizen for not helping the government and for traveling abroad at the end of January without having been cleared of all allegations (Republika 27/2/98). The campaign aimed not only to thwart Sofyan Wanandi’s attempts to stop Habibie’s election as vice-president, but also to deflect the blame for the economic crisis from the president and the government in anticipation of the presidential election in March to an alleged conspiracy of ethnic Chinese businessmen and foreigners.13 General Feisal Tanjung, together with other senior military officials, advised the press to write stories critical of wealthy Chinese, and a document, reportedly drafted by the Special Forces, Kopassus (Komando Pasukan Khusus) which described a conspiracy of ethnic Chinese and foreigners allegedly responsible for the currency crisis, was circulated among the mass media. The official news agency Antara, furthermore, started to use Sofyan Wanandi’s Chinese name, Liem Bian Koen, in order to emphasize his ethnicity, and this initiative was followed by most other media.14 At a large meeting in Jakarta’s Al-Azhar Mosque entitled “A Heart Surgery for the CSIS” (Membedah Jantung CSIS), the chairman of the military faction in parliament, Lieutenant-General Syarwan Hamid, said that it was necessary to eradicate the rats in the Indonesian economy. “These rats took away the fruits of our national development and work for their own self interest . . . Don’t think that the people do not know who these rats are. It’s time to eliminate these rats” (American Reporter February 1998).15 In February, President Suharto accused a conspiracy of domestic and international elements of trying to destroy the rupiah, alluding to “certain business people,” a thinly veiled reference to Indonesia’s ethnic Chinese business community, supposedly responsible for the crisis (Far Eastern Economic Review 5/3/98). The anti-Chinese campaign coincided with a spate of riots around the country, the main targets of which were ethnic Chinese shop-owners. The
Politics, business, and democratization in Indonesia 231 riots seem in most cases to have been spontaneous and rooted in the increasingly difficult economic situation and food scarcity experienced by many poor Indonesians. The official anti-Chinese rhetoric, however, served to endorse racist sentiments, and seems to have contributed to the outbreak of antiChinese violence. The riots and the anti-Chinese campaign conducted by the president and sections of the military establishment also heightened the sense of insecurity for many Chinese Indonesians, and many middle-class and small businessmen of Chinese ethnicity started to make plans for emigrating from Indonesia (Far Eastern Economic Review 19/2/98).16 The fears of many Chinese Indonesians came true in the first half of May 1998, when Jakarta and several other big cities, including Medan and Solo (Surakarta), exploded in massive riots, mainly directed at ethnic Chinese. Altogether, thousands of shops, vehicles, banks, and other buildings were destroyed, and over 1,000 people were killed, most of whom were nonChinese who were burned to death in fires in shopping complexes. In contrast to the smaller outbreaks of violence in January and February, the May riots were deliberately planned and instigated, following the same overall patterns in different locations and starting almost simultaneously in separate places, which made it difficult for the security forces to control the violence. Several observers have expressed suspicions that the commander of the Army’s Strategic Reserve, Kostrad, and President Suharto’s son-in-law, LieutenantGeneral Prabowo Subianto, was responsible for instigating the riots, possibly with the approval of the president.17 Apart from Prabowo’s or Suharto’s possible short-term political objectives for instigating the riots, many Chinese Indonesians seemed to believe that the violence was part of a concerted campaign to drive them out of the country and to redistribute their businesses and other assets to pribumi.18 The fact that Sino-Indonesians were the main targets of the violence seems to strengthen such suspicions. Most conspicuously, the rape and sexual assault of a number of Chinese Indonesian women at the time for the riots, especially in Jakarta, supports the theory of a deliberate scenario aimed at driving out the Chinese Indonesians. Tens of thousands of Chinese Indonesians fled the country at the height of the riots, the majority of whom later returned (Far Eastern Economic Review 30/7/98).19 The campaign seems to have continued with threats and intimidation of ethnic Chinese also after the riots had exacerbated in mid-May and after President Suharto was forced to resign in favor of Vice-President Habibie on 21 May. Pictures of gang rapes were published on the Internet, seemingly with the intention of creating more fear among Indonesia’s Chinese community. An Internet document, signed the “Pribumi Fighters,” but believed to have been disseminated by elements from the army, laid out plans for burning the houses of ethnic Chinese and for raping Chinese girls and mutilating the genitals of the men. The document also urged the reader to photocopy it for other Chinese (Siegel 1998: 102–3). Several leading commentators, furthermore, blamed the riots on the economic disparities and implicitly on the
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victims, that is the Chinese Indonesians themselves. A letter to the editor in the bi-weekly Tajuk (9/7/98) even charged that the discussions in the aftermath of the riots had turned into an effort to discredit Indonesia’s pribumi. While Indonesian media in the months following the riots abounded with stories of sexual assaults, rapes, torture, and murder of ethnic Chinese, a rumor spread that Indonesia’s Chinese community, especially the business elite, had fled the country. Estimations of the number of Sino-Indonesians who had fled around and after the May riots varied, typically ranging from around 30,000 to over 100,000 (see, for example, Jakarta Post 13/6/98, Prospek 27/7/98). The exodus of Chinese Indonesians coincided with price increases in basic commodities, because of production bottle necks and increases in the price of imported goods because of the currency depreciation in the wake of the political upheaval. However, it was widely, but incorrectly, reported in the media that the flight of the Chinese Indonesians had led to a breakdown of the distribution system, which mainly was in the hands of ethnic Chinese. Many pribumi businessmen seemed to regard this alleged circumstance as a window of opportunity for redressing the economic dominance of the SinoIndonesians. The chairman of Kadin and the head of Indonesia’s largest pribumi conglomerates, the Bakrie Group, Aburizal Bakrie, who in February had called for the government to use the economic crisis to redistribute the property of Chinese Indonesians to pribumi, called the breakdown of the basic goods distribution a “golden opportunity” (kesempatan emas) for the entrepreneurs in Kadin and Hipmi, and said that they were prepared to take over the role of the ethnic Chinese. When asked if there was an attempt to evict the Chinese businessmen from the distribution of basic commodities, Aburizal Bakrie only answered: “We can’t say that we’ll die if they don’t come back.”20 President Habibie took a similar attitude, and in July said that the economy would survive if the ethnic Chinese entrepreneurs who had fled the country did not return, because their role would be filled by others (EIU Country Report Indonesia, 3rd quarter 1998: 19). At a meeting with Kadin the same month, the president furthermore said that that if the businessmen who had fled abroad did not return within two weeks, he would instruct Kadin to take over the distribution of basic commodities (Prospek 27/7/98). In terms of concrete policies, the Indonesian food agency Bulog (Badan Urusan Logistik Nasional) also started increasingly to allocate quotas of subsidized rice and other commodities to smaller pribumi distributors rather than to the large Sino-Indonesian-owned companies which had dominated the market under President Suharto. The new policies especially affected the Salim Group which had enjoyed a near-monopoly on the distribution on many important commodities, including rice and wheat. Not all contracts went to small-scale businessmen; many also went to larger companies, including the Bakrie Group. It was even rumored that Aburizal Bakrie, who was close to President Habibie, aspired to replace Liem Sioe Liong as Indonesia’s leading tycoon. Although such rumors deserve to be met with skepticism, the economic crisis and the general slowdown in demand did increase the level
Politics, business, and democratization in Indonesia 233 of competition among the economic elites, and to some extent this increasing competition followed ethnic divisions. Many pribumi businesses were active in the contracting and engineering sectors, both of which were severely affected by the economic crisis. Taking over the distribution of subsidized foodstuffs and basic goods, which traditionally had been in ethnic Chinese hands, seemed to be an attractive way to adapt to the crisis for many of these firms. The chairman of Hipmi, Bambang Wiyogo, for example, argued that his members should take over the distribution of basic commodities, saying: “We have friends who used to work as contractors and own as many as 100 trucks for transporting soil. Now, these trucks are ready to be changed into transportation trucks, so as to transport these commodities [basic goods and foodstuffs] to the provinces” (Prospek 3/8/98, translation mine). The apparent attempt by sections of the pribumi business community to take over distribution was portrayed by its proponents more as a necessary effort to secure the food distribution in the wake of the alleged exodus of Chinese Indonesians than as a premeditated assault on the business interests of the Sino-Indonesians. There was no evidence, however, that the distribution system ever had ceased to function, or that it was “completely jammed” (macet total), as Aburizal Bakrie claimed (Prospek 3/8/98). Goods were scarce because of a decline in production and import owing to the currency depreciation in the wake of the May riots, and in mid-July, President Habibie was informed by the president of the Indonesian Association of Retailers, Steve Sondakh, that there had been no substantial breakdown in distribution, a circumstance which was also confirmed by Bulog’s chairman Beddu Amang (Far Eastern Economic Review 30/7/98). In addition to the increasing competition in the distribution sector between ethnic Chinese and pribumi businessmen, there were also signs of friction between different groups of pribumi interests. Minister of Cooperatives and Small Enterprises, Adi Sasono, advocated a proposal to channel the distribution of basic commodities through cooperatives and small businesses. In order to facilitate their establishment in this sector, Adi Sasono wanted to extend cheap credit to the cooperatives and small enterprises. Starting in August, Adi Sasono planned a gradual expansion of Indonesia’s 53,000 existing cooperatives into the distribution of basic commodities, starting off with subsidized cooking oil. In spite of the threats from Coordinating Minister for the Economy, Finance, and Industry, Ginandjar Kartasasmita, to resign if the proposal was realized, Adi Sasono won the ear of the president and was granted 20 trillion rupiah for re-lending at an interest rate of around 16 percent (Prospek 3/8/98, Asiaweek 18/12/98). In relation to the state budget, these funds were very large, amounting to 10 percent of the entire budget (Hill 1999: 103). The populism of Adi Sasono’s economic program, which was called the “people’s economy” (ekonomi rakyat or ekonomi kerakyatan), aroused considerable controversy. The idea of an economy based on cooperatives had a long-standing association with Indonesian nationalism, and was enshrined
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in Indonesia’s constitution. The effort to empower the cooperatives also seemed to go well with the general public mood, calling for a more equitable distribution of income. Critics, however, charged that the money channeled to the cooperatives risked being lost in corruption, and that with 50 percent deposit interest rates, there was little incentive for the recipients of cheap state credit to use the funds for productive investment. Another worry was that funds set aside for the cooperatives would be used to buy political support, especially in the upcoming June 1999 general election (Asiaweek 18/12/98).21 Although Adi Sasono consistently asserted that his program was for the people and not about race, its effect was that the cooperatives, mainly run by pribumi, would take over the businesses of ethnic Chinese traders and distributors. Many people in Indonesia were suspicious of Adi Sasono’s intentions and the Far Eastern Economic Review (3/12/98) asked if he was Indonesia’s most dangerous man. Adi Sasono argued for a diminished role for the cukong, and accused those who had run the national economy of causing the crisis. “The big party is over. Now is the time to wash the national dishes,” he said in September (Suara Karya 29/9/98). There was no attempt, however, either on behalf of Adi Sasono or Aburizal Bakrie or any other prominent pribumi representative, to include representatives of the Sino-Indonesian community in discussions about how to bring about economic redistribution, in spite of explicit support for an affirmative action program by several leading Chinese Indonesians.22 The leading representatives of the pribumi business community and the government rather preferred to downplay racial factors in their discourse about economic disparities, and instead took recourse to populist rhetoric, through which the “people” (rakyat) came to be used as euphemism for pribumi, and taking over the allegedly broken-down distribution system of Sino-Indonesian businessmen was conveyed almost as a noblesse oblige to save the people from starvation.
Bank restructuring and intra-elite friction In addition to the assault by pribumi interests on the distribution networks of the ethnic Chinese businessmen, members of the pribumi business community, in collaboration with sections of the government, also tried to use the official bank restructuring program to redistribute the assets of the large Sino-Indonesian conglomerates. In August 1998, Aburizal Bakrie suggested that four banks, including Indonesia’s largest private bank, Liem Sioe Liong’s Bank Central Asia (BCA), all of which were under government supervision, be taken over by the government, recapitalized and then sold through an initial public offering with preference given to pribumi businessmen. Foreign investors (and, presumably, Sino-Indonesians as well) would be allowed to buy shares on the secondary market (Kompas 26/8/98). It seems that the attempt to redistribute the assets of the conglomerates initially got the support of the government. On August 21, the government announced that 14 banks which had received liquidity support from the Bank of Indonesia earlier
Politics, business, and democratization in Indonesia 235 in the year would have to repay their debt within one month’s time. The 14 banks included the BCA, which had received as much as 30 billion rupiah in liquidity support, owing to a run on the bank in the wake of the May riots.23 When the deadline expired on September 21, all 14 banks were able to fulfill their obligations, mainly by depositing their assets with the Indonesian Bank Restructuring Agency (IBRA). However, shortly after the deadline, the government, as represented by IBRA and the governor of the Bank of Indonesia and with the support of Finance Minister Bambang Subiyanto, changed its policy, demanding instead that the liquidity support be repaid within five years and all in cash. The next day, however, President Habibie, as quoted by Coordinating Minister for the Economy, Finance and Industry, Ginandjar Kartasasmita, and the president’s economic advisor, Frans Seda, intervened and again changed the time limit, this time to one year. Frans Seda explained that it was better for the government to recover 30 percent of the debt in one year’s time than all of it five years. Given the depressed status of the economy, however, the requirement to repay the liquidity aid in cash within one year would in effect have meant selling out the assets of several of the major conglomerates, including the Salim Group, at low prices and mainly to foreign interests. The policy was consequently criticized by economists for not being in the nation’s best interest (Prospektif 19/10/98). The government’s mishandling of the issue of liquidity support repayment indicated that there were divisions within the government over the issue. A rumor, which seemed plausible to many Chinese Indonesians, had it that the strict requirements for debt repayment, which would force the Salim Group and other major conglomerates to sell out their assets, was an attempt by the Bakrie Group allied with the Lippo Group, a major Sino-Indonesian conglomerate, to take over the Salim Group’s assets. Although the owners of the Lippo Group, Mochtar Riady and his son James Riady, were of Chinese descent, they were among the few Sino-Indonesian tycoons who enjoyed a close relationship with the pribumi conglomerate community led by Aburizal Bakrie. James Riady had been active for several years in Kadin, and he also often attended the meetings of Hipmi. Moreover, both Aburizal Bakrie and James Riady were close to President Habibie and to several ministers in his cabinet. Bakrie was close to both Habibie and Ginandjar Kartasasmita, and he was the secretary general of the president’s Economic and Financial Resilience Council, a post which he had taken over from Anthony Salim, the son of Liem Sioe Liong, shortly after Habibie’s ascendancy as president. James Riady was a member of the People’s Consultative Assembly, MPR (Majelis Persmusyawaratan Rakyat), Indonesia’s highest legislative assembly, and he was often invited to government consultations on matters of economic policy. The president and director of the Lippo Group’s Bank Lippo, Markus Permadi, moreover, was an assistant to the Minister of State Enterprises Tanri Abeng, who himself was a former chief executive of the Bakrie Group (Prospektif 19/10/98). The close cooperation between the Bakrie and Lippo groups illustrated that leading pribumi businessmen, in spite of their strident
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rhetoric about strengthening pribumi interests, were prepared to work closely with the ethnic Chinese tycoons. Suharto’s half-brother Probosutejo likewise took a fairly militant pro-pribumi stand, although his business ventures were inextricably linked with several large Sino-Indonesian business groups (Robison 1986: 348). Although there is no evidence that the Bakrie and Lippo groups conspired to take over the assets of the Salim Group or other conglomerates, there was pressure on the government to use the bank recapitalization program for redistributing assets from Chinese owners to pribumi interests. As we have seen, both Aburizal Bakrie and Adi Sasono publicly called for such policies, as did the chairman of Hipmi, Hariyadi B. Sukamdani, who said that his members were prepared to take over the assets of the troubled banks. As it was, however, these attempts came to nothing as the government again, on November 10, changed its policy on the matter of liquidity support repayment, reportedly at the insistence of the IMF, now raising the time limit to four years for repayment (Warta Ekonomi 24/11/98). Overall, however, the pace of the bank restructuring was slow, and it seemed that the government was unwilling to take on the interests of the influential tycoons who owned many of the troubled banks under IBRA’s supervision. A plan for the restructuring was due to be presented on February 27, but was postponed, officially for technical reasons, although Asiaweek (26/3/99) quoted an official at IBRA as saying that the reason was political. It was later revealed, by the Far Eastern Economic Review (19/8/99), that the original plan had been to close 45 banks, but that President Habibie intervened in the last minute in order to save seven of them, including the Bakrie family’s Bank Nusa Nasional. An audit earlier in the year by the firm of PricewaterhouseCoopers had estimated Bank Nusa’s capital-adequacy ratio at minus 210, well below the Bank of Indonesia’s limit of minus 25 percent for banks to be eligible for recapitalization. The central bank, however, rejected PricewaterhouseCoopers’ estimation in favor of the Bank Nusa management’s own calculations and revised the figure to a convenient minus 24.6 percent, thus making the bank eligible for recapitalization. In the official plan, which eventually was made public on March 13, Bank Nusa and six other banks were exempted from liquidation, and eventually were merged into the nationalized Bank Danamon. This solution appeared to be the result of a compromise between the government and the Bakrie group, where the latter gave up control of Bank Nusa but the bank was spared liquidation, a process which would have led to the unraveling of its bad loans and the seizure of the Bakrie family’s collateral. The extra cost for the government was estimated by the Far Eastern Economic Review at US$300 million. To some extent, the slow pace of the bank and private sector debt restructuring demonstrated the Habibie government’s unwillingness to take on many of the powerful vested interests of the Suharto era. There were no attempts to dismantle the business empires of the Suharto children, and the investigation of corruption charges against the former president and his family hardly
Politics, business, and democratization in Indonesia 237 proceeded at all. In February 1999, a taped telephone conversation between President Habibie and Attorney General Andi Ghalib, who was responsible for the investigation, indicated that neither of the two were serious about pursuing the case (Panji Masyarakat 19/2/99). In May, moreover, Andi Ghalib himself was accused of receiving payments from prominent businessmen and was eventually forced to resign (The Economist 16/10/99). In October 1999, shortly before the end of Habibie’s term as president, the probe into Suharto’s wealth was closed owing to lack of evidence. Although the parliament passed several anti-corruption laws in response to public opinion, these generally contained many loopholes, and as of August 1999, no senior government official had been brought to trial on charges of corruption (Far Eastern Economic Review 13/5/99, 19/8/99). Taken together, these and other similar developments bred public cynicism about the government’s commitment to creating a clean government and seemed to signal that the old ways of corruption, collusion, and nepotism inherited from the Suharto era still lived on, albeit with some reshuffles in the political and economic leadership. The Suharto family and the former president’s closest cronies had been pushed aside, but to a large extent their places had been filled by others better connected in the new corridors of power. Moreover, several analysts argued that the uncertainty of the Habibie administration’s political future raised the stakes for those in power. For example, shortly before the June 1999 general election, Teten Masduki, coordinator of the NGO Indonesia Corruption Watch, observed: “We’re now in this temporary time where the officials are afraid the next regime could clean them out, so they’re grabbing what they can” (Far Eastern Economic Review 13/5/99). This uncertainty and the decreasing opportunity for election-rigging compared with that during the Suharto era fueled public suspicion and fears that “money politics” would mar the June 1999 election.
Democracy, electoral contest, and “money politics” During the Suharto era, carefully staged general elections were held every fifth year, which invariably produced large victories for the government’s electoral vehicle, Golkar. Golkar’s main patron was President Suharto, who provided the organization with financial resources, much of which consisted of contributions from the corporate sector and which were channeled through the yayasan which the president controlled. A large part of Golkar’s funding from the business community and other sources was for example channeled through the Dakab Foundation (Yayasan Dana Abadi Karya Bhakti), which was set up in 1985 and was chaired by Suharto. The strong financial position gave Golkar a huge advantage over the two legal non-government parties, the United Development Party, Partai Persatuan Pembangunan (PPP), and the Indonesian Democratic Party, Partai Demokrasi Indonesia (PDI), both of which had to rely mainly on the collection of membership fees and the scarce funding provided by the government.24
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With the resignation of Suharto from the presidency, and later from Golkar’s advisory board as well, however, the organization lost its main financial patron. Moreover, many businessmen who felt that they had been forced by the Suharto regime to donate money to Golkar abandoned their support for the organization (Jakarta Post 26/8/98). These factors, together with the difficult economic situation in general, probably limited Golkar’s options for using money politics in order to win the first post-Suharto election in June 1999. In the end of January 1999, however, the Chairman of Supreme Advisory Council, DPA (Dewan Pertimbangan Agung), Arnold Baramuli, who was also a member of Golkar’s advisory board and close to President Habibie, made big headlines in the Indonesian media when he toured the president’s home province of South Sulawesi, handing out money and urging people to vote for Golkar. Baramuli gave out hundreds of millions of rupiah for purposes such as the upkeep of mosques, clothes, student scholarships, and for direct use in Golkar’s upcoming election campaign. It was unclear where the money came from; it was handed out as cheques rather than cash, and according to Baramuli it was donations from friends of Golkar and not corruption money (Gatra 6/2/99). Several months later, however, it was revealed that 546 billion rupiah, or around US$70 million, from Bank Bali, a private bank which was under the supervision of IBRA, had been siphoned off to a debt-collecting company controlled by Golkar’s deputy treasurer Setya Novanto and Golkar fund-raiser Djoko Chandra. Baramuli, together with several other senior officials close to President Habibie, appeared to have been involved in the scandal and reportedly also tried to cover it up when the affair began to arouse the interest of the media, the IMF, and the general public.25 As the election approached, Golkar also apparently handed out money directly to voters. In one village near Yogyakarta in central Java, a Golkar supporter going door-to-door reportedly distributed 50,000 rupiah to households in exchange for their support in the election (Asiaweek 18/6/99). Many of the thousands of people who attended a Golkar mass meeting in a sports stadium in Jakarta on March 7, 1999, were reported to have been given pocket money, food, and clothes to attend the meeting (Ummat 22/3/99). Furthermore, according to the non-government Independent Committee of Election Observers, Komite Independen Pemantau Pemilu (KIPP), in several areas, Golkar used local branches of the state-owned Bank Rakyat Indonesia (BRI), to lend money to voters (EIU Country Report Indonesia, 2nd quarter 1999: 15). Moreover, the head of the non-government Urban Poor Consortium, Wardah Hafidz, accused Golkar of using state funds marked for social welfare for political purposes. Although Golkar’s chairman Akbar Tandjung rejected such charges, he conceded that Golkar had helped people to obtain government facilities (Asiaweek 18/6/99). The World Bank, meanwhile, apparently believing that there was a significant risk that its funding for social security purposes would be used for buying votes in the election, postponed a US$600 million loan for the government’s social welfare program (Asian Wall Street Journal 13/4/99).
Politics, business, and democratization in Indonesia 239 Accusations of money politics also affected Adi Sasono and the People’s Sovereignty Party, Partai Daulatan Rakyat (PDR), with which the minister was associated. Many of the local government officials who administered and distributed the credits under the minister’s “people’s economy” program were PDR cadres, and it seemed that the party tried to attract mass support through its control over government funding. Moreover, according to Wardah Hafidz, Adi Sasono, at a closed meeting in April, instructed the regional functionaries of the Department of Cooperatives to support the PDR in the election. These accusations were denied, however, by both the PDR and Adi Sasono, and the party declared that they were prepared to sue Wardah Hafidz (Tajuk 6/4/99, Gatra 29/5/99). The Suharto family, moreover, tried to regain political influence by funding several new political parties. According to an official at the General Election Committee, Komite Pemilhan Umum (KPU), the Suharto family funded 12 political parties (South China Morning Post 2/2/99). One of them was the Republican Party (Partai Republik), whose leadership included several figures close to Suharto’s daughter Tutut. The party also received funding from Tommy Suharto to pay for T-shirts, flags, and television commercials (Far Eastern Economic Review 27/5/99). The influence of money politics was circumscribed, however, by a large awareness among the political public, and perhaps of the electorate in general, of the potential threat to the country’s first democratic election in over four decades. This awareness was probably in part attributable to the widespread media attention in Indonesia surrounding the alleged involvement of the Lippo Group in contributing financially to the re-election campaign for US President Bill Clinton in 1996.26 The KPU, in order to suppress the emergence of “money politics,” issued regulations that limited the maximum amount which a party was allowed to spend on the campaign to 110 billion rupiah. The committee also limited the sums which a party was allowed to receive in donations from individuals and corporations and commissioned independent accountants to audit the bookkeeping of the parties (Gatra 29/5/99). Although “money politics” no doubt influenced the outcome of the June 1999 general election, several factors worked to limit this influence. For one thing, against the background of the severe economic crisis, few groups or parties taking part the election had much money to spread around. The competition facing Golkar in the June 1999 election was also much fiercer, as most of the manipulative and restrictive practices and policies which had helped the organization in the Suharto era elections had been abolished. In 1999, therefore, buying a significant amount of votes required much larger funds than earlier. Moreover, the regulations of the KPU and the requirements for transparency probably hindered some of the worst excesses. The general awareness of the issue of money politics and the negative public attitudes surrounding it also contributed to decrease its usefulness for the election contestants. The general view of Indonesian political scientists seemed to be that the efficiency of money politics was limited, because with
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the secrecy of the ballot guaranteed, people would take the money and still vote according to their political preferences. The outcome of the election seemed to confirm that money politics was not decisive. The largest influence of money politics was probably visible in Golkar’s performance. The party collected around 22 percent of the votes, which was far below 74.5 percent which it had achieved in the 1997 election. The Republican Party did not manage to collect enough votes to gain a seat in parliament, in spite of a massive advertizing campaign which cost US$155,000, a figure surpassed only by Golkar which spent US$214,000 on advertizing (Asiaweek 18/6/99). The winner and largest party in the election was the Indonesian Democratic Party of Struggle (PDI-P), led by Megawati Sukarnoputri, the daughter of Indonesia’s first president, Sukarno. The party collected around 34 percent of the votes. As Gerry van Klinken has observed, the swing towards Megawati and the PDI-P, which had comparatively little money to spread around, suggested that charisma, rather than “money politics,” was the central factor which influenced the outcome of Indonesia’s first post-Suharto election.27 The Bank Bali scandal began to unravel in the weeks leading up to the presidential election following an investigation by Indonesia’s highest legislative body, the MPR, in October 1999 and became a major liability for President Habibie in his attempt to be re-elected as president. Although the affair was not the only circumstance working against the president – his domestically unpopular decision to allow a vote for independence in East Timor and opposition from the ranks within his own party, Golkar, were other central factors – it totally discredited his administration. On October 19, the MPR rejected his accountability speech by a narrow vote, thus effectively ending his political career (Liddle 2000: 37). Instead, Abdurrahman Wahid, leader of the traditionalist Islamic organization NU (Nahdlatul Ulama, the rise of the Islamic scholars), was elected president, while Megawati was elected vice-president. Both were popular leaders and relatively untainted by corruption. Fighting the practices of KKN and increasing transparency looked set to become two of the top priorities of the new government. The appointment of Kwik Kian Gie, a leading PDI-P member and vocal critic of the corruption and cronyism in the late Suharto era, to the important position of Coordinating Minister for the Economy, Finance and Industry, signaled that the government intended to deal seriously with the problems of KKN. In the course of 2000, however, a string of highly publicized suspected cases of KKN involving the president or people close to him made this commitment seem much less certain then it first had when Wahid took office in November 1999. The most damaging affair for the president was his implication in a scandal involving the government food agency, Bulog, and which quickly was dubbed “Bulog-gate” by the Indonesian media. Early in 2000, Wahid’s masseur, Suwondo, who claimed to act at the president’s behest, siphoned off 35 billion rupiah (US$4.1 million) from the agency, allegedly to be used as extra-budgetary funds to facilitate the government’s peace effort in the
Politics, business, and democratization in Indonesia 241 troubled province of Aceh. Wahid later confirmed that he had met with a deputy chief of Bulog, Sapuan, in early January and inquired about the possibility of using Bulog’s money for Aceh, although, according to the president, nothing had come out of the meeting. When Suwondo persisted in asking for the money, however, Sapuan granted him a loan of 35 billion rupiah. Shortly afterwards, Suwondo disappeared. It is unclear what Suwondo intended to use the funds for; they may have been intended to be used to finance a new airline company, Awair, in which associates of both Wahid and Suwondo were involved, or to support an abortive campaign of Acting State Secretary Bondan Gunawan to become elected as secretary-general of the PDI-P (Asiaweek 16/6/00). Although at least parts of the money were returned shortly after news of the scandal broke and the president himself was cleared of suspicion after a police questioning on June 24, the affair damaged him politically, and it also damaged confidence in the government’s commitment and ability to deal effectively with the practices of KKN and to uphold transparency in government accounts. Moreover, shortly afterwards, the president came under fire from legislators over a US$2 million donation from the Sultan of Brunei to be used for humanitarian aid in Aceh. The president had accepted the money personally, thus excluding them from the state budget, and left them to a business associate to manage (EIU Country Report Indonesia August 2000: 19). Meanwhile, there were accusations of continuing political favoritism of certain, predominantly ethnic Chinese, businessmen close to the president. Some of these had also been prominent during the Suharto era, such as the Suryajaya [Soeryadjaya] family and Sofyan Wanandi. The latter was appointed chairman of the newly established National Business Development Council, Dewan Pengembangan Usaha Nasional (DPUN), an advisory team to the president. His appointment, as well as the appointment in April of Lieutenant-General Luhut Panjaitan as minister of industry and trade, was probably an attempt by the president to shore up support from the mainly Catholic-Chinese network of businesses connected with Wanandi, the CSIS, and the former commander-in-chief of the military, General (ret.) Benny Murdani (EIU Country Report Indonesia May 2000: 16, 18). Benny Murdani was widely believed to still hold considerable informal influence over the military over a decade after he had stepped down as armed forces chief. Wahid’s attempt to approach the Wanandi–CSIS–Murdani network may thus largely have been related to the president’s struggle for control over the military.28 Almost a year after Abdurrahman Wahid took office as president, the pace of corporate reform and debt restructuring remained slow. Through its ownership of state enterprises and the seizure of corporate assets by IBRA, the state, on paper, controlled almost 70 percent of the economy (Business Asia 18/9/00). By October 2000, however, less than 20 percent of the assets controlled by IBRA had been sold, and for the most part, the original owners retained control over the operation of their companies. Lack of managerial
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skill and investment capital, as well as long-standing popular opposition against foreign influence in the economy, all seemed to have affected the slow pace of corporate reform. In addition, business tycoons with personal connections to Wahid were able to get favorable deals, allowing them to continue to operate and control their companies. Pressure on the president from his political opponents had apparently generated an immediate need for money to be used for political maneuvering, and the only available source of funds was the business community (Far Eastern Economic Review 19/10/00).
Conclusion Given the highly personalized character of political business during the late Suharto era, it was inevitable that the president’s fall from power would involve big changes in the relationship between politics and business. Most obviously, the members of the Suharto family overnight lost their privileged access to political power, and eventually, with Habibie’s resignation in November 1999, also their protection from persecution for their involvement in the practices of KKN.29 Public resentment against the widespread KKN during the late Suharto era had been one of the main causes of the rise in opposition against the president, and his often blatant favoritism of his own family members was particularly damaging to his image. Moreover, many analysts blamed the endemic corruption, collusion, and nepotism for the severe economic crisis. Against this background, rooting out KKN would have to be a top priority of any post-Suharto government, and suspicions of involvement in KKN was to prove extremely damaging politically. Most of the reformers of the post-Suharto era, however, were prominent figures also under the New Order, and many had prospered as a result of his personalized system of political business. The fall of Suharto led to the demise of his family and closest cronies, but the overall links between business and politics remained largely intact. Virtually all influential politicians in the postSuharto era had either close contacts with prominent businessmen, direct interests in businesses, or both. This was true not only for those who had been inside the power structure of the New Order, but also for those who had operated on the margins of the regime and who often were critical of the government, including Abdurrahman Wahid and Megawati Sukarnoputri. As we have seen, political business under the New Order did not only take the form of patrimonial distribution of favors from the president, as there were always alternative centers of power to that of the president. Although the influence of these centers was much smaller than that of the president, they formed parts of a number of networks which included business people, politicians, intellectuals, and military leaders.30 For many critics of the government, such networks enabled them to establish business links and interests, thus providing them with a necessary measure of economic independence. The economic crisis and the instigated violence in the months leading up to Suharto’s fall combined to increase the tension and suspicion among
Politics, business, and democratization in Indonesia 243 Indonesia’s political and economic elites. Moreover, Suharto’s resignation created a power vacuum and left the field open for a heightened competition between the various networks of politicians and businesses. During the Habibie presidency, networks of Islamic modernists and predominantly pribumi businessmen seemed to have the upper hand and apparently tried to use their access to state power to take over the businesses and assets of ethnic Chinese businessmen. Although there seems to have been some support within the Chinese Indonesian business community for some kind of affirmative action of to redress the economic imbalance between ethnic Chinese and pribumi Indonesians, there was no dialogue between the two sides on what forms such a policy might take. Instead, the attempts launched by prominent politicians and businessmen under Habibie looked more like hostile assaults on the businesses of Chinese Indonesians and appeared to be driven more by personal ambition than any wish to find a workable solution to the problem of ethnic economic and social inequality. The intimate links between business and politics remains a major obstacle in Indonesia’s transition to democracy, in all the three varieties identified by Gomez in the Introduction to this volume. First, the close connections between politicians and business elites, as we have seen, seem to be firmly entrenched. The fall of Suharto involved some personal changes in the system as well as some alteration of the rules of the game, notably an increasing intraelite competition for economic and political power, but the ties between business and politics do not appear to have been weakened by the political transition from the New Order. The relationship is symbiotic, as businesses have much to gain from influencing the political process, and politicians often desperately need funds for their political activities. Second, the unstable and elitist character of the Indonesian political system makes it susceptible to money politics within the main representative bodies, such as political parties and the parliament, where money may be used to buy over politicians or facilitate negotiations. It appears that at least parts of the funds siphoned off in the Bank Bali scandal were intended to be used in this way in order to secure Habibie’s re-election as president. Third, although the influence of money politics in the June 1999 general election seems to have been limited, there remains a significant risk that such practices will surge in the future. As the Indonesian economy recovers, there will again be more money to spread around and as initial euphoria over the new-won political freedom turns into disillusion, electoral money politics could find fertile ground in Indonesia just as it has in other new democracies in the region. In spite of these problems, Indonesia has made considerable headway on the path towards democracy. Even though practices of KKN persist, there is an enormous difference in the scope and blatancy of such practices under the Wahid administration compared with the Suharto era. It would probably not be possible, nor desirable, to sever all links between politics and business. However, if the commitment among Indonesia’s political and business elites
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remains strong to creating a clean government and business environment, and if trust can prevail over suspicion among these elites and among the population in general, then Indonesia will have come a long way towards political and economic democracy.
Notes * The research for this article was funded by the Center for East and Southeast Asian Studies, Lund University and the Faculty of Humanities, Lund University. I wish to thank Terence Gomez and Robert Cribb for their valuable comments on earlier drafts of the text. 1 Liem himself, however, implausibly claimed that his connection with the president had not helped him in his ventures (Suryadinata 1997: 40). For further information on Liem Sioe Liong and the Salim Group, see Robison (1986: 296– 315) and Schwarz (1994: 109–15). 2 For the patrimonial character of the Suharto regime, see Crouch (1979), and about the yayasan, see Aditjondro (1998: 3–78). 3 See also Winters (1996: 95–141). Although Robison specifically applied his analysis to the period from the mid-1970s to the mid-1980s, it also serves well to describe the relations between government and business during the Suharto era in general. 4 For an estimation of the increase in economic disparity in the first half of the 1990s, see Tjiptoherijanto (1997); see also the discussion in Eklöf (1999: 69). 5 Cf. MacIntyre (1994: 257). One source of resentment seems to have been the exclusionary way in which many Chinese businessmen ran their companies, appointing exclusively ethnic Chinese as senior managers, Suryadinata (1997: 40); Loveard (1999: 202). For a discussion of the Islamic identity of the Indonesian middle class in the 1990s and its generally moderate and tolerant views, see Hefner (1993). 6 On Kadin’s role in the relations between business and politics, see further MacIntyre (1990). 7 The plan to build the bridge was postponed, together with a number of other mega infrastructure projects, on September 23 (McLeod 1997: 45). 8 Cf. also Johnson (1998: 12); Evans (1999: 114). Indonesia’s finance minister, Mar’ie Muhammad, also agreed that the loss of confidence in the rupiah initially was driven by domestic capital flight; interview, Jakarta (16/11/98). 9 The full text of the agreement was not made public; for a summary of its main non-classified contents, see the IMF Survey (17/11/97). The national car project was mentioned only in vague terms; according to the IMF Survey (17/11/97), the Indonesian government had “indicated that it will implement ahead of schedule the World Trade Organization dispute panel ruling on the special tariff preferences given to the National Car, should the judgement on this case be decided against Indonesia.” 10 For the affair with the bank closures, see further The Economist (8/11/98), Far Eastern Economic Review (20/11/98) and Warta Ekonomi (8/12/98). 11 In contrast to the first agreement, the full text of the January agreement was made public and published on the internet page at http://www.imf.org/external/ np/LOI/011598.htm (version current at 22/2/99). For the budget, see Kompas (7/1/98); Asiaweek (16/1/98). 12 See the interview with Michael Camdessus in Asiaweek (29/5/98). 13 A third reason for the campaign, as has been suggested by Arief Budiman (1998: 19), was for the government to try to diffuse opposition from Muslim groups,
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15 16 17
18
19
20
21 22
23 24 25
particularly the supporters of Amien Rais, by playing off Muslims against nonMuslims. The Age (Melbourne) (24/1/98, 16/2/98) and Human Rights Watch/Asia, “Indonesia Alert: Economic Crisis leads to Scapegoating of Ethnic Chinese;” internet page at http://www.hrw.org/hrw/press98/feb/indo-al2.htm (version current at 22/2/99). See also internet page at http://www.american-reporter.com (version current at 9/4/99). For the riots, see Human Rights Watch/Asia, op. cit. and Digest 52 (19/2/98), internet page at http://www.insideindonesia.org/digest/dig52.htm. See, for example, Booth (1998: 9); Bourchier (1998: 22); Sidel (1998: 139); Mietzner (1999: 78–9). For the riots, see further Eklöf (1999: 175–97). The purpose of instigating the riots would either have been for the regime to justify a crack-down on the increasingly vocal anti-Suharto opposition or for Prabowo to discredit his rival and superior, the military commander-in-chief, General Wiranto. See, for example, Prospek (3/8/98) and Jusuf Wanandi’s article in Jakarta Post (3/ 8/98). Personal conversations with Chinese Indonesians in Jakarta in September and November 1998 confirmed that such suspicions were widespread in the wake of the riots. The government-appointed Joint-Fact-Finding Team, TGPF (Tim Gabungan Pencari Fakta), confirmed 66 cases of rape, several of which included the torture or killing of the victims, in connection with the riots in Jakarta, Medan and Surabaya (Joint-Fact-Finding Team 1998: 10). The numbers are probably underestimations owing to problems of reporting and verification and, in addition, rapes also occurred before and after the riots (Joint-Fact-Finding Team 1998: 11). See also Prospek (3/8/98). For Bakrie’s statement in February, see EIU Country Report Indonesia (1st quarter 1998: 15), and for his thoughts in general on how to empower Indonesia’s pribumi businessmen, see Bakrie (1997) and Tamara (1998: 80–4). For Adi Sasono’s economic ideas, see, for example, Sasono (1998). For example, both Sofyan Wanandi and his brother Jusuf Wanandi expressed such support, as did leading Sino-Indonesian economist Christianto Wibisono (see Prospek 8/6/98; Prospek 27/7/98; Jakarta Post 3/8/98). Sofyan Wanandi, however, also recognized that there were two main problems with initiating an affirmative action program. One was that the lack of adequate representation for Indonesia’s ethnic Chinese rendered negotiations to achieve a national consensus on the matter impossible. The other was that it was uncertain if the necessary condition of transparency of an affirmative action program could be met until the overall governance in Indonesia had improved (Wanandi 1999: 133). See Warta Ekonomi (24/11/98) for the estimation of BCA’s and the other 14 banks’ liquidity support and Warta Ekonomi (8/6/98) about the run on the bank. See Djadijono (1999: 126–9) for the issue of funding to Golkar and the political parties under Suharto. See Ward (1974) and Irwan and Edriana (1995) for the management of New Order elections in general. The details of the Bank Bali scandal are still not entirely clear. An investigation by PricewaterhouseCoopers said that it found “preferential treatment, concealment, bribery, corruption and fraud” in connection with the Bank Bali affair, and that “ministers, senior government officials, members of parliament” and others seemed to be involved. In accordance with the government’s instructions, however, the abbreviated version of the report which was distributed to the Indonesian legislature and the IMF did not disclose the names of those involved (Far Eastern Economic Review 23/9/99).
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26 See George Aditjondro, “The Lippo Story” 1–3, posting on the Indonesia-P e-mail list (
[email protected]) (19/3/97); available at the searchable database REG-INDONESIA, internet gopher page at gopher://gopher.igc.apc.org: 2998/ 7REG-INDONESIA (version current at 25/2/99). 27 Digest 80 (15/5/99); internet page at http://www.insideindonesia.org/digest/ dig80.htm (version current at 9/10/99). In August 1999, however, allegations surfaced that the PDI-P had received large sums of money from several leading conglomerates, including the Suharto family as well as from leading military figures. A list of the alleged contributions was published by the tabloid Siaga. However, the editor-in-chief of the paper, Eki Syachrudin, who was also a leading Golkar activist, conceded that the list was “half nonsense, half accurate” (Gatra 4/ 9/99). It seems that the list and the accusations against the PDI-P were fabrications aiming to deflect public interest from the Bank Bali scandal and the possible involvement of leading government officials and Golkar activists. As such, however, the attempt was unsuccessful. 28 The establishment of the DPUN and a number of other economic advisory councils to the president weakened the position of Coordinating Minister for the Economy, Finance and Industry, Kwik Kian Gie, who apparently felt by-passed as the weight of policy making shifted from the cabinet to the advisory councils reporting directly to the president. In August 2000, ahead of cabinet reshuffle, the minister resigned after several months of rumors of a schism between Kwik and the president (EIU Country Report Indonesia August 2000: 18–19). 29 In September 2000, the attempts to prosecute Suharto were stalled as the Jakarta District Court had declared the former president medically unfit to stand trial. Suharto’s youngest son, Tommy Suharto, however, was sentenced to 18 months in jail for his involvement in an US$11 million land deal with Bulog, but at the time of writing (November 2000), he was on the run from the police seeking his arrest (Far Eastern Economic Review 12/10/00). 30 For the development of networks (jaringan) under the New Order, see Sidel (1998: 165–74).
References and further reading Aditjondro, G.J. (1998) Guru Kencing Berdiri, Murid Kencing Berlari: Kedua puncak korupsi, kolusi, dan nepotisme rezim Orde Baru dari Soeharto ke Habibie (The teacher urinates standing, the student urinates running: the two peaks of corruption, collusion and nepotism under the New Order regime), Jakarta: Masyarakat Indonesia untuk Kemanusian (MIK) and Pusat Informasi Jaringan Aksi Reformasi (PIJAR) Indonesia. Bakrie, A. (1997) “Pembauran Pri-Nonpri di Tanah Air” (The Assimilation of Pribumi and Non-Pribumi in the Fatherland), in M. Dawam Rahardjo (ed.), Pembangunan Ekonomi Nasional: Suatu Pendekatan Pemerataan, Keadilan dan Ekonomi Kerakyatan, Jakarta: Intermasa. Booth, A. (1998) “Economic Development, National Security and Political Accommodation in Indonesia in the New Order Era” (revised paper prepared for the ESRC (Economic and Social Research Council) Pacific Asia Program Project on Security, Development and Political Accommodation in Pacific Asia), London, July: Workshop, Institute of Commonwealth Studies, unpublished. Bourchier, D. (1998) “The Shaming of the Indonesian Military,” Asia-Pacific Magazine 13. Budiman, A. (1998) “Friend or Foe?,” Inside Indonesia 54.
Politics, business, and democratization in Indonesia 247 Cole, D.C. and B.F. Slade (1998) “Why Has Indonesia’s Financial Crisis Been so Bad?,” Bulletin of Indonesian Economic Studies 34(2). Crouch, H. (1979) “Patrimonialism and Military Rule in Indonesia,” World Politics 31(4). —— (1993) The Army and Politics in Indonesia, Ithaca, NY: Cornell University Press. Djadijono, M. (1999) “Economic Growth and the Performance of Political Parties,” in R.W. Baker, M. Hadi Soesastro, J. Kristiadi, and D.E. Ramage (eds), Indonesia: The Challenge of Change, Singapore: Institute of Southeast Asian Studies and Leiden: KITLV Press. Eklöf, S. (1999) Indonesian Politics in Crisis: The Long Fall of Suharto, 1996–98 (NIAS Studies in Contemporary Asia, no. 1), Copenhagen: NIAS Publishing. Evans, K. (1999) “Economic Update,” in G. Forrester (ed.), Post-Soeharto Indonesia: Renewal or Chaos? (Indonesia Assessment 1998), Singapore: Institute of Southeast Asian Studies and Leiden: KITLV Press. Glassburner, B. (1976) “In the Wake of General Ibnu: Crisis in the Indonesian Oil Industry,” Asian Survey 16(12). Hefner, R. (1993) “Islam, State, and Civil Society: ICMI and the Struggle for the Indonesian Middle Class,” Indonesia 56. Hill, H. (1994) “The Economy,” in H. Hill (ed.), Indonesia’s New Order: The Dynamics of Socio-Economic Transformation, Sydney: Allen & Unwin. —— (1996) The Indonesian Economy Since 1966: Southeast Asia’s Emerging Giant, Cambridge: Cambridge University Press. —— (1998) “The Indonesian Economy: The Strange and Sudden Death of a Tiger,” in G. Forrester and R.J. May (eds), The Fall of Soeharto, Bathurst, NSW: Crawford House Publishing. —— (1999) The Indonesian Economy in Crisis: Causes, Consequences and Lessons, Singapore: Institute of Southeast Asian Studies. Irwan, A. and E. (1995) Pemilu: Pelanggaran Asas Luber (Election: Violations of the Principles of Direct, General, Free and Secret), Jakarta: Pustaka Sinar Harapan. Johnson, C. (1998) “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies 34(2). Joint-Fact-Finding Team (1998) “Final Report of the Joint-Fact-Finding Team on 13–15 May 1998 Riot. Executive Summary,” Jakarta (23/10/1998): Tim Gabungan Pencari Fakta, unpublished. Liddle, R.W. (1985) “Soeharto’s Indonesia: Personal Rule and Political Institutions,” Pacific Affairs 58(1). —— (1996) Leadership and Culture in Indonesian Politics, Sydney: Asian Studies Association of Australia and Allen & Unwin. —— (1999) “Indonesia’s Unexpected Failure of Leadership,” in A. Schwarz and J. Paris (eds), The Politics of Post-Suharto Indonesia, New York: Council on Foreign Relations Press. —— (2000) “Indonesia in 1999: Democracy Restored,” Asian Survey 40(1). Lindblad, T. (1997) “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies 33(3). Linnan, D.K. (1999) “Insolvency Reform and the Indonesian Financial Crisis,” Bulletin of Indonesian Economic Studies 35(2). Loveard, K. (1999) Suharto: Indonesia’s Last Sultan, Singapore: Horizon Books. MacIntyre, A. (1990) Business and Politics in Indonesia, Sydney: Allen & Unwin. —— (1991) “State–Society Relations in New Order Indonesia: The Case of
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Business,” in A. Budiman (ed.), State and Civil Society in Indonesia (Monash Papers on Southeast Asia; no. 22), Clayton, Victoria: Centre of Southeast Asian Studies, Monash University. —— (1993) “Political Dimensions to Controversy over Business Conglomerates,” in H. Crouch and H. Hill (eds), Indonesia Assessment 1992: Political Perspectives on the 1990s, Canberra: Department of Political and Social Change, Research School of Pacific and Asian Studies, Australian National University: 122–8. —— (1994) “Power, Prosperity and Patrimonialism: Business and Government in Indonesia,” in A. MacIntyre (ed.), Business and Government in Industrialising Asia, Sydney: Allen & Unwin: 244–67. Manning, C. and S. Jayasuriya (1996) “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies 32(2): 3–43. McCawley, P. (1978) “Some Consequences of the Pertamina Crisis in Indonesia,” Journal of Southeast Asian Studies 9(1): 1–27. McKendrick, D. (1992) “Obstacles to ‘Catch-up’: The Case of the Indonesian Aircraft Industry,” Bulletin of Indonesian Economic Studies 28(1): 39–66. McLeod, R.H. (1997) “Postscript to the Survey of Recent Developments: On Causes and Cures for the Rupiah Crisis,” Bulletin of Indonesian Economic Studies 33(3): 35–52. Mietzner, M. (1999) “From Soeharto to Habibie: the Indonesian Armed Forces and Political Islam During the Transition,” in G. Forrester (ed.), Post-Soeharto Indonesia: Renewal or Chaos? (Indonesia Assessment 1998), Singapore: Institute of Southeast Asian Studies and Leiden: KITLV Press: 65–102. Naisbitt, J. (1996) Megatrends Asia. Eight Asian Megatrends that are Reshaping Our World, New York: Simon & Schuster. Robison, R. (1986) Indonesia: The Rise of Capital, Sydney: Allen & Unwin. —— (1988) “Authoritarian States, Capital-Owning Classes, and the Politics of Newly Industializing Countries: The Case of Indonesia,” World Politics 41(1): 52–74. —— (1995) “Organising the Transition: Indonesian Politics in 1993/94,” in R.H. McLeod (ed.), Indonesia Assessment 1994: Finance as a Key Sector in Indonesia’s Development, Canberra: Research School for Pacific and Asian Studies, Australian National University and Singapore: Institute of Southeast Asian Studies: 49–74. —— (1997) “Politics and Markets in Indonesia’s Post-oil Era,” in G. Rodan, K. Hewison, and R. Robison (eds), The Political Economy of South-East Asia, Melbourne: Oxford University Press: 29–63. Sasono, A. (1998) “Perspektif Ekonomi Kerakyatan dalam Megnhadapi Era Pasar Bebas” (The People’s Economy Perspective in Facing the Era of the Free Market), in A. Sasono, K.H. Didin Hafidhuddin, A.M. Saefuddin et al., Solusi Islam atas Problematika Umat (Ekonomi, Pendidikan dan Dakwah), Jakarta: Gema Insani: 13–27. Schwarz, A. (1994) A Nation in Waiting. Indonesia in the 1990s, Boulder, CO: Westview. Shiraishi, T. (1996) “Rewiring the Indonesian State,” in D.S. Lev and R. McVey (eds), Making Indonesia: Essays on Modern Indonesia in Honor of George McT. Kahin, Ithaca, NY: Cornell University Press. Sidel, J.T. (1998) “Macet Total: Logics of Circulation and Accumulation in the Demise of Indonesia’s New Order,” Indonesia 66.
Politics, business, and democratization in Indonesia 249 Siegel, J.T. (1998) “Early Thoughts on the Violence of May 13 and 14, 1998 in Jakarta,” Indonesia 66. Sjahrir (1993) “The Indonesian Economy: The Case of Macro Success and Micro Challenge,” in C. Manning and J. Hardjono (eds), Indonesia Assessment 1993. Labour: Sharing in the Benefits of Growth?, Canberra: Department of Political and Social Change, Research School of Pacific and Asian Studies, Australian National University. Soesastro, H.M. (1989) “The Political Economy of Deregulation in Indonesia,” Asian Survey 29(9). Soesastro, H. and C.M. Basri (1998) “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies 34(1). Suryadinata, L. (1997) The Culture of the Chinese Minority in Indonesia, Singapore and Kuala Lumpur: Times Books International. Tamara, N. (ed.) (1998) Aburizal Bakri: Bisnis dan Pemikirannya (Aburizal Bakrie: His Business and Thoughts), Jakarta: Pustaka Sinar Harapan. Thee Kian Wie (1998) “Indonesia’s Economic Performance Under the New Order. The Effects of Liberalisation and Globalisation,” The Indonesian Quarterly 26(2). Tjiptoherijanto Prijono (1997) “Poverty and Inequality in Indonesia at the End of the 20th Century,” The Indonesian Quarterly 25(3). Wanandi, S. (1999) “The Post-Soeharto Business Environment,” in G. Forrester (ed.), Post-Soeharto Indonesia: Renewal or Chaos? (Indonesia Assessment 1998), Singapore: Institute of Southeast Asian Studies and Leiden: KITLV Press. Ward, K. (1974) The 1971 Election in Indonesia: An East Java Case Study (Monash Papers on Southeast Asia, 2), Clayton, Victoria: Centre of Southeast Asian Studies, Monash University. Wibisono, C. (1995) “The Economic Role of the Indonesian Chinese,” in L. Suryadinata (ed.), Southeast Asian Chinese and China: The Politico-Economic Dimension, Singapore: Times Academic Press. Winters, J. (1996) Power in Motion: Capital Mobility and the Indonesian State, Ithaca, NY: Cornell University Press.
8
Democratization and economic crisis in Thailand Political business and the changing dynamic of the Thai state Tom Wingfield*
Thai paradoxes: development, democracy, and corruption Since 1985, Thailand has moved from a succession of corrupt and unaccountable military dictatorships to a parliamentary system of government based on competitive elections among civilian-led political parties. However, one of the great paradoxes of Thai politics has been the continued high levels of corruption in the wake of greater political liberalization. This chapter argues that the dominance secured by capital over the state following Thailand’s democratic transition is the key to understanding this apparent contradiction. The imperfections of Thailand’s democratic system should not distort the total picture which is one of important change. Although the evidence suggests that absolute levels of government corruption were much higher under Thailand’s military regimes, perceptions about politics have changed radically.1 Looting state coffers is no longer considered the unquestioned privilege of unaccountable bureaucrats and military officers, and corruption has become a central political issue. With the growth of civil society and a vociferous media, public intolerance of corrupt behavior is much higher and has hastened the fall of a number of elected governments.2 Nevertheless, genuine attempts to eradicate “money politics” – vote-buying, MP-buying, corruption, and cronyism – will continue to fail until the link between politics and business is severed. The pattern of corruption scandals is also changing: elected politicians and senior bureaucrats are, for the first time, colluding in complex schemes to generate illicit income. New forms of political–business ties are also emerging – exemplified by the career of telecom billionaire Thaksin Shinawatra – and may continue to undermine the consolidation of democracy in Thailand. A second paradox, at least until the onset of the 1997 financial crisis, was Thailand’s dynamic economic growth. Despite pervasive corruption and extensive links between politics and business, Thailand outperformed most other developing countries between 1970 and 1995, and was lauded by the World Bank as a “miracle economy.” A key explanation for Thailand’s rapid growth was the relative autonomy of the state from capital and the emphasis on macroeconomic stability. Thailand’s
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bureaucrats inherited a tradition of protecting public sector finances, owing to fears of colonial domination earlier in the century. Thai technocrats also had a significant degree of independence from politicians, with loyalty to nation and King superseding loyalty to the government of the day (Warr and Bhanupong 1996: 18–19). Even with the entry of elected politicians in the cabinet from the 1980s, key macroeconomic institutions – the Bank of Thailand, the Office of Fiscal Policy, the Bureau of Budget, and the Ministry of Finance – were insulated from political pressure and remained under the control of powerful technocrats. Legal norms protecting the budget reinforced macroeconomic independence and limited rent-seeking opportunities. Doner and Ramsay (1997: 239) also point out that there was a competitive dimension to clientelism in the Thai context. Not only did this compel patrons to keep their revenue from corruption within Thailand in order to sustain their patronage networks, competition also prevented the monopolization of economic sectors by a small number of rent-seekers. Competition within the market, and the fact that continued access to state rents was by no means assured in the long run, also compelled rent recipients to deploy rents productively to develop their enterprises as well as to raise funds to support favored politicians or to fund their own election campaigns. There is, however, some disagreement over whether the Thai state productively deployed rents to develop the economy. On one side of the debate, Rock (1996: 9–14) argues that Thai policy-makers used rents to “positive developmental advantage,” citing as an example the development of a small number of large conglomerates that had successfully shifted to export-oriented production using the “technical, managerial, and marketing competence” gained through foreign joint ventures. Rock’s comparison of the Thai state with the developmental states of East Asia has been challenged by the argument that the Thai economy developed rapidly despite, and not because, of rents. Although rent-seeking proliferated in the sectoral agencies, chiefly industry, commerce, and transport and communications, which were controlled by elected politicians, the distortions that occurred were largely canceled out because responsibility for industrial policy was divided among different public agencies. For example, protective tariffs and promotional privileges granted by the Fiscal Policy Office, the Ministry of Commerce, and the Ministry of Industry operated independently from one another, were largely uncoordinated, and frequently in conflict (Dixon 1999: 103). Where Rock (1996: 9) argues that micro (industrial) policy was “selective, extensive and effective,” Dixon (1999: 242) holds that: Overall there have been few signs of any co-ordinated development strategy . . . There has been a general favoring of industrial growth and a neglect of the agricultural sector other than as a source of labor, food, raw materials and revenue. Beyond this there have been few signs of any clear sectoral policies. There has been no question of the state following the Asian NIE pattern of “picking winners” and actively promoting them.
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Whether rents were productively used or not, what is clear is that both the technocratic capacity of the state and the competitive nature of rent-seeking influenced the development of a dynamic domestic capital class. A coordinated state strategy to promote economic development was affected by the consolidation of elected civilian rule after 1988. From then on the autonomy of technocrats has been continually challenged by elected politicians. In sharp contrast to the past, political appointees have dominated the upper echelons of the bureaucracy. Important government institutions have been bypassed or ignored during policy implementation and Thailand’s macroeconomic pillar, the Bank of Thailand, has been mired by political interference. In short, since 1988, economic policy-making and implementation has become highly politicized. Thai conglomerates also took advantage of the weak regulatory environment to secure loans for quick-profit, but unproductive investments in the real estate and finance sector, particularly stock market speculation. This is not to say that democracy is not conducive to economic growth. Rather, the premise of this chapter is that electoral politics have been subverted by the capture of the state by corporate interests, hindering the development of a more genuine form of democracy. The chapter begins by tracing the history of the ties between politics and business from the early twentieth century. It argues that by the 1980s, the power and authority of the civilian and military bureaucracy had been eclipsed by the wealth, independence, and power of business. It then goes on to assess the Thai state in the 1990s, exploring the links between politics and business and the impact this nexus has had on the quality of democracy that emerged in Thailand in the 1990s. It argues that the rise of business, its subsequent domination of political parties, and the consolidation of electoral politics, together with the unequal distribution of wealth and urban/rural divide, have resulted in the monetization of democratic politics. The financial crisis in 1997 drew attention to this problem, but the constitutional reforms that were introduced have not led to genuine structural reforms in both politics and business, mainly because of the continued domination of the state by capitalists.
Evolving nature of political business: from bureaucratic polity to bourgeois state The overthrow of Thailand’s absolute monarchy in 1932 placed politics in the hands of a small group of military officers and state officials. The economy was dominated by the rice trade with the output of small farmers linked to the international market by second- or third-generation immigrant Chinese millers, merchants, and later bankers. Politically vulnerable and subordinate, Thailand’s nascent commercial class relied on individual clientelistic alliances with the ruling military generals to secure economic rents and protection, at least up until the early 1970s. Firms with the strongest political connections developed rapidly and, in return, ethnic Chinese entrepreneurs provided
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members of competing ruling factions with money to build and maintain patronage networks which were at the center of each clique’s power base.3 The most important development in the early twentieth century was the creation of a Sino-Thai banking cartel under military patronage which spawned an intricate web of inter-linked companies and conglomerates that came to dominate the Thai economy. By the late 1950s, there were five main banking groups: the Asia Trust group (Bangkok Bank), the Thai-Hua group (Bangkok Metropolitan Bank), the Ayudhya group (Bank of Ayudhya), the Lamsam-Wanglee group (Thai Farmers Bank), and the Mahaguna group (Union Bank of Bangkok). All but one of the bank groups were controlled by shareholders who were Teochiu Chinese. The exception, the Thai Farmers group, was led by the Lamsam (Hakka) and Wanglee (Teochiu) families which overcame Chinese subethnic barriers and maintained their alliance through intermarriage (Suehiro 1992: 45). The reasons that brought the shareholders together were vastly different. The Asia Trust group, led by Chin Sophonpanich, was set up by nine families originally from Southern China. Their business interests varied across a range of trades, including construction, liquor distilling, and gold trading. In contrast, the Ayudhya group, led by Luan Buasuwan, was formed on the basis of common occupation: all its leading members were upcountry rice-millers and members of either the Northeastern Rice Millers’ Association or the Northeastern Sawmillers’ Association. The Thai-Hua group was centered on the Teochiu Rice Industry and Trade Company, a political rather than business organization formed to support the resistance against Japan’s invasion of China. Its leaders included the dye trader, U Chuliang, the liquor magnate, Uthane Techaphaibun, and the insurance broker Kiarti Srifuengfung. Finally, the Mahaguna group was set up by the joint investments of more than 150 leading Chinese merchants. The group, led by Sahat Mahakhun who chaired the Chinese Chamber of Commerce for almost a decade and a half, “served as a nucleus about which all other leading Chinese business blocks united, irrespective of dialect group” (Suehiro 1992: 46). By the early 1960s, the corporate structure of the Chinese-owned banks changed as ownership and management control was centralized under four families. They were the Sophonpanich (Bangkok Bank), Lamsam (Thai Farmers Bank), Techaphaibun (Bangkok Metropolitan Bank, First Bangkok City Bank, and Bank of Asia) and Rattanarak (Bank of Ayudhya) families.4 These four families were able to use their access to capital to fund conglomerate-style growth. Family ownership was maintained through family-owned investment or holding companies, with the banks serving as the core of each groups’ activities. The number of companies controlled by the four families mushroomed, increasing five-fold between 1958 and 1973, to total 273 companies. Six years later, more than half of the families’ companies were involved in non-finance activities, mainly in manufacturing or commerce (Suehiro 1989: 250–1). The Sophonpanich family and Bangkok Bank, for example, invested
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directly in 20 industrial projects. Similarly, the Lamsam family and Thai Farmers Bank, which invested in finance, trading, and manufacturing with the support of foreign technology and capital, reputedly had the most diversified industrial base of all the banking conglomerates. The group had an interest in pharmaceuticals, automobile tyres, lubricating oil, fruit canning, canned seafood, and vegetable oil as well as the dairy industry. The Techaphaibuns, on the other hand, used the income from their liquor monopoly to develop a vertically integrated enterprise involved in sugar and molasses production, and later beer production, glass manufacture, and chemicals, before diversifying into finance. After the mid-1960s, the group further diversified into land development, establishing six real estate development companies by 1972. By contrast, the Rattanaraks used takeovers to rapidly expand from banking and insurance into manufacturing and agri-processing. The key to the rapid development of these banking groups was their political connections. Through their alliances with military leaders and later control over political parties, the banking families retained their influence over the financial sector. Bangkok Bank, for example, would have collapsed in 1953 had it not been rescued by a Bt30 million capital injection from the Thai government that was controlled by Phin Choonhavan and his Rachakhru group which had seized power in 1947.5 The bailout was engineered by then deputy minister of economic affairs, Siri Siriyothin, who sat on Bangkok Bank’s board (Hewison 1989: 193; Suehiro 1989: 171).6 The banks were equally quick to drop their old patrons and reshuffle their boardrooms following a coup and the ascendance of a new military clique. When the Rachakhru group was supplanted by Field Marshal Sarit in 1957, Bangkok Bank appointed the new leader as an adviser and invited his secondin-command to chair its board. The other banking families followed suit and these powerful political alliances ensured that the banking sector remained protected from both state dominance and new competition. The Banking Act of 1962, for instance, barred the development of new Thai banks, curtailed the operation of informal credit markets, and prevented the entry of foreign competition. This had a tremendous impact on the subsequent development of Thai capital. First, it led to the mushrooming of bank deposits held by the big banking groups.7 Second, it resulted in the concentration of ownership within the banking sector. Finally, it facilitated the availability of credit to a small number of local entrepreneurs (Rock 1996: 11). The rise of capital: political ties, monopoly rents, and foreign joint-ventures Under the Sarit administration (1958–63), economic growth, based on the development of the private sector, became the government’s priority. The restructuring of the Thai economy in favor of domestic capital was in part encouraged by increasing flows of aid from the United States in its bid to prevent the spread of communism.8 With US assistance, key macroeconomic institutions were established, including the Budget Bureau, the National
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Statistical Office, the National Economic Development Board (NEDB), and the Board of Investment. The core institution remained the Bank of Thailand, established in early 1942. While US funding helped consolidate the military’s grip on power, the funds were also used to encourage import-substituting industrialization (ISI). The military introduced incentives for foreign investment, abolished trade unions, and outlawed strikes. The state policy of ISI, coupled with the rising global market demand for primary agricultural products, dramatically recast the Thai economy and by the 1960s, major Sino-Thai capitalist groups had emerged in three areas: the financial sector, low-end manufacturing, and agribusiness.9 Three factors influenced the rapid growth of these companies: political connections to secure monopoly rents or government protection, financing from one of the major banking families, and access to foreign technology and management expertise. It was the Thai banks – not the state – that allocated credit and allowed these companies to expand.10 Bangkok Bank, for example, began by financing the “big five” rice families that monopolized the rice trade after state control was relinquished in the 1950s. A decade later, the bank backed the shift many of these firms made into textiles. During the 1970s recession, Bangkok Bank pumped Bt8 billion into textile companies to keep them afloat (Pasuk and Baker 1995: 133). Throughout the export boom a decade later, the bank remained the largest credit supplier to rice exporters and textile manufacturers; overall, financing 42 percent of Thailand’s exports and 27 percent of imports. The Sophonpanich family also lent heavily to agro-industry firms and from the mid-1960s financed the Charoen Pokphand (CP), Metro, Soon Hua Seng, and Hong Yiah Seng groups and other nascent manufacturers (Suehiro 1989: 270). By the 1990s, Bangkok Bank was lending to the petrochemical, cement and electronics sectors, as well as large private infrastructure projects. Access to the banking families’ political connections was almost as important as their loan portfolios. As Pasuk and Baker (1995: 133) argue: “The major banks and their special relationship with the generals were central to the networks of political connections which were a crucial ingredient to business success. Many of the entrepreneurs who prospered under the aegis of the banks benefited from the advantages which these connections conveyed.” Political connections provided these embryonic firms with privileges and protection that allowed them to expand rapidly during ISI. Under government protection, a number of Thailand’s merchants developed their enterprises in a vertically integrated manner: commodity traders moved into manufacturing; primary exporters ventured into agri-processing; consumer goods traders went into assembly; and cloth traders became textile manufacturers. Investment in manufacturing depended on the financial and technological support of foreign capital, particularly from Japan.11 In many cases, the links with these foreign firms had been established decades earlier, when the Thai companies imported the products the Japanese manufactured. Although a number of Thai merchants had no previous experience in manufacturing,
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through these joint ventures they were able to venture rapidly into this sector, acquiring know-how in the process and developing their technological base (Suehiro 1989: 230–1). The progression of Thai firms in this manner is typified by the development of enterprises owned by Sukree Potiratanangkun during the 1960s. Before Sukree became Thailand’s leading textile manufacturer, he was a cloth importer who developed his business swiftly after securing a lucrative military contract to supply uniforms. Sukree shifted into textile manufacturing after he used his connections with the army to secure control of a state-owned textile company. In 1964, he had entered into a joint venture with a Japanese firm to obtain capital and access to the latest spinning machines. Within six years, he had entered into another six joint ventures and established a vertically integrated textile group. Once technical, managerial and marketing skills were acquired, he dispensed with his Japanese joint venture partners (Rock 1996: 14). A similar pattern of development occurred in Thailand’s nascent manufacturing and agri-business sectors. Thaworn Phornprapha, who started out as a scrap metal dealer, became the country’s leading automobile manufacturer after the Thanom–Praphat government declared that all taxi models must be changed from Austins to the Nissans he manufactured with Japanese assistance (Suehiro 1989: 234). In agro-industry, Thai Roong Ruang evolved into a conglomerate following Sarit’s decision to ban the import of sugar in 1961 and to relinquish state control of sugar exports to two cartels in which the group was included. By the late 1970s, there were about 30 of these conglomerates with interests in over 800 companies, a quarter of which were joint ventures with foreign firms. Each conglomerate had a cluster of companies grouped around its core interest, though most diversified into finance, insurance, distribution, and property, mainly through buyouts. Six of the conglomerates were centered on banks, with an interest in financial services and investment companies. Nine were based in agri-business (rice, sugar, feedmills, and cassava). Six supplied the domestic consumer market (cars and electrical goods assembly, manufacturing pharmaceuticals). Two specialized in textiles. The remaining seven focused on basic process industries (building materials, chemicals, steel, and glass). Many of these conglomerates shared a common corporate structure and development pattern. Most were operated by a single family and there was no distinction between management and capital ownership. By the early 1980s, large firms amounted to only 1.6 percent of all industrial enterprises but owned 54 percent of all industrial assets and accounted for 41 percent of industrial employment (Doner and Ramsay 1997: 255–6). Business in politics By the mid-1970s, the character of the Thai state was changing. Rapid economic growth marked the beginning of the end of the bureaucratic polity and
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the preoccupation of the Thai state centered on facilitating capitalist development. Although the military continued to dominate the Thai polity, its authority was no longer uncontested. The corporate groups that had emerged during the Sarit era began to grow increasingly independent. Business support for democratization was also linked to the desire by new capitalists to break down the old oligopolies established under Sarit. Moreover, with greater political liberalization, market competition increased, providing new firms with greater access to business opportunities (Doner and Ramsay 1997: 264). Ockey (1994: 294) noted that the concentration of political power in a small clique during the Thanom regime had led to a “bottleneck for the aspiring entrepreneurs dependent on patronage,” while business leaders realized that with the emergence of democracy they could possibly enter government through control of parliament, thus securing direct access to state rents. The patronage-based, clientelistic alliances between military elites and businessmen began to unravel with the rise of big business. By the mid-1970s, most of Thailand’s large corporations had removed members of the military from their boards and looked to new ways to secure state rents and government privileges. Most businessmen supported the overthrow of the Thanom–Praphat junta and the establishment of a civilian government in 1973. A new coalition comprising royalist supporters in the bureaucracy and newly independent Sino-Thai businessmen began to take shape. The vehicle for this new alliance was political parties. Three parties – Social Action, Chat Thai, and Democrat – dominated the civilian governments of 1975 and 1976, as well as Thailand’s five elected national assemblies between 1976 and 1988 (see Table 8.1).12 Business played a leading role in founding, funding, and running these parties. In 1974, 27 of the 51 members of the executive committees of these three parties were businessmen (Anek 1992: 34–5). The number of business people being elected to parliament also steadily rose. In 1957, 28 percent of all parliamentarians had a business background, but by January 1975 the number had risen to 35 percent and by the July 1988 election 68 percent of the National Assembly members were businesspeople (see Table 8.2).13 In parallel, business representation within Thailand’s cabinets grew steadily from the early 1980s. The two elected civilian coalition governments of Kukrit Pramoj and Seni Pramoj in 1975 and 1976 represented a range of business interests (see Table 8.2).14 Kukrit’s Social Action Party, politically on the moderate right, represented financiers, technocrats, and industrialists. Kukrit himself had interests in publishing, banking, hotels, and commerce. His finance minister, Boonchu Rojanastien, a leading immigrant Chinese businessman, was a former executive vice-president of Bangkok Bank and later became its president. Other important Bangkok-based businessmen-cum-politicians who formed the heart of the Social Action Party were Pong Sarasin and Koson Krairiksh.15 Kukrit’s coalition partners were also representative of business interests.
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Table 8.1 Election results by political party, 1975–92 1975 1976 1979 1983 1986 1988 1992a 1992b Social Action Chat Thai Democrat Social Justice Social Agrarian Social Nationalist New Force Socialist Socialist Front Prachakorn Thai Seritham Chat Prachachon National Democratic Siam Democratic United Democratic Ruam Thai Rassadorn Community Action Palang Dharma Samakkhitham Chat Pattana New Aspiration
18 28 72 45 19 16 12 15 10 – – – – – – – – – – – – –
45 56 114 28 9 8 3 2 1 – – – – – – – – – – – – –
83 38 32 – – – 8 – – 32 21 13 – – – – – – – – – –
92 73 56 – – – – – – 36 – – 15 18 – – – – – – – –
51 63 100 – – – – – – 24 – – – – 38 19 18 15 – – – –
54 87 48 – – – – – – 31 – – – – 5 35 21 9 14 – – –
31 74 44 – – – – – – 7 – – – – – – 4 – 41 79 – 72
22 77 79 – – – – – – 3 8 – – – – – 1 – 47 – 60 51
Other parties Independent
34 –
13 –
11 63
10 24
19 –
53 –
8 –
12 –
269
279
301
324
347
357
360
360
Total
Source: Pasuk and Baker (1995: 343). Reprinted with the permission of Oxford University Press. Notes: a March; b September.
Deputy prime minister Pramarn Adireksarn, leader of the Chat Thai Party, was a former director of Bangkok Bank and Bank of Ayudhya, with major interests in textiles. Chat Thai emerged around the business interests of the Rachakhru military faction which dominated Thai politics in the 1940s and 1950s. While in power, the Rachakhru group led by Phin Choonhavan established an interest in 32 firms: 10 financial institutions, 15 industrial and transporting firms, and seven trading and service firms.16 Although pushed out of power in 1957, the Rachakhru group retained their involvement in these enterprises. Pramarn, who was Phin’s son-in-law and Deputy Minister of Industry and Communications under his regime, was on the board of directors of seven companies. Pramarn, who became a major figure in Thailand’s textile industry after setting up the Thai Textile Company in 1954, also brokered a number of joint ventures between Japanese companies and local partners (Suehiro 1989: 149–50). Pramarn, together with Siri Siriyothin and Phin’s only son, Chatichai Choonhavan, went on to found the Chat Thai Party in 1973.17
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Table 8.2 Professional background of elected assemblymen, 1933–92 Election
Business
Bureaucrat
Professional
Farmer
Other
Total
Nov 1933 Nov 1937 Nov 1938 Jan 1946 Aug 1946 Jan 1948 Jun 1949 Feb 1952 Feb 1957 Dec 1957 Feb 1969 Jan 1975 Apr 1976 Apr 1979 Apr 1983 Jul 1986 Jul 1988 Mar 1992 Sep 1992
15 18 20 20 9 22 7 25 42 44 100 93 82 112 124 186 243 165 151
27 47 36 43 50 34 4 34 46 42 45 33 62 55 33 48 25 40 21
26 20 27 21 16 31 7 53 51 53 45 83 72 70 n.a. 82 69 63 62
8 5 7 7 4 6 1 4 11 13 12 23 16 26 14 7 8 12 10
2 1 1 5 3 6 2 7 10 8 17 37 46 38 114 24 12 80 116
78 91 91 96 82 99 21 123 160 160 219 269 279 301 324 347 357 360 360
Source: Pasuk and Baker (1995: 338). Reprinted with the permission of Oxford University Press. Note According to Pasuk and Baker (1995: 338), those classified as “other” in the March 1992 and September 1992 elections (80 and 116, respectively) were probably businesspeople.
The role of business in government became more pronounced in the Democrat-led coalition elected less than a year later in April 1976. The Democrat Party, once described as a “loose and unstable coalition of ‘loyal opposition’ conservatives, ambitious right-wingers, and enterprising lawyers and businessmen,” also included representatives of Bangkok’s emerging business elite, such as pharmaceutical manufacturer Bhichai Rattakun (Girling 1981: 181–2). Apart from Bhichai, Seni Pramoj’s cabinet included five other leading figures from Bangkok’s emerging business elite.18 Although Thailand’s experiment with democracy was short-lived – in October 1976 the military returned to power in a bloody coup – this period of open politics had succeeded in loosening the military’s absolute grip on politics and opened the way for business to dominate the state in the 1980s and 1990s. Semi-democracy and divided capitalists The alliance between bureaucrats and Bangkok business developed in the mid-1970s re-emerged under the Prem Tinsulanonda governments from the early 1980s. With the support of the palace and the military, Prem held the post of Prime Minister until 1988 despite never joining a political party. On the one hand, the old bureaucratic elite, comprising senior generals and
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civilian administrators, retained control over the key ministries of defence, finance, and the interior. On the other, newly emergent and increasingly independent political parties were invited into the government. Since these parties were financed and often led by businessmen, just under half of Prem’s cabinets were made up of established Bangkok-based businessmen (Anek 1992: 38). Key figures in Prem’s cabinets included Boonchu Rojanastien, then president of Bangkok Bank and deputy leader of the Social Action Party, and Chat Thai Party leader Pramarn Adireksarn. Despite the increasing importance of elected politicians in the lower house and cabinet, the military and conservative bureaucrats maintained a check on political parties through their control of the appointed senate. Under this “soft authoritarianism,” otherwise known as Thailand’s period of “semi-democracy,” technocrats and their policies of fiscal austerity were protected from avaricious elements within the military and political parties (Girling 1996: 59). In return, military budgets increased, while politicians were satiated with rents such as quota and tariff exemptions, price subsidies, contracts, and concessions for their backers in business (Girling 1996: 59). Although capital was fast developing, since capitalists were weakened politically by their own internal divisions, a single party representing the interests of “business” did not emerge to dominate the elected assembly. The Chat Thai Party was the party of manufacturing and banking interests (specifically the textile, glass, and sugar-milling industries as well as Bangkok Bank and Bank of Ayudhya). Chat Thai members occupied the Ministry of Industry for almost a decade and a half between 1975 and 1990 and manipulated state protection (import and export bans, factory permits, domestic content requirements) to the benefit of the party’s financiers in manufacturing. By contrast, Social Action was the party of agri-business (rice, tapioca, soybean, and animal feed industries). Much of the industry depended on government quotas granted by the Ministry of Commerce, which the Social Action Party controlled in seven of the nine administrations after 1975 (Doner and Ramsay 1997: 267, n. 30). The Ministry of Agriculture, which controlled government procurement prices for rice, was typically shared between the two parties. Business was also divided over Thailand’s future economic direction. Since the mid-1970s, there had been a major decline in the trading of primary products. Faced with falling prices, the rate of agricultural expansion slowed, exports revenues dropped, and domestic demand decelerated, increasing the pressure on Thailand’s balance of payments. At the same time, US withdrawal from Indochina in 1975 saw the end of American military and economic aid, impairing the Thai economy further. The push for export-oriented industrialization favored by Thailand’s technocrats and certain sectors of business – most importantly the textile industry and its major backer Bangkok Bank – was bitterly resisted by those with a vested interest in state protection.19 As Pasuk and Baker (1995: 145) explain:
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Ministries and departments which administered the licenses, privileges and restrictions which enforced import protection were not keen to surrender this patronage. Many entrepreneurs who had been nurtured under import-substituting protection were opposed to changes which would expose them to international competition. As the saturation of the domestic market increased problems of profitability, firms used their political connections to secure additional tariff protection, bans on competitive entries, and other privileges. Under pressure from the powerful industrial conglomerates, protection for ISI manufacturing actually increased in the 1970s and early 1980s.20 It was not until the period 1983–4, when the second oil crisis occurred, and the government’s strict fiscal discipline and tight monetary policy brought the economy to the brink of collapse, that ISI was eventually abandoned, the baht devalued, and incentives introduced for export industries.21 Prem also used the mid-1980s recession to restructure the relationship between the core macroeconomic agencies and the line ministries (see Rock 1996).22 Finally, Thai capital was divided regionally between the Bangkok-based conglomerates and rapidly emerging provincial businesses. Although political parties in the 1970s could be said to represent Bangkok-based business interests, over the course of the 1980s their influence was gradually eclipsed by the rise of provincial business-politicians. The economic clout of this provincial group rapidly expanded on the back of cash-cropping, trading and services, public supply and construction contracts, and “semi-illegal and illegal businesses” (Pasuk and Baker 1998b: 30). As elections at both the provincial and national level became increasingly important from the mid1970s, business leaders in the provinces became key political actors in their own right.23 Since parties lacked nationwide networks, leading provincial businessmen with established networks of influence were essential to winning votes upcountry. In return, the connections with Bangkok-based parties opened up new business opportunities, particularly government contracts. According to Chai-Anan (1998: 51), provincial business people became “convinced that the most effective way to protect their economic interests [wa]s to support or ‘own’ political parties or factions of them.” Changing composition of the state: decline of bureaucratic autonomy The election of the Chatichai Choonhavan government in 1988 represented a watershed in Thai political history. Despite being a former general, Premier Chatichai’s backing came from his connections in the private sector and for the first time Thailand’s executive was occupied by a government widely seen as representing the interests of business.24 Chai-Anan (1998) argues that the wider significance of the Chatichai government was that it effectively marked the end of a triangular alliance between the military, the bureaucracy, and
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Bangkok-based business elites which had sought to maintain control over rising economic elites in the 1980s. According to Chai-Anan (1998: 52): They [the military–bureaucrat elite] formed an effective alliance with big, established business groups under the leadership of General Prem Tinsulanonda during his decade as prime minister. They jealously guarded strategic positions in the National Economic Social Development Board (NESDB), the Ministry of Finance, Budget Bureau, and the Ministries of Defence and the Interior. They developed a mechanism to connect with emergent economic interests through the Joint Public–Private Consultative Committee (JPPCC). Under Chatichai’s coalition, national economic planning was abandoned – the NESDB was sidelined and the JPPCC dissolved – as decision-making shifted into the hands of the elected business-politicians. His government became known as the “buffet cabinet” because of the perceived high levels of corruption and distribution of rents and patronage. After the military coup against the Chatichai administration in 1991, 25 cabinet members were accused of being “unusually rich,” and 12 were found guilty of having amassed about Bt1 billion and 8,000–9,000 rai of land while in office (The Nation 26/2/ 98). Further investigations revealed that ministers had received large kickbacks from companies which had won government concessions. The convictions were later quashed on the grounds that the judicial process was improper. The economic shift in 1985, with an emphasis on export-oriented industrialization, had dramatic results and the economy, during the first two years of the Chatichai government, registered explosive growth. With the steady appreciation of the yen, capital flow from East Asia in search of new, low-cost production sites, helped transform Thailand’s industrial base significantly.25 Although foreign investment was crucial in providing technology, export markets, and management expertise, the motor for Thailand’s boom was domestic capital led by the conglomerates fostered under ISI. Private domestic investment averaged Bt150 billion a year in the mid-1980s, but from 1986 it increased by five times in four years (Pasuk and Baker 1995: 156). As well as dominating the manufacturing export boom, many of these conglomerates re-invested their profits and used their access to cheap credit to diversify further, though usually into unproductive, but highly profitable, sectors such as property and finance. Other companies continued to invest in protected industries such as petrochemicals and steel, or looked for rents derived from Thailand’s new wave of infrastructure privatizations. The Chatichai regime created the conditions for the emergence of a “new rich” who were able to secure investment from new sources, including the newly licensed finance companies, the stock market and foreign capital. Handley (1998: 98) noted that: The new capitalists were particularly confident. These were business
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people who found that, for the first time, they could thumb their noses at the big banks, which they saw as part of the control apparatus of the old elite, monopolizing capital. The changes in the economy allowed them to tap non-bank sources for the expansion of their businesses. By the early 1990s, finance, property, and telecommunications had become the three largest sectors on the Stock Exchange of Thailand (SET), after banking. Even so, at the tail end of the boom, the asset base of the banks continued to expand, rising from Bt714 billion in 1985 to Bt4,605 billion in 1994 (Pasuk and Baker: 1998a: 39–40). Many of the largest banking families also began to function like investment companies with heavy investments in property, retailing, and other sectors that had grown rapidly during the economic boom (Pasuk and Baker 1995: 167). Although the Chatichai government was overthrown by the military in 1991, the coup represented a “last-ditch,” but ultimately vain, attempt by this alliance to “conserve their state against the capitalist class’ movement to make the state more bourgeois” (Hewison 1993: 180). In essence, the coup can be seen as an attempt to bring decision-making back under the ambit of the bureaucracy, away from civilian politicians.26 The 1992 uprising and subsequent defeat of the military regime, on the other hand, represented “a counter revolt against a conservative, authoritarian, technocratic and militarydominated coterie,” aimed at re-establishing “legitimate political space and a parliamentary regime where elected politicians are dominant” (Hewison 1993: 180). The final demise of the military–bureaucratic alliance was signaled by the election of the Chuan Leekpai government in September 1992.
Democratization, political business, and “money politics” By the early 1990s, the Thai state had been radically recast. After three decades of economic growth, the power and authority of the bureaucracy – both civilian and military – has been eclipsed by the wealth and power of business interests. Although a segment of the old bureaucratic polity continues to resonate within the state, the days of overt military intervention in politics appear to be over.27 Key bureaucratic positions previously occupied by relatively insulated technocrats have been replaced by political appointees and promotions within the civil service are based more on connections with parties than on merit. Moreover, elected politicians have used their new access to the state, and their capture of the bureaucracy, as a means to generate funds to maintain party factions, build war chests for impending general elections, and reward private firms for their support. The late twentieth century has been marked by the domination of political parties by business. While the Bangkok Bank and the Techaphaibun family have been long time supporters of the Chat Thai party, other financial backers that have emerged in the 1990s have included the Amata, Ban Chang and Hemaraj groups as well as Thaksin Shinawatra who is said to have been close
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to the Therd Thai faction, despite also bankrolling the Palang Dharma Party. The principle backers of Chat Pattana – a breakaway faction of Chat Thai set up in 1992 – has been the Osathanugrah family of the Osotsapa Group, Adisai Bodharamik of the Jasmine conglomerate, and the Tipco Group, which, along with the Phataraprasit family (Sura Thip group), also had ties to the Democrats. The New Aspiration Party has been supported by the CP Group, the Krisdathanont family (ITF Finance and Securities), and the Kanjanapas family (Bangkok Land) (see Backman 1999: 314–20). Thai companies have supported politicians or political parties during elections in expectation of favors once they achieve office. High-profile business leaders who have donated money during election campaigns are often appointed as non-elected members in Thai cabinets. This has been particularly true with leading members from Thailand’s banking sector. The business figures packing Thailand’s parliament and cabinets are not, however, a unified and cohesive group acting in harmony. They include such diverse figures as the bureaucrat–entrepreneurs or “technocrats,” such as former diplomat turned businessman and former premier Anand Panyarachun, and the so-called metropolitan business-politicians. This catch-all category includes old elite interests, particularly the Thai banking families represented by former bankers turned politicians, as well as the “new rich” spawned by the financial boom of the late 1980s, like telecom mogul Thaksin Shinawatra. In the 1990s, the Democrat Party has been most closely associated with the banks. Chuan Leekpai’s 1992 cabinet contained four senior bankers, including the former president of Siam Commercial Bank, Tarrin Nimmanhaeminda, who served as Finance Minister.28 Two former bank presidents were also appointed to the Chavalit government in 1997.29 Almost all these business politicians have served as non-elected members of the cabinet, their money and influence allowing them to bypass the electoral route to top positions in the cabinet. Sitting across the cabinet table from the distinguished bankers have been Thailand’s much-maligned provincial business-politicians. Banharn Silpaarcha, probably the most successful business-politician from the provinces, has held every important ministerial portfolio – including Interior, Finance, Communications, Industry, and Agriculture – since the mid-1970s, and also served as prime minister between July 1995 and November 1996. Banharn’s first company sold chlorine and then water pipes to the Department of Public Works; he still supplies chlorine to the government (The Nation 18/4/00). Banharn then expanded into construction before buying into real estate, petrol stations, a rice mill, a hotel, car dealerships, a finance company, and a school in his home province of Suphanburi. Since joining his first cabinet in 1976, he has adeptly directed public funds into his province30 and his political career has been dogged by a succession of scandals.31 Each successive civilian government elected since 1988 has been mired in corruption scandals or allegations of “money politics.” Corruption permeates all levels of the political process from vote-buying during national elections to
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the abuse of public office by elected officials for private gain. Under these conditions, Parliament earned a reputation of lacking a commitment to the promotion of national interests while parliamentary debates and new legislation reputedly had little policy content (Girling 1996: 65). Pending legislation has been delayed or killed off by frequent changes of government. Since electoral politics were established in 1988, not one government has lasted its full term of office. All four coalition governments – led by three different political parties – before November 1997 were brought down by scandal. The logic of public office for these elected politicians, has been to misappropriate the resources of the state for their vested business interests, as well as to secure access to funds to payback financial supporters, recoup expenses in past elections, or establish new alliances in preparation for future elections. This determination to maximize financial gains from public office to build up patronage networks (as opposed to implementing policies in the long-term economic interests of the country) has been intensified by the unstable nature of Thailand’s coalition governments. “Money politics”: vote-buying, MP-buying, and factions The underlying reasons for growing business participation in politics lie with the nature of Thai political parties and the commercialization of the electoral process. Since most political parties, with the exception of the Democrat Party, were established in the 1970s, they remain loosely structured and lack a national party network. It was not until the 1980s, moreover, that civilian political parties had held power for more than three consecutive years. Since 1932, there have been 15 coups, 21 elections, and more than 50 cabinets. Typically, after each successive military coup, the parties are disbanded and their assets seized. In view of this, there is no long tradition of political mobilization and organization at the local level (Ockey 1998: 47). As a result, parties also lack a mass base and cannot depend on membership subscriptions to fund party campaigns. Under these circumstances, political parties have resorted to vote-buying to secure votes at the local level. The chief means used by parties to expand their network of party canvassers has been through political patronage, including appointments to government advisory positions or the Thai Senate or the awarding of government contracts. Funds raised in the corporate sector have been channeled to political parties for vote-buying during national elections. Vote-buying, MP-buying, political patronage, and political corruption have been the chief means used by political parties in their fight for ascendancy in the Thai Parliament. For example, estimates of money spent during general elections show a sharp increase, from Bt4–5 billion in 1988 to Bt20–30 billion in 1996 (see Table 8.3). “Money politics” has also been encouraged by the factional nature of Thai political parties. Loyalty to political parties is weak and rarely do party members unite around a particular ideology or manifesto. Parties are merely vehicles for individuals to achieve the premiership; the New Aspiration Party,
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Table 8.3 Election spending, 1986–96 Election year
Amount spent on campaigning,vote-buying, and MP-buying (Bt million)
1986 1988 1992 1995 1996
300–400 4–5 10 17 20
Sources: Pasuk et al. (1998: 261); The Nation 29/12/00.
for example, was created to support Chavalit’s bid for the premiership. The building blocks of parties are competing groups of factions. Chatichai, for instance, defected from Chat Thai and set up the Chat Pattana Party in a failed attempt to become premier, while Thaksin Shinawatra has launched the Thai Rak Thai Party to contest the election due before November 2000. The leader of the party is usually the leader of the most powerful faction, and the most powerful faction is typically determined by the relative amount of money a faction has to spend on election campaigns and MP-buying. MPs frequently switch parties on the basis of financial rewards or with the expectation of a position in the cabinet. According to one study, 45 percent of MPs had defected to other parties in the seven general elections up to and including the one held in March 1992 (Suchit 1996: 78). Banharn won the premiership because the Therd Thai group of Narong Wongwan joined Chat Thai, while Chavalit’s victory was secured when the Wang Nam Yen faction of Snoh Thienthong left Chat Thai to join the New Aspiration Party. The Wang Nam Yen faction, with as many as 60 former and incumbent MPs, subsequently announced that it would leave the New Aspiration Party for Thai Rak Thai (Bangkok Post 21/3/00). During the 1996 general election, it was reported that politicians could expect “transfer fees” of between Bt3–7 million and in the run-up to the 2000 general election these fees had risen to between Bt10 million and Bt20 million (Bangkok Post 21/3/00). The strength of each faction within a party also determines the number of cabinet seats it will be able to control. Under this “quota system,” cabinet positions are awarded not on the basis of seniority or expertise, but on the number of MPs a faction leader controls. A faction of at least seven members usually ensures an MP a seat in the cabinet. Once a cabinet position is secured, faction leaders can use access to corruption revenue (granting concessions, skimming off funds, or auctioning top positions in the bureaucracy) to recoup their election expenses, accumulate financial resources for the next election, and consolidate or build on the number of MPs under their control. Cabinet ministers are also obliged to provide financial support for the party’s general activities. On the other hand, factions that do not secure cabinet positions will often seek to bring down the government. With the high cost of election campaigns, parties have become dependent
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on secret donations from banks, companies, or individual financiers. Once in office, an individual politician or political party must continue to generate income to reward supporters, maintain the loyalty of faction members, and build war chests for the next election. For example, an embittered former deputy interior minister in the Chatichai coalition who had been forced to resign over accusations of corruption, went public in 1990 and described how anything from garment export quotas, import licences, provincial bus concessions to MPs’ votes on no-confidence motions, had been “sold” by government ministers. He also revealed that when his Social Action Party decided to raise Bt500 million for the next election, it instructed the ministers for transport and communications and commerce to provide Bt250 million and Bt200 million each (The Nation 2/11/96). Party funding and rent-seeking in the 1990s The introduction of sweeping economic reforms to deal with the severe mid1980s recession led to important policy shifts, including the easing of capital market controls, liberalization of the domestic financial sector, privatization of selected state-owned companies, and contracting out of major infrastructure projects to the private sector. Although, in theory, deregulation of the domestic financial sector and privatization were intended to introduce market competition and create a level playing field, the opposite appears to have occurred. Key government economic agencies which had previously been relatively insulated from political influence and staffed with technocrats became the captive of particularistic interests. With each new government or cabinet reshuffle, the senior bureaucrats in charge of regulating government agencies and running public enterprises have been replaced. In 1993, for example, the Chuan government replaced the entire board of the Communications Authority of Thailand (CAT) before the approval of nine major projects worth Bt8 billion (Sakkarin 1995: 210). As a result of such political interference, policies aimed at rolling back government involvement in the economy have been used by political factions to secure rents to fight increasingly expensive election campaigns. The brief case studies below illustrate how the stock market, infrastructure privatization, and domestic banks were plundered to support parties, factions, and individual politicians. Stock Exchange of Thailand (SET) The stock market boom, which lasted from the late 1980s to the mid-1990s, created new opportunities for politicians to generate funds for their parties and build vast private fortunes. Handley’s (1998: 101) study of the SET between 1987 and 1996 argues that: public policy was significantly modified to respond to the fluctuations of
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Without proper regulation, insider trading, margin financing, and chainlisting flourished.32 A common practice involved company owners and underwriters conspiring to artificially raise the issue price of new shares. To create the impression that share prices would increase further, market sentiment was manipulated by associating these shares with elites within the military, political parties and major firms (Handley 1998: 100). Through this allocation of shares, direct links with politicians were established, while profits from the share manipulation would be used by the firms to support politicians. Much of this activity on the SET involved top politicians who benefited from directly or indirectly manipulating the bourse. For example, in the weeks leading up to the May 1992 election, the SET index rose significantly as politicians used the SET to raise money for their election campaigns (Handley 1998: 107). One case that was indicative of the sheer scale of abuse of the SET for political gain involved Sia Song. In the high-profile prosecution case against Sia Song for share manipulation brought by the Security Exchange Commission in 1992, it was revealed that a number of those implicated had direct links with a range of senior political and military figures. These included air force commander Kaset Rojananin, the leader of the New Aspiration Party Chavalit Yongchaiyudh, Democrat Party Members of Parliament, Bhichai Rattakun and Supachai Panitchpakdi, and Palang Dharma Party Member of Parliament Akorn Hoontrakun.33 Song’s syndicate was estimated to have controlled some US$800 million in investment funds and he was understood to have contributed heavily to the coffers of a number of political parties. At least one newspaper alleged that he had acted as portfolio manager for Chavalit’s New Aspiration Party (see Bangkok Post 15/7/94). Song was, however, acquitted of all charges, but during the investigation a number of senior police officers were transferred off the case. As the Minister of Interior at the time, Chavalit was responsible for the activities within the police department. Privatization Privatization emerged as an important mechanism for politicians to benefit from “commissions” in exchange for granting concessions to private consortiums. The privatization of some government-owned enterprises, like the Petroleum Authority of Thailand and Thai Airways International, was severely compromised by the vested financial interests of individual
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government leaders (see Handley 1998). During the era of active privatization, the Transport and Communications Ministry became one of the most sought-after economic portfolios, and in his study of the telecommunications sector, Sakkarin (1995: 209) concludes that: It was well known that there were brokers connected to political parties selling many telecommunications licenses to prospective investors. In this connection, the outcomes of many BOT [build–operate–transfer] bids were said to be known prior to the conclusion of the bidding results. As well as generating enormous personal wealth for cabinet ministers and political parties, the privatization of telecommunications licences and contracts facilitated the rise of a number of politically connected Thai conglomerates. Four corporate groups – Shinawatra, CP, Ucom, and Jasmine – dominated the list of companies awarded concessions (see below). The collusion between Thai politicians and business people usually subverted the intended goals of privatization. One example was the alleged contract violations involving Thailand’s first highway privatization, the Bt25 billion Second Stage Expressway project, which was to the detriment of a foreign investor. In 1990, a private consortium, Bangkok Expressway Company (BECL), led by the Japanese construction firm, Kumagai Gumi, was awarded the concession to build and operate a toll-road in Bangkok. After the road was built, a dispute ensued when the state agency involved, the Express and Rapid Transit Authority (ETA), refused to share toll revenues with BECL. A second contractual obligation ETA flouted was the stipulation that BECL be allowed to monitor the collection of toll receipts, leading to allegations by some observers that the government agency was skimming money when the tolls were collected. The conflict was resolved only when a group of Thai companies led by Bangkok Bank and construction firm Ch Karnchang – under heavy pressure from the Thai government – bought out the Japanese firm’s 65 percent stake in BECL.34 The cost of the takeover was put at Bt3.6 billion and as an inducement to the Thai companies to take on the debt for this acquisition, the government provided a guarantee that BECL would secure a listing on the SET. A number of serving ministers were also said to have benefited from the issuing of preferential shares.35 The ETA governor, Sukavich Rangsitphon, was later appointed deputy prime minister under the New Aspiration Party’s quota and became the party’s Secretary General in 1995 after allegedly agreeing to contribute Bt100 million to the party’s campaign fund for the next general election. When Chavalit became prime minister in 1996, Sukavich was appointed education minister and became embroiled in a long-running scandal involving the purchase of overpriced computers for schools. Apart from the collusion between politicians and Thai business leaders against the interests of a foreign investor in the expressway project during the dispute, the Thai banks, which were both lenders to and shareholders of
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BECL, appeared to act against their own commercial interests by switching sides and taking positions against Kumagai Gumi.36 Perhaps one explanation for this change of heart was Bangkok Bank’s ties with Chavalit and his New Aspiration Party. The bank contributed to the New Aspiration Party’s 1992 election campaign, while Deputy Prime Minister Amnuay Wirawan, who was charged with resolving the dispute, was also a former chairman of Bangkok Bank and a nominated MP under the New Aspiration Party’s quota. The looting of the Bangkok Bank of Commerce Alongside new avenues for raising revenue, through corrupt means, to support political parties, politicians have also resorted to the time-honored tradition of abusing the country’s domestic banks. The scandal surrounding the Bangkok Bank of Commerce (BBC) in 1996 illustrates how collusion between bankers, politicians, and state regulators allowed the proliferation of fraudulent lending and prevented the state from disciplining errant banks. Following the collapse of BBC, it was revealed that Bt10 billion of the Bt78 billion in suspect loans had been extended to members of Banharn’s Chat Thai Party, including the Deputy Finance Minister, Newin Chidchob. One of the BBC’s former directors further admitted that the bank had contributed Bt1 billion to Chat Thai during the 1995 election (Bangkok Post 2/8/96).37 The BBC scandal also revealed the inter-connections between the private bankers and state regulators, which allowed such fraudulent practices to go unpunished. The central bank had been aware that BBC was virtually bankrupt as early as 1995 and knew of the bank’s risky management structure and fraudulent lending (Wall Street Journal Europe 5/10/99). Rather than forcing a write down of capital and instituting a management change when these problems were discovered, the central bank bailed the BBC out with Bt1.7 billion from the Fund for Rehabilitation of Financial Institutions. When it later emerged that the central bank governor, Vijit Supinit, had borrowed Bt5 million from the BBC without collateral, the motivation for the bailout became clear (Bangkok Post 12/7/96). The integrity of Vijit, and by association the Bank of Thailand, was also questioned when it was revealed that he had accepted 4,000 shares in Siam City Credit Finance and Securities Plc (SCCF) at par value before he personally chaired a meeting of the Stock Exchange Commission which approved the company’s listing on the stock market. Criminal cases against the BBC executives were subsequently dropped because the central bank had failed to act on the case within the 12-month time limit. Newin, who resigned over the scandal, rejoined the Chuan cabinet in 1997. The BBC scandal was an important precursor to the 1997 financial crisis. Not only did the scandal expose the central bank’s lack of independence, it also undermined its credibility as an institution capable of regulating the financial sector. The official enquiry into the causes of the crisis concluded that the “lack of transparency and protracted handling of the BBC problem
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denigrated the Bank of Thailand’s name in the eyes of the Thai public and foreign investors” (Nukul Commission 1999: 135). Financial crisis: improper collusion, poor regulation Although the causes of Thailand’s financial crisis have been welldocumented,38 two important contributory factors were byproducts of the changing nature of political business ties in the 1990s. First, the history of collusion between bankers, borrowers, and politicians contributed to the debt crisis by encouraging reckless lending. Second, poor regulation of the financial sector and a failure to discipline the banks were made worse by the politicization of economic management after 1988. Key macroeconomic institutions, such as the Bank of Thailand and the Ministry of Finance, formerly known for their insulation from politicians and for their conservative fiscal policies, became captive of elected politicians. In 1996, for example, the central bank governor resigned his post over political interference that had compromised the bank’s independence. He had been under increasing pressure by the Banharn government to lower interest rates after a number of cabinet ministers had publicly criticized the Bank of Thailand’s high interest policy.39 Growth during Thailand’s boom years in the early 1990s had been fueled by cheap credit and undercollateralized loans. Loans were based on poorly evaluated assets, usually land. In many cases, long-term debtors were awarded with seats on the boards of banks to which they owed money and then went on borrowing illegally (Far Eastern Economic Review 16/4/98). In the family-based banks, personal credit was common and bank lending was often influenced by long-standing family relationships dating back to the 1940s and 1950s. The families also plundered their own banks. For example, as of December 1997, more than 10 percent of Bangkok Bank’s top 20 outstanding loans were made to companies or parties related to the Sophonpanich family (Asiamoney June 1999). The fate of the Techaphaibun family is indicative of many of the problems facing Thailand’s family-owned banks. The Techaphaibuns lost control of Bangkok Metropolitan Bank (BMB), Bangkok Metropolitan Trust, Thai Overseas Trust, and the Bt10 billion World Trade Center. During the boom, the family used cash from Bangkok Metropolitan Bank and overextended into real estate and land through its property arm Bangkok Metropolitan Land. In 1995, 76 percent of the bank’s net assets had been lent to subsidiaries or affiliated companies of the Techaphaibun family (Backman 1999: 137). When the property market collapsed in 1997, the World Trade Center and Banpu Industrial Estate together owed the bank some Bt4 billion (The Nation 12/1/ 2000). The bank, however, was facing severe problems even before the crisis and warnings by the Bank of Thailand to cease lending to subsidiaries owing to rising non-performing loans were ignored. Despite these problems, the bank was kept afloat through liquidity injections from the government. During this period the BMB’s managing director, Panya Tantiyavarong, was
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an economic adviser to the Chavalit government and it was not until December 1997, when the Democrats came to power, that the bank was nationalized. By that time, its non-performing loans had reached Bt89 billion, or 43.2 percent of total loans (The Nation 27/1/98).40 A key factor in the pattern of lending and inherent weakness of the banks was the power of Thailand’s banking cartel. Prior to the crisis, banking was dominated by 16 Sino-Thai families and highly concentrated, with the five biggest banks (Bangkok Bank, Krung Thai Bank, Thai Farmers Bank, Siam Commercial Bank, and Bank of Ayudhya) accounting for more than twothirds of bank assets (Lauridsen 1998: 140).41 The political influence of these banks, described in 1989 as “second to none” (Hewison 1989: 204), ensured that the banking cartel remained intact and regulation was resisted. Even after Thailand’s first financial crisis in the mid-1970s, the state failed to discipline the banks. The 1979 Banking Act’s 5 percent limit on individual shareholders did not apply to shares owned before the enactment of the law. Moreover, despite recommendations from the World Bank that badly managed banks be allowed to collapse and that greater competition be introduced to the financial sector, the state bailed out 30 financial institutions between 1983 and 1991 (Dixon 1999: 244). The bailouts continued unabated right up to the collapse of the baht in July 199742 with Bt700 billion lent by the Bank of Thailand to the troubled financial sector (Nukul Commission 1998: 144). Ministers from the Chat Pattana Party were shareholders of some of the most debt-ridden finance companies, which were plagued with non-performing loans following the collapse of the property market in early 1997 (Lauridsen 1998: 148).
Constitutional reform and economic restructuring: endurance of political business In the midst of Thailand’s financial crisis, criticism of the country’s parliamentary system and the behavior of elected politicians was overwhelming. McCargo (1998b: 10) noted that the “electoral process was becoming increasingly exclusionary, controlled by an unholy alliance of socalled ‘professional politicians,’ provincial crooks and hoodlums, unsavory business interests, large companies, and third-rate ex-soldiers and bureaucrats.” A broad coalition of different social forces with varied motivations supported constitutional reform. Despite opposition from conservative forces – the interior ministry, the military, the police and the judiciary – a new constitution was pushed through Parliament in November 1997. Although the primary concern that drove efforts for constitutional reform was the desire to curb money politics, the actual drafting of the new constitutional was dominated by Thailand’s political elite and despite the new charter, genuine structural reforms in both politics and business have not been implemented. McCargo (1998b: 25) noted that the constitution drafting process itself was a “source of vast quantities of patronage” both in terms of the financial perks
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and publicity and for many was “an important means of launching, sustaining, or relaunching a career as a politician or public intellectual.” The new constitution does, however, set out to attack “money politics” on a number of levels. First, multi-member constituencies have been broken up into 400 single-member units, and an additional 100 members are to be elected nation-wide under a party-list system. The smaller constituencies, and the introduction of compulsory voting, will presumably discourage votebuying and improve accountability of elected members. The party-list system is also designed to encourage well-qualified candidates since they will be chosen in a national vote. In a bid to stop MP-buying, politicians are barred from switching to a new political party less than 90 days before an election. The charter also aims to stem factional rivalry: the right to call a vote of noconfidence is limited to once a year and ministers who leave or are sacked from the cabinet must relinquish all their political positions. Additionally, the Prime Minister will be chosen by an open vote in the house. Finally, an independent Election Commission is to monitor elections, with the power to disqualify candidates guilty of vote-buying or fraud. To break the vicious cycle of “money politics” and special interest funding of political parties, the new charter has also established a series of regulations that attempt to bring transparency to party financing, place limits on spending during election campaigns, and introduce a measure of state support for election campaigns. First, the identity of party donors and the value of each contribution to a party must be made public and registered with the Election Commission. It is also against the law for parties to receive donations from foreign individuals or organizations. The assets of party executives and their spouses must also be declared. Violators are liable to a three-year prison term and/or a fine which is three times higher than the amount of the unlawful contribution, as well as the loss of their right to run in an election for five years. Second, the Election Commission is required to set legal limits on campaign spending by political parties during elections. To enforce this measure, each party is required to have certified accounts prepared and submit their campaign spending reports to the commission. Finally, under the new rules, a Political Party Fund has been set up to help fund party activities, recruit new members, and, in theory, make them less reliant on financial contributions from the private sector. The funding, which is provided annually, is calculated for each party according to the number of MPs (35 percent), party-list votes (30 percent), party members (20 percent), and the number of party branches (15 percent). Parties are also given equal radio and television airtime to announce their policy platforms. Critics charge that these provisions will do little to eliminate money politics. Suchit (1996: 4) predicts that the new smaller, single-member, constituencies will work only in favor of local business elites. Sombat (1999) is equally pessimistic. He argues that the greater competition for a smaller number of seats under the new system will encourage a “do-or-die” attitude among rival candidates and may actually lead to more vote-buying to ensure victory;
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previously, it was common for two or three of the leading candidates in multimember constituencies to strike bargains to assure they were all elected. Sombat (1999) also suggests that the party-list system is unlikely to prevent faction leaders or party financiers joining the cabinet given the dependence of parties on their support, while the open vote for the prime minister will probably encourage the auctioning of the premiership now that MPs are no longer obliged to follow party whips. The implementation of the charter has also fallen far short of its intentions. The original constitution envisioned the creation of a raft of new judicial and quasi-judicial institutions to implement the rights and intentions written into the charter and this has required the drafting of enabling laws by the Council of State and their passage by Parliament. The Council of State, a body of lawyers that vets all government-supported legislation before it becomes law, is already reputed to be a conservative institution concerned with ensuring that power remains concentrated in the hands of the executive (see The Nation 12/10/99). On the reform process involving the new institutions, one newspaper editorial commented that the “Council of State deflects the enabling laws. The Constitutional Court muddies key decisions. Politicians and bureaucrats team up to sandbag challenges to corruption and the abuse of power” (The Nation 4/1/00). Another example of the ineffectiveness of the proposed reform is the Human Rights Commission. Instead of the independent body envisioned by the charter, the Council has placed the Commission under the executive and packed it with state officials (The Nation 12/10/99). The Freedom of Information Act and the provision enabling 50,000 signatories to initiate a corruption investigation against a state official have also been impotent so far.43 Many of the plagues facing Thai democracy have re-emerged under the new constitution and the courts continue to bow to influential politicians. For example, after 10 rulings, the new and powerful Constitutional Court has come under fierce criticism for politically expedient verdicts. In June 1999, it ruled in favor of a minister who had been found guilty of libel and given a suspended six-month prison sentence. This flew in the face of the charter’s intention that MPs must step down if sentenced to prison, whether suspended or not. A rash of scandals during the Chuan administration also indicated that the nexus between politics and business had not been broken. The scandals included illegal logging of national forest, the overpricing of seeds for farmers hit by the crisis, and the finance minister’s alleged cover up of bad loans and political lending at the state-owned Krung Thai Bank at the time when his brother was the bank’s chairman. The first test of the National CounterCorruption Commission involving the scandal surrounding the Public Health Ministry’s overpricing of medical supplies was similarly disappointing when it failed to bring a prosecution, on the grounds that no evidence could be found. More importantly, the pattern of scandals appears to be changing: politicians and senior bureaucrats are for the first time colluding in complex schemes to generate illicit income.44
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Senate elections: retaining the status quo The first real test of the new constitution was the March 2000 Senate elections. Under the new charter the upper house – in the past an appointed bastion of military and bureaucratic conservatism – is directly elected. Senators have also been given wide powers to check the executive and to prevent conflicts of interest, senators were intended to be free from any party affiliations.45 Ironically, following the election, political parties appear to have gained a greater hold of the upper house than in the past and the Election Commission (EC) admitted it had been forced to abandon attempts to disqualify people with suspected links to political parties because of the difficulty in proving such cases (Bangkok Post 15/3/00). According to one estimate, 70 percent of the election candidates were affiliated with a politician or party. This included family members and close aides of politicians, former senior military and police officials and associates of political godfathers (Bangkok Post 23/3/00). Just over 40 percent of the candidates were active or retired bureaucrats with almost 21 percent describing themselves as business people (see Table 8.4).46 Although political campaigning was illegal, the Thai Farmers Bank Research Center estimated that Bt10 billion was spent promoting candidates and, according to the chief of police, an estimated Bt20 billion may have been spent on vote-buying (Associated Press 6/3/00).47 In the run-up to the election, vote-buying was widespread and after the first poll, 78 of the 200 winners were barred from taking up their seats owing to suspected fraud or “grave violations” of the electoral law (The Nation 21/3/ 00). Those barred included many of Thailand’s elite political families who were faced with the public humiliation of being placed on the EC’s “list of shame” and forced to stand again in a series of by-elections. None of these candidates has been prosecuted and all but three of the 78 candidates were allowed to run again in a series of re-run elections. Among those accused of vote-buying were the wives of the minister of interior and secretary general of the Democrat Party. Leading business people suspected of vote-buying include the garment exporter and secretary-general of Thailand’s Board of Table 8.4 Senate candidates, March 2000 Profession
Number
% of total
Active and retired officials Businesspeople Lawyers Farmers Ex-MPs and senators Employees Others Total
612 318 259 55 9 61 207 1,521
40.2 20.9 17.0 3.6 – 4.0 13.6 100.0
Source: Election Commission at http://www.ect.go.th.
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Trade, Wirote Amatrakulchai and casino tycoon and newspaper owner Chatchawal Kongudom. There is also the case of Maleewan Ngernmuan, the wife of the Minister of Justice. The EC rejected her victory in the first two rounds of elections because of irregularities. Despite the apparent violations of the election law, her third-round victory was accepted and she now sits in the upper house. In the end it took four months and five rounds of elections before a new Senate was appointed. Although a handful of candidates from NGOs, academia, and the media were successful in the election, the list of disqualified candidates is a veritable “who’s who” of the relatives – spouses, brothers, sisters, brothers-in-law – of Thailand’s political elite. In addition, more than half of those elected are former MPs. Despite the best intentions of the new charter, the election of the Senate speaker and his deputies attracted heavy interference by political parties lobbying for their candidates and there were even allegations of vote-buying (Bangkok Post 4/8/00). A similar process of block voting was also said to have taken place over the appointment of the Senate’s 16 standing committees. Following these events, one Thai paper concluded that “popular hopes for a Senate free of political partisanship have already been comprehensively dashed” (Bangkok Post 13/8/00). Financial crisis and the realignment of political parties While the provisions of the new constitution appear to have fallen short of their intentions, it is also evident that despite the financial crisis, business continues to dominate the state. The crisis has, however, highlighted divisions between the financial sector and the real economy that is reflected in a new alignment of party politics. The Democrat Party has become the defender of finance and the party of the banks, while Thaksin Shinawatra’s Thai Rak Thai Party has positioned itself as the party of “domestic capital mauled by the crisis and ignored by the Democrats” (The Nation 17/4/99). This division is reflected in the Chuan government’s failure to challenge the remaining banking families and restructure the financial sector. In addition, a new powerful political and business alliance has emerged between Thaksin Shinawatra and Dhanin Chiaravanont of the CP Group. Not only does this represent an alliance between old and new capital, but it may have profound implications for the concentration of capital and political power at the next general election. The problems surrounding restructuring of the banking and corporate sectors indicate that continued close inter-connections between Thailand’s political, business and bureaucratic elites have stymied attempts to punish those who misappropriated bank funds and brought the economy to near collapse. One bureaucrat, Amaret Sila-On, chairman of the Financial Sector Restructuring Authority, complained in May 1999 that “cronyism, collusion, corruption, and complacency” had spread to all levels of the economy and
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slowed the subsequent restructuring of the financial sector (The Nation 27/5/ 99). Although the country’s smaller family-owned banks have collapsed or been subject to ownership change,48 Thailand’s five largest banks, which account for 70 percent of all Thai banks’ assets, have survived and will stay in Thai hands. These five represent various sectional interests: three of Thailand’s most powerful banking families – the Sophonpanich family (Bangkok Bank), the Lamsam family (Thai Farmers Bank) and the Rattanaraks (Bank of Ayudhya) – the Thai bureaucracy (state-owned Krung Thai Bank), and the monarchy (Siam Commercial Bank). In its attempt to restructure the financial sector, the government has bowed to the remaining powerful banking families to the detriment of the economy. When the then finance minister Tarrin Nimmanhaeminda told a banking analyst from Goldman Sachs that the Bangkok Bank was the biggest threat to the banking system in 1999, he came under intense political pressure (The Nation17/8/00). The political clout of the banking families did not allow him a free hand. For example, the Bt300 billion August 1999 bank restructuring plan, which was designed to force the banks to write down the value of their shares in exchange for capital, failed because it was voluntary. Only the ostensibly government-controlled Siam Commercial Bank agreed to enter the scheme. Rather than seek government funds and lose ownership and management control, the family banks devised two new forms of financing known as Staple Limited Interest Preferred Securities (SLIPS) and Capital Augmented Securities (CAPS). These schemes allowed the banks to raise Bt79 billion from the domestic market without diluting their shareholdings. With the failure of the government scheme, the chance to bring about a proper recapitalization of the banks with new equity was lost. The credit rating agency, Standard & Poor’s, argued that much of the capital raised by the Thai banks via these schemes was of a “poor quality” because it was in the form of hybrid debt-linked equity which was mostly of short-term duration.49 To cope with non-performing loans, which amounted to Bt2 billion and nearly 40 percent of loans in the financial system in January 2000 (see Table 8.5), the survival strategy of the remaining banks has been to downsize and cut back lending. Total lending in the first eight months of 1999 fell by 13.3 percent against the same period the previous year, while outstanding credit in the business and services sectors fell by Bt622 billion to total Bt6.35 trillion (Pichit 2000: 301). The contraction in lending has stymied an economic recovery. With losses amounting to Bt71.9 billion in the first half of 1999, the banks have also charged abnormally high spreads of 5–8 percent that penalize depositors and responsible borrowers (The Nation 11/11/98; Pichit 2000: 301). Corporate restructuring has also been fiercely resisted by many of Thailand’s biggest debtors. Many of the reforms proposed by the Chuan government were either opposed or watered down by the Thai Senate which was packed with the “country’s most renowned strategic defaulters” (Far Eastern Economic Review 25/11/99). Although new bankruptcy and foreclosure laws were eventually passed in 1999, debtors are still allowed to hide
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Table 8.5 Non-performing loans (NPLs), November 1999–January 2000 (Bt million) Nov 1999
Dec 1999
Jan 2000
60,341 52,123 8,218
55,002 40,187 14,815
47,772 38,499 9,273
NPL reductions Restructured loans ● Accrued interest payments ● Transfers to asset management companies ● Writeoffs ● Others (selloffs, etc.)
155,843 53,246 30,576 59,900 250 15,871
310,600 150,126 22,601 41,200 66,526 30,147
54,870 30,222 12,405 – 432 11,811
Net change % change
–95,502 –3.91
–255,598 –10.88
–7,098 –0.34
Total new NPLs ● New NPLs ● Re-entry NPLs ●
●
Total NPL % of outstanding credit
●
2,349,959 42.34
2,094,361 2,087,263 38.91 38.68
Source: Bank of Thailand at http://www.bot.or.th/bothomepage/databank/Financial_ Institutions/Npl_Fi/Npl_Fi_E.htm.
funds offshore or in relatives’ accounts. Trade associations can still threaten not to pay loans unless they are offered a discount, while the process of liquidating a company’s assets and foreclosure on property can take years to execute (Newsweek 12/7/99). For example, Thai Petrochemical Industry (TPI), which along with its subsidiaries owes US$3.5 billion to more than 140 foreign and domestic banks, stopped paying interest in 1997. The company’s chief executive, Prachai Leophairatana, who is also a Senator, refused to acknowledge any responsibility for the company’s bad loans. It was not until March 2000 that the Central Bankruptcy Court finally ruled TPI insolvent and the case typified the division between creditor and debtor that had emerged in post-crisis Thailand. The Thai Rak Thai Party, launched one year after the crisis, is led by telecom tycoon, Thaksin Shinawatra and its cofounders include the son-in-law of the CP group’s chairman, Dhanin Chiaravanont, as well as the group’s deputy managing director. In 1998, the same year the party was formed, the Shinawatra and CP groups entered into an alliance to establish a monopoly in the cable television sector. This may signal the possibility of further strategic alliances in the future, which could lead to extensive wealth concentration and the monopolization of key economic sectors. If, for example, the cellular phone concession of Shinawatra were merged with CP’s fixed-line telephone concession, the assets would be worth over Bt141 billion and the market capitalization of Bt69 billion would be the third largest on the stock exchange (Ukrist 1998: 76–7). Dhanin has already explained the necessity for conglomerates in the same industry to merge or form alliances in order to compete with foreign multinationals (Ukrist 1998: 75).
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The Thai Rak Thai party represents a post-crisis political and business alliance through which major capitalists are combining forces to ensure that they secure dominance over the state. This political alliance between the two groups marks the CP group’s first direct entry into party politics. In the past, in order to promote its business interests, the conglomerate relied on its indirect control of ministries, usually achieved by financing several political parties at the same time.50 Thai Rak Thai appears to represent a far more significant alliance between old and new capital. Thaksin represents Thailand’s “new rich,” who made their fortunes from privatization and the booming stock market, while the CP group symbolizes the handful of Thai conglomerates which emerged in the 1950s and dominated the Thai economy until the late 1980s. In the 1950s, CP was one of Thailand’s largest importers of mixed feed and chemical fertilizer (Suehiro 1989: 225). Its initial success in the animal feed business has been attributed to its close connections with the military (Sakkarin 1996: 27). The key to the group’s rapid expansion was access to foreign technology and management expertise. By entering into joint ventures with a number of American firms, CP was able to build a vertically integrated production system for the feed-milling and poultry industries and became Thailand’s largest agri-business conglomerate (Suehiro 1989: 230). By the late 1980s, the company had expanded markets abroad and diversified its business at home. In 1988, CP was also awarded a 3-million telephone line installation project worth Bt100 billion by the Chatichai government in 1988.51 Beginning with one agri-business investment in China in 1979, the group had established more than 200 in the mainland by the mid-1990s, where it derives 20–30 percent of its total revenue. The group also has telecom interests in Vietnam, China, Nepal, Indonesia, and the Philippines (Far Eastern Economic Review 28/5/98; The Nation 6/1/98; Pasuk and Baker 1995: 164–8). Before the financial crisis, the CP group comprised a web of about 250 companies in 20 countries with a turnover of US$9 billion in 1997, about two-thirds of it in agriculture. To fund the group’s rapid diversification and expansion, CP borrowed in US dollars and some companies had debt–equity ratios as high as 10:1 (Far Eastern Economic Review 8/4/99). Thaksin Shinawatra, on the other hand, typifies the new generation of entrepreneurs who emerged with Thailand’s economic boom in the late 1980s. In the space of three years, he was able to amass a personal fortune of over Bt50 billion by listing a handful of his telecommunications projects on the stock exchange. Thaksin’s first company, Shinawatra Computer, was set up in 1983 and leased computers to the police department while he was still a serving officer. Between 1989 and 1991, he was awarded seven monopoly telecommunications concessions in Thailand’s first wave of privatizations under the Chatichai government.52 This included a cellular phone monopoly awarded by the Telephone Organization of Thailand (TOT) without competitive bidding. The then head of the TOT, Paiboon Limpaphayom, is now
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Shin Corp’s executive vice-chairman (Far Eastern Economic Review 10/8/ 2000). By December 1993, Thaksin had launched Thailand’s first communications satellite under another government-awarded monopoly concession and had become an international player with projects in Vietnam, Laos, Cambodia, Burma, and India. As of mid-2000, Shin Corp had total assets of Bt33.7 billion with 21 companies under its umbrella (Bangkok Post 25/10/00). Thaksin’s success in business has been put down to three factors: his political connections, his ability to source off-the-shelf technology on the world market53 and his adept playing of the stock market. He was known to have a close relationship with Chatichai and other members of the Chat Thai Party and most of his lucrative telecommunications concessions were awarded during the Chatichai administration.54 While Dhanin – until 1998 – sought to influence politics indirectly by discretely financing political parties, Thaksin has used his vast personal fortune as a means to enter politics. Throughout his chequered political career he has been able to build a political base by financing individual politicians or political parties. His first entrance into politics came in 1994 when he was appointed Foreign Minister as a non-MP under the Palang Dharma Party’s quota for cabinet positions in Chuan Leekpai’s coalition government. Thaksin was forced to resign less then three months later, shortly before an amendment to the constitution prohibiting individuals with state monopoly concessions holding posts in the government came into effect (Bangkok Post 31/1/95). Less then six months later, he became leader of the Palang Dharma and Deputy Prime Minister in Banharn’s government after the July 1995 general election. A month before the election, Thaksin scaled down his equity holdings to circumvent the constitutional provision that had forced him to step down from the government earlier in the year. The sale of this equity raised some Bt1 billion, which apparently was used to finance the Palang Dharma’s general election campaign (Bangkok Post 2/6/95). Thaksin is also said to have continued to provide financial support to other political parties even after he became leader of Palang Dharma. In particular, he is said to have given Bt200 million to members of Chat Thai’s Therd Thai faction (Bangkok Post 30/6/95).55 Thaksin’s decision to join the Banharn government, widely regarded by the public as comprising corrupt provincial business politicians, was costly and in the 1996 general election the Palang Dharma won only one seat. After resigning from the helm of Palang Dharma, Thaksin attempted to join the Constitution Drafting Assembly (CDA) which was charged with drafting Thailand’s new constitution. He was said to have spent heavily to “buy the loyalty of some CDA candidates to create a bloc of votes to push himself into the panel” (Bangkok Post 10/1/97). Although this attempt to buy his way onto the CDA failed, Thaksin was appointed as a non-MP, deputy prime minister in the Chavalit government in August 1998. He was said to have contributed Bt100 million to Chavalit’s NAP during the November 1996 general election (Bangkok Post 10/1/97).
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In 1998, Thaksin launched his own political party, the Thai Rak Thai Party, with the spurious claim that his aim was to “create clean and honest politics” (The Nation 6/10/98). He spent Bt3 billion launching the party, claiming it was a sum of money set aside by his family (The Nation 6/8/98). As well as linking old and new capital, the party has also for the first time appeared to unite urban Thailand, represented by Thaksin, and rural Thailand, represented by a NAP faction which defected to the Thai Rak Thai in March 2000. The faction, led by the NAP’s former secretary general, Snoh Tienthong, comprises 60 former and incumbent members of Parliament (Bangkok Post 27/3/2000). This same faction’s defection to the NAP from Chat Thai was the primary reason for Chavalit’s ascension to the premiership in 1996. Thaksin has also succeeded in recruiting key figures from other leading political parties.56 This fusion of politicians from different parties under Thai Rak Thai, together with the financial backing of the two conglomerates could prove to be a powerful combination in the next general election. Despite large foreign exchange liabilities, both corporate groups owned by Dhanin and Thaksin were quick to restructure, downsize and concentrate on core businesses, in the wake of the crisis.57 CP acted faster than many larger conglomerates and its immediate strategy was to mobilize new capital to maintain the group’s cashflow, cuts costs, and limit future borrowing.58 Following its restructuring, the CP group’s position in the Thai economy became even stronger, owing not just to the weakened position of domestic capital following the crisis, but to the group’s strategic purchases since 1997 (Hewison 1999: 33).59 Similarly, Thaksin has used the crisis as an opportunity to expand his stable of companies and build up a network of political patronage. In 1998, his investment company, the SC Asset Group, spent Bt7 billion acquiring a range of companies involved in property, retail, publishing, leasing, and management (The Nation 8/6/98). A year later, Thaksin came to aid of the Thai Military Bank, bailing out the interests of senior figures in the military and his colleague Thanong Bidhya (Far Eastern Economic Review 28/12/00–4/1/01). Thaksin was one of the few entrepreneurs to benefit from the flotation of the baht in July 1997. He had hedged nearly 70 percent of his group’s foreign currency exposure prior to the baht devaluation, leading the Democrat Party to suggest that he had been tipped off by the then Finance Minister, Thanong Bidaya, who he is known to have had a close relationship with (The Nation 27/9/97). After leaving the government, Thanong was appointed to Shin Corp.’s internal audit committee, further fueling speculation about collusion (Far Eastern Economic Review 10/8/00). The price of Shinawatra’s telecom shares also rose dramatically just prior to the baht flotation. Thailand’s largest mobile-phone operator, Shin Corp. subsidiary Advanced Info Service, for example, gained Bt2.4 billion on the Thai stock exchange between January and September 1997 (Ukrist 1998: 74). The corporate strategies adopted by Thaksin and Dhanin suggest that like the Thai-owned banks, domestic capital is, as a result of the crisis, becoming
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increasingly concentrated in a few hands. Thai Rak Thai, backed by Thailand’s corporate sector, achieved an unprecedented election victory in the January 2001 elections (see Postscript).
Conclusion The great paradox of contemporary Thai politics is that the more open society and politics have become, the more they have been abused for the financial gain of elected politicians. Each civilian government elected since 1988 has been tarnished with the brush of “money politics” and mired in a succession of corruption scandals. Rather than limiting the abuse of authority and checking the actions of elected officials, this chapter has argued that the process of “democratization” has been subverted by the dominance of capital over the political process. With the fading of ethnic boundaries and the rapid expansion of the economy, Sino-Thai business people have moved from a subordinate role, as “pariah” capitalists and clients of Thailand’s military and bureaucratic elites, to securing independence and hegemony over the Thai state. The vehicle for capital’s control over the state and economic policy-making has been political parties. With the transition to parliamentary government, leading business people have secured control over Thailand’s cabinets by financing political parties or entering directly into electoral politics. This remains a key factor hindering the development of a more genuine form of democracy and a more transparent and accountable form of governance. Rather than being unified by an ideological goal or common vision for Thailand, political parties have been characterized as expedient and temporary alliances of factions which momentarily come together to secure control over the state for vested interests. Within parties, factionalism has been rife as support for faction leaders supersedes loyalty to the party. The inability to satisfy competing factional interests has also affected the capacity of parties to sustain their positions within particular coalition governments. The limited longevity of parties in government, in turn, has been one reason for the entry of business people into politics as a means to secure direct access to the state. Since no single party has been able to secure a majority in Parliament, Thailand’s period of democratic politics has been characterized by a succession of unstable coalition governments. This combination of political instability – there have been three general elections since 1992 – with political parties’ dependence on vote-buying and MP-buying, has meant that the costs of financing parties and elections have steadily risen. This has worked only to increase the dependence of parties on funding from the private sector. Following the transition to parliamentary government, the logic of public office has been to appropriate the resources of the state to pay back financial supporters in past elections or to establish new alliances in preparation for future elections; this, in part has contributed to the significant rise of corruption since 1988. This determination to maximize financial gains from
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office and build up patronage networks, as opposed to implementing policies in the long-term interests of the country, has been intensified by the unstable nature of Thailand’s coalition governments. What also distinguishes political–business ties in the 1990s has been the capture of the once autonomous bureaucracy by elected politicians. Political appointees have replaced key bureaucratic positions previously occupied by relatively insulated technocrats. Such macroeconomic pillars as the Ministry of Finance and the Bank of Thailand have become subject to the whims of elected politicians, most of whom have secured positions in the legislature through funding from business, or are themselves business people. The financial crisis in 1997 demonstrated the degree to which economic policymaking had become highly politicized and how the power of the technocrats to check unproductive rent-seeking had diminished. While the 1997 financial crisis highlighted the implications of political business for the Thai economy, events in the post-crisis period suggest that genuine reform has yet to be realized. The new constitution promulgated in the same year failed to introduce comprehensive structural reforms and the Thai state under the tutelage of business interests remains a conservative institution bent on defending special interests and old hierarchies (Pasuk 1999: 17). Power continues to be wielded by and for monied interests – labor unions are repressed, social welfare is non-existent, and the interests of Thailand’s rural majority continue to be largely ignored. Genuine attempts to eradicate “money politics” have failed owing to the continued domination of the state by politicians with business interests. No government has had the political will to stem the tide of corruption because parties remain beholden to financiers and must continue to use corruption revenue to stay in power. More importantly, new forms of political business ties are emerging which may continue to undermine the consolidation of democracy in Thailand. Within the corporate sector, big businesses that have survived the financial crisis appear to be consolidating their enterprises, emerging stronger than before, raising new concerns about wealth concentration and monopolization of key economic sectors. The conduct and outcome of the Senate elections held in March 2000, the first national-level election since the 1997 crisis, has indicated that more far-reaching political reforms are required if a genuine form of democracy is to emerge. If any further evidence was needed to make the case for comprehensive electoral reform, it was provided by the January 2001 general election. The greatest challenge facing the Thai polity lies with enforcing political accountability and reform of the judiciary, which controls the levers of regulation. Despite a vibrant civil society and the regular exposure of government scandals, there is little accountability of elected officials. For example, in the almost 70 years since the overthrow of Thailand’s absolute monarch, only one sitting politician has ever been tried and convicted for corruption. Moreover, despite widespread evidence of fraud within the financial sector, not one banker or business person has been prosecuted in wake of the crisis.
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One measure that is necessary as a first step to stem the tide of “money politics” is the introduction of state financing for election campaigns. The amount provided by the Political Party Fund has so far been woefully inadequate if it is intended to underwrite campaigns and eliminate the influence of vested interests over political parties. Even the head of the fund, Anuchit Kraisakthong, recognized in 1999 that the sum allocated “would not help much in election campaigning” (The Nation 15/6/99). In parallel, there should be limits on the amount of private and group contributions that can be made to political parties. The current system, which relies solely on public disclosure of donations, has done little to end the domination of party contributions by Thai corporations. To help prevent MP-buying, the authorities should be empowered to fix the maximum amount a party can spend before polls are announced. Under the current regulations, checks on campaign spending can begin only after a royal decree calling an election has been issued. As a result, allegations surrounding a Bt20 billion fund used by the Thai Rak Thai Party to buy MPs were never investigated (see Postscript). Finally, the legal limits on campaign spending and full disclosure of party donations must be strictly enforced. These measures would help to sever a number of important links between politics and business that have flourished under the current system.60 Meanwhile, the continued presence of big business in politics means that it is unlikely that collusion between politics and business that has so damaged the Thai economy will be checked. The fact that the best reformist offensive over the new constitution has been side-tracked and ridiculed does not bode well for the future of Thai democracy.
Postscript: political business ascendant – Thaksin Shinawatra’s election victory On February 9, 2001, Thaksin Shinawatra was appointed prime minister following a general election called by Chuan Leekpai in December. Thaksin’s Thai Rak Thai Party, which received 40.6 percent of the vote, has won the strongest mandate of any elected government in Thailand’s history. Just short of a parliamentary majority, Thaksin secured his position as premier by forming a coalition with the New Aspiration and Chat Thai parties. Thaksin’s election – some 10 months after this chapter was completed – confirms it’s central argument and represents an unprecedented fusion of political and economic power. This does not augur well for the consolidation of Thailand’s political reforms and the deepening of democracy. We can expect a Thaksin administration to wield power in the interests of private capital and concentrate economic power in the hands of a coterie of corporate groups which survived the 1997 financial crisis and financed his campaign or ran directly under the Thai Rak Thai banner. For the first time, a single party representing the interests of “business” has emerged and it dominates the country’s elected assembly. Unlike previous parties and administrations, capital is no longer politically divided.
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Nowhere is the new clout of capital seen more clearly than in the cabinet announced in February 2001. Packed with special interests, it represents a coalition of leading figures from Thailand’s corporate sector, provincial strongmen, old-style patronage politicians, and party financiers. Together with the prime minister, it includes representatives from three of Thailand’s four largest telecommunications companies. The CP group’s Dhanin Chiaravanont, who openly endorsed Thaksin before the election, is represented in the cabinet by the Deputy Prime Minister, Pitak Intrawityanunt.61 In addition, the Minister of Commerce, Adisai Bodharamik, is a former Telephone Organization of Thailand official who launched the telecommunications conglomerate, Jasmine International, in 1982.62 The Finance Minister, Somkid Chatusripitak, is adviser to one of Thailand’s leading consumer product companies, the Sahapat Group, and a Thaksin loyalist, while the Industry Minister, Suriya Chungrunggurengkit, is connected to one of Thailand’s largest auto spare parts firms. Finally, the head of one of the country’s largest media groups who is said to be one of Thai Rak Thai’s top campaign contributors, Pracha Malinond, has been appointed to the Transport and Communications Ministry. Departing from recent Thai administrations, there are no representatives from Thailand’s three surviving banking families in the cabinet. However, Chatri Sophonpanich head of the largest banking family and the Bangkok Bank, openly endorsed Thaksin’s candidacy and the bank is expected benefit the most from the government-led bailout plan (see below). While neither the finance minister nor the ministers for industry, transport and communications, or commerce have significant government experience, they do represent key economic interests: telecommunications, automotives, the media, and manufacturing. This has raised the specter of conflicts of interests and damaged the credibility of the new administration. As one editorial in The Nation (20/2/01) observed of Thaksin’s cabinet: These companies have been battered by the crisis and think they deserve help. Also, these are the survivors of the crisis and are well-poised to benefit from the massacre of their rivals. Thai Rak Thai may highlight its social policies, and may indeed be serious about them. Social harmony is good for business. But this government is the Assembly of the Rich, and the boardroom will have shareholder interests at heart. It is also likely that politically connected firms will benefit from the planned liberalization of the telecommunications sector, the privatization of stateowned companies, and the deregulation of media broadcasting, which is expected to begin before the end of 2001. Thaksin is already committed to reducing corporate and personal income tax. With its commanding majority in the parliament, many analysts have also questioned whether the Thaksin administration will roll back the Bankruptcy and Foreclosure Laws introduced by the Democrats after a long-running battle with the country’s strategic debtors. Such back-peddling on reform would “augur ill for the
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reformer’s hopes of breaking up corrupt and collusive practices that traditionally confined business opportunities to a select, politically connected few” (Far Eastern Economic Review 18/1/01). Despite Thaksin’s populist rhetoric, this is government by and for big business. The clearest example of this is Thai Rak Thai’s policy to set up a national asset management company (AMC) to bail out the banking sector. In essence, the program represents a major concession to the country’s remaining family-owned banks and surviving corporations who ran up heavy debts during the unrestrained period of lending and borrowing in the 1990s. The AMC, formally launched in February 2000, will take over the Bt1,220 billion in non-performing loans held by the country’s state and private banks. In all likelihood, the asset management company will be used as a vehicle to concentrate political and corporate power into the few surviving conglomerates in post-crisis Thailand. The fall-out from the crisis has already stripped down Thailand’s leading 40–50 Sino-Thai business families to a core group of less than a dozen. This new oligarchy would, in turn, be expected to use its direct access to political power to its economic advantage, thus further concentrating wealth in just a few families and “narrowing rather than broadening opportunities in the Thai market place” (Far Eastern Economic Review 28/12/00–4/1/01). A large portion of bad loans are held by “strategic debtors.” These are borrowers, typically from politically connected firms, who have the resources to service debt payments, but lacking any incentive to do so, such as effective court sanctions, have chosen not to. Most analysts remain skeptical that the debts of these politically connected borrowers will ever be paid back once they are transferred to the government. On cue, non-performing loans rose in December 2000. This is most likely owing to non-performers holding out from making deals on anticipation of a Thai Rak Thai victory and government bail out of the banking sector. Thai Rak Thai politicians have already suggested buying back the loans at above market rates – thus drawing charges that it plans to bail out the banks at the expense of taxpayers (Far Eastern Economic Review 28/9/00). It is also no coincidence that many of the country’s major debtors appeared on Thai Rak Thai’s party list (Far Eastern Economic Review 28/12/00–4/1/01). The power of these corporate interests overshadows Thailand’s provincial business politicians. With their focus on domestic markets, many business leaders in the provinces were hit hard by the financial crisis. Without access to the international market they have been slow to recover and lacked the financial resources to back political candidates in the January election.63 Many provincial politicians were also simply outspent by Thaksin (Far Eastern Economic Review 25/1/01). In sharp contrast to previous elections, it was the provincial business politicians who actively sought out allies among Bangkok’s political–business elite, rather than vice versa. With their campaigns financed by Thai Rak Thai, these provincial politicians are now beholden to the party and Thaksin, further bolstering his support base and reversing the pattern of recent elections (Far Eastern Economic Review 25/1/01).
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Although the crisis and revelations of money politics helped spur political reform and ensure passage of the new constitution, the same generation of politicians who had done so much to damage the economy by the abuse public office for private and party gain, have returned to power on the coat tails of Thaksin. Under quota allocations – which continue to operate despite the new charter’s intention to end its practice – over half the cabinet is made up of “old-style patronage politicians.” The defence ministry has gone to NAP leader, Chavalit Yongchaiyudh, the man who bears most responsibility for Thailand’s economic collapse in 1997. The ministry, which oversees a vast and opaque procurement and construction budget, is a traditional source of patronage (The Nation 20/2/01). The Foreign Minister is Surakiat Sathirathai. A former adviser to the 1991 coup leader, General Suchinda Kraprayoon, Surakiat was appointed finance minister by Banharn Sipa-archa in 1995. As finance minister, he blocked a number of financial sector reforms proposed by the Democrats and sacked the head of the Securities and Exchange Commission who was at the time leading the charge against corruption (Far Eastern Economic Review 18/1/01). He resigned in May 1996 over his failure to take action against those members of his Chat Thai Party who were implicated in the Bangkok Bank of Commerce scandal (Time Asia 8/1/01). Chucheep Harnsawat, the Wang Nam Yen faction’s principal financier, has been appointed agriculture minister (The Nation 20/2/01; Bangkok Post 23/2/01). Chucheep was implicated in alleged irregularities in fertilizer purchases while serving as agriculture minister under the Chavalit administration in 1997 (Bangkok Post 17/2/01). The ministry is known to be one of the more lucrative portfolios. The faction’s leader, Snoh Thienthong, was blocked from serving in the cabinet over his involvement in the controversial sale of temple land, but serves as the government’s chief whip and is the prime minister’s principal adviser.64 The Chat Thai Party’s largest donor, Dej Boonlong, has been appointed Deputy Prime Minister and Labor Minister (The Nation 20/2/01). Despite Thaksin’s rhetoric about representing “new politics,” he used his vast wealth to secure the premiership. He was alleged to have created a Bt20 billion fund to induce more than 100 incumbent MPs from other parties to run under the Thai Rak Thai banner (Bangkok Post 17/9/00). Although the party was widely criticized for continuing this practice of “MP-buying,” it was one of the main reasons for Thaksin’s victory. His party was also able to capitalize on “Chuan fatigue,” running on a populist and nationalistic platform. This included the plan to bail out Thailand’s indebted banks and corporations and a pledge to halt the sell-off of Thai assets to foreign investors. The party also promised a three-year debt moratorium for indebted farmers and a Bt1 million (US$23,000) development fund for each of the country’s 70,000 villages. As an editorial in The Nation newspaper (7/1/01) argued: With Thai Rak Thai in the picture, Thailand has entered the era of new money politics. In more ways than one, the Thai Rak Thai Party has lifted local politics to a higher level. Forget about giving individual voters a few
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Hopes that new constitution would curb vote-buying and usher in a new generation of professional politicians failed to materialize. Despite provisions in the 1997 constitution, “money politics” continued to flourish. After the close of polls, Election Commission (EC) official Sawasdi Chotipanitch, concluded that “this is the election where there has been the most votebuying” (The Nation 8/1/01). Illegal party donations and spending on election campaigns also remained unchecked. In the run-up to the election, the Election Commission announced that campaign spending would be limited to 1 million baht for each candidate, regardless of whether they were running in constituencies or as party-list candidates. Since at least 2,000 candidates stood in the election, approximately Bt4 billion would have been within the approved spending limits set out by the commission (Bangkok Post 3/11/00). This is a massive Bt21 billion below the Bt25 billion that the Thai Farmers Bank Research Center estimated would be spent on the 2001 election campaign (The Nation 29/12/00). It also represents a Bt5 billion increase on the amount estimated to have been spent in the 1996 election (see Table 8.3). Finally, it pales in comparison to the Bt603 million made in declared donations to political parties between 1998 and November 2000 (The Nation 29/12/00) and the Bt108 million and Bt216 million provided by the Political Party Fund in 1999 and 2000, respectively (The Nation 14/6/99). A question mark also hangs over the fate of Thailand’s political and constitutional reforms. Many old-guard politicians with vested interests in slowing or reversing the political reform “form the entourage and circle of senior aides surrounding” the Prime Minister (Far Eastern Economic Review 8/2/01). In particular, the fate of the independent agencies established under the 1997 constitution to strengthen the rule of law and deepen democracy appear under threat. In the run-up to the election, Thaksin pledged to roll back certain unspecified constitutional reforms. In February 2001, the government’s chief cabinet whip, Snoh Thienthong, confirmed that two new House Standing Committees would be created to “monitor” the Election Commission (EC), the National Counter Corruption Commission (NCCC), and the Constitutional Court (Bangkok Post 23/2/01). Moreover, the Council of State, which has already threatened the integrity of the Human Rights Commission (see above) has set its sights on the National Broadcasting Commission which will oversee liberalization of the media. The 1997 charter envisioned an end to military control of the airwaves. Faced with losing a huge and unaccountable income, the military mounted a campaign to retain their monopoly privileges. As a result, the Council of State is “aiming to stack the new nominally independent National Broadcasting Commission with old-school military and bureaucratic figures” (Far Eastern Economic Review 8/2/01). Shin Corp.’s controversial
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purchase of a 39 percent stake in the country’s only independent television station, iTV, in May 2000 has also threatened the independent media. The station promptly fired 23 reporters when they complained of management pressure to give positive coverage to Thaksin during the general election campaign. The independence of the EC has also come under mounting pressure. Although the EC discarded the results in 62 constituencies in the January election because of voting irregularities and cheating, only eight candidates were barred from standing in repeat by-elections (The Nation 7/1/01). Despite widespread reports of vote-buying in almost all of the by-elections, the EC failed to take action against any of the alleged poll violators, indicating a general retreat from its former enthusiasm for enforcing the rule of law. This was partly attributed to the conservative backlash following the EC’s action during the 2000 Senate election when it disqualified a number of well-known political figures.65 Also, in its last days, the Chuan administration abandoned the mantle of reform and acquiesced in a resurgent conservative bloc in the upper house when the EC was brought back under the purview of the executive. The Council of State has been granted the “right to review the legal aspects of the EC’s cases for disqualification of candidates” (Far Eastern Economic Review 8/2/01). According to one council member, judgments which in the past were made on “convincing evidence” must now be “beyond a reasonable doubt” (Far Eastern Economic Review 8/2/01). While this helped check the EC’s former zeal, there were also allegations that EC officials were being “bought” by political parties in the run-up to the election (Far Eastern Economic Review 8/2/01). As one newspaper concluded, the commission’s “velvet-glove approach is the first clear signal that political reform in Thailand is starting to lose momentum” (Far Eastern Economic Review 8/2/01). Thaksin’s own political fate is under threat by the Constitutional Court. In December 2000, the NCCC indicted Thaksin on charges that he concealed shares worth Bt4.5 billion (US$104 million) held in 17 of his 67 companies. The case dates back to 1997 when he allegedly failed to give a full account of his assets when he was appointed deputy prime minister under the Chavalit administration. Thaksin and his wife, Pochamarn Shinawatra, have been accused of transferring these shares to their domestic staff – including their maid, housekeeper, a security guard, and a driver.66 The couple were also said to have remained in active control of the shares of one proxy shareholder who had died in 1995. The constitution clearly stipulates that all assets must be accounted for, including those held by nominees.67 The NCCC later said a desire to cover up evidence of stock market violations – including insider trading – and income tax evasion ahead of the general election was the motive for the couple’s concealment. The case has been passed to the Constitutional Court. If it upholds the NCCC decision, Thaksin faces a five-year ban from politics. His entire cabinet would also have to resign with him, plunging the country into a potential political crisis.
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In an interview in January 2001, Thaksin indicated how he would like the problem to be resolved, stating that if the charges against him take more than two years to be resolved, his five-year ban on holding public office would already have expired (International Herald Tribune 11/1/01). This assumes that the ban would be retroactive and date from the time he first allegedly committed the offence in 1997. Under another scenario, even if the Constitutional Court rules against Thaksin, he may not accept its ruling. Some suggest he may use his majority in Parliament to amend the constitution and limit the power of independent bodies such as the NCCC and the Constitutional Court (Far Eastern Economic Review 11/1/01). Given the Prime Minister’s past disrespect for the rule of law, some form of political compromise which will keep him in power can be expected. In the unlikely event that he and his cabinet are forced to step down, the powerful political alliance of Thailand’s economic oligarchs will outlive the Prime Minister and his short-lived administration.
Notes * The author wishes to thank Terence Gomez, Donald Hindley, and Marcel Barang for their comments on an earlier draft of this chapter. The author is solely responsible for any errors or ommissions. 1 For a detailed comparison of corruption levels under Thailand’s military and civilian governments, see Pasuk and Sungsidh (1994). 2 The majority of Thais surveyed by the Civil Service Commission, for example, believed that corruption, particularly among politicians, was getting worse, not better (Far Eastern Economic Review 7/9/00). 3 Suehiro (1989: 170) argues that this Chinese–military alliance was of mutual interest because these Sino-Thai joint ventures were a means to monopolize business opportunities for the Chinese while military leaders had access to covert funding sources. For a detailed account on the rise of Sino-Thai capital in the early twentieth century, see Skinner (1957). 4 In 1968, the Sophonpanich family increased its stake in Bangkok Bank to 32 percent, when the bank’s registered capital was doubled to Bt400 million. Similarly, the Lamsam family increased its holding in Thai Farmers Bank from 22 percent in 1945 to 58 percent by1968, while the Techaphaibun family became the largest shareholder in Bangkok Metropolitan Bank, with 19 percent in 1972 and to 44 percent over the next 10 years. The Techaphaibun family also took over First Bangkok City Bank and Bank of Asia. Following the 1957 coup, the military appointed Chuan Rattanarak to head the Bank of Ayudhya. By 1964 Chuan’s family and his investment companies owned 26 percent of the bank’s equity, increasing to 43 percent in 1972 (see Hewison 1989: 189; Suehiro 1989: 245). 5 The bank also benefited from the decision that all bilateral rice deals between governments would be channeled through Bangkok Bank. In return for this and for the capital injection in 1953, the bank is said to have laundered revenue from the opium trade for Chin’s close ally and director general of the police Phao Siriyanond who also chaired the group’s Bangkok Trust Co. (Hewison 1989: 194). 6 The practice of having cabinet members on a bank’s board of directors was not unique to Bangkok Bank. Pramarn Adireksarn, who was Phin’s son-in-law and deputy minister of industry and communication under his regime, served as a director of the Bank of Ayudhya as well as the Thai-Hua Insurance Co.
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7 The share of total deposits of these four banks increased from 54 percent in 1962 to 68 percent in 1972 (Suehiro 1989: 245). 8 Between 1951 and 1975, direct military aid totaled US$2.5 billion, while nonmilitary aid amounted to US$627 million (Pasuk and Baker 1995: 277). 9 The only significant “indigenous” banking group is the Siam Commercial Bank/ Siam Cement group which is backed by the Crown Property Bureau, the investment arm of the Royal Family. The group was launched to counter British, not Chinese, domination of the economy before the Second World War. 10 The banking families’ stranglehold on credit lasted until the late 1980s when alternative sources of finance, such as newly licensed finance companies and a rejuvenated stock exchange, became available. Nevertheless, even at that time, nine out of 10 of the largest finance companies were owned by the four families and Siam Commercial Bank. 11 In 1981, the top 24 industrial groups had 211 manufacturing firms and of these 77 were joint ventures with foreign capital, and 62 of these were with Japanese companies (Suehiro 1989: 229–30). 12 Chat Thai, the Social Action Party, the Democrats and the Prachakorn Thai Party collectively occupied 185 of the 301 seats in Parliament in 1979, 257 of 324 seats in 1983, and 238 of 347 seats in 1986. 13 These figures are adapted from Table 10.1, Background of Members of the Assembly, 1933–92, in Pasuk and Baker (1995: 338). 14 In the first relatively open elections held in January 1975, the Democrat Party secured the largest number of seats, but failed to put together a majority government. Instead, a coalition government led by Kukrit Pramoj, a royalist intellectual, was formed. 15 Pong’s grandfather was the son of a Chinese merchant, who rose into the ranks of the Thai government in the early twentieth century. On retirement, he started his own rice-milling business and became director of royal-sponsored companies such as Siam Cement and Siam Commercial Bank. His son, Pote Sarasin, trained as a lawyer and served as ambassador to the United States, and for a short time served as Prime Minister under Sarit in 1957. While Pong’s career centered on the expansion of the family’s business, his siblings entered the bureaucracy. Koson’s family, also descendants of ethnic Chinese and influential in the royal court during the late Ayutthaya period, had been involved in managing the Crown Property Bureau before venturing into finance among other businesses (Pasuk and Baker 1995: 341–2). 16 Seven of the actual promoters of the 1947 coup, including Phin, Siri, and Pramarn, held directorships in 91 companies (see Suehiro 1989: 138). 17 The Agriculture Minister and leader of the Social Justice Party, Thawit Klinpratum, had a background in business, making his fortune transporting goods to US military bases in Northeast Thailand. His party was a mix of businessmen, retired air force officers, and allies of General Krit Sivara, who had led the move against Thanom and Praphat in 1973. 18 The other five businessmen were Krisorn, Samak, Lek, Siddek, and Damrong (Girling 1981: 182). Seni’s cabinet also included Prasit Kanchanawat, a wealthy rice trader and leader of the Social Nationalists. 19 For example, although the Joint Public Private Consultative Committee (JPPCC), a peak public–private sector forum set up in mid-1981, lobbied for simplifying export and customs procedures, and better access to export incentives, it achieved little in real terms (see Rock 1996: 18–20). 20 According to Pasuk and Baker (1995: 145), the average level of effective protection doubled between 1970 and 1980. Rock (1995: 35) adds that by 1985, the effective rate of protection of Thai manufacturing was 52 percent, almost twice that of South Korea, Malaysia and the Philippines.
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21 In this period, the stock exchange plummeted, 12 finance companies on the verge of collapse were taken over by the Ministry of Finance, and many other companies faced financial ruin. For example, half of all rice mills were effectively bankrupt, while a real estate empire linked with the Bangkok Bank also collapsed. 22 For the first time in history, the planning agency, the National Economic and Social Development Board (NESDB), was invited to weekly cabinet meetings. 23 Under Thailand’s electoral system, 90 percent of parliamentary seats are returned from areas outside of Bangkok and support in the provinces is a key factor in the success of political parties in national elections. 24 As well as his links with the Rachakhru group, Chatichai had a number of his own companies including Erawan Trust Co., Siam International Amalgamated Manufacturers, and Amherst Thailand (Backman 1999: 316). 25 The annual inflow of investment from East Asia between 1988 and 1991 was 10 times the level between 1980 and 1985, while the registered capital of companies from Japan rose from Bt2.8 billion in 1986 to Bt38.7 billion in 1991. While exports quadrupled in value between 1985 and 1991, agriculture’s share of GDP fell from 27 percent to 12 percent, and that of manufacturing rose from 16 percent to 26 percent (Pasuk and Baker 1995: 152–5). 26 Unger (1998: 141) goes so far as to suggest that it may have been more than coincidence that the 1991 coup against Chatichai was launched shortly after the award of a number of large private infrastructure projects. 27 For example, the military refused to step into the breach during the 1997 financial crisis when some civilian politicians were proposing that it should assume power under an emergency decree. 28 The other two were Supachai Panichpakdi, former president of Thai Military Bank, and Amnuay Wirawan, a former senior executive at Bangkok Bank. Both were appointed deputy prime minister. The Palang Dharma Party appointed former Bangkok Bank executive Wichit Surapongchai Minister of Transport and Communications under its quota of cabinet seats. 29 When the Democrats returned to power at the end of 1997, Tarrin and Supachai returned to government as Finance Minister and Deputy Prime Minister, respectively. In addition, Pisit Lee-ahtam, an executive vice president of Bangkok Bank, was appointed Deputy Transport and Communications Minister. Almost all these business politicians have served as non-elected members of the cabinet, their money and influence allowing them to bypass the electoral route to top positions in the cabinet. 30 According to the account of one newspaper: “As an MP, Banharn paid special attention to the budget process. He always got himself on the House Budget Committee. He made friends in the Budget Bureau. It was no surprise when he selected as his Finance Minister a Budget Bureau official who had reputedly helped him channel disproportionate amounts towards Suphanburi. With these flows, local businessmen got rich. Local contractors did well. Local people got good facilities. They all know who to thank, who to keep sending back to Parliament to sit on the budget committee. The power this patronage conveys is formidable. During the Senate election in 2000, villagers claimed that Banharn’s supporters had threatened to rip up the road to their village if they did not vote for his candidates” (The Nation 18/4/00). 31 In 1987, Banharn was alleged to have received kickbacks while serving as Transport and Communications Minister. In 1991, he had four times more unexplainable assets than anyone else on the “unusually wealthy” list drawn up by the 1991 coup leaders. After agreeing to resign as prime minister, Banharn held on to office for a week, until he had approved 60 infrastructure projects worth Bt34.7 billion.
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32 “Margin financing” describes the practice where loans are leveraged on shareholdings in order to fund further stock purchases. Handley (1998: 100) describes the workings of “chain-listing” as the practice where “a business owner floating a relatively new company on the market, and following that up by listing subsidiary or related companies, with share prices bolstered in each successive flotation, through a bookkeeping exercise where assets and profits are ‘transferred’ from one company in the group to the one being listed. Meanwhile the earlier listed company would often begin to report poor earnings and even losses. But by this time, speculators had made more than enough money on the stocks to care.” 33 These politicians were prominent business figures. Bhichai was a leader in pharmaceuticals (see above), Supachai was the former president of Thai Military Bank, and Akorn was a well-known property developer. 34 After the buyout, Ch Karnchang became the largest shareholder with 35 percent equity interest in BECL, followed by Bangkok Bank (18 percent), Thai Military Bank (13 percent), and Siam Commercial Bank and Crown Property Bureau which collectively held 16 percent. The remaining equity was held by several smaller banks (15 percent), Thaksin Shinawatra (2.69 percent), and the Asian Development Bank (ADB) (0.31 percent) (Bangkok Post 8/12/94). Ch Karnchang is among Thailand’s top three construction companies and its political connections run deep. Some 70 percent of its revenues are derived from public sector and military construction projects. As well as cultivating close ties with the military, the Thai Military Bank has been its principal lender. Not only did Ch Karnchang lead the buyout of Kumagai Gumi, thereby taking over a lucrative concession, but it also won the next two road projects awarded on a turnkey basis by ETA. 35 The shares were allocated at Bt15 per share for listing on the stock exchange at Bt40 per share. As a result, capital gains of Bt25 per share enabled “involved” parties to gain a Bt10 billion windfall. The politicians understood to have acquired these shares included the deputy prime minister, who was charged with resolving the dispute, Amnuay Wirawan, Interior Minister Chavalit Yongchaiyudh, Finance Minister Tarrin Nimmanhaeminda, and Foreign Minister, Thaksin Shinawatra. 36 At the height of the dispute, Wichit Suraphongchai, President of Bangkok Bank, reportedly urged the managing director of Kumagai Gumi to comply with the court order and open the road, despite the fact ETA had openly flouted the contract. Wichit and Siam Commercial Bank president Olarn Chaiprawat also reportedly pressured BECL’s lawyers not to file an appeal against the court order. 37 Many of the loans to the Chat Thai members were not secured with collateral and were used to buy land without title deeds. According to the Democrat Party, the politicians were planning to increase the price of the land before selling it and using the earnings to take over companies listed on the stock exchange (Bangkok Post 2/8/96). 38 For explanations on the causes of Thailand’s crisis see Bello et al. (1998); Lauridsen (1998); Montes (1998); Pasuk and Baker (1998a); Arndt and Hill (1999); Hewison (1999). 39 The economics faculty at Thammasat University published an open letter over the affair, arguing that “political pressure or vested interests should not be allowed to interfere with it” (Bangkok Post 12/7/96). A similar fate met the Finance Ministry. Under Banharn, two finance ministers were appointed in less than 12 months. They were both recognized as lacking stature which made them dependent on the prime minister for support. Both sacrificed stable long-term growth by pushing down costs of capital and labor rather than improving the
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competitiveness of the Thai economy. For example, interest rates were forced down, the employment of foreign workers was legalized, while margin requirements were reduced to boost the stock market (The Nation 7/7/96, 15/7/96). In November 1999, Panya and the bank’s former president, Wichien Techaphaibun, were accused of violating a central bank order barring the bank from lending money to its subsidiaries. The authorities found that in May 1996, the bank had authorized Bt67m in promissory notes for its subsidiary, Bangkok Metropolitan Finance. Wichien is also a prominent member of Thailand’s Board of Trade and a senator. The cases remain pending. (The Nation 12/1/00, 24/11/99.) The assets of these five banks rose from 56 percent of the total in 1962 to almost 70 percent in 1980. In 1990, it was still as high as 69 percent (Lauridsen 1998: 140). After a series of attacks on the Thai currency, the Bank of Thailand was forced to abandon the baht’s peg to the US dollar and float the currency on July 2, 1997. The baht immediately fell from an average of Bt26 to the dollar to just under Bt50:US$1. In 1998, the exchange rate averaged Bt41.87 to the dollar, appreciating slightly to Bt37.84 to the dollar in 1999. For example, the first effort to activate the constitution’s provision to enable 50,000 signatories to initiate a corruption investigation was stymied when the woman who had collected the necessary signatures was asked to “verify” the signatures, while the subject of her petition filed a law suit against her. One example is the illegal logging case, involving 13,000–20,000 logs that had been felled from the Salween national forest and then laundered through Burma. Pasuk (1999: 7) noted that this case “required the connivance of police, customs, military, and forestry officials scattered along routes of many hundreds of kilometres. The businessman who masterminded the scheme boasted of his political connections. Some of the suspect logs finished up in the possession of senior politicians and party branches,” and when the case was exposed “politicians and bureaucrats were able to close ranks and bury the accusations in a confusing muddle of investigative committees.” With the support of at least three-fifths of members, the Senate can remove corrupt politicians and state officials, including the prime minister, cabinet ministers, MPs, as well as the Supreme Court President, the Constitutional Court President and its judges, the attorney-general, and members of the Election Commission. This figure is probably an underestimate since the figures are only according to the candidates’ principal occupation. The business people elected ranged from representatives of Bangkok business, such as Pramon Suthiwong, chairman of Toyota (Thailand) and executive vice president of Siam Cement Group, to Wichien Techaphaibun, the disgraced former chairman of Bangkok Metropolitan Bank and chairman of the Thai Chamber of Commerce. Wichien is facing legal action over a Bt70 million loan to Bangkok Metropolitan Trust, a former subsidiary. A Senate seat would provide him for immunity from prosecution for six years. Evidence provided by the Bank of Thailand supports widespread vote-buying. For example, the withdrawal of small-denomination banknotes from banks in Northeast Thailand leapt by 41.8 percent in February 2000 compared to the same period the previous year. In the South, Central, and North Thailand, such withdrawals increased by 27.5 percent, 17.9 percent, and 11.1 percent, respectively. The Techaphaibun family lost control of Bangkok Metropolitan Bank, the Wanglees gave up Nakornthon Bank, the Chansrichawlas lost Laem Thong Bank, and the Cholwijarns ceded Union Bank of Bangkok to Krungthai Thanakit. The Tuchindas and Thawisins lost control of Thai Danu to a foreign bank as did the Euarchukiat and Phatraprasit families at the Bank of Asia (see Hewison 1999).
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49 Standard and Poor’s concern with SLIPs and CAPs was that they were a costly form of short-term capital which was very expensive for the banks to service. In the agency’s view, the recapitalization of the Thai banking sector needed to be met with real core capital, that is common equity (Reuters 14/10/99). Another financial analyst offered a similar prognosis, arguing that these Thai banks had “succeeded in pulling off one of the biggest confidence tricks on the face of the planet. I am amazed that people bought into them – they are fairly risky investments and its very expensive money for the banks which indicates how desperate they were at the time” (The Asset September 1999). 50 The CP group had been a regular financier of the New Aspiration Party (NAP), but the relationship deteriorated following Chavalit’s poor performance of handling the economy during his premiership (Ukrist 1998: 76). 51 This project, dogged by controversy, was eventually renegotiated by the Anand government. Among the allegations made at the time were that a 13 percent commission had been paid to cabinet ministers for their approval of the project. 52 This included a mobile phone and pager service, data transfer facilities, and a cable TV channel. These four companies were then listed on the SET with a combined capitalization of over Bt50 billion. 53 His mobile phones were built in Scandinavia, his paging system was Japanese, while his satellite was built in the US and launched on a French rocket. 54 Thaksin’s family were long supporters of the Chat Thai Party in their home province of Chiang Mai. His father is a former parliamentarian and his uncle, Suraphan Shinawatra, was a Chat Thai MP and served as Deputy Minister of Communications from 1986 to 1988. 55 Thaksin became embroiled in a number of scandals while in office. An attempt to award the Bangkok Expressway Company (BECL) the contract for an expressway project without calling for bids was scuppered when it was revealed that Thaksin was a shareholder in the company. He was also said to have blocked the award of two telecoms concessions to rival firms in order to protect his monopoly (Bangkok Post 21/6/96). 56 Thai Rak Thai’s executive committee comprises 10 senior figures from Chat Pattana, 10 Democrat Party MPs, as well as the banker and former Finance Minister Surakiart Sathirathai. In March 2000, the leader of the Social Action Party, Suwit Khunkitti, announced that the party would be disbanded and he would join Thai Rak Thai (Bangkok Post 28/3/00). 57 The Shinawatra groups combined unhedged loans in 1997 equaled US$680 million, while the CP group’s Telecom Asia were as high as US$1 billion (Ukrist 1998: 74). 58 Dhanin confessed that the group and in particular its non-core businesses had expanded too fast before the crisis. For example Hong Kong-listed CP Pokphand, a holding company for a number of ventures in China was struggling after it had guaranteed the loans of failed group companies in China and Indonesia (see Far Eastern Economic Review 28/5/98 and 8/4/99). 59 In 1999, the CP group sold off a 50 percent share in a motorcycle factory in Shanghai for US$12.8 million, a majority stake in the Lotus retail unit to Britain’s Tesco for US$365 million, a 11 percent stake in the lucrative 7–Eleven convenience store franchise, TelcomAsia’s minority stake in Apstar, a Chinese satellite operator, some US$19 million worth of shares in Kopin Corp., a US-based R&D firm, shares in Shanghai Brewery to its partner Heineken, as well as consolidating 11 Thai agri-business subsidiaries under the listed Charoen Pokphand Feedmill. Meanwhile, the group stepped up core businesses of agro-industry, animal feed, and seeds, which benefited greatly from the weak baht in 1998 (Far Eastern Economic Review 8/4/99). 60 Nevertheless, even with the strictest limits on campaign financing, loopholes are
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often exploited. In cases where private company donations have been banned, the evidence suggests that companies find alternative ways to fund parties, which are illegal, but often difficult to detect. In addition, France, South Korea and Japan have all faced campaign scandals despite comprehensive regulations governing elections. The United States, which faces a crisis in public confidence given the influence of special interests over elected politicians, has also repeatedly failed to introduce comprehensive reform of campaign financing. Pitak has been described as the CP Group’s “long-standing political lobbyist” (The Nation 20/2/01). Like Thaksin, Adisai benefited from his close ties with Telephone Organization of Thailand officials and Chatichai Choonhavan. During Chatichai’s premiership (1988–91), Jasmine International was awarded two lucrative telecom concessions. Jasmine International is linked with the Loxley group, a large and diverse conglomerate controlled by the Lamsam family of the Thai Farmers Bank. One notable exception is Sonthaya Khunpluem, son of influential provincial godfather Kamnan Poh, who was appointed to the cabinet under the Chat Thai Party’s quota. Snoh was dropped from the cabinet list after a Council of State ruling on his involvement in the controversial sale of temple land that later became part of the Alpine Golf and Sports Club. Snoh and his brother were major shareholders in the company that developed the golf course, which they later sold to Thaksin (Bangkok Post 23/2/01). Time pressure was another factor: the Commission is required by law to announce official results for all lower-house seats within one month of the general election and it did not have enough time to prosecute offenders before it had to endorse the winners (The Nation 30/1/01). According to one newspaper, three of Thaksin’s domestic employees received shares worth Bt10.1 billion as early as 1994, shortly before he joined his first government (The Nation 25/12/00). In the run-up to the January 2001 election, Thaksin and his wife agreed to sell most of their 35 percent stake in Shin Corp. to their son Panthongthae and to Pochamarn’s brother in order to meet with the new constitution’s stipulation that a minister cannot own more than 5 percent of shares in any company. Thaksin and his wife agreed to transfer 24.9 percent stake, or 73.3 million shares, in Shin Corp. to Panthongthae. The transaction price was Bt10 per share, compared with the market price of Bt178. They sold another 10 percent of Shin Corp. to Pochamarn’s brother (The Nation 7/9/00).
References and further reading Ammar Siamwalla (1997a) “The Thai Economy: Fifty Years of Expansion,” in Thailand’s Boom and Bust, Bangkok: Thailand Development Research Institute. —— (1997b) “Can a Democracy Manage its Macroeconomy? The Case of Thailand,” in Thailand’s Boom and Bust, Bangkok: Thailand Development Research Institute. Anek Laothamatas (1992) Business Associations and the New Political Economy of Thailand: From Bureaucratic Polity to Liberal Corporatism, Boulder, CO: Westview. Arndt, H.W. and H. Hill (1999) Southeast Asia’s Economic Crisis: Origins, Lessons, and the Way Forward, Singapore: Institute of Southeast Asian Studies. Backman, M. (1999) Asian Eclipse: Exposing the Dark Side of Business in Asia, Singapore: John Wiley.
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Bello, W., S. Cunningham, and L.K. Poh (1998) A Siamese Tragedy, Bangkok: White Lotus. Bhanupong Nidhiprabha (1993) “Monetary Policy,” in P. Warr (ed.), The Thai Economy in Transition, Cambridge: Cambridge University Press. —— (1999) “Economic Crises and the Debt-Deflation Episode in Thailand,” in H.W. Arndt and H. Hill (eds), Southeast Asia’s Economic Crisis: Origins, Lessons, and the Way Forward, Singapore: Institute of Southeast Asian Studies. Bullard, N., with W. Bello and K. Malhotra (1998) “The IMF and the Asian Crisis,” in K.S. Jomo (ed.), Tigers in Trouble, London: Zed Books. Callahan, W. and D. McCargo (1996) “Vote-buying in Thailand’s Northeast,” Asian Survey April 4. Chai-Anan Samudavanija (1998) “Old Soldiers Never Die, They are just Bypassed: The Military, Bureaucracy and Globalisation,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge. Chaipat Sahasakul (1993) “Fiscal Policy,” in P. Warr (ed.), The Thai Economy in Transition, Cambridge: Cambridge University Press. Christensen, S., Ammar Siamwalla, and Pakorn Vichyanond (1997) “Institutional and Political Bases of Growth-Inducing Policies in Thailand,” in Thailand’s Boom and Bust, Bangkok: Thailand Development Research Institute. Crone, D. (1998) “Southeast Asia: A Year When High Ambition Was Challenged,” in Southeast Asian Affairs 1998, Singapore: Institute of Southeast Asian Studies. Dixon, C. (1999) The Thai Economy, London: Routledge. Doner, R. (1992) “Politics and the Growth of Local Capital in Southeast Asia: Auto Industries in the Philippines and Thailand,” in R. McVey (ed.), Southeast Asian Capitalists, Ithaca, NY: Cornell University Southeast Asia Program. Doner, R. and A. Ramsay (1997) “Competitive Clientalism and Economic Governance: The Case of Thailand,” in S. Maxfield and B.R. Schneider (eds), Business and the State in Developing Countries, Ithaca, NY: Cornell University Press. Girling, J. (1981) Thailand Society and Politics, Ithaca, NY: Cornell University Press. —— (1996) Interpreting Development: Capitalism, Democracy, and the Middle Class in Thailand, Ithaca, NY: Cornell University Press. Handley, P. (1998) “More of the Same? Politics and Business, 1987–96,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge. Hawes, G. and Hong Liu (1993) “Explaining the Dynamics of the Southeast Asian Political Economy,” World Politics 45. Hewison, K. (1989) Bankers and Bureaucrats: Capital and the New State in Thailand, New Haven: Yale University Southeast Asian Monographs 34. —— (1993) “Of Regimes, State and Pluralities: Thai Politics Enters the 1990s,” in K. Hewison, R. Robison, and G. Rodan (eds), Southeast Asia in the 1990s, St Leonards: Allen & Unwin. —— (1996) “Political Oppositions and Regime Change in Thailand,” in G. Rodan (ed.), Political Opposition in Industrialising Asia, London: Routledge. —— (1998) “Introduction: Power, Oppositions and Democratization,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge. —— (1999) “Thailand’s Capitalism: The Impact of the Economic Crisis,” Asia Papers, UNEAC, 1. Hewison, K. and Maniemai Thongyou (1993) “The New Generation of Provincial Business People in Northeastern Thailand,” Working Paper 16, Asia Research Center, Murdoch University.
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Hill, H. (1994) “Asean Economic Development: An Analytical Survey – The State of the Field,” Journal of Asian Studies 53(3). Hutchcroft, P. (1998) Booty Capitalism: The Politics of Banking in the Philippines, Ithaca, NY: Cornell University Press. Jomo, K.S. (1997) Southeast Asia’s Misunderstood Miracle, Boulder, CO: Westview. —— (ed.) (1998) Tigers in Trouble, London: Zed Books. Keyes, C. (1987) Thailand: Buddhist Kingdom and Modern Nation State, Boulder, CO: Westview. Lauridsen, L. (1998) “Thailand: Causes, Conduct, Consequences,” in K.S. Jomo (ed.), Tigers in Trouble, London: Zed Books. Mackie, J. (1992) “Changing Patterns of Chinese Big Business in Southeast Asia,” in R. McVey (ed.), Southeast Asian Capitalists, Ithaca, NY: Cornell University Southeast Asia Program. Masuyama, Seiichi, D. Vandenbrink, and Chia Siow Yue (eds) (1999) East Asia’s Financial Systems, Singapore: Institute of Southeast Asian Studies. McCargo, D. (1998a) “Thailand’s Political Parties: Real, Authentic, Actual,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge. —— (1998b) “Alternative Meanings of Political Reform,” The Copenhagen Journal of Asian Studies 13. McVey, R. (1992) “The Materialisation of the Southeast Asian Entrepreneur,” in R. McVey (ed.), Southeast Asian Capitalists, Ithaca, NY: Cornell University Southeast Asia Program. Montes, M. (1997) “The Economic Miracle in a Haze,” Asian Crisis Homepage, N. Roubini, http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html. —— (1998) The Currency Crisis in Southeast Asia, Singapore: Institute of Southeast Asian Studies. Naris Chaiyasoot (1993) “Commercial Banking,” in P. Warr (ed.), The Thai Economy in Transition, Cambridge: Cambridge University Press. Neher, C.D. and R. Marlay (1995) Democracy and Development in Southeast Asia, Boulder, CO: Westview. Ng Chee Yuen and N. Wagner (1989) “Privatization and Deregulation in Asean,” Asean Economic Bulletin 3(3). Nukul Commission (1999) The Nukul Commission Report: Analysis and Evaluation on Facts Behind Thailand’s Economic Crisis (English translation), Bangkok: Nation Multimedia Group. Ockey, J. (1994) “Political Parties, Factions, and Corruption in Thailand,” Modern Asian Studies 28(2). —— (1998) “Crime, Society, and Politics in Thailand,” in C.A. Trocki (ed.), Gangsters, Democracy, and the State in Southeast Asia, Ithaca, NY: Cornell University Southeast Asia Program. Pasuk Phongpaichit (1999) “Civilising the State: State, Civil Society and Politics in Thailand,” Wertheim Lecture, Center for Asian Studies, Amsterdam. Pasuk Phongpaichit and C. Baker (1993) “Jao Sua, Jao Pho, Jao Thii: Lords of Thailand’s Transition,” paper presented at the 5th International Conference on Thai Studies, School of Oriental and African Studies, London. —— (1995) Thailand: Economy and Politics, Kuala Lumpur: Oxford University Press. —— (1998a) Thailand’s Boom and Bust, Chiang Mai: Silkworm Books. —— (1998b) “Power in Transition: Thailand in the 1990s,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge.
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Pasuk Phongpaichit and Sungsidh Piriyarangsan (1994) Corruption and Democracy in Thailand, Bangkok: Political Economy Center, Chulalongkorn University. Pasuk Phongpaichit, Sungsidh Piriyarangsan, and Nualnoi Treerat (1998) Guns, Girls, Gambling, Ganja, Chiang Mai: Silkworm Books. Pichit Likitkijsomboon (2000) “The Thai Economy: Stabilisation and Reforms,” in Southeast Asian Affairs 2000, Singapore: Institute of Southeast Asian Studies. Rock, M. (1996) “Thai Development: If Rent-Seeking is so Pervasive, why is Development Performance so Good?,” paper presented at the workshop on “Rents and Development in Southeast Asia,” Institute for Advanced Studies, University of Malaya, Kuala Lumpur. Rodan, G. (ed.) (1996) Political Opposition in Industrialising Asia, London: Routledge. Rodan, G., K. Hewison, and R. Robison (eds) (1997) The Political Economy of SouthEast Asia, Auckland: Oxford University Press. Sakkarin Niyomsilpa (1995) “The Political Economy of Telecommunications Liberalization in Thailand,” PhD thesis, Australian National University. —— (1996) “Telecommunications, Rents, and the Growth Liberalization Coalition in Thailand,” paper presented at the workshop on “Rents and Development in Southeast Asia,” Institute for Advanced Studies, University of Malaya, Kuala Lumpur. Skinner, W. (1957) Chinese in Thailand: An Analytical History, Ithaca, NY: Cornell University Press. Sombat Chantornvong (1999) “The 1997 Constitution and the Future of Thai Politics,” paper presented at the International Conference on Thai Studies, Amsterdam. Suchit Bunbongkarn (1996) State of the Nation: Thailand, Singapore: Institute of Southeast Asian Studies. —— (2000) “Thailand: Farewell to Old-Style Politics?,” in Southeast Asian Affairs 2000, Singapore: Institute of Southeast Asian Studies. Suehiro, A. (1989) Capital Accumulation in Thailand, 1955–1985, Chiang Mai: Silkworm Books. —— (1992) “Capitalist Development in Postwar Thailand: Commercial Bankers, Industrial Elite, and Agribusiness Groups,” in R. McVey (ed.), Southeast Asian Capitalists, Ithaca, NY: Cornell University Southeast Asia Program. Sunanda Sen (1998) “Asia Myth: Asia Miracle,” Economic and Political Weekly, January 17. Surin Maisrikrod (1992) Thailand’s Two General Elections in 1992: Democracy Sustained, Research Notes and Discussion Paper 75, Singapore: Institute of Southeast Asian Studies. Surin Maisrikrod and D. McCargo (1998) “Electoral Politics: Commercialisation and Exclusion,” in K. Hewison (ed.), Political Change in Thailand, London: Routledge. Suthad Setboonsarng (1998) “Asean Economic Co-operation: Adjusting to the Crisis,” in Southeast Asian Affairs 1998, Singapore: Institute of Southeast Asian Studies. Trocki, C.A. (1998) “Democracy and the State in Southeast Asia,” in C.A. Trocki (ed.), Gangsters, Democracy, and the State in Southeast Asia, Ithaca, NY: Cornell University Southeast Asia Program. Ukrist Pathmanand (1998) “The Thaksin Shinawatra Group: A Study of the Relationship Between Money and Politics in Thailand,” The Copenhagen Journal of Asian Studies 13.
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Unger, D. (1998) Building Social Capital in Thailand, Cambridge: Cambridge University Press. Vajragupta, Yos and Prakorn Vichyanond (1999) “Thailand’s Financial Evolution and the 1997 Crisis,” in Seiichi Masuyama, D. Vandenbrink, and Chia Siow Yue (eds), East Asia’s Financial Systems, Singapore: Institute of Southeast Asian Studies. Warr, P. (ed.) (1993) The Thai Economy in Transition, Cambridge: Cambridge University Press. Warr, P. and Bhanupong Nidhiprabha (1996) Thailand’s Macroeconomic Miracle: Stable Adjustment and Sustained Growth, Washington, DC: World Bank. World Bank (1991) Thailand: Country Economic Memorandum, Washington, DC: World Bank, October 10. Yoshihara, K. (1994) The Nation and Economic Growth: The Philippines and Thailand, Kuala Lumpur: Oxford University Press.
Newspapers and periodicals Asiamoney Asian Wall Street Journal Asiaweek Bangkok Post Euromoney Far Eastern Economic Review Financial Times The Asset The Nation
9
State, politics, and business in Singapore Stephan Haggard and Linda Low
Close business–government relations have long been seen as a distinctive component of the Asian growth model, assuring investors and contributing to the quality of policy. Yet this positive strand of thinking has always coexisted with a more skeptical interpretation, especially in countries such as the Philippines, Indonesia, and Malaysia where business–government relations have been characterized by particularism and clientelistic relationships between politicians and individual businessmen. In the wake of the financial crisis of 1997–8, this skeptical strand gained ground. Cronyism and corruption may have been compatible with high growth in the past, but they created vulnerabilities, including particularly weak financial regulation and moral hazard, that contributed directly to the onset and depth of the crisis of 1997–8 (Haggard 2000: Chapter 1). Singapore poses an interesting contrast to other countries in the region in this regard. Despite an activist industrial policy, the government has not historically been responsive to the interests of the domestic private sector. Indeed, domestic capital has been overshadowed by multi-national corporations (MNCs) and state-owned enterprises (SOEs), known in Singapore as government-linked companies or GLCs. These SOEs have generally been held accountable to implicit, not publicized performance standards and have not become the locus of private rent-seeking or patronage either. The citystate’s reputation for clean government and efficient administration is well deserved. These differences with other countries in the region can be traced in part to historical legacies, such as the nature of British colonial administration and the relative economic weakness of the Singapore private sector, for example when compared to the entrepreneurial talent that flooded into Hong Kong in the late 1940s and 1950s. Situational imperatives also played a role in limiting the potential for cronyism. The country’s small size and the corresponding pressures to maintain liberal trade and investment rules partly foreclosed the opportunities for rent-seeking available elsewhere in the region. No complete understanding of business–government relations is possible, however, without reference to politics. We begin this chapter with an analysis of the PAP’s consolidation of political power in Singapore in the late 1950s
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and 1960s and how political conflicts with the left influenced the government’s extensive involvement in the economy. In the second section, we explore the government’s ambivalent relationship with the domestic private sector and how this was at least one element in the emergence of the well-known strategy of reliance on MNCs and SOEs. In the third section, we argue that after the 1985 recession, structural changes in the economy and a political transition began to reverse these biases somewhat, resulting in a variety of efforts in the second half of the 1980s and the 1990s to support the local private sector. In the fourth section we underscore, however, the fact that the role of the state remains quite substantial in Singapore and that political considerations probably play at least some role in the apparent reluctance to relinquish that role. The conclusion addresses the Asian financial crisis and its aftermath.
Political origins of the Singapore model and the role of the state Understanding the nature of business–government relations in Singapore requires a review of how the PAP consolidated political power and how that political process conditioned the role of the state in the economy. The PAP was formed in 1954 by moderate nationalists led by Lee Kuan Yew and other English-educated middle class professionals (Minchin 1986, 1990). The narrowness of this base necessitated alliance with groups capable of mobilizing support among the majority of Chinese-educated. The centrist leadership therefore tolerated a left wing which was sympathetic to, if not infiltrated by, the banned Malayan Communist Party (MCP). At its formation, for example, three of the 12 members of the PAP’s Central Executive Committee (CEC) were known communist sympathizers. One reason for the adoption of a hierarchical party structure that distinguished cadre from ordinary members – an innovation Lee Kuan Yew copied from the way cardinals in the Catholic church choose the pope (Lee 1998) – was precisely to allow the moderate leadership to maintain its hold on the party. The left came close to seizing control of the PAP in 1957 but the moderates were saved by the government’s detention of some leading activists. In 1959, the party won the general elections with 53.4 percent of the vote, but the nature of districting and the distribution of the vote allowed them to take no fewer than 43 of 51 legislative seats. Nonetheless, the election split the PAP and the party had to contend with the newly constituted Barisan Socialis (Socialist Front) which positioned itself on the left. The opportunity for controlling and ultimately defeating the Barisan came with the debate over merger with Malaya in 1963. Both the PAP and the conservative United Malays’ National Organization (UMNO) in Malaya saw merger as a means of restraining the left in Singapore, in part by shifting key security functions to Kuala Lumpur. In advancing the cause of merger, the PAP had a number of compelling arguments on its side; at this juncture, few believed that Singapore could be viable on its own. But the PAP did not rely on persuasion or its electoral triumph alone. Detention without trial under the Internal Security
State, politics, and business in Singapore 303 Act, the secret police, and curbs on press freedom were also employed (Goh 1972: 230–5). By the time the merger effort had failed in 1965, the Barisan had been broken. A crucial element of the subsequent political control structure concerned the labor movement. With the defection of labor leaders to the Barisan Socialis, the Singapore Trade Union Congress broke up into a PAP-aligned National Trades Union Congress (NTUC) and a socialist Singapore Association of Trade Unions (SATU). Operation Cold Store in 1963 resulted in the arrest of a number of SATU officials. De-registration of dissident unions allowed NTUC to establish a monopoly over the union movement. By 1966, the NTUC had become both financially and organizationally dependent on the PAP, providing the government with a crucial tool both in the conduct of macroeconomic policy (through the ability to control the wage-setting process) and in seeking to attract foreign direct investment (FDI). But the control that the PAP would later exercise over labor should not be read back into the tumultuous period prior to 1963. The government could not pursue its policy of “riding the tiger” or defeat the Barisan without a policy program that appealed to the electorate; this simple political fact helps explain much of what is distinctive about the Singapore model of semiauthoritarian social democracy. The PAP’s first step on coming to office was to gain control of the government itself (Bloodworth 1986). One of the first acts of the PAP government was to centralize political power by disbanding the city council and eliminating local government.1 Rather than operating through a second layer of government that the PAP might not control, the party used political institutions like Citizens’ Consultative Committees (CCCs) and community centers (CCs) to blur the lines between state and party at the grassroots (Chan 1976: 130; Quah et al. 1985). The PAP also moved to exert control over the civil service, which was localized in 1957 (Chan and Haq 1987). Most English-educated civil servants cast their fate with the PAP, despite their antipathy to the party’s socialist rhetoric. But the PAP eliminated cost-of-living allowances for top civil servants, introduced new disciplinary procedures and established a political study center to “train” civil servants in 1959, in effect carrying out a purge and indoctrination of the bureaucracy. The loyalty of the civil service was buttressed by a variety of both carrots and sticks. Among the carrots were scholarships and bonds that coopted elites and intellectuals into the government (Chen and Evers 1978; Yuan and Low 1990). Over time, public salaries became an important incentive as well. Ministers and senior civil servants are among the best paid in the world, with their salaries benchmarked against six top occupations in the private sector (Chew 1993, Singapore 1994). The government was not averse to using sticks as well, including the Corrupt Practices Investigation Bureau (CPIB) established directly under the Prime Minister’s office. The government has not hesitated to aggressively prosecute corruption cases, including those among high-ranking government
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officials. In 1994, the former chief executive officer (CEO) of the prestigious Trade Development Board (TDB), Yeo Seng Teck, was sentenced to a fouryear jail term after pleading guilty to four graft charges (Business Times and Straits Times 16/2/94).2 Another corruption case in 1999 involving a PAP MP Choo Wee Khiang resulted in his serving eight months on cheating charges (Straits Times 3, 4, 8, 10/99).3 It is testimony to the government’s tight internal controls that neither of these cases involved purely private malfeasance rather than abuse of office. The two most important instruments for the establishment of PAP hegemony lay in the generation of economic growth and employment – which itself required substantial intervention and provision of public goods – and in government supply of various social services. In 1961, the government established the Economic Development Board (EDB), giving it the tasks of promoting foreign investment, industrial estate development, and management and industrial financing; in 1968, the latter two functions were spun off to the Jurong Town Corporation (JTC) and the Development Bank of Singapore (DBS), respectively. The PAP government also revamped a number of other colonial statutory boards into more dynamic entities aimed either at providing the public goods that proved central to the subsequent growth process and the attraction of foreign investment: Public Utilities Board (PUB, 1963), Port of Singapore Authority (PSA, 1964), Telecommunication Authority of Singapore (TAS, 1974) among others. The government also rehabilitated the colonial Singapore Improvement Trust (SIT) into the Housing and Development Board (HDB, 1960) and expanded social insurance through the Central Provident Fund (CPF, founded in 1955). With a highly transient Chinese population, provision of public housing, education, health, and a widening range of social insurance programs through the CPF not only served the purpose of building political support in a narrow partisan sense; the CPF and the HDB were also instruments of nation-building. As Lee Kuan Yew repeatedly emphasized, the provision of jobs and housing served to create both political and economic stakeholders in what had historically been a migrant population. In addition to the statutory boards, Singapore has also been characterized by a proliferation of government-linked companies or GLCs that stand somewhat at odds with its market-oriented image. The motivations for establishing these companies have been diverse. The earliest state-owned enterprises – Prima Flour Mills and National Iron and Steel Mill (to become NatSteel) – date to 1961 and were formed in manufacturing segments in which the government deemed private capital incapable of entering; we return to this theme below. Other GLCs supplemented the activities of the statutory boards or grew out of their activities, as seen in JTC and DBS from EDB, the corporatization of hospitals under the Ministry of Health, and GLCs formed to support the activities of the HDB (before such services were contracted out). Yet another cluster of GLCs, the Sheng-li group of companies, was formed under the defense ministry.
State, politics, and business in Singapore 305 Information on the aggregate size of the SOE sector in Singapore is surprisingly difficult to find. Ministries and statutory boards are accountable in parliament and aggregate investment income, interest and dividends are reported in financial statements and annual reports. However, breakdowns by source of income, rates of return, and other financial performance indicators on both the statutory boards and GLCs are unavailable to the public. The government issues an annual directory of GLCs under Temasek Holdings Ltd (THL), formed in 1974 as the main vehicle for the government’s domestic investments, other holding companies, ministries, and statutory boards. But the report does not cover holdings of the Government of Singapore Investment Corporation (GIC), formed at the same time as THL to manage overseas investments. Moreover, information in this report is limited, giving only boards of directors, subsidiaries, and associated companies, and not financial, performance, or employment statistics and even that is restricted to use by GLC directors. Nonetheless, the size of Temasek Holdings is revealing of the ongoing level of involvement of the state in the Singapore economy (see Table 9.1). GLCs owned by Temasek account for one-tenth of Singapore’s output and about a quarter of local stock market capitalization (Straits Times 29/4/00), giving the government a powerful direct stake in the Singapore economy. In other political settings, a large SOE sector might be a vehicle for politicians either to support the private sector or to provide patronage to supporters through employment. The absence of close political connections with the local private sector ruled out the former, as we show in the following section, and a meritocratic recruitment policy and tough internal controls generally ruled out the latter. Nor is this view simply the official one; in a Gallup international survey of over 50 countries, only 10 percent of Table 9.1 Major holdings of Temasek Holdings Ltd, 2000 Market capitalization (S$billion) Listed companies Singtel SembCorp Industries Singapore Airlines Neptune Orient Lines Keppel Corporation DBS Group Holdings
38 29 21 18 30 28
Unlisted companies PSA Corporation Singapore Technologies Media Corporation of Singapore Singapore MRT Singapore Power
n.a. n.a. n.a. n.a. n.a.
Source: Straits Times (29/4/00).
THL owns (%) 78.2 57.9 56.3 32.6 31.7 15.5 100 100 100 100 100
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respondents in Singapore worried about graft compared with 41 percent of respondents elsewhere (Straits Times 26/11/99). But this does not rule out a third possibility that is of equal political significance: that the growth of the state reflected a lack of confidence in the private sector and had the effect of pre-empting private opportunities.
The PAP and the private sector An activist state is certainly not incompatible with the promotion of the local private sector; as the other chapters in this volume show, the two have frequently gone together in the region. However, a distinctive feature of early post-independence PAP rule was a certain distance from, if not outright antipathy toward, the local private sector. We suggest that this influenced the nature of Singapore’s subsequent development strategy, including the strong reliance on foreign firms. The reasons for the disdain for Chinese business, and the corresponding development of a growth model that relied heavily on foreign rather than local firms, were both economic and political. Despite its small size and history as an entrepôt, the PAP leadership mirrored the thinking of many newly independent political elites that industrialization was the key to economic transformation and, not coincidentally, employment growth. Moreover, the government found international support for these views. No fewer than three early reports on the Singapore economy made the case for industrialization: the World Bank mission (1955) and the Lyle Industrial Development Program (1959) considered Singapore’s industrialization in the context of its relationship with Malaya and the Winsemius Report (1961) proposed an export-oriented development strategy that would allow Singapore to stand on its own (Lee 1973: 35). There is some question about the ability of the local private sector in Singapore to meet these objectives. On the one hand, it is true that a dynamic, influential Chinese business community had emerged during the colonial period comprising some large enterprises, including Lee Kong Chian’s Lee Rubber group, the Overseas-Chinese Banking Corporation (OCBC) group, Aw Boon Hwa’s conglomerate (Sin Chiew Jit Poh, Tiger Balm), and possibly the Hong Leong group. During the colonial period, many of the largest Chinese enterprises in Southeast Asia were to be found in Singapore. On the other hand, most Chinese firms in Singapore were small, familyowned enterprises concentrated in trade, commerce, real estate, and finance; in the eyes of the PAP, local capital was largely synonymous with unproductive rentier activities. The city-state did have a number of firms in industry, particularly in simple processing activities. Table 9.2 provides an overview of the structure of the manufacturing sector in 1963, and underlines some of the government’s concerns about its capacity to spearhead industrialization either within a consolidated Malaysian market or through exports. Among the smaller firms (those employing 5–9 workers), footwear and food were the largest in terms of number of establishments and employment and together
State, politics, and business in Singapore 307 Table 9.2 Sectoral distribution of industrial enterprises in Singapore, 1963 Industry
5–9 >10 5–9 >10 employees employees employees employees Establishments
Food, beverage, tobacco Footwear, apparel, textile Wood, rattan Furniture, fixtures Paper, paper products Publishing, allied products Leather, leather products Rubber products, processing Chemical, chemical products Non-mineral products except petrol Basic metal Metal products except machinery, transport Machinery except electrical Electrical machines, appliances, supplies Manufacturing, repair transport equipment Miscellaneous including quarrying Total
Workers
120 124 47 28 22 40 8 17 15 17 4
161 54 82 18 22 124 6 45 44 34 5
859 867 346 204 162 281 53 106 94 111 25
7,595 1,611 3,432 705 590 4,598 194 857 2,047 3,077 437
68 49
80 58
460 339
3,087 1,465
17
23
114
1,381
63 45 684
69 62 897
417 316 4,754
4,060 2,523 43,184
Source: State of Singapore, Report on the Census of Industrial Production (1963 Tables 1, p. 41; 19, p. 83).
with a small number of other segments – tailoring, metal products (spurred by government construction efforts), and repair of transport equipment – accounted for more than 50 percent of all employment and value added. A conspicuous feature of this group is the relatively high proportion of unpaid family workers and working proprietors (State of Singapore 1963: 4–5). The Chinese preference for sole-proprietorship did not appear to lend itself to the formation of joint ventures that would inject needed technology and capital (Lee and Low 1990). Among the largest of the larger firms (employing 10 and more workers) nine were in the public sector, including shipbuilding and repair (PSA), printing (Government Printing Office), furniture (Central Supplies Office), pharmaceuticals (government Pharmaceutical Laboratory and Stores), quarrying, mechanical engineering (Public Works Department), slaughtering (City Abattoirs), and electricity and gas (PUB). Even for this group of larger establishments – and including the SOEs – average employment was only 48. Among the larger establishments, only chemicals and petroleum industries had export potential and these relied on foreign investment, which already began to account for a growing share of capital in manufacturing from the late 1950s. The role of foreign capital was also increasingly prominent in textiles and garments, leather, and non-metallic product industries, reinforcing the
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argument that local private firms were unlikely to spearhead industrialization. However, three political factors also played into the distance and tension between the PAP government and the private sector: the PAP’s initial embrace of a Fabian socialist ideology and the redistributive implications of several of its early policies; the Chinese “chauvinism” of a number of prominent business leaders; and the related phenomenon of business financing of the left. From 1955 to 1959, when the PAP was in opposition, it stressed the deficiencies of the incumbent government and relied both on appeals to the Chinese community and on the left for support. On coming to office in 1959, Lee shifted course from the more socialist rhetoric of the campaign and took pains to assure the Singapore Chinese Chamber of Commerce and Industry (SCCCI) that the government’s electoral platform and the new focus on industrialization did not mean an end to the role of trade and commercial activities in the Singapore economy (Josey 1968: 110, 116). However, several of the government’s policies did put it into direct conflict with private interests, most importantly its policy on land acquisition. Chinese landowners and some small businesses faced dispossession of land for urban renewal, redevelopment, resettlement, and other purposes. These policies clearly had a redistributive element, since compensation was set to reduce the fiscal burden of the PAP’s ambitious efforts for developing housing and industrial estates. In fact, the HDB did spawn a new breed of “mom-and-pop” shops serving the housing estates and new town centers (Low et al. 1996: 216); in the 1980s such activities were even accused of “hogging” land and labor in lowproductivity activities. Moreover, local light manufacturing had access to JTC estates just as foreign firms did. But from the perspective of small Chinese businesses at the time, the government’s policies were disruptive of existing neighborhoods and appeared confiscatory. The political interests of Chinese business is a more complex, and underresearched topic. It must be underlined at the outset that the political interests and activism of the private sector should not be exaggerated. Chinese organizations in the British era were either voluntary associations formed within the framework of the traditional lineage system or secret societies which furnished newcomers with various forms of social assistance (Chan 1976: 82). When secret societies were suppressed by the colonial authorities and became clan associations, they remained relatively narrow in membership and fragmented by dialect. Because of the diversity of its Chinese immigrant population, Singapore has had a more heterogeneous group of such associations than any Chinese community in Southeast Asia (Carstens 1975). The formation of the SCCCI in 1906 represented the first successful effort of the community to cooperate across clan lines even if the diversity of its membership and emphasis on mutual aid and cultural issues limited its ability to play any sort of advocacy role. Both the SCCCI and clan associations mobilized Chinese patriotism in the
State, politics, and business in Singapore 309 1930s (Cheng 1985) but in the political context of the late 1950s and early 1960s the emphasis on Chinese culture and solidarity with mainland China were far from innocuous and reflected important cultural subdivisions. On the one hand, the “peranakans” or “babas” were acculturated and integrated with either local Malays, the British, or both; the top PAP leadership was dominated by these “babas,” including Lee Kuan Yew, Goh Keng Swee, Toh Chin Chye, and Tony Tan. By contrast, the “sinkehs” or “alien” or “Chinese” Chinese constituted a culturally alienated majority that had fought the British on a number of sensitive issues from citizenship to Chinese education. This Chinese-educated majority constituted the key constituency for the competing political parties, and appeals to Chinese identity were a natural means of mobilizing support. However such appeals also threatened to upset the delicate ethnic balance in the city-state. As the Maria Hertog riots in 1950 and the Hock Lee riots in 1955 had shown, political and social tensions could easily break out along ethnic lines (Minchin 1986: 97–8). Moreover, the PAP harbored multi-racial ideals not only in Singapore but within Malaya as a whole, where the issue of Chinese identity politics was even more explosive. The PAP’s victory in 1959 provided the English-educated moderate leadership the opportunity to start the complex process of distancing itself both from the left and Chinese “chauvinism.” These efforts reached their peak during the political battle over merger, during which Lee Kuan Yew went to great lengths to separate “the communists” from “the Chinese majority.” The issue proved a losing one for the left because the economic arguments for merger were compelling and Chinese business generally stood to gain from it. But a number of incidents suggested that the PAP had not completely succeeded in winning over the Chinese-educated nor its business elite. In the 1961 Hong Lim by-election, PAP attacks on Ong Eng Guan, who was highly popular in the “sinkeh” community, backfired and he handed the PAP a resounding defeat by winning 73 percent of votes cast (Lee 1998: 351–61). Tan Lark Sye, a prominent Chinese businessman, organized and financed Chinese educational institutions with support from other SCCCI members who were skeptical about the PAP’s insistence on multi-culturalism. The most significant of these efforts was clearly Nanyang University, which subsequently developed a reputation as being anti-government. In 1966, Lee Kuan Yew claimed that Tan had also been a major funder of both the communists and Barisan Socialis for two years between 1961 and 1962 as well, and it is almost certain that he was not alone among the Chinese business community (Josey 1968: 421–2).4 After the Barisan Socialis lost the 1963 general elections, Tan’s citizenship was rescinded (Bloodworth 1986: 60, 285) and Nanyang University was closed, granting the then University of Singapore (later the National University of Singapore) a monopoly on higher education and establishing English as the language of tertiary instruction.5 The election results of 1963, Operation Cold Storage, and merger itself combined to severely dampen the opportunities for both the left and the articulation of a Chinese political identity; the PAP relentlessly sought to link
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“communism” and “Chinese chauvinism.” The Chinese associations began to wane with PAP’s policy of breaking down communal barriers among the clans (Cheng 1985: 125). The failure of merger allowed these issues to resurface briefly. For example, in 1966, the SCCCI argued that the Chinese language deserved a special place in Singapore (Josey 1968: 526). Although these appeals were resisted and the PAP has clung tightly to a doctrine of multiculturalism, these issues have never fully disappeared. In his 1999 national day rally speech, Prime Minister Goh Chok Tong noted the cleavage which still existed between the mobile, English-educated, professionals who constituted Singapore’s “cosmopolitans” and dialect-speaking “heartlanders” (Straits Times 24/8/99). There is no need here to reiterate the dominant role that MNCs came to play in the Singapore economy as much has been written on the topic already (Rodan 1989; Low et al. 1996; Schein 1996). The EDB always argued that bringing in MNCs was a necessary first step to initiate industrialization and to give local subcontractors time and space to grow. These arguments gained even more potency with the failure of the merger experiment and the breakup of the common market. Given the characteristics of local capital that we have noted, it is doubtful that Singapore would have experienced the growth it did had it tried to industrialize through local efforts alone. From a comparative political economy perspective, however, the important point to underscore here is that the PAP did not rely heavily on political support from business, did not develop an ideology that gave pride of place to indigenous firms, and therefore did not look to the local private sector as a central object of either policy or patronage (Chalmers 1992).
Revising the Singapore model: I – supporting the local private sector It is difficult to identify a single turning point when the PAP government began to pay more attention to the local private sector. The formation of the tripartite National Wages Council (NWC) in 1972 provided business with some formal representation in a government body for the first time, although there was little doubt that the government remained firmly in charge of that effort. Over the 1960s, the government established some small programs for local business under the Light Industry Scheme (Lee 1973) and during the first oil shock provided additional financial assistance to small enterprises facing difficulties. But in 1977, when the president of the SCCCI, Wee Cho Yaw, urged the government to outline more clearly the respective roles of the public and private sectors (Straits Times 17/3/77), finance minister Goh Keng Swee continued to defend the government’s large role in the economy and rejected Wee’s call for a consultative body with the private sector (Goh 1977: 2, 7). The recession of 1985 appears to be a turning point of sorts, and for reasons that are both political and economic. The PAP had a number of political
State, politics, and business in Singapore 311 reasons to reach out to the private sector at this time. The high point of the PAP’s electoral hegemony was 1968, when it secured 84 percent of the popular vote and a complete monopoly of parliamentary seats (see Table 9.3). In the 1970s, it still managed to win between 69 and 75 percent of the popular vote. But in the 1981 by-election and 1984 general elections, two opposition Members of Parliament (MPs) finally broke the PAP’s parliamentary monopoly. The electoral system continued to produce large PAP majorities; in 1991, there were only four opposition MPs in a 81-member parliament. However, the party’s share of the popular vote declined sharply with the 1984 election and stayed in the low- to mid-60 percent region throughout the 1980s and 1990s (see Table 9.3). Moreover, this decline in electoral support was coming just as Lee Kuan Yew was engineering the complex transition to a second generation of leaders that would culminate in Goh Chok Tong becoming Prime Minister in 1990. Goh was not completely free of Lee Kuan Yew’s stewardship, giving rise to the claim that Singapore had “one government, two styles.” Unlike most of the first-generation leadership, Goh did have some business background (with the GLC Neptune Orient Line). Moreover, Goh championed, if somewhat vaguely, consultation, participation and the development of a meaningful civil society in which the local private sector would presumably have some role (Low 1998: 60–4). The more important reasons for a shift in government policy were, however, economic. The 1985 recession gave rise to a substantial number of business failures and brought attention not only to the cyclical problems facing the local private sector and smaller businesses but to larger structural questions as well. The management of the recession may have also had a subtle subethnic dimension, since business failures were concentrated among Nanyang graduates and others who faced a language barrier in finding employment either in the civil service, GLCs or foreign multinationals. To address these problems, the government formed an Economic Committee headed by Lee Kuan Yew’s son Lee Hsien Loong (Singapore 1986). The final report drew on the work of eight subcommittees: the service sector; international trade; manufacturing; banking and finance; entrepreneurship; local business; manpower; and fiscal and financial policy. These subcommittees provided one of the first sustained opportunities for the local private sector to express its views in an official government body, and their assessments were often surprisingly critical. The Singapore Federation of Chamber of Commerce and Industry (SFCCI) Table 9.3 PAP share of popular vote, general elections, 1959–97 1959
1963
1968
1972
1976
1980
1984
1988
1991
1997
53.4
46.4
84.4
69.0
72.4
75.5
62.9
61.8
61.0
65.0
Source: Straits Times (4–8/1/97).
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chaired the subcommittee on local business and was the most forthright in outlining the structural problems local business faced. The subcommittee emphasized (somewhat wishfully) that local firms were the “pillars of the national economy” and underlined the fact that government enterprises were given “more favorable treatment,” competed directly with the private sector, and pre-empted its opportunity for expansion (Singapore 1985a: 2–4). Among the private sector’s complaints were the high wage policy the government had pursued briefly in an effort to force technological upgrading, the high cost of public services and utilities, the emphasis on high technology which placed local firms at a disadvantage, the intrusiveness and frequent changes in government regulations and statutory requirements, and overinvestment in commercial and residential property (Singapore 1985a). The committee recommended that the government refrain from forming new enterprises and consider privatization of those in which local business had the ability to expand. The subcommittee on entrepreneurship development was somewhat less critical of the government. The subcommittee acknowledged that local entrepreneurs were engaged in traditional activities and without a large home market “to test new ideas and products [and] pay for organizational and overhead costs,” expanding to international markets would be difficult (Singapore 1985b: 6). The subcommittee’s attitude toward the technological capabilities of local firms also seems, with the perspective of the 1990s, to be prematurely defeatist. The subcommittee also provided some support for state entrepreneurship, arguing that their successes demonstrated the capacity for indigenously owned and managed enterprises to be internationally competitive (Singapore 1985b). Nonetheless, the subcommittee also came to the conclusion that privatization and public procurement offered opportunities for local business. The subcommittee on manufacturing also concluded that the government should be “confined to providing general incentives or facilities” and that “government leave business activities to the private sector” (Singapore 1985c: vii). The drafting of the 1991 Strategic Economic Plan, which presented a vision of Singapore as a developed country, provided another opportunity for the private sector to participate in a major policy exercise (SEP, Singapore, MTI, 1991). Although key ministries and agencies led the discussion and they retained their top-down character, sectoral subcommittees included “resource persons” from the private sector and academia. The entire exercise was built around detailed surveys and studies of a number of economic “clusters” in which both foreign and local firms would play a role. Indeed, the very conception that underlay the cluster concept was that supporting industries of various sorts was central for the generation of agglomeration economies, thus providing a new rationale for the development of local capabilities. Several additional structural changes in the Singapore economy in the 1990s contributed to this gradual re-evaluation of the government’s arm’s length stance toward the local private sector and spawned new programs of
State, politics, and business in Singapore 313 support for them. One was simply the increasing size of a number of local private firms that had grown as supporting industries or service providers over the years of Singapore’s rapid growth. Recognition of the achievements of these firms was codified in the announcement of the Promising Local Enterprise (PLE) program in 1995, which sought to nurture strong local enterprises into multi-national corporations. The criteria for support included strong core capabilities, growth-oriented management and proven capacity and critical mass to continue to expand. The target of the program was to produce 100 PLEs with at least S$100 billion sales turnover by 2005. Table 9.4 outlines the sectoral distribution of targeted firms; noteworthy is the fact that manufacturing and services were targeted equally, a point to which we return below. A basic thrust of the new program was to increase the productivity of these enterprises, a response to findings that Singapore’s productivity had been surprisingly unimpressive. To this end, the National Productivity Board (NPB) merged with the Singapore Institute for Standards and Industrial Research (SISIR) into a new Productivity and Standards Board (PSB) in 1996. NPB had previously focussed on workforce training, improving management practices and public education on productivity. SISIR had more of a technological focus, assisting firms on questions related to technology, quality control, standards, and industrial research. By forming PSB, the “soft” aspects of productivity handled by NPB and the “hard” aspects handled by SISIR were brought together in a single entity. PSB also took over the small and medium-sized enterprise (SME) development function from EDB, which had been accused in the past of concentrating primarily on the interests of foreign multi-nationals. A second trend was the growing recognition that both Singapore as a whole and specific firms could benefit from internationalizing their operations more aggressively and “going regional.” Such regionalization would allow Singapore to retain its status as a regional headquarters even as its firms were going offshore in search either of lower costs or to service clients in the region. We Table 9.4 Sectoral distribution of promising local enterprises, May 1997 % Manufacturing Electronics Chemicals Engineering systems Manufacturing systems Light industries
50 14 4 2 17 13
Services Architecture, engineering and construction, hospitality Lifestyle/educare Logistics and distribution Communications and media
50 19 11 12 8
Source: EDB Yearbook (1996/97: 38).
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have already noted how the PLE Program had this objective. One further way for the government to support such efforts was through its involvement in the development of industrial parks that would draw on Singapore’s own experience through the EDB and JTC, while simultaneously providing opportunities for Singaporean firms, both public and private. Following the relative success of in industrial parks in Batam and Bintan in neighboring Indonesia, the government assisted in the development of the Bangalore Information Technology Park in India and industrial parks in Vietnam. The Suzhou Industrial Park (SIP) launched in February 1994 and led by GLCs was, however, to be the flagship of the regionalization policy. Although the park subsequently ran into difficulties, the effort was interesting because one of its stated objectives was to provide a mechanism through which PLEs could expand their China presence. The policy of supporting the local private sector was extended into the international arena by using the GLCs to internationalize local subcontractors. The final and broadest change that affected the role of the local private sector was the emergence of services, and information services in particular, as a source of growth that could over time rival manufacturing. Both the Economic Committee and the SEP already noted the significance of services, as did the PLE Program. Two more reports in the late 1990s, the Committee on Singapore’s Competitiveness (Singapore, MTI 1998), which was a direct response to the financial crisis of 1997–8, and Manpower21 (Singapore, Ministry of Manpower 1999) further developed the idea of the “knowledgebased economy” (KBE). Although the government increasingly pushed the role of “foreign talents” over the 1990s across a range of sectors, the very nature of the new service economy also lent itself to the small startups and “dot.com” companies that played such a central role in the development of the internet service industry in the United States. To support these ventures, the government advanced a plan in 1999 to stimulate technology entrepreneurs, or “technopreneurs,” through a Technopreneurship Investment Fund and the planned Buona Vista science hub located next to the Science Park that will augment the western technology corridor where the universities, polytechnics, research institutes, and high-technology firms are sited (Straits Times 9/4/99). The government also undertook regulatory changes, including bankruptcy laws and zoning regulations that would allow HDB flats to be used as offices for technopreneurs. Given the significance for the crisis of 1997–8 elsewhere in the region, it is important to digress in somewhat more detail on the financial services sector. Although the government was not particularly attentive to the interests of Chinese firms prior to 1985, the family-owned Chinese banks constitute a partial exception, perhaps because of the positive role they played in the entrepôt trade. In contrast to other countries in the region, the Monetary Authority of Singapore (MAS) has consistently exercised strong regulatory oversight of the domestic banking sector. However, even as it encouraged the development of offshore financial services in Singapore, the government also
State, politics, and business in Singapore 315 enforced a 40 percent foreign shareholding limit for local banks that provided them a substantial degree of protection. The owners and top management of the largest privately owned banks – the Overseas-Chinese Banking Corporation, the Overseas Union Bank, the United Overseas Bank, and the Tat Lee Bank (merged in 1998 with the government-controlled Keppel Bank) – have also maintained close working and even personal relationships with the top PAP leadership, including Lee Kuan Yew himself (Hamilton-Hart 1999). In the wake of the regional crisis of 1997–98, however, and in anticipation of accession to the World Trade Organization (WTO) financial services agreement, the government began to shift away from this protective strategy. In 1999, MAS chairman Lee Hsien Loong put forward a financial sector liberalization blueprint. The financial liberalization was not a “big bang” because liberalization was both gradual and partial. In mid-1999, 62 percent of deposits of Singapore residents were in domestic banks and the MAS wanted to maintain this share at no less than 50 percent (Straits Times, Business Times, Asian Wall Street Journal 18/5/99). But the plan did remove the 40 percent foreign ownership limit, paving the way for mergers or greater foreign ownership and control of domestic banks. Local banks were also required to set up “nominating committees” for board and senior management positions in order to force the recruitment of talent outside the family. Approval from MAS was required for re-nomination of existing board members and senior executives. A new category of full banking license, qualifying full banks (QFBs), was introduced and up to six were to be issued by 2001. QFBs can open branches and off-premises automated machines (ATMs).6 Lee Hsien Loong also did not rule out allowing non-financial institutions (NFIs) to offer financial services in the future (Straits Times 3/12/99). The government has also undertaken steps to develop the financial markets. Asset-rich statutory boards are taking part in the medium-term note (MTN) program which is designed to stimulate a market in government bonds and in fixed-income securities more generally. The JTC will be raising S$4 billion over the next few years to finance its infrastructural projects instead of relying on accumulated reserves or government funding (Straits Times 6/11/98) and the HDB also has plans to issue its own bonds. By first testing the domestic market, these statutory boards are poised to take advantage of the need for a regional bond market tapping in both high savings and the need for longer-term borrowings. The Asian financial crisis has pointed to the need for such capital markets to augment bank and equitybased funding. In sum, while the government was moving to support local manufacturing and services enterprises, financial services firms were being exposed to somewhat greater competition. Overall, however, the second half of the 1980s and the 1990s were marked by a gradual change in the government’s view of the private sector. Political factors, including declining PAP support and a transition to a new generation of leadership provided the political backdrop for these changes, but the mid-1980s recession appeared to mark a turning
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point. The emergence of a “cluster” development strategy, a regionalization policy, and a new emphasis on the information services sector all created new reasons for the government to support local firms. However, an ongoing feature of these initiatives is their genesis in the government and its responses to market developments. Even input from the private sector was limited and localized, with few opportunities for business to set the agenda or capture policy.
Revising the Singapore model: II – whither the role of the state? We have argued that the expansive ownership role for the state in Singapore stemmed initially from a number of motives. These included the felt need to provide public goods, employment, and public services, the perceived weaknesses of the Singapore private sector, and the absence of political incentives to support it. During the mid-1980s recession, the private sector first expressed its disaffection with the domineering role of the GLCs and shortly thereafter, a Private Sector Divestment Committee issued the report that initiated Singapore’s privatization program (Low 1991). The report underlined the objective of deepening the stock market, a motive which gained in salience following the creation of an independent Kuala Lumpur Stock Exchange in 1991 and the delisting of Malaysian securities on the Singapore exchange. A central argument of the report was, however, the need to make more room for private-sector initiative. In spite of this, the total number of GLCs actually increased almost two-fold from 1985 (361) through 1994 (720), before turning down in the second half of the decade (to 592 in 1996) (Low 1998: 161). Behind these aggregate numbers were some large privatizations, the most significant of which was the partial privatization of Singapore Telecommunications Ltd (Singtel) in 1993. The fact that these privatizations sometimes left the government controlling a large bloc of shares – 78.2 percent of equity in the case of Singtel – with the remainder fragmented among small holders served only to raise further questions about whether the government really intended to relinquish its extensive ownership role. Has Singapore come to have its own “GLC problem,” a kind of “political business” within the state sector itself? If so, what form did it take and who benefited from it? First, it must be noted that one source of resistance to wholesale privatization came from legitimate policy objectives. As we have argued, the GLCs took on a number of new functions in the second half of the 1980s and 1990s, some of which served to support or complement the private sector. These included the regionalization policy and the effort to complement foreign investment in certain technology- and capital-intensive sectors, such as semiconductor fabrication. In 1991, the EDB took a 26 percent equity share in a US$300 million joint venture in Tech Semiconductor with Texas Instruments (26 percent), Hewlett-Packard (24 percent), and Canon (24 percent) to
State, politics, and business in Singapore 317 produce dynamic random access memory (DRAM) chips designed by Texas Instruments. Under a 20-year agreement, Texas Instruments has the option to buy over EDB’s share as EDB wanted only to ensure technology acquisition and upgrading of the electronic industry as a core. The EDB Investments Pte Ltd., established in 1991, has two subsidiaries, EDB Ventures and EDB Bio-Innovations, to make the necessary investment to support similar policy objectives. The government incorporated Petrochemical of Singapore in 1977 as a joint venture with DBS and Japan-Singapore Petrochemical Corporation when a petrochemical complex was mooted with Sumitomo Chemical Company. The catalyst role of the state in such high-technology areas is also deemed necessary to instill MNC confidence. There are spillover and trickle-down effects to local enterprises adopted by MNCs and GLCs through a Local Industry Upgrading Program (LIUP) set up in 1986 to improve their operational efficiency, introduce new processes, and jointly develop product or process development. These policy objectives must, however, be weighed against a number of possible political economy considerations as well. The lack of transparency surrounding decision-making in this area means that extreme caution is required in drawing strong conclusions about how “Singapore Inc.” actually works. Singapore’s combination of a highly open economy with a persistently large state role that appears to have escaped the inefficiencies seen elsewhere in the region poses an interesting puzzle. One possible explanation is a statist one: that the GLCs not only provide opportunities for members of the political elite to advance their careers and create bases of power, but they also allow the government to continue to exercise control over major segments of the economy. The GLC sector is very clearly under the control of the top political leadership. The boards of directors and management of the GLCs are appointed by the Directorship and Consultancy Appointments Committee (DCAC) under the Ministry of Finance, and appointments draw heavily from the civil service. Like the Japanese practice of “amakudari” (descent from heaven), where retired politicians enter as advisers or in non-executive positions in business groups to strengthen government–business ties (Boyd 1987), retired politicians and civil servants including brigadier-generals from the defense ministry in Singapore are despatched to statutory boards and GLCs, resulting in complex interlocking directorships within the government itself. For example, retired permanent secretary from the finance ministry, Ngiam Tong Dow, is chairman in both CPF and HDB, permitting coordination between the two bodies (many CPF members use their savings to buy HDB flats). Similarly, Lim Boon Heng, minister without portfolio, is Secretary General of NTUC and has also been appointed to the Singapore Airlines (SIA) board of directors. His influence in the unions is clearly designed to help SIA avert the problems other airlines, such as British Airways, have faced in seeking to improve productivity and reduce costs. This explanation of the GLC role fits easily with observations about the
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conduct of fiscal policy in Singapore. Singapore’s fiscal policy has long been praised for its conservative nature; the government has generated surpluses over a long period. GLCs are both beneficiaries of and contributors to these surpluses; surpluses allow for the funding of GLC investments and profitable GLCs provide a return to the government. However, these surpluses also allow the government to pursue a variety of political as well as economic objectives, including the provision of various social services that have long been central to the PAP’s paternalist style of rule. The government has secured support among its long-standing working-class constituency by investing in training and skills upgrading, and has even been able to reap some political gains from passing surpluses back to the public through a variety of channels, including medifund, edusave, and “topping-up” the investment accounts of CPF members to permit upgrading of HDB housing estates (Low and Aw 1996). One particular variant of this statist argument is that the Lee family itself has benefited from the GLCs, particularly Lee Hsien Loong, his wife, Ho Ching, who is president and CEO of Singapore Technologies, and his brother, Lee Hsien Yang, CEO and president of Singtel. Their career stories suggest not only the tight interconnections among top civil servants and GLC managers but also the incentives for these individuals to support an expansive conception of the GLCs. Ho Ching was groomed under Philip Yeo when they were both in the defense ministry; she subsequently became deputy chairperson in EDB after he became EDB chairman in 1985. In the late 1980s, when the government experienced problems nurturing new electronic ventures through Chartered Semiconductor Manufacturing (CSM), J.Y.M. Pillay, then SIA chairman, was brought in by Temasek in 1991 to look into the losses that had accrued; he recommended that the government reduce its presence. Nonetheless, Philip Yeo, Ho Ching, and Lee Hsien Loong (then defense minister) prevailed and repositioned CSM as an independent chip fabricator. Ho Ching’s problems at Singapore Technologies (ST) began in 1994 and centered on competing conceptions of what the enterprise should do. Defense minister Lee Boon Yang and executive chairman, ex-minister Yeo Ning Hong saw the group’s mission narrowly as giving technological support to the ministry and the Singapore Armed Forces (SAF); the company’s activities were seen in the context of defense strategy. Ho believed that such a narrow conception of the firm was stifling and gave rise to uncompetitive enterprises. She took a wider view of ST, as the vehicle for achieving a variety of broader economic and even political objectives, including regionalization, the purchase of assets elsewhere in Asia, the acquisition of technology, and the development of management capabilities. She also argued that the group should operate on a commercial basis. For example, a listing of some of the group’s operations would send a clear signal that they were commercially run and she was a proponent of incentive-based contracts for managers within the group. One particular conflict with Yeo Ning Hong centered on a bonus for S$1 million to an engineer running a venture capital operation in the group.
State, politics, and business in Singapore 319 Beside technology acquisition, Ho also set her sights on asset-based financing operations for technology-based manufacturers and a banking license to expand into underwriting services, currency trading, and fund management (Institutional Investor May 1997). These interests coincided with Lee Hsien Loong’s initiative to liberalize the financial sector after he took over as chairman of MAS from Richard Hu in 1998, itself an unprecedented move since the finance minister usually acts as chairman of both MAS and Board of Commissioners of Currency (BCCS). It is important to underscore that grumbling about political insiders and nepotism has not extended to charges that the Lee family or other officials have abused office for personal gain. The observation is a wider one, that the GLCs provide a field for the political elite to exercise economic power through their control of a variety of assets. This power extends quite naturally to employment and relationships with suppliers, giving public officials a commanding presence in the economy as a whole. By drawing talent into the public sector, the GLC sector as a whole can be viewed as a cooptive mechanism that serves to limit the development of an independent private sector that might articulate a different conception of the government’s role. Moreover, this new, commercial conception of the GLC role does not resolve the problem of pre-empting local business opportunities that was first raised in the mid-1980s. An ironic example centers on Philip Yeo’s involvement in the telecommunications sector. In the mid-1990s, Yeo also championed an expansive role for the GLCs. For example, in 1994 he prevailed over Temasek’s initial resistance to merge SembCorp Industries (SCI) and Singapore Technology Industrial Corporation (STIC) in an effort to move SCI beyond its limited focus on marine into broader industrial activities. After he left SCI, Philip Yeo remained as adviser to SCI’s 42 percent associate Pacific Internet, which he founded. Yeo, as well as two other private companies, Cyberway and PacNet, accused Singtel of subsidizing its division, Singnet, which launched toll-free access service in December 1998; in Yeo’s words, Singtel was Singnet’s “sugar daddy” (Business Times 27/9/99, Straits Times 19 and 21/10/99). The Telecommunications Authority (TAS) launched an investigation and found no cross subsidies, but Yeo’s concerns centered not only on the issue of propriety and transparency or of anticompetitive practices but the broader potential for GLCs to compete with private enterprises. However, the foregoing story also suggests a somewhat different interpretation of the role of the GLCs, one which sees their operations less in terms of the political and career incentives of politicians and civil servants and more in terms of a gradual interpenetration if not fusion of public and private interests (Low 1998; Hamilton-Hart 1999). The career trajectory of Philip Yeo suggests the potential for civil servants to move from GLC management into the private sector, but the opposite is also increasingly the case. As the conception of the GLC role changes to a more dynamic and commercially driven one, and as GLCs are increasingly involved in joint ventures with
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private firms, they are increasingly in need of managers and directors with private sector experience. The current chairman of ST is Koh Boon Hwee, formerly from Hewlett-Packard, and Ho Kwon Ping from the Wah Chang Group was appointed the chairman of the new electricity and gas company, Singapore Power Inc. in 1995. GLCs operating abroad in the Philippines and Thailand have also drawn prominent local businessmen onto their boards.
Conclusion We have argued that the nature of decolonization and early politics created a pattern of business–government relations that was unique in the region. With strong challenges on the left and few ties to the local private sector, the PAP devised a growth strategy in which government agencies, state-owned enterprises (SOEs) and, somewhat later, multi-national firms played a dominant role. This strategy moderated somewhat beginning in the second half of the 1980s as the government began to pay more attention to the private sector, primarily for economic reasons. There was, however, little evidence of the corrupt and crony relations between the state and private capital visible elsewhere in the region. The bureaucracy and regulatory apparatus was not only extraordinarily competent, but tightly controlled by the top political leadership and highly insulated from social pressures. Nor was the political elite dependent on ties to business to sustain its political monopoly. The state sector continued to be quite large, and while its operations are far from transparent they do not appear to be the locus of the extreme inefficiencies or political abuses visible elsewhere in the region. To what extent did these factors help insulate Singapore from the effects of the Asian financial crisis? The answer is not self-evident. Even if cronyism did contribute to the onset and depth of the crisis in other countries, most notably in Indonesia, it does not necessarily follow that the absence of cronyism was crucial to Singapore’s avoidance of the crisis. Singapore has long pursued highly conservative fiscal, monetary, and exchange rate policies, including a currency board that mandates 100 percent backing for note issue. These policies not only dampened speculative pressure against the Singapore dollar but also provided the government with the leeway to respond with countercyclical macroeconomic policies. When the 1997 recession hit, the government moved to cut costs through its control over the wage-setting process, but it was also able to initiate a large-scale program to improve Singapore’s international competitiveness including through funding for skills upgrading and retraining. Looking forward, the central question for the government is whether the state will continue to play the same direct ownership and guidance role in the economy that it has in the past or whether we will see a gradual retreat through privatization, liberalization, and a more arm’s-length regulatory stance toward important markets, including financial markets. Economic pressures will weigh in these decisions, but it is important to underscore that
State, politics, and business in Singapore 321 their effects do not point unambiguously in a single direction. On the one hand, global pressures, including through the WTO, and the emergence of the knowledge-based economy, would appear to constitute powerful pressures toward a retreat of the state, including through the loss of talent to the budding opportunities in the private sector. But these pressures are not altogether unidirectional. Recall that the same developments have also been invoked to support the regionalization policy, joint ventures between GLCs and MNCs, and a variety of new aids to local industry, including the promising local enterprise program. In the end, the answers to these questions are likely to depend on politics. We have argued that incentives within the government, as well as a growing symbiosis between the state and private sector, may serve to perpetuate the government’s pervasive “nanny state” role. This might change were politics to move in a different direction. Both deputy prime ministers have recently addressed the way in which the knowledge-based economy will require new political and administrative models and prime minister Goh Chok Tong inaugurated the rethinking when he reflected that a top-down leadership which served Singapore well in the past might not produce the best results for the country in a globalized economy (Straits Times 12/11/99). The question remains of whether the PAP – still enjoying the political fruits of its successful policies – really has any incentives to loosen the political reins. Accumulation of considerable budgetary surpluses and official reserves has underpinned the political legitimacy of PAP government. Opposition parties do not have political resources and the passing of the political donations bill covering all groups in politics, banning foreign funding, hits them and all political associations which charge the new bill as stunting the growth of the civil society (Straits Times 12, 23/5/00).
Notes 1 2 3 4
5
See Chan (1971, 1976) for details on how the PAP dealt with the problem they faced with devolution of power. The case involved antiques that Yeo had recommended to a museum at inflated prices; he was charged with fraud, forgery, and corruption. Choo abetted his elder sister’s common-law husband to use false invoices to cheat a finance company into granting a loan of S$830,000 loan in one charge and S$1 million loan in another. It should be noted that despite these claims about the funding of the Barisan, PAP finances are far from transparent. All branches were expected to be financially autonomous and they kept all funds raised except some proportion of membership subscriptions, subject only to headquarters audit and oversight. Fund raising at the branch level has ranged from running kindergarten classes to publication of magazines, National Day dinners, branch anniversaries, and other social activities. Sizeable donations from private individuals and interest groups are channeled to the CEC rather than the headquarters except during election years but there is no public information on these donations or their source. Nanyang Technological University was opened in 1992, but bore no connection to its earlier namesake.
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Currently, there are nine local full license banks among the total of 22. Five more restricted bank licenses were to be granted by 2001, raising the number from the current 13 to 18. Since 1971, restricted banks do the same range of domestic banking business as full license banks except that they have only one main branch, and cannot accept S$ savings accounts and S$ fixed deposits under S$250,000 from non-bank customers. These institutions are distinct from the 98 offshore banks, which cannot accept interest-bearing S$ deposits from persons other than approved financial institutions.
References and further reading Bloodworth, D. (1986) The Tiger and the Trojan Horse, Singapore: Times Books International. Boyd, R. (1987) “Government–Business Relationships in Japan: Access, Communication, and Competitive Collaboration,” in S. Wilks and M. Wright (eds), Comparative Government–Industry Relations: Western Europe, the US and Japan, New York: Oxford University Press. Carstens, S.A. (1975) “Chinese Associations in Singapore Society,” Institute of Southeast Asian Studies, Occasional Paper 37. Chalmers, I. (1992) “Loosening State Control in Singapore: The Emergence of Local Capital as a Political Force,” Southeast Asian Journal of Social Science 20(2). Chan Heng Chee (1971) Singapore: The Politics of Survival, 1965–67, Kuala Lumpur: Oxford University Press. —— (1976) The Dynamics of One-Party Dominance: The PAP at the Grassroots, Singapore: Singapore University Press. Chan Heng Chee and Haq ul Obaid (1987) S. Rajaratnam: The Prophetic and the Political, New York: St Martin’s Press. Chen, P. and H.-D. Evers (1978) Studies in ASEAN Sociology: Urban Society and Societal Change, Singapore: Chopmen Enterprises. Cheng Lim Keak (1985) Social Change and the Chinese in Singapore: A SocioEconomic Geography With Special Reference to Bang Structure, Singapore: Singapore University Press. Chew, D.C.E. (1993) “Civil Service Pay in the Asian Pacific Region,” Asia-Pacific Economic Literature 7(1). Goh Keng Swee (1972) The Economics of Modernisation and Other Essays, Singapore: Asia Pacific Press. —— (1977) The Practice of Economic Growth, Singapore: Federal Publications. Haggard, S. (2000) The Political Economy of the Asian Financial Crisis, Washington, DC: Institute of International Economics. Hamilton-Hart, N. (1999) “Informal Institutions of the Singapore State,” mimeo. Josey, A. (1968) Lee Kuan Yew, Singapore: Donald Moore Press. Lee Kuan Yew (1998) The Singapore Story: Memoirs of Lee Kuan Yew, Singapore: Times Edition. Lee Soo Ann (1973) Industrialization in Singapore, Camberwell: Longman. Low, L. (1991) The Political Economy of Privatization in Singapore: Analysis, Interpretation and Evaluation, Singapore: McGraw-Hill. —— (1998) The Political Economy of a City-State: Government-Made Singapore, Singapore: Oxford University Press. Low, L., Toh M.H., Soon T.W., Tan K.Y., and H. Hughes (1996) Challenge and
State, politics, and business in Singapore 323 Response: Thirty Years of the Economic Development Board, Singapore: Times Academic Press. Low, L. and T.C. Aw (1996) Housing a Healthy, Educated and Wealthy Nation Through the CPF, Singapore: Times Academic Press. Minchin, J. (1986, 1990) No Man is an Island: A Portrait of Lee Kuan Yew, Sydney: Allen & Unwin. Pugalenthi Sr. (1996) Elections in Singapore, Singapore: VJ Times. Quah, J.S.T., Chan Heng Chee, and Seah Chee Meow (eds) (1985) Government and Politics of Singapore, Singapore: Oxford University Press. Rodan, G. (1989) The Political Economy of Singapore’s Industrialization, London: Macmillan. Schein, E.H. (1996) Strategic Pragmatism: The Culture of Singapore’s Economic Development Board, Cambridge, MA: MIT Press. Singapore, Federation of Chamber of Commerce and Industry (1985a) “Report of the Subcommittee on Local Business,” August. —— (1985b) “Report of the Subcommittee on Entrepreneurship Development,” October. —— (1985c) “Report of the Subcommittee on Manufacturing,” September. Singapore, Ministry of Manpower (1999) “Manpower21: Vision of a Talent Capital,” Singapore: Singapore National Printers. Singapore, Ministry of Trade and Industry (MTI) (1986) “Report of the Economic Committee,” Singapore: Singapore National Printers. —— (1991) The Strategic Economic Plan: Towards A Developed Nation, Singapore: Singapore National Printers. —— (1998) “Report of the Committee on Singapore’s Competitiveness,” November. Singapore, Prime Minister’s Office (1994) “Competitive Salaries for Competitive and Honest Government: Benchmarks for Ministers and Senior Public Officers. Cmd 13 of 1994, October,” Singapore: Singapore National Printers. State of Singapore (1963) Report on the Census of Industrial Production 1963, Singapore: Government Printing Office. Yuan Lee-Tsao and L. Low (1990) Local Entrepreneurship in Singapore, Private and State, Singapore: Times Academic Press.
10 Politics, business, and the inescapable web of structural corruption in Japan James Babb
Introduction In important respects, the relationship between business and politics in Japan is different from that of other East Asian countries, primarily because the relationship in Japan has developed under conditions of rapid growth for a longer period of time. This has meant that simple relationships between particular firms and politicians have been supplemented with a persistent pattern of business–politician influence which some have termed “structural corruption” (Murobushi 1981; Johnson 1986). Within the business community there is a tension between heavy industry and competitive exporting manufacturers, on the one hand, and light industry and domestically oriented businesses, on the other. In the early post-war years, both sectors sought to maintain protection of the Japanese market, but differed over the allocation of resources, particularly capital, to each sector. These potentially different business interests were reconciled to a degree in an institutional framework which has been described as a “steel–rice coalition” similar to the “iron and rye coalition” of heavy industry and agriculture in Bismarck’s Germany. Over the years, Japanese economic policy had balanced cultivation of competitive export industries and created domestic opportunities for less competitive sectors. Export-orientated firms often were uncomfortable with domestic arrangements, owing to potential trade friction and the domestic costs of corruption, but the interweaving of economic interests and opportunities for gain muted exporter criticisms. This chapter examines the protected domestic sectors at the core of the notion of political business in Japan. The relationships between the financial sector, real estate, construction, and public works demonstrate the intertwined nature of political business relations in Japan. The institutional framework, moreover, has seemed to create more and more corruption with the opportunities it provided. In particular, non-establishment or underworld entrepreneurs exploited this framework to the mutual gain of themselves and politicians who increasingly needed more funds to compete with their rivals and so became more “creative” in seeking new sources of political finance. As a result, nearly all major leaders in Japan’s ruling Liberal Democratic Party (LDP) were implicated in corruption scandals by the late 1980s.
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It is true that the business establishment began to distance itself from the LDP in the early 1990s, and that this contributed to the fall of the party from power. However, this trend away from the LDP was soon reversed after the party returned to power in 1994 and the inescapable embrace of the LDP through its control of policy-making has meant that business has been compelled to return to support the party. There is hope that recent moves toward political and economic reform will eliminate the structural causes of corruption but, as this chapter concludes, the rise of new political leaders demonstrates the persistence of structural corruption in Japan. This chapter has five sections. In the first section, I explain the broad pattern of links between Japanese politicians and business with an emphasis on the role of factions. In the second section, I focus on the policy context of these links – particularly the role of zoku policy tribes – while in the third section, I explore the role of these links in the distortions of the Japanese financial sector. In the fourth section, the political consequences of these distortions are explained, including perfunctory attempts are controlling corruption. In the fifth and final section, the conclusion is reached that despite attempts to root it out, political business corruption remains endemic in Japan.
Politicians and business interests Differing industrial interests in the 1950s championed different political parties, namely the Liberal Party and the Democratic Party. Liberal Party leaders tended to have strong connections with light industry and the financial elites while the Democratic Party tended to be backed by heavy industries, particularly those associated with defense. The policy orientations of the two parties reflected and reinforced these associations. However, the Liberal Party was fighting a losing battle and the Democratic Party growing stronger as the bureaucracy – encouraged by Democratic Party politicians – sought to wind down light industries such as textiles and build up heavy industry such as automobiles, steel and chemicals. The merger of the two parties into the Liberal Democratic Party (LDP) in 1955 was a direct consequence of overwhelming business pressure to reconcile these differences. The merger avoided a showdown between industrial sectors by combining both interests into one party. In addition, the Socialists had already merged into one party in 1955, and business was concerned that the conservatives achieve unity in the face of the Socialist challenge, fearing the temptation for the Democratic Party to ally with the Socialists, as in the coalition governments of 1947–8. One of the consequences of the merger of the two conservative parties was the emergence of increasingly organized factions within the new party. Conservative party leaders had often been sources of political finances for their followers before 1955, but the formation of a single party led to the consolidation of party leaders’ control over access to political finance and to government posts. As a result, membership in one of a small number of
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leadership factions became a prerequisite for political success in the ruling party in Japan after 1955. As business channeled funds through faction leaders, the role of factions was further strengthened. However, the formation of factions did not immediately alter earlier patterns of business associations with individual politicians. For example, when Nobusuke Kishi became Prime Minister (1958–60), he maintained business connections with his classmates at Tokyo University, colleagues from the days he spent in building up the industries of Japanese-occupied Manchuria (1905–45) and the industries he worked with as wartime Minister of Munitions (Hara 1995: 237). Steel companies were an important source of support for Kishi along with the Sumitomo group of industries (Iyasu 1984: 107), and his strong advocacy of Japanese rearmament reinforced the heavy industry bias in his funding support. In contrast, Kishi’s successor Hayato Ikeda (Prime Minister 1960–7) was a former Finance Ministry bureaucrat and direct heir to the Liberal Party with strong connections with the financial services sector, especially brokerage houses, and light industry (Tadamiya 1963: 229). Other faction leaders had similar patterns of business ties (Iyasu 1984: 107). The continued dominance of the LDP, solidified in General Elections in 1958 and 1960, along with the potential threat of Socialist gains with continued urbanization, compelled the main business association, Keidanren, to act as a conduit for political donations to the LDP with the formation of the Kokumin Seiji Kyokai (People’s Political Association) in 1961. Keidanren is a federation of business organizations, and each of its constituent organizations was expected to provide a share of funds based on the economic strength of its constituent members. The money raised was channeled directly to the LDP; funding sent to other parties was negligible. More importantly, individual industry associations and firms continued to supply an even greater amount to individual politicians, and in particular, to faction leaders, such as Kishi, Ikeda and Eisaku Sato, who were potential and actual Prime Ministers (Iyasu 1984: 107). With generous funding, the LDP could stave off the threat from the left, and individual industries and firms could also try to influence politicians to support their interests at the same time. Consistently high levels of economic growth meant that there was a lot of money available to give to politicians. Ikeda’s famous “Income Doubling Plan” which boosted the Japanese economy in the high-growth 1960s, involved massive government spending on public works, often associated with the boom surrounding the hosting of the Olympic Games in Tokyo in 1964. The construction industry and related industries benefited directly from these projects. Financial services and other service industries, though heavily regulated by the government, enjoyed a large measure of protection from both domestic and foreign competition by restrictions on new entry of firms and foreign access to the Japanese market. Since most firms thus gained in some way from the post-war institutional framework, they were happy to make political donations to the LDP.
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Despite this system, or perhaps because of it, high growth continued under Ikeda’s successor Sato (1967–72). Sato reverted to Kishi’s pattern of funding, in part because of the connections bequeathed to him by his brother Kishi, and in part because of his relatively pro-military credentials from his days as a bureaucrat in the pre-war and wartime Transport Ministry. Sato was also a former Liberal Party leader and educated at the prestigious Tokyo University so he maintained good relations with a range of industries, though his “hawkish” inclinations still attracted more support from heavy industries, especially those with defense production connections. During Sato’s administration, the so-called “Black Mist” scandals occurred, in which several LDP politicians were implicated in dubious sales of public lands and the questionable use of public funds. Sato himself had been implicated in a shipbuilding industries scandal in the mid-1950s and was saved from prosecution only by the intervention of the Liberal Party Home Minister who blocked his arrest and indictment despite public outrage. Despite these scandals, however, Sato continued in office to be one of the longest-serving post-war prime ministers and thus allegations of corruption never ultimately harmed his career.
Kakuei Tanaka: an exemplar, not an exception The impact of dubious sources of political finance on Japanese politics became clearly more noticeable during the rise and fall of Sato’s successor, Kakuei Tanaka (1972–6). Tanaka was a rare former businessman among the former bureaucrats of the LDP leadership. Given his humble origins and lack of bureaucratic or other central government connections, Tanaka had to be especially creative in exploiting any possible sources of money. He established a reputation for “getting things done”; for example, when as Finance Minister in 1965 he saved Yamaichi Securities from collapse. Long before his indictment on bribery charges in the Lockheed scandal in 1976, Tanaka had been involved in dubious land deals. His involvement in real estate and construction, and the related areas of financial services and public works, have been at the center of corrupt political business links in Japan. For example, Tanaka became president of the Nihon Denken in 1961, a company which controlled a capital fund of prospective home owners’ savings held in trust to finance housing construction. In essence, the firm was a private housing construction cooperative. Tanaka decided to use the capital and unsold land as collateral to speculate in real estate and the stock market. He created ghost companies to hide his direct involvement, and he used his position in government to control sales and purchase of government land to take advantage of several lucrative government land deals in the early 1960s. For example, his ghost companies made massive profits from the siting of a major dam project, a nuclear power plant, and a Japanese university. Tanaka also used his influence to the benefit of his business associates. For example, he enabled Kenji Osano to buy government land in the central
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Toranomon area of Tokyo from which Osano earned 2.7 billion yen in profits. Four months later, when Tanaka’s company Nihon Denken was in trouble, Osano bought the firm by paying 160 yen for shares that were valued at only 50 yen each (Tachibana 1982: 87). Tanaka’s sales of public land while finance minister far outstripped that of previous incumbents in the post, by as much as six times (Tachibana 1982: 85–7). Tanaka’s business and fundraising success was eventually used in the fight for the post of Prime Minister in 1972 against his main rival Takeo Fukuda. Fukuda’s background was the opposite of Tanaka’s. Fukuda had been educated at the elite Tokyo University, worked as a bureaucrat in the powerful Ministry of Finance, and was the candidate supported by Japan’s business establishment. The flow of funds to LDP MPs to persuade them to support one or the other of the candidates was unprecedented. In the end, Tanaka won and is believed to have done so in part by outdoing his rival in the collection of illicit funds, even though Fukuda officially collected more in legally reported funds. Once in power, the business community grudgingly accepted Tanaka. In some respects, Tanaka was very good for business. He had come to power on a platform of a radical redevelopment of Japan which involved a decentralization of industry away from major cities such as Tokyo to less developed rural areas of Japan. The rural areas also happened to be the key support base of the LDP and the massive public commitment to infrastructure improvements provided unprecedented opportunities for gain on the part of construction companies and real estate speculators who purchased potential sites where industry might be relocated. Established firms, too, could benefit from the improved infrastructure and incentives to develop greenfield sites in rural areas. Japan’s skyrocketing land prices took off in this period. Unfortunately for Tanaka, his massive government spending plans ran into trouble almost immediately as a result of the first oil crisis and the breakdown of the Bretton Woods system of fixed exchange rates. Moreover, Tanaka’s dubious fundraising practices began to be exposed in the press, and internal opposition in the LDP forced him to resign. He was further discredited after leaving office when he was indicted and convicted of bribery in the Lockheed scandal, where he agreed to intervene on behalf of the Lockheed corporation in the purchase of airplanes for the Japanese government. In the aftermath of Tanaka’s fall and the Lockheed scandal, new laws were introduced in 1975, requiring stricter reporting of campaign contributions. The leader of the Japan’s main business federation, Keidanren’s Toshio Doko (former chairman of the Tokyo Electric Company), even suggested that organized business funding of politicians should stop altogether. The problem was, however, that the competition for factions continued to be intense and their need for funds continued unabated. Indeed, Tanaka’s style of politics accelerated and deepened the process of structural corruption since all factions in the LDP were compelled to emulate the aggressive fundraising activities of the Tanaka faction to compete or even survive. Thus, the
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dependence of a party leader on one set of industries or individual business sponsors was supplemented with a wider base of companies and individuals, particularly from the real estate and construction industries. These new sources of support were cultivated by a systematic form of interest politics which, like Tanaka’s ambitious policies to restructure Japan, relied on massive government initiatives. Business benefited and it rewarded politicians for creating the opportunities. However, the indiscriminant search for business sponsors also led politicians to follow Tanaka’s example and become more deeply involved with dubious characters, as had Tanaka himself. This led many politicians more deeply into the policy-making process to benefit of their political business allies, and ultimately, the politicians themselves.
Policy-making, “zoku” policy tribes, and interest politics Before turning to an examination of the role of factional policy tribes (zoku) in the formation of policies to cultivate business support, brief mention should be made of the role of the Japanese bureaucracy in the policy-making process. There is a strong popular perception that the Japanese bureaucracy plays the predominant role in policy-making in post-war Japan. This view has been reinforced, if not created, by Chalmers Johnson’s study of the role of the Ministry of International Trade and Industry (MITI) in the creation of the Japanese economic miracle (Johnson 1982). Another recent study has examined the ways in which the powerful Ministry of Finance manipulated politicians in order to realize the implementation of an unpopular new consumption tax in Japan in 1988 (Kato 1994). It would be a mistake, however, to view the bureaucracy as the driving force in the policy-making nexus between business and politics in Japan. In fact, the opposite has also been argued. Ramseyer and Rosenbluth (1993) argue that the politicians are really the principle players but allow the bureaucrats, as agents, leeway in the formulation and implementation of policy. They insist that “LDP leaders both set the basic contours of economic regulation and constrain their bureaucratic agents effectively enough so that they can rely on them to perform politically sensitive jobs” (Ramseyer and Rosenbluth 1993: 140). The truth is more often between the two extremes of bureaucratic and political control, but the fact is that bureaucrats are involved in questionable arrangements and have benefited from them as much as politicians (Babb 1995: 546–7). It is the politicians, however, who have exploited policy-making and regulatory potential to obtain political finance. Given the range of economic interests in most of Japan’s major industrial groups, many firms found areas where government contracts and programs provided profitable opportunities. The politics of creating these opportunities, through the manipulation or development of new government programs, led to the emergence in the 1980s of so-called zoku giin (literally, “tribe MPs”) who specialized in a given policy
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area and cultivated bureaucratic expertise in that area through experience in related posts in the LDP Political Affairs Research Council and the government. Zoku MPs used their specialized knowledge and connections to bring concrete benefits to their constituents and to their business supporters as well as to raise funds and mobilize resources from the industries connected with the policy area. Iwai and Inoguchi’s seminal study (1987) of the zoku phenomena concentrates on 11 main areas of activity: commerce, agriculture, fisheries, transport, construction, welfare, labor, education, posts and telecommunications, finance, and defense. While the distribution of zoku expertise across factions in the LDP was uneven, the study clearly demonstrates the ability of the Tanaka faction to dominate the most lucrative zoku niches. As Table 10.1 shows, the Tanaka faction dominated the construction and posts zoku, but also had a strong presence in commerce, transport, welfare, finance, and defense. To a degree, this is a function of size: the Tanaka faction is the largest while the Komoto faction and MPs not affiliated to a faction are relatively few in number. Nonetheless, the Tanaka faction was not much larger than its three main rivals – Kiichi Miyazawa, Yasuhiro Nakasone, and Shintaro Abe. The widespread involvement of all factions in commerce, agriculture, and transport is an indication of the gains to be made for local constituencies and individual MPs from policy knowledge of the area. Less lucrative areas of zoku activity, such as welfare, education, or labor, on the other hand, are motivated by other factors, such as right-wing ideology in the case of the Nakasone faction’s interest in education. Not surprisingly, the weakest faction, that of Toshio Komoto, was also the least involved in zoku politics. The Tanaka faction’s connections with the construction and postal service were the most lucrative of the zoku networks. Construction has been an ideal Table 10.1 Zoku MPs and factions (Upper and Lower House MPs), 1987
Commerce Agriculture Fisheries Transport Construction Welfare Labor Education Postal Finance Defense
Tanaka
Miyazawa
Nakasone
Abe
Komoto
None
34.1 13.5 11.1 28.0 68.0 29.2 16.7 9.5 56.3 22.7 28.6
14.6 16.2 44.4 8.0 15.6 37.5 38.7 0.0 12.5 31.8 9.5
26.8 29.7 22.2 16.0 9.4 12.5 22.2 33.3 6.3 18.2 14.3
22.0 21.6 0.0 36.0 3.1 16.7 16.7 23.8 12.5 22.7 33.3
2.4 13.5 11.1 8.0 0.0 4.2 5.6 19.0 12.5 4.5 4.8
0.0 5.4 11.1 4.0 3.1 0.0 0.0 14.3 0.0 0.0 9.5
Source: Iwai and Inoguchi (1987), cited in Babb (2001). Note All figures are percentages of total zoku MPs.
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sector since policy decisions about the scale, location, and contracting of public works projects can often be influenced by policy decisions in which construction zoku can become involved. Indeed, it was usual practice for construction companies to reward the Tanaka faction a percentage of a public works contract as a “kickback” for getting the project approved. The “bubble” economy of the late 1980s saw this pattern of political business relations expand throughout Japan beyond the Tanaka faction.
The financial sector and corporate development In a very real sense, then, the “bubble economy” was an extension of Tanaka faction politics on a large scale. The starting point for the bubble was the very understandable concern of the Japanese government for the ability of industry to adjust to appreciation of the value of the yen after the Louvre and Plaza accords. In order to permit Japanese industry to relocate its low-wage manufacturing overseas, mainly to Southeast Asia, and create new highervalue added enterprises to re-employ displaced workers, the Bank of Japan set interest rates very low – with adjustment for inflation, effectively zero or less than zero. Firms did transfer production overseas and create new enterprises, but the availability of effectively free money fueled speculation in real estate and the accumulation of massive corporate debt backed by artificially inflated assets. Government policies, particularly those associated with the Tanaka faction, and its successor faction of Noboru Takeshita, created conditions in which the bubble was expanded even further. For example, the government of Japan passed a law to encourage the development of “leisure” facilities in an effort to respond to foreign criticism that Japanese employees work too long hours and have no opportunities for leisure pursuits (Itagaki 1987: 181–200). The law also had the advantage of encouraging construction projects in rural areas, especially the bulldozing of agriculturally unproductive land for golf courses. Golf course club memberships, extremely expensive in Japan, were also floated to provide further finance and produced a bubble market of their own. Into this environment entered Japanese organized crime (yakuza). The yakuza were especially active in these leisure development and other similar projects. They borrowed large sums, raised further finance through sales of memberships and equity shares, and then the money disappeared and the projects eventually ground to a halt. It is estimated that more than 40 percent of the unrecoverable bad loans held by financial institutions in the current economic crisis in Japan can be traced back to the yakuza (Yomiuri Shimbun 31/3/99). This might seem an unfortunate by-product of the bubble economy, but it is important to realize how the yakuza were an integral part of the bubble and deeply involved with both politicians and major firms in Japan. Moreover, gangsterism has a long association with the construction industry and real estate which were at the center of the bubble economy and involved most LDP
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constituency support organizations. Yakuza or their imitators were useful in enforcing illegal bid-rigging agreements and kickbacks to politicians. They could also engage in intimidation to force landowners to sell land for largescale redevelopment projects. Many of these practices were widespread beyond organized crime and were well known, but were considered a problem only once financial institutions began to collapse. One prominent case as early as 1995 involved the Tokyo Kyowa Credit Association and Anzen Credit Bank which exposed the murky world of bubble finance. After weeks of investigation, three former credit union executives and the president of a related company were arrested on 27 June 1995 for arranging illegal loans which caused the collapse of these two financial bodies. The total of bad loans exceeded 110 billion yen and were initially related to the golf course and resort development companies, including some that received financing before local government planning approval had been obtained, though most of the projects were never initiated. In addition, there was insufficient collateral pledged for the loans so the prospects for recovery of the debt were small. The case had a political dimension as the former Minister of Labor, Yamaguchi Toshio, and a former Director General of the Defense Agency, Nakanishi Keisuke, as well as a senior bureaucrat in the Minister of Finance, Taya Hiroaki, were implicated in the scandal. Yamaguchi’s brother was a member of the board of directors of a country club with ties to the golf course development scheme and the Minister had acted as a joint surety on the loan. Nakanishi admitted renting an apartment from the former president of Tokyo Kyowa Credit, Takahashi Harunori, and acknowledged that a related firm had purchased 60 million yen of political reception tickets from him but denied he had done anything illegal or unethical. The bureaucrat Taya received a trip to Hong Kong on Takahashi’s private airplane, but as he had no direct responsibility for banking supervision at any time, he was only reprimanded. In fact, none of the politicians and bureaucrats implicated were arrested. This was not just an isolated incident as nearly all Japanese financial institutions were involved in such deals, either directly, or indirectly though the supply of funds to dubious financial institutions. Indeed, most politicians have connections to similar projects throughout Japan, including the winner of the 1999 leadership election of the main opposition Demcratic Party, Yukio Hatoyama, whose implication in a dubious development scheme in his constituency was discussed in parliament in 1991 (though at the time he was still an LDP MP). The key point is that both politicians and banks knew what was happening and were enmeshed in the world being created by these policies even if they tried to distance themselves from the more shadowy corners of that world. The problem spread from the banks throughout the entire corporate sector. Many major Japanese firms currently have debt problems because of dubious investments in land and property development or because they are caught in
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the spiral of debt with those who were entangled in financing the bubble encouraged by aggressive financing policies of financial institutions. Politicians were involved directly as facilitators or indirectly through policy initiatives around which many schemes were based. More significantly, financial institutions and related business provided large amounts of political finance to politicians. This is particularly well documented in the case of the LDP as a result of political campaign finance reports which are published each year in September. Banks and construction firms, and their related industry associations consistently dominated the list of the top 20 donors to the LDP until 1993. It was only after major scandals broke in 1992–3 involving politicians and the construction industry and 1997–8 when the bailout of financial institutions by LDP-led governments made it politically unpopular to receive bank contributions, that the banks and construction firms moved down the list.
Corruption, money, and political change As the end of the preceding section suggests, the legacy of the bubble began to manifest itself in an economic downturn and a series of scandals starting in 1992. The first consequence of these revelations was that the LDP split over the issue of political reform and the mainstream of the business community, led primarily by major export firm business leaders, finally found the courage to distance itself from their long-time ally. The key turning point in the LDP– business relationship came when the leaders of the Keidanren and Keizai Doyukai business federations indicated that they felt there was a need to rethink political contributions to the LDP which was reeling from the defection of large number of LDP MPs. The business community was anticipating a new conservative or centrist group which would enable it to end its dependence on the LDP. Even the construction industry, which had depended for so many years on profits from public work projects supplied by LDP politicians to their constituencies, was constrained from assisting the party as a result of a new scandal which involved the Tanaka/Takeshita faction “fixer” Shin Kanemaru, who was arrested and charged with tax evasion. The Zenkon (General Federation of Construction Companies) members ended up giving a limited number of incumbents in the LDP and the LDP break-away Japan Renewal Party approximately 2 million yen, or one-tenth of what most had requested, and much less than in previous elections. The construction industry had reason to be cautious. On June 29, the Tokyo Prosecutor’s Office arrested the mayor of Sendai and six top managers of four major construction companies for bribery. Since most major firms could also be implicated, the industry and its relations with the LDP, were in turmoil. This shift in business support was one of the main factors for the fall of the LDP from power in 1993. Removal from power was a serious blow to the LDP which in essence was a
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party of government which managed policy and divided the spoils of office among its supporters. Without access to power and patronage, the party experienced a crisis of confidence. For example, on August 24, the LDP held a meeting with industrial leaders to discuss the growing strength of the yen which was hurting exports and the sudden humility of the LDP surprised the participants. LDP Political Affairs Research Council chairman Ryutaro Hashimoto began his remarks to the group with the fear that “Now we have become an opposition party, the greatest concern we had was whether or not you would come or not” (Asahi Shimbun Political Bureau 1994: 37). These concerns were to a degree justified as on September 2, the largest Japanese business association, Keidanren, announced that it would no longer act as a conduit for campaign contributions to political parties from its member corporations. In the past, the many industry associations and interest groups had always thought it useful to have MPs from the LDP as their chairmen or in some other symbolic capacity, but given their opposition status, these links also came under question. When the anti-LDP coalition fell the following year, however, the business community began to reverse its earlier distancing from the LDP. It was obvious that the longer the LDP was in power and the longer it took for the anti-LDP opposition to return to office, the more business became wary of alienating the LDP. Keidanren began to encourage more individual business donations and individual business associations affiliated with Keidanren resumed contributions, even thought the amounts involved have been much less than in the past. Business was also swayed in its decision to more firmly back the LDP by the deepening economic crisis in Japan which first manifested itself in the bailout of the seven Housing Loan Corporations or Jusen. The Jusen were originally set up to provide reasonable mortgages in order for average Japanese to become homeowners, but during the bubble period, the corporations increasingly lent money for major development projects, including resort facilities and golf courses. Jusen received their funds from a variety of sources, including the major Japanese banks, but a large proportion of their finance was supplied through the Agricultural Cooperative Banks. The Agricultural Coop Banks were awash in money in the late 1980s and early 1990s and invested heavily in Jusen which were considered a relatively safe investment. The figure continued to grow until, by mid-1995, the Jusen held over 7 trillion yen in bad debt and were unable to pay their creditors, including the Agricultural Coop Banks which were in financial difficulties themselves for similar reasons. Given that the LDP was heavily involved at the local level in the agricultural cooperatives, they needed to act. Therefore the government proposed a reorganization plan for the Jusen which involved the injection of 685 billion yen of public monies as part of the restructuring, an amount which meant that every man, woman, and child in Japan would be forced to pay 5,500 yen in additional taxes to save these financial institutions.
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The opposition demanded full disclosure of Finance Ministry information on the scale of the crisis, and publication of the information created an uproar as the situation was far worse than the government had led the public to believe. A number of large loans had inadequate collateral to back them and some of them involved questionable deals between financial institutions and individuals associated with organized crime. However, the main goal of the business community was Japanese financial stability and the murky issue of the pursuit of responsibility for the crisis could not be allowed to endanger that goal. Business once again fully backed the LDP. Thus, a shift of business away from the LDP helped to remove the party from power in 1993, and once out of power, business was able to operate more freely. Once the LDP returned to power, however, they had to be placated by the business community and the old relationship was resumed. Moreover, the growing economic crisis led business to support LDP efforts to bail out stricken financial institutions. LDP interests and those of business were so deeply tied with the troubled financial institutions that the rethink of the relationship between business and politicians was shelved indefinitely.
Conclusion: the unchanging role of “money politics” Evidence for suspecting that little will change in structural corruption in Japan is compelling. Business has always tended to develop an unseemly close relationship with the LDP as the perpetual party of government. With the lack of alternation of parties in power, as we have seen, these interest group links become fixed. These links are continuously being renewed. For example, the factional leadership of the LDP has been renewed with the influx of dynamic new leaders. However, each of these leaders have prominent backgrounds as members of zoku policy tribes. Moreover, the new stricter rules governing political fund raising and the provision of public financing for political parties have not stopped allegations of serious impropriety. At the end of 1999, LDP only reluctantly passed legislation prohibiting business and interest group contributions to individual MPs, and left a large loophole by making it possible for businesses to make donations to local party branches which are dominated by individual MPs. It is not surprising then that all of the new major faction leaders have been implicated in past political contribution scandals. For example, in January 1996 it was alleged by the leader of his local constituency organization that the then LDP Party Secretary Koichi Kato had received 1 million yen illegal campaign contributions from a failed leisure complex developer who had been convicted of bribing public officials. This did not stop Kato from becoming the new leader of the Miyazawa faction in early 1999 and actively campaigning to replace the Prime Minister Keizo Obuchi in the summer of 1999 and trying to unseat Prime Minister Mori in late 2000. Similarly, Taku Yamazaki took control of the bulk of the old Nakasone faction in early 1999, despite his implication in a scandal in which a petroleum
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wholesaler received a total of 640 million yen over the period from 1992 to 1994 from Mitsubishi Petroleum and Mitsui Mining to act as their agent. Mitsui Mining also provided the wholesaler with an unrecovered 240 million yen short-term loan, all of which was not declared for tax purposes. The wholesaler admitted giving 20 million yen to Yamazaki as a political contribution. Yamazaki has indicated his interest in becoming prime minister at some point in the future. Finally, Yoshiro Mori who assumed control of the Hiroshi Mitsuzuka (former Abe) faction in early 1999 was one of the MPs involved in the Recruit scandal of 1988–9 in which he obtained a 10 million yen profit when the Recruit shares he received were subsequently listed on the Tokyo stock exchange. Mori has played a balancing role between the faction of the Prime Minister Obuchi and the ambitious Kato and Yamazaki factions. It was Mori who became prime minister in early 2000 as a result of the sudden death of Obuchi. Thus, each of these three faction leaders – Kato, Yamazaki, and Mori – were the key figures who have made the Hashimoto (1996–8) and Obuchi (1998–2000) governments possible. They have been joined by the former Tanaka/Takeshita faction, to which Hashimoto and Obuchi have belonged, the former of whom is the current faction leader. Indeed, the Tanaka faction and its successors have been instrumental in the selection of most of the Prime Ministers since Tanaka himself resigned as a result of the Lockheed scandal. Whatever the political fate of any of these key leaders, the key point to be made is that LDP leaders continue to rely on contributions which – even though not always illegal in themselves – sometimes rely on illegally obtained funds in which Japan was awash especially in the period of the bubble economy. Japanese politicians created the bubble through their economic policies and reaped the benefits in various ways, both straightforward and dubious. There is no indication that these practices have ended, and the process of deregulation and continuation of massive public works spending to stimulate the stagnant Japanese economy, not to mention persistent allegations of impropriety, indicate that past practices continue unabated. In this way, it is possible to see the role of the two key issues raised in the introduction to this volume: the politics of the state and the politics of the development of the corporate sector. The role of the politics of the state is important in Japan because politicians have created connections of mutual interest and expertise to exploit the powers of the bureaucracy for the gains of business clients. This is the core of the zoku phenomenon of Japanese interest politics discussed above. When these connections are used for particularistic gain, it is considered corruption, but when entire sectors – as a financial services, real estate, and construction – are intertwined in a policy nexus which produces a similar (if structural) result, the situation is not straightforward. This is why some observers have resorted to the term “structural corruption” in the Japanese context, though in some sense this term is also unsatisfactory. The second issue of the development of the corporate sector is similarly
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difficult to place in a simple category. When a dynamic corporate sector is produced as a result of collusive practices and policies, then it is considered an economic miracle, but when it produces economic collapse (as in the bubble economy), then it is viewed as a failure caused by excessive political interference in the corporate sector. In fact, politics and the corporate sector are often difficult to separate in Japan. Nearly every sector has been politically involved (promoted and protected) at some point of time in Japan’s modern history, and at any given moment, some sectors are more “political” than others. In a sense, all business in Japan is political business. Yet, this may be true in every country. It is only more apparent in those countries in which the institutional structure of the state has yet to insulate business from deep involvement in politics and policy-making. In Japan, as in most of East Asia, the political route for business has been attractive if not necessary. Indeed, the record of the post-war period in Japan indicates that corruption has become more endemic in spite of, and even due to, the political involvements of a dynamic and economically successful Japanese corporate sector. Over time the relationship between business and politicians has gone from being simple ties of mutual interest to a structural compulsion to find new ways to create opportunities for gain. There is strong evidence to suggest that political contributions by businesses to political parties (and politicians) will continue to be made with the continued hope than policies will favor specific business interests. Current moves toward deregulation of the economy in Japan may create new rules, but these rules will also provide new opportunities for impropriety and dubious practices.
References and further reading Asahi Shimbun Political Bureau (1994) Renritsu Seiken Mawari Butai (Coalition Government Behind the Scenes), Tokyo: Asahi Shimbun Sha. Babb, J. (1995) “Japan’s Ministry of Finance and the Politics of Complicity,” Review of International Political Economy 2(3). —— (2001) Business and Politics in Japan, Manchester: Manchester University Press. Hara Yoshihisa (1995) Kishi Nobusuke – Kensei no Seijika (Nobusuke Kishi – An Authorative Politician), Tokyo: Iwanami Shoten. Itagaki Hidenori (1987) Jiminto no Senkyo Himitsu (The Secret of LDP Election Success), Tokyo: Sanichi Shobo. Ito Hirotoshi (1993) Zenekon Giwaku: Boro sareta dango no ura joho (The General Construction Scandal: Publicly Disclosed Inside Information on Collusive Practices), Tokyo: Seikai Shuppan Sha. Iwai Tomiaki and Inoguchi Takeshi (1987) Zaikai no Kenkyu (A Study of Business), Tokyo: University of Tokyo Press. Iyasu Tadashi (1984) Jiminto – Kono Fushigi na Seito (The Liberal Democratic Party – That Strange Party), Tokyo: Kodansha. Johnson, C. (1982) MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford, CA: Stanford University Press. —— (1986) “Tanaka Kakuei, Structural Corruption and the Advent of Machine Politics in Japan,” Journal of Japanese Studies 12(1).
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Kato, J.O. (1994) The Problem of Bureaucratic Rationality: Tax Politics in Japan, Princeton, NJ: Princeton University Press. Murobushi Tetsuro (1981) Oshoku no Kozo (The Structure of Corruption), Tokyo: Iwanami Shinsho. Ramseyer, J.M. and F. McCall Rosenbluth (1993) Japan’s Political Marketplace, Cambridge, MA: Harvard University Press. Tachibana Takashi (1982) Tanaka Kakuei Kenkyu Zenkiryoku (A Study of Kakuei Tanaka: The Full Record), Tokyo: Kodansha. Tadamiya Eitaro (1963) Showa no Seijikatachi (Politicians of the Showa Era), Tokyo: Kobundo.
Index
Abdulrahman Wahid 16, 240–2, 243–4 Abe, Shintaro 330 Aburizal Bakrie 224–5, 232–4, 235–6 Adi Sasono 233–4, 236, 239 Adisai Bodharamik 216, 264 Agricultural Cooperative Banks 334 Akbar Tandjung 238 Akorn Hoontrakun 268 Amata group 263 Amin Shah Omar Shah 88, 100 Amnuay Wirawan 270 Anand Panyarachun 264 Ananda Krishnan, T. 86, 90, 91, 108 Andi Ghalib 237 Anwar Ibrahim 2, 76, 86, 87–90, 97, 98–9, 101–2, 103, 104–9, 111 Asia Trust group 253 Association of Indonesian Muslim Intellectuals (ICMI) 224 Astra group 218 Aw Boon Hwa 306 Bakrie group 232–3, 235–6 Baktimu Sdn Bhd 92 Bakun Dam 91, 98 Bambang Subiyanto 235 Bambang Trihatmojo 221, 223, 225, 227, 228 Bambang Wiyogo 233 Ban Chang group 263 Bangkok Bank 253–4, 255, 257–8, 260, 263, 269, 271, 272, 277, 285, 287 Bangkok Bank of Commerce (BBC) 270–1, 287 Bangkok Land group 264
Bangkok Metropolitan Bank 253, 271–2 Banharn Silpa-archa 8, 264, 266, 270, 280, 287 Bank Bali 238, 240, 243 Bank Bumiputra Bhd 92, 93, 102, 109 Bank Central Asia (BCA) 234–5 Bank Danamon 236 Bank Lippo 235 Bank Nusa Nasional 236 Bank of Asia 253 Bank of Ayudhya 253, 258, 260, 272, 277 Bank of Thailand 251, 252, 255, 271, 272, 283 Bank Sinopac 122, 124 Baramuli, Arnold 238 Barisan Nasional 82, 83, 84, 91, 107 Barisan Socialis 302–3, 309–10 Beijing Capital Steel and Iron (Shougang) 167–8 Berjaya Group 87, 90, 91, 92, 126 Bhichai Rattakun 259, 268 Bimantara group 221–2, 223 Boonchu Rojanastien 260 Bulog 233–5, 240–1 Bulog-gate 240–1 Camdessus, Michael 229 Celcom Sdn Bhd 93–4 Center for Strategic and International Studies (CSIS) 230, 241 Central Provident Fund (CPF) 304, 317, 318 Central Investment Holding Company 121, 125, 141–9
340
Index
Chang Myong 50, 187 Charoen Pokphand (CP) group 14, 73, 255, 264, 269, 276, 278, 279, 281, 285 Chat Pattana Party 264, 266, 272 Chat Thai Party 8, 257, 258, 260, 263, 264, 266, 270, 280, 281, 284, 287 Chatri Sophonpanich 285 Chavalit Yongchaiyudh 2, 15, 264, 266, 268, 269, 270, 272, 280, 281, 287, 289 Chen Cheng 122–3 Chen Shuibian 115 Chi Sheng Industrial Holding Company 125, 141, 144, 146 Chiang Ching-kuo 118, 131, 135, 136 Chiang Kai-shek 118, 129, 131 Chiloo Enterprises 121, 142 China 7, 23–4, 34, 51, 55, 118, 129, 130, 131, 155–78; and collective enterprises (COEs) 167, 170–2, 173, 174, 176–7; and international investment and trust corporations (ITICs) 169, 170; and private-owned enterprises (POEs) 172–4, 176–7; and state-owned enterprises (SOEs) 156, 158, 159–60, 161–8, 169, 170, 171, 172, 173, 174–5, 176–7; and township and village enterprises (TVEs) 156, 158, 159–60, 169, 170–1, 172 China International Trust and Investment Corporation (CITIC) 169 Chinese Communist Party (CCP) 7, 24, 155–6, 175–6, 178 Ching Teh Investment Holding Company 125 Chong, Joseph 86, 90 Choo Wee Khiang 304 Choonhavan, Chatichai 258, 261–3, 266, 267, 279 Choonhavan, Phin 254, 258 Chuan Leekpai 2, 263, 264, 267, 270, 274, 276, 277, 280, 284, 287, 289 Chun Doo Hwan 184–5, 186, 187–8, 189, 195, 196, 197–8, 199, 204, 207 Chung Hsing Bills Finance Company (CHBFC) 136 Chung Ju Yung 8, 199–200, 206
Chung Mong Hun 200 Chung Mong Jun 199 Chung Mong Koo 200 Chung Se Yung 199, 206 Citra Lamtoro Gung group 222 Cold Storage Bhd 88, 92, 97 Corrupt Practices Investigation Bureau (CPIB) 303–4 corruption: in Africa and Latin America 37–55, 57; definition 3–5, 10–11, 14–18, 37–9; degenerative corruption 22, 37–45, 46, 52, 53, 54, 55, 57; and democracy 14–18; and development 34–61, 56–7, 75–7; developmental corruption 22, 45–55, 56, 57–8; in the United States 64–5 Daewoo 10, 13, 190, 193–5, 197, 198, 203, 206, 212 Dahua Securities 122, 124 Daim Zainuddin 86, 87–90, 91–7, 98, 99, 101, 103–4, 105, 107–9 Democrat Party 257, 259, 264, 265, 268, 272, 275, 276, 281, 287 Democratic Action Party (DAP) 83, 97 Democratic Liberal Party 188, 207 Democratic Progressive Party (DPP) 115, 118, 127, 132, 137 Deng Pufang 167 Deng Xiaoping 161, 167, 168, 169 Deng Zhifang 168 Development Bank of Singapore (DBS) 304, 317 developmental state model, 46–50, 55, 62–4, 66–70, 72–3, 116–17, 175; and Korean model 182–91, 203–4, 211–12; and Singaporean model 302–6 Dhanin Chearavanont 14, 276, 278, 280, 281–2, 285 Djoko Chandra 238 Drucker, Peter 63 Economic Development Board (EDB) 304, 310, 313, 314, 316, 317, 318 Estrada, Joseph 15 ethnic Chinese: in business in Southeast Asia 50–1, 74–5, 76; in Indonesia 53, 54, 216–17, 218, 219, 224, 225, 229,
Index 341 230–4, 235, 241, 243; in Malaysia 53, 76, 83, 84–6, 90–1, 96, 97–8, 103–4, 110; in the Philippines 53; in Thailand 253, 255, 257, 282 Evans, Peter 37, 53, 63, 72–3, 116 Faber Bhd 92 factionalism: the concept 7–8; in Japan 7–8, 17, 132, 330, 331, 333, 335–6; in Malaysia 7–8, 97–9, 111; in the Philippines 8; in Taiwan 8, 131–5; in Thailand 8, 263–4, 266, 280, 281, 287 Federation of Korean Industries (FKI) 203 Feisal Tanjung 230 Fiat 193 financial crisis, 1997 1–2 First Pacific group 14 Fleet Group 92, 93 Fleet Holdings Sdn Bhd 92, 93, 96, 97 Ford 193, 194 Fukuda, Takeo 328 funding political parties 18–22, 56: in Indonesia 20; in Japan 20, 21; in Singapore 20–1; in South Korea 20; in Taiwan 20, 21; in Thailand 21, 267–72, 273–4, 284, 288 General Motors (GM) 193, 194 Gerakan Rakyat Malaysia 83, 85 Ghafar Baba 90, 98 Ginandjar Kartasasmita 233, 235 Goh Chok Tong 310, 311, 321 Goh Keng Swee 309, 310 Golkar 16, 228–9, 237, 238, 239–40 Grand Cathay Securities Corporation 121 Grand National Party 209 Granite Industries Bhd 87, 90, 97–8, 103 Guan Zhong 131, 132 Guangdong International Trust and Investment Corporation (GITIC) 169, 170 Guanghua Investment Holding Company 133–4 Habibie, B.J. 16, 24, 220, 224, 229–30, 231, 232–3, 235, 236–7, 238, 240, 242–3
Halim Saad 87, 91, 93, 96–7, 98, 100, 101, 102, 108 Hanbo 16–17, 189, 204–5, 208, 210 Hanguk Fertilizer Company 198 Hariyadi B. Sukamdani 236 Harmoko 226–7 Hartono 226–7 Hashimoto, Ryutaro 334, 336 Hemaraj group 263 Hipmi (Himpunan Pengusaha Muda Indonesia) 224, 232, 233, 236 Hong Leong group 306 Hong Yiah Seng group 255 Housing and Development Board (HDB) 304, 308, 314, 315, 317, 318 Hua Hsia (Xia) Investment Holding Company 125, 141, 142, 143 Huaren Holdings Sdn Bhd 85 Humpuss group 222, 223 Hutomo Mandala Putra see Tommy Suharto Hyundai 8, 10, 13, 188, 190, 193–5, 197, 198, 199–200, 203, 206, 207, 208, 210 Ibnu Sutowo 221 Ikeda, Hayato 326, 327 Indofood 226 Indonesia 2, 6, 9, 11, 12, 13, 14, 17, 18, 20, 22, 24, 50, 53, 54, 55, 63, 70–1, 77, 107, 126, 301; and corruption (and KKN factor) 76, 225–9, 237–42, 240, 241, 242, 243–4; and political business 16, 75, 216–44; and pribumi enterprises 216, 218, 220, 221–4, 236, 243; and Sino-Indonesian enterprises 216, 218, 219, 220, 221, 222, 223, 224, 229, 233, 235, 236, 242–3; and state-owned enterprises (SOEs) 216, 219–20 Indonesian Bank Restructuring Agency (IBRA) 235, 236, 241–2 Indonesian Democratic Party (PDI) 237 Indonesian Democratic Party of Struggle (PDI-P) 240, 241 International Monetary Fund (IMF) 62, 176, 184–5, 186, 227–9, 230, 236, 238 Ishak Ismail 88, 98–9 Jakarta Stock Exchange (JSE) 12
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Japan 2, 6, 7, 8, 11, 17, 20, 21, 22, 25, 34, 35, 50, 52, 63, 65, 66–9, 70, 71–2, 75, 116, 118, 119, 121, 122, 126, 128, 156, 196, 197, 198, 203, 206, 207; and corruption 324, 333–5, 336–7 Jasmine group 264, 269, 285 Jen Hua Investment Holding Company 125, 141, 147, 149 Johnson, Chalmers 9, 36–7, 46–7, 329 Jurong Town Corporation (JTC) 304, 308, 314, 315 Jusuf Wanandi 230 Kadin (Chamber of Commerce & Industry) 224–5, 232, 235 Kamaruddin Jaffar 89, 98–9 Kamaruddin Mohamad Nor 89, 99 Kanemaru, Shin 333 Kang Hua Industrial Corporation 167 Kanjanapas family 264 Kaset Rojananin 268 Kato, Koichi 335, 336 Keidanren 52, 203, 326, 328, 333, 334 keiretsu 52, 126, 164 Kia 190, 193–5, 225 Kim Bong Ho 209 Kim Dae Jung 2, 186, 187, 188–9, 190, 191, 194, 198, 200, 201–3, 207, 209, 210 Kim Jong Pil 188, 189, 191, 209 Kim Yong Sam 2, 16–17, 185–6, 188–9, 194, 195, 198, 200, 201, 204, 205, 206, 207–8, 209, 210 King Dom Investment Holding Co. 141, 142, 143 Kishi, Nobusuke 326, 327 KMT, Inc. 23, 115–52 Komoto, Toshio 330 Korean Stock Exchange (KSE) 192 Krisdathanont family 264 Kristiadi, J.B. 230 Krung Thai Bank 272, 274, 277 Ku In Whoi 206 Kuala Lumpur Stock Exchange (KLSE) 12, 94, 95, 104, 110, 316 Kuang Hua Investment Holding Company 121, 122, 125, 141, 144, 145, 147 Kumbo 203, 209
Kuok, Robert 96 Kuomintang (KMT) 6, 9, 17, 21, 23, 50, 53, 77, 115–52 Kutche 209, 210 Kwangju uprising 187–8, 207 Lamsam family 253, 254, 277 Lamsam-Wanglee group 253 Land & General Bhd 87, 95 Lee Byong Chull 197–9, 206 Lee Ho Ching 318–19 Lee Hsien Loong 311, 315, 318, 319 Lee Hsien Yang 318 Lee Kong Chian 306 Lee Kuan Yew 302, 304, 309, 311, 315 Lee Kun Hee 198, 204 Lee Rubber group 306 Lee Soon Ja 207 Lee Teng Hui 118, 119, 129, 130, 131–2, 135, 136, 137, 138 Li Ka-shing 168 Li Peng 168 Lian Zhan 137, 138, 140 Liberal Democratic Party 6, 7, 8, 17, 21, 25, 52, 69–70, 132, 156, 324–30, 332, 333, 334, 335 Liem Sioe Leong 14, 16, 217–18, 226, 227, 228, 229, 232–3, 234 Lim, T.K. 86, 90 Ling Hee Leong 86 Ling Liong Sik 86 Lippo group 16, 218, 235–6, 239 List, F. 65, 66 Liu Taiying 122, 123, 124, 139 Lockheed scandal 327, 328, 336 Luan Buasuwan 253 Lucky Goldstar (LG) 10, 13, 197, 203, 206 McVey, R. 10 Mahaguna group 253 Mahathir Mohamad 2, 76, 82, 83, 86, 87–90, 91, 92, 97, 98, 100, 101, 103, 104–11 Malayan Banking Bhd 93, 102, 110 Malayan Communist Party (MCP) 302 Malaysia 2, 6, 7, 8, 9, 10, 11, 12, 13, 16, 17–18, 22, 23, 24, 50, 53, 63, 70–1,
Index 343 126, 301; and corruption 76; and political business 54, 73–4, 75, 82–113 Malaysia Airlines Bhd 87, 94 Malaysian Chinese Association (MCA) 83, 84, 85, 86 Malaysian Helicopter Services (MHS) Bhd 87, 94 Malaysian Indian Congress (MIC) 83, 84, 85 Marcos, Ferdinand 6, 15 Mar’ie Muhammad 228 Matsushita Electrical Co. Ltd 71 Mazda 193, 194 Megawati Sukarnoputri 240, 242 Metro group 255 Millennium Democratic Party (MDP) 190 Mirzan Mahathir 89, 96, 100, 101, 102, 105 Mitsubishi 65, 71, 193, 336 Mitsui 65, 336 Miyazawa, Kiichi 330, 335 Mohamed Sarit Yusoh 88, 98–9 Mohammad “Bob” Hasan 218, 222, 229 Mohd Noor Yusof 88, 102 Monetary Authority of Singapore (MAS) 314, 315, 319 money politics 3–6, 10–11, 16, 48–50, 56; in China 155–6; the concept 2–3; and electoral reform 18–22; in Indonesia 237–42; in Japan 17, 333–7; in Malaysia 17–18, 83; in Taiwan 133–5, 137, 140; in Thailand 21, 250, 263–72, 273–4, 282, 283, 284, 287 Mori, Yoshiro 335–6 Multi-Purpose Holdings Bhd 85, 90, 109 Murdani, Benny 241 Musa Hitam 90, 98, 105 Nakasone, Yasuhiro 330, 335–6 Narong Wongwan 266 National Semiconductor 71 National Trades Union Congress (NTUC) 303, 317 National Wages Council (NWC) 310 New Aspiration Party (NAP) 264, 265–6, 268, 269, 270, 280, 281, 284
New Economic Policy (NEP) 84–5, 86, 94, 108 New KMT Alliance 132 New Korea Party 189 New Party 132 new rich 4; the concept 1; in Malaysia 86–91; in Thailand 262–3, 279 New Straits Times Press Bhd (NSTP) 88, 92, 93, 97 Newin Chidchob 270 Obuchi, Keizo 2, 335, 336 Ong Eng Guan 309 Osano, Kenji 327–8 Osathanugrah family 264 Osotsapa group 264 Overseas-Chinese Banking Corporation (OCBC) group 306, 315 Overseas Union Bank 315 Pak Kwan Yong 209 Palang Dharma Party 264, 268, 280 Park Chung Hee 16, 50, 184, 186, 187–8, 191–2, 195, 196, 197–8, 199, 205, 206–7, 209 Partai Republik (Republican Party) 239, 240 Parti Keadilan Nasional 83, 106–7 Parti Se-Islam Malaysia 83 Peace and Democratic Party 188 People’s Action Party (PAP) 10, 25, 301–3, 306–10, 311, 315–16, 318, 320, 321 People’s Liberation Army (PLA) 155, 156, 167 People’s Sovereignty Party (PDR) 239 Peremba Bhd 87, 91–2, 93, 96 Pertamina 221 Phataraprasit group 264 Philippines 2, 6, 7, 8, 9–10, 11, 12, 13, 14, 22, 53, 63, 70–1, 74, 77, 122, 301; and political business 15, 55, 76 political business 22, 63, 64, 65; in context of East Asia 6–10, 56–7, 70–5; in China 155–78; definition 2–6, 35–7, 47–50, 53–4, 177–8; evolution of the concept 14–18; in Indonesia 216–44; in Japan 17, 324–37; in Malaysia 17–18, 75,
344
Index
82–113; in Singapore 301–21; in South Korea 182–214; in Taiwan 115–52; in Thailand 250–96 Prabowo Subianto 231 Pramarn Adireksarn 258, 260 Pramoj, Kukrit 257–8 Pramoj, Seni 257, 259 Prem Tinsulanonda 259–60, 261, 262 Probosutejo 217, 221, 228, 236 Promising Local Enterprise (PLE) program 313, 314 P.T. Bogasari 217 P.T. Mega 217 P.T. Timor Putra Nasional 225 Rachakhru group 254, 258 Ramos, Fidel 13, 15, 76 Rashid Hussain 88 Rashid Hussain Bhd 88, 102 Rattanarak family 253, 254, 277 Razaleigh Hamzah 97, 98, 105 Red Chips 158, 164–5, 169–70 Renault 98, 194 Renong 13, 87, 93, 96–7, 102, 105, 109 Rhee, Syngmon 50, 186, 187, 192, 196, 206 Riady family 16 Riady, James 235 Riady, Mochtar 218, 235 RJ Reynolds Bhd 87, 94–5, 96 Robison, Richard 216, 222 Roh Tae Woo 185, 186, 188, 189, 191, 195, 197–8, 199, 204, 207–8 Rohas Sdn Bhd 94–5 Rong Yiren 169 Ruentex 137 Ryutaro Hashimoto 2 Sahat Mahakhun 253 Salim, Anthony 235 Salim group 16, 218, 222, 235, 236 Samhak Distillery 210 Samsudin Abu Hassan 87, 97–8, 101, 103 Samsung 10, 13, 14, 190, 194–5, 197–9, 203, 207, 210 Sapuan 241 Sapura group 89, 96 Sarit 254–5, 256, 257
Sato, Eisaku 326, 327 Seagate Technology Inc. 71 Seda, Frans 235 Sempati Air 222 Setya Novanto 238 Shamsuddin Kadir 89, 96 Shinawatra group 73, 269, 278, 279–80, 281, 288–9 Sia Song 268 Siam City Credit Finance and Securities Plc (SCCF) 270 Siam Commercial Bank 264, 272, 277 Sime Bank Bhd 88, 92, 97, 102; also known as United Malayan Banking Corp Bhd (UMBC) and RHB Bank Sime UEP Bhd 92 Singapore 7, 9, 10, 11, 13, 18, 25, 34, 35, 36, 63, 71, 122, 126, 226; and corruption 303–4 (see also Corrupt Practices Investigation Bureau (CPIB)); and government-linked companies (GLCs) 301, 302, 304, 305, 307, 311, 314, 316, 317, 318, 319; and multi-national corporations (MNCs) 301, 302, 310, 321 Singapore Association of Trade Unions (SATU) 303 Singapore Chinese Chamber of Commerce and Industry (SCCCI) 308–9, 310 Singapore Federation of Chamber of Commerce and Industry (SFCCI) 311–12 Siti Hardiyanti Rukmana see Tutut Suharto Siti Hediati Hariyadi 226, 228 SK 10, 13, 203 Snoh Thienthong 266, 281, 287, 288 Social Action Party 257, 260, 267 Sofyan Wanandi 230, 241 Sondakh, Steve 233 Song Chuyu, James 131, 132, 135–7, 140 Soon Hua Seng group 255 Sophonpanich family 253–4, 255, 271, 277 South Korea 2, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16–17, 20, 22, 24, 25, 34, 35, 50, 52–3, 63, 66–9, 70, 71, 75, 77, 106, 116, 121, 122, 126, 128, 156, 225; and
Index 345 chaebols, 2, 16, 24, 52–3, 182–3, 184, 185, 186, 188, 189, 190, 191, 192, 194–203, 204, 205–6, 207, 208, 209, 210, 211; and corruption 76, 203–11; and Economic Planning Board (EPB) 185, 191, 203; and HCI policy 184, 186, 193, 195, 198, 199, 208; and “politics–economy collusion” 192, 204, 210, 212; and sunshine policy 200 Ssangyong 203 Star Publications Bhd 85, 87 Stock Exchange of Thailand (SET) 263, 267–8, 269 Sudwikatmono 217, 221 Suharto 2, 6, 11, 13, 16, 20, 24, 53, 54, 105, 216–18, 220, 221, 222–32, 236–8, 239, 242–3 Suharto, Tommy 222, 223, 225, 228, 229, 239 Sukarno 216, 221 Sukavich Rangsitphon 269 Sukree Potiratanangkun 256 Sun Yat-sen 117–18, 127 Supachai Panitchpakdi 268 Suryajaya family 241 Suryajaya, William 218 Suwondo 240–1 Sykt. Maluri Sdn Bhd 91–2 Taiwan 6, 7, 8, 9, 11, 13, 17, 20, 21, 22, 23, 24, 34, 50, 53, 63, 66–9, 70, 71, 77, 106, 110, 158; and political business 115–52; and state-owned enterprises (SOEs) 119, 120, 121, 126 Taiwan Polystyrene 121, 124 Taiwan Stock Exchange (TSE) 124, 136 Tajudin Ramli 87, 91, 93–4, 95, 96, 97, 98, 100, 101, 102, 108 Takeshita, Noboru 331, 333, 336 Tan Chee Yioun, Vincent 86, 90, 91, 100 Tan Lark Sye 309 Tan Siong Ke 218 Tan, Tony 209 Tanaka Kakuei 8, 327–9, 330, 331, 333, 336 Tanri Abeng 235 Tarrin Nimmanhaeminda 264, 277
Tat Lee Bank 315 Techaphaibun family 253, 254, 263, 271 Technology Resources Industries Bhd (TRI) 87, 93–4, 97 Temasek Holdings Ltd (THL) 305–6 Thai Farmers Bank 253, 254, 272, 275, 277, 288 Thai Rak Thai Party 2, 266, 276, 278, 279, 281–2, 284, 285, 286, 287–8 Thai Roong Ruang group 256 Thailand 2, 7, 8, 9, 10, 12, 13, 14, 22, 25, 50, 63, 70–1, 74, 75, 106; and corruption 15, 21, 55, 75–6, 250, 251; and political business 15, 54, 73, 250–96; and privatization 268–70, 279–80 Thaksin Shinawatra 2, 73, 250, 263–4, 266, 276, 278, 279–80, 281, 284–90 Thanong Bidaya 281 Thaworn Phornprapha 256 Therd Thai faction 264, 266, 280 Ting Pek Khiing 86, 90, 91, 97–8, 100, 103 Toh Chin Chye 309 Tong Kooi Ong 86 Toyota 71, 193 Tuntex 137 Tutut Suharto (Siti Hardiyanti Rukmana) 222, 225, 227, 228–9, 239 TV3 88, 92, 97 U Chuliang 253 Ucom group 269 Unification National Party (UNP) 199–200 Union Bank of Bangkok 253 United Development Party (PPP) 237 United Engineers (M) Bhd (UEM) 87, 97 United Liberal Democrats 189, 209 United Malays’ National Organization (UMNO) 6, 7, 10, 13, 73, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 96–7, 98, 99, 100, 101–2, 105, 106–9, 111, 302 United Overseas Bank (UOB) 315 United People’s Party 8, 17–18, 23 Uthane Techaphaibun 253
346
Index
Vijit Supinit 270–1 Wan Azmi Wan Hamzah 87, 93, 94–5, 96, 98, 100, 108 Wang Nam Yen 266, 287 Wardah Hafidz 238, 239 Wee Cho Yaw 310 World Bank 62, 65–6, 238, 250, 272, 306 Xu Lide 122–3, 139
Yang Jixiong 135, 136 Yeo Ning Hong 318–19 Yeo, Philip 318, 319–20 Yeo Seng Teck 304 Yeoh, Francis 103, 108 YTL Corporation Bhd 96 Yueh Sheng Chang Holding Co. 122, 125 Yutai Corporation 121, 124, 131, 142
Yahya Ahmad 87 yakuza 331–2 Yamazaki, Taku 335–6
Zhou Guanwu 167–8 Zhu Rongji 166 zoku 325, 329–31, 335, 336
