Emerging Economic Systems in Asia: A Political and Economic Survey

EMERGING ECONOMIC SYSTEMS IN ASIA This page intentionally blank EMERGING ECONOMIC SYSTEMS IN ASIA A political and e...

Author: Kyoko Sheridan

39 downloads 1727 Views 2MB Size Report

This content was uploaded by our users and we assume good faith they have the permission to share this book. If you own the copyright to this book and it is wrongfully on our website, we offer a simple DMCA procedure to remove your content from our site. Start by pressing the button below!
Report copyright / DMCA form

DOWNLOAD PDF

EMERGING ECONOMIC SYSTEMS IN ASIA

This page intentionally blank

EMERGING ECONOMIC SYSTEMS IN ASIA A political and economic survey

Edited by Kyoko Sheridan

ALLEN & UNWIN

Copyright © this collection Kyoko Sheridan 1998 The copyright in individual pieces remains with the authors All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. First published in 1998 by Allen & Unwin 9 Atchison Street St Leonards NSW 2065 Australia Phone: (61 2) 9901 4088 Fax: (61 2) 9906 2218 E-mail: [email protected] Web: http://www.allen-unwin.com.au National Library of Australia Cataloguing-in-Publication entry: Emerging economic systems in Asia. Bibliography. Includes index. ISBN 1 86448 297 4. 1. Asia — Economic conditions. 2. Asia — Commerce. I. Sheridan, Kyoko. 338.950 Set in 10/11 pt Sabon by DOCUPRO, Sydney Printed by South Wind Productions, Singapore 10 9 8 7 6 5 4 3 2 1

CONTENTS

Tables Contributors Abbreviations 1 Introduction Kyoko Sheridan The East Asian economies: industrial `models' for the region 2 Japan's economic system Kyoko Sheridan 3 Taiwan's economic success Fred Robins 4 Emergence and transformation of the South Korean model Sejin Pak

vii ix xi 1

PART I

The South-East Asian economies: second-tier Asian economies 5 The ASEAN economies: growth and change in newly emerging socio-economic systems Bruce McFarlane 6 The state and capitalist development in the Philippines Bruce McFarlane 7 Indonesia: the changing balance of commercial power? Colin Brown

9 45

78

PART II

119 144 180


8 Òverseas Chinese' business in South-East Asia Colin Brown PART III Market socialism in Asia 9 Market socialism in South-East Asia: economics, society and politics in Vietnam, 1975-96 Melanie Beresford and Bruce McFarlane 10 The Russian economy in transition: an overview Louis Haddad 11 China Richard Pomfret 12 Conclusion Kyoko Sheridan Index

vi

208

231 256 287 304 312

Tables 2.1 5.1 5.2

5.3 5.4 5.5 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 9.1

9.2 9.3

Possible future scenarios for Japan Growth rate of GDP in ASEAN (% per annum) ASEAN: Changing sectoral shares in GDP (%) as a macroeconomic guide to structural change, 1970-92 Water in the Manila system, 1984-93 Japanese investment in major Asian countries, 1982-93 Japanese percentage in total machinery imports of ASEAN, 1990 Growth rate of value added in industry, 1971-81 to 1991-94 (% per annum) Sector share of GDP, 1970-92 (%) Structure of Philippines' industry 1956-86 New foreign investment levels in the Philippines, 1986-91 (US$ million) Financial flows and external debt, the Philippines, 1986-88 (US$ million) Debt service on foreign loans, the Philippines, 1986-91 (billions of pesos) Debt burden estimates, the Philippines, 1970-90 Gross domestic investment, 1971-80 to 1991-94 (% of GDP) The value of total industrial products in the whole country, Vietnam, 1930-88 (1982 prices, 1930 = 1.0) Industrial structure of Vietnam: Percentage of gross value of output by industrial sector Some main industrial products of Vietnam, measured in volume

30 123

124 133 138 140 152 152 152 162 164 165 167 174

236 236 237


9.4 10.1

11.1

Some main industrial products of Vietnam, measured in levels of output per head Selected indicators of economic activity in the Russian Federation, 1990-94 (real percentage change from one year earlier) Macroeconomic indicators, China, 1978-95

viii

238

273 290

Contributors MELANIE BERESFORD holds a PhD degree from the University of Cambridge, England, where she specialised in Vietnamese studies. At Macquarie University, Sydney, she is Senior Lecturer in Economics. Her two major books are National Unification and Economic Development in Vietnam (Macmillan) and her prize-winning Vietnam: Politics, Economics, and Society (Pinter Press). She has visited Vietnam regularly since 1979. COLIN BROWN is Professor of Asian Studies and Languages at Flinders University. His primary research interests are in the political economy of South-East Asia, particularly Indonesia. Recent publications include (with Robert Cribb) Modern Indonesia: A History Since 1945, Longman Cheshire London, 1995 and (as editor) Indonesia: Dealing with a Neighbour, Allen & Unwin, 1996. LOUIS HADDAD is Senior Lecturer in Economics, Department of Economics, University of Sydney. He has written extensively on a wide range of topics, including economics of transition, history of economics, North African and Middle Eastern economies, economics of Socialism, and planning ethics and economics. He is currently working on a monograph entitled `Towards a Well-functioning Economy: An Essay on the Functioning and Evolution of Economic Systems'. BRUCE McFARLANE, now retired, held chairs at the Universities of Adelaide and Newcastle after starting at the Australian National University as an economist in the 1960s. He held government appointments in India and Australia. His main works are in the area of Asian economic studies, and he has been co-editor of Journal of Contemporary Asia since 1979. His main books are


x

Other Economic Systems (Oxford University Press), Labour and Industry in ASEAN (JCA Press), Yugoslavia (Pinter Press) and, with E. Wheelwright, The Chinese Road to Socialism (Penguin). SEJIN PAK is a lecturer at the Centre for Asian Studies, University of Adelaide. He is an industrial sociologist and does research on both Japan and Korea. He is particularly interested in exploring the character of East Asian capitalism. His main teaching area has been contemporary Japanese political economy. RICHARD POMFRET has been Professor of Economics at the University of Adelaide since 1992. Before that he taught at the Johns Hopkins University School of Advanced International Studies from 1979 to 1991, including 12 months (1988-89) at the JHUNanjing University joint project in China. He also spent one semester in 1991 as Ford Foundation Visiting Professor at Fudan University in Shanghai. He has published 14 books and over 50 articles, mainly in the areas of international economics and economic development, and has provided policy advice and consultancy services to public agencies including the United Nations, World Bank and AusAid. FRED ROBINS is Senior Lecturer in Commerce at the Graduate School of Management, University of Adelaide, and member of the University of South Australia's Marketing Science Centre. He teaches postgraduate and executive programs in international marketing and international business. As a researcher he remains a regular visitor to both North-East and South-East Asia and writes on several aspects of Asian business, particularly marketing. He has also published articles on Australia's trade policy. KYOKO SHERIDAN is Professor in Management and Economics at the Graduate School of Management, University of Adelaide. Born and educated in Tokyo, Professor Sheridan has written and edited several books including Australian Economy in the Japanese Mirror (Queensland University Press 1992) and Governing the Japanese Economy (Polity Press 1993) and many academic, magazine and journal articles on economic planning, industrial and social policies, business and management structure and strategy. She has also written extensively on the role and contribution of women in economic spheres in Japan. She has served as an active member on both Australian and Japanese government advisory committees enquiring into economic and investment policies, education, training, social and cultural issues. She visits Japan regularly to conduct research at Keio University.

Abbreviations ADRs AFTA APEC ASEAN BOI BPIS BULOG CARP CBR CEPD CIECD CMEA CPV DFI EOI EPA EPB EPZs ERSO ESB FDI FECs GATT GDP GNP IBRD IC

American depository receipts ASEAN Free Trade Area Asia Pacific Economic Cooperation Association of South-East Asian Nations Board of Investments Agency for the Development of Strategic Industries State Logistics Agency Comprehensive Agrarian Reform Program Central Bank of Russia Council for Economic Planning and Development Council of International Economic Cooperation and Development Council for Mutual Economic Assistance Vietnamese Communist Party direct foreign investment Export-Oriented Industrialisation Economic Planning Agency Economic Planning Board export processing zones Electronic Research and Service Organisation Economic Stabilization Board foreign direct investment foreign exchange certificates General Agreement on Tariffs and Trade gross domestic product gross national product International Bank for Reconstruction and Development integrated circuit


IECDF IGGI III ILO IMF ISI ITRI KADIN KMT MITI MNCs MWSS NAPOCOR NBFIs NDC NEC NGO NICs NIEs OECD PBOC PC PKI PLN PRD Ses SOEs TRP TSMC TVEs UMC UMNO USAID US VAT WTO

International Economic Cooperation Development Fund Inter Governmental Group on Indonesia Institute for Information Industry International Labour Organisation International Monetary Fund Import-Substitution Industrialisation Industrial Technology Research Institution Indonesian Chamber of Commerce and Industry Kuomintang Ministry of International Trade and Industry multinational corporations Metropolitan Works and Sewerage System National Power Corporation non-bank financial institutions National Development Company National Economic Council Non-Government Organisation newly industrialising countries newly industrialising economies Organisation for Economic Development People's Bank of China personal computer Communist Party of Indonesia Perusahaan Listrik Negara Partai Rakyat Demokrasi (People's Democratic Party) state industrial enterprises state-owned enterprises tariff reform program Taiwan Semiconductor township and village enterprises United Microelectronics United Malay National Organisation Agency for International Development value-added tax World Trade Organization

xii

1 Introduction Kyoko Sheridan The subject matter of this book is the economic systems of six selected Asian countries (the People's Republic of China, Indonesia, Japan, South Korea, Taiwan and Vietnam), as well as of Russia and the member countries of ASEAN, and the economic force known as the Overseas Chinese. The book focuses on the socio-cultural and political ramifications of the economic systems under review in an attempt to understand their fundamental nature and discover ways to encourage economic activities that promote the well-being of all peoples. There are two aims in the book: (1) to conduct country studies; and (2) to identify a unifying theme in the behaviour of the systems which are the subject of the study. The country studies provide a holistic but concise picture of Asian economies that have emerged through rapid industrialisation over the last few decades and indicate the direction in which those economies are moving. The book demonstrates that different societies organise and manage their economic activities according to their own socio-cultural and political-economic environments. Each economy thus has particular strengths and weaknesses.

IS THERE A UNIFYING PRINCIPLE? In attempting to identify a unifying theme, we ask a fundamental question: Are Asian economies more than simply economies of Asia? In other words, is there a common approach to structuring economic society, administering the national and industrial economies, and managing business? At the risk of being overly simple, we ask: Is there some sort of unity among the economies of Asia


2

that may be designated as Àsian' or Èastern' and which differentiates them from the `Western' economies? Any attempt to define Èastern' or `Western' as a type of economy is likely to be subject to various criticisms. The following chapters will show that even countries in neighbouring parts of Asia will display a diverse range of economic and industrial structures, as well as broadly differing behaviours among individual firms and people. Despite this, some of the contributors start from the premise that the question is one worth asking. One reason for this is the development of considerable regional integration in Asia (notably within ASEAN, although it is also apparent in the appearance of `growth' triangles), particularly in recent years with the establishment of institutional frameworks, cooperation and networking in the areas of trade and investment, technological progress, and education and training. Efforts to promote and benefit from this dynamism have led to the rapid formation of a communal economic base in the region. Despite the diversity and heterogeneity of approach of the individual economies, the current dynamism is shared by the region as a whole. The authors of the following chapters contemplate where this will take the region. The book avoids taking the conventional `comparative economic systems' approach. That is, each developing economy is described and analysed without reference to or comparison with the industrialised West. This approach reduces the bias that arises from the selection of study issues and is structured to address issues important to those Western economic systems specifically. They may not necessarily be constructed adequately to serve for the analysis of other economic systems outside the West. The conventional ways of studying Western economic systems may fail to target the core issues that should be addressed when studying particular Asian cases. The scope of our study must thus be more òpen' than a simple comparison of indicators of economic performance, such as employment levels, inflation rate, rate of economic growth and industrial development, and so on. Instead, we pose the fundamental questions asked by Arthur Lewis (1955): What is the purpose of economic activities? What contributions are expected to be made by the promotion of economic growth to an increase in the wellbeing of the population and the nation as a whole? Our aim is to capture the driving force of Asian economies. The answers to these questions differ from country to country, from society to society, and at different times in those countries and societies. We wish to explore what is motivating the people and economies of Asia to strive for economic growth and social

INTRODUCTION

3

progress and to comment on the effectiveness of various economic systems in bringing about social development. The comparative economic systems approach has led Asian researchers to compare their own countries' experiences of industrial development to those in developed economies in the West and Japan, rather than to the experiences of their neighbours within Asia. This approach thus fails to illuminate those activities which characterise individual Asian economies and which produce a unique and vital blend of potential and problems. This book attempts to eliminate all preconceived ideas and assumptions in order to identify the economic development that is actually taking place in the countries under review. Our discussion of the emerging economic systems in Asia addresses two key issues. First, the economies profiled here are at different stages of economic development. For example, China, the Philippines, Indonesia and Vietnam are still struggling to emerge from a backward state of development, while Taiwan and Korea are rapidly becoming advanced industrial nations. This diversity within the region, it is argued, could produce one of two effects. It could encourage the Asian economies to cooperate with each other in the hope of building a closely knit economic network which will operate to their mutual benefit. Or, as winners and losers emerge in the race to achieve rapid economic development, intense disturbances may upset the region's dynamic prosperity. The other key issue is concern over the equally diverse cultural and historical backgrounds of these Asian economies. This book considers the political, social and geographic realities of these nations — and not just their physical endowments — as the driving source of their economic development. Of particular note is the preferred form of social development in individual countries, ways and strategies to achieve that development through economic development and, of course, the economic development itself — that is to say, the diverse purposes entrusted to economic activities and the promotion of industrial growth in order to fulfil those purposes. Among the diversity we attempt to seek coherence in the form of a common or characteristic element or strategy that drives those Asian economies, thereby distinguishing them from those operating in the West. Some contributors identify cultural factors such as Confucianism as a possible unifying principle; others discuss the nationalism of late-developing countries; and yet others argue that coherence is derived from the essential sameness of human nature and the disappearance of economic and cultural differences as a result of the satisfaction of basic material needs through economic development and the globalisation of Western values (for instance, democracy and individualism).


4

WHAT IS THE PURPOSE OF AN ECONOMIC SYSTEM? Let us first define the term èconomic system'. An economic system is a social organisation whose participants (individuals in social and family groups, as well as those in business firms, schools, trade unions, government offices and agencies, and so on) cooperate to enhance their material well-being. In this book we propose to study the economic systems of our selected countries in Asia by examining the three basic dimensions of an economic system. First is the concept of the word èconomic'. The term refers to our concern for people's material well-being. In practice, it concerns the effective use of limited endowed economic resources in an effort to maximise our material benefits. Given the limited supply of resources available to the economy, and people's unlimited and numerous needs and wants, what choices do people in the countries under review make in terms of using those resources? How do they weigh the costs and benefits involved in the choice? What kinds of ideas, activities and behaviour do they display, and what patterns of organisation do they build? Since most of the Asian economies are at the developing stage, and economic resources are severely limited and frequently unevenly distributed among individuals and groups, èconomic' considerations in Asia tend to be highly `political'. For instance, many problems associated with development arise from the uneven distribution of power and from the key role of the government in guiding the economic affairs of the country. The second dimension of an economic system is the concept of the word `system'. A system, in this context, is the interrelated arrangement of the ways in which we conduct economic activities and form common economic objectives or goals — for instance, the economic planning and business and management techniques which express the ideology and philosophy of the society and which people put into practice in the actual operation of economic activities. Finally there is our concern about a larger system to which the economic system, as defined above, belongs. That is, we see the economic system as a subsystem within the larger framework of the society. Other subsystems include the educational system, the legal and administrative systems, and the family and the household, all of which have their own specific purpose in terms of the organisation of society. The economic system operates within this larger framework of the total social system, influencing its shape and character as well as its performance. In this book, we study the components — the activities, methods, ideas and objectives — of each country's economic system. We

INTRODUCTION

5

ask three questions: (1) What is the exact nature, position and role of the economic system? (2) What relationship is formed and developed between the system's economic and social environments and its components? (3) What relationship exists among those components? The answers to these questions differ for each country. The first question is concerned with the shape and choice of economic objectives for an economic system. Its specific goals, and the priority given to each, will depend on the values and ideologies of the participating population of that system and on the nature of the information those participants are provided with about the system's environment. Our country studies reveal a variety of types and levels of economic performance. Evaluation of the performance of a national economic system as a whole is difficult and often meaningless. We may compile a set of performance criteria against which to evaluate the economic performance of different countries. These criteria may include efficiency of resource use, rate of national economic growth, availability of consumer products and services, rate of unemployment and of inflation, freedom of choice of jobs, patterns of income and asset distribution, national security, and so on. However, we have not compared and evaluated the total performance of the economic systems discussed here, because that would be to attempt to evaluate the performance of the social system itself. Such a task is beyond the aim of this study. Instead, we limit our efforts to seeking to identify those factors — economic, social, political, cultural, and so on — which are responsible for each country's observed economic outcomes. In order to examine the relationship between some of the component elements and the economic environment, the second question raised above, and to examine the causal relationship between the `condition of economic endowment' given and the `pattern of economic system' developed, we study the importance of surplus labour in building Japan's mixed economy. Problems of surplus labour and a shortage of capital accumulation have plagued most of the economies in Asia. Japan noted the abundance of cheap labour, together with the limited endowment of natural resources and arable land, when selecting an appropriate economic system throughout the national efforts for industrialisation since the Meijin era up to the eventual success in building capital accumulation towards the end of the 1960s. The Korean and Taiwanese economies operate under economic conditions almost identical to those in Japan, with surplus labour and limited natural resources and land, plus they have adopted practices and ideas introduced during their period of colonisation by Japan, yet their


6

economic systems have developed differently and moved in different directions. What does this observation indicate? We noted above the diversities of the ways and strategies to achieve social development through economic development in individual countries. We see the confirmation of it in the different experiences of the three countries: Japan, Korea and Taiwan. In terms of the relationship between the component elements of an economic system, the third question raised, we examine efforts made in China and Russia to transform a centrally planned economy into a market socialist economy. Their differing approaches have produced different economic outcomes. By examining an economic system in relation to a larger system, we are also relating people's material well-being to the larger concept of general well-being, or `happiness'. In essence, then, the term èconomic system' refers to the way people perform economic activities in their search for personal happiness. We have chosen to study economic systems in Asia because we believe there are many different ways of promoting economic activities and managing business affairs, based on a variety of economic philosophies and social processes. Discovering and understanding these different economic forms will help free us from our own — and others' — preconceived ideas about the promotion of economic growth and development. The error of seeing people solely as economic beings with few noneconomic appendages has been frequently noted by researchers and observers of people's social activities. Yet the magnitude of the error has not really been understood. By holding to this misguided notion we fail to appreciate the capacity and real workings of the social process. In this study, by first observing the varieties of economic systems that have developed in Asia and then trying to identify the processes that went into building those systems, we hope to demonstrate the importance of psychological and emotional motives in economic development, and the capacity and potential of people to build a better economic society and increase their personal well-being and that of others.

BIBLIOGRAPHY Lewis, Arthur 1955 The Theory of Economic Growth, George Allen & Unwin Ltd, London.

PART I The East Asian economies: industrial `models' for the region


2 Japan's economic system Kyoko Sheridan

JAPAN'S ECONOMIC CONCERNS IN THE 1990S In 1995 an article in the Nihonkeizai Shinbun (Nikkei Financial Review) expressed the view that the driving force behind the Japanese economy had begun to weaken and that the economy would need to undergo reforms if it were to survive.1 The article stated that the dynamism which had driven the economy towards a state of affluence in the postwar years was faltering and that the future of the economy looked bleak. People were becoming uncertain about whether the economy would be able to provide them with continuing ìmprovements' in their well-being in respect of income, working conditions and lifestyle. Continuing economic growth of around 4 to 4.5 per cent of gross national product (GNP) would be required to ensure an adequate quality of life, given the trend towards an ageing society, the environmental deterioration of the country and the effects of Japan's increasing involvement in international conflicts which include economic and trade issues, as well as territorial disputes and diplomatic and security problems. The question is if Japan will be able to achieve the required target of economic growth without overtaxing its economic resources and the work efforts of the people any further. The economy underwent a period of chaos following the collapse of the speculative boom in 1991. By mid-1996, the situation had been brought under control, but industries and households have been left with the task of trying to recover their financial losses. While the nation struggled to put the economy on the road to recovery, incidents of misconduct, dishonesty, conspiracy and incompetence came to light among the leaders in government and financial circles. All of this has fuelled the general


10

public's anxiety about the economic management of the country and the future prospects of society. In addition to these long-term and general concerns about the future of the economy, a number of developments since the mid-1980s have added to the sense of unease experienced by the general working population. One source of concern is the increasing trend for industrial corporations to shift their production bases overseas. This development was to be expected, given the rise in the value of the yen and the general trend towards globalisation of production and distribution. What was not expected was the speed with which the shift has taken place. Many of the working population are finding it difficult to make adequate adjustments in their attitude and training to secure job opportunities and satisfactory working conditions at home and abroad. A second fear is that the need for a large and more expensive government machinery in the postindustrial era will create a high tax burden. A relatively inexpensive and well-structured government which provides adequate public services and infrastructure facilities to individuals and industries in a cost-efficient manner is fast becoming a thing of the past. There is widespread public concern, also, about loss of freedom of choice in the use of income. Up to now, individuals have been free to allocate their personal savings between various port-folio choices, such as investing in the financial market, owning their own home, opting for leisure time now or in the future and, most importantly, selecting the nature and extent of education and training of their children. The commitment to working hard was largely based on people's assumption that they would be able to enjoy the fruits of their labour in a way that was meaningful to them. Thus, any suggestion that they will be deprived of the benefits they expected out of the economic growth of the national economy is considered a threat. Many readers of the Nikkei Financial Review must have agreed with the general thrust of the argument. The problems of deindustrialisation, fear of having too expensive a government and other associated problems are not uncommon in advanced industrialised economies. Similarly, the world's economic and business press frequently comment on the anxiety that has become widespread among government, management and union leaders who admit their inability to come up with clear plans to guide industrial development. However, what sets Japan's case apart is the sudden appearance of this fear about the future prospects of the economy in the population in general. The Nikkei Financial Review report included the results of a study of almost 1000 senior managers in large corporations. The majority

JAPAN’S ECONOMIC SYSTEM

11

(62 per cent) of those surveyed said they were happy and content with their working career and life, but 36 per cent held a somewhat pessimistic view of the future of Japanese society, fearing that their children would not enjoy the same benefits as they had enjoyed.2 By 1985 the Japanese economy had become the world's wealthiest. The per capita GNP in that year exceeded that of the United States, up until then the richest nation. This achievement was calculated in terms of the official exchange rate, and the substance of the claim can be questioned.3 Nevertheless, the news pleased many in Japan, where general living standards, asset holdings and overseas production capacity were all estimated to be well beyond the level of the United States. Japan's high profile on the international economic and diplomatic scene appeared to be well established. The year 1985 is thus considered by the Japanese to be an epoch-making time. Their achievements were obvious to all, and they were convinced that Japan had become a truly world-leading industrial power and economy. Despite this achievement, many Japanese discounted the value of the nation's accumulated economic power — the assets and resources which had been accumulated in the economy for future development — because they were unsure of the use they wanted to make of them, of the kind of economic system they wanted to build in the future, and of how they would go about building such a system. Japan's present economic system is quite different from the classic model of free market capitalism — and now that the economy is at an important crossroads, there is pressure for reform. The process of eliminating or modifying some of the hallmarks of this unique system will likely produce a political economy very different from what existed in the past. Will the new system be a form of `mixed economy' highlighting Japan's unique characteristics, or will it move in a decisive market-oriented direction? Economies come in various forms and have different purposes depending on their cultural and historical environments; most importantly, each economy is shaped by the unique approach of the people who created and live in that system. Japan's model is therefore different from any other model. When an economy faces the need for transformation, how should it approach the task? What part of it should be modified in order to build a new and better form of economy? This vital question is yet to be asked in Japan. Instead, at the time of writing this chapter in mid-1997, there is a simplistic nationwide cry for deregulation of the economy, as if the removal of public control and guidance will create market competition which will then act as a panacea for the country's economic ills.


12

Behind this public reaction is an apparent preference for bringing the Japanese economy into line with that of the United States (given a constant pressure exerted upon Japan by the US government for Japan to move in such a direction) and with other freemarket economies in Europe, where economic rationality and material welfare are seen as the core criteria and driving force of economic activities. This view ignores how Japan's postwar economic system was inspired and guided by people's values and motivations. It casts doubt on the workability of an economic system that evolved out of goals selected by the people themselves to improve and develop their way of life and to raise the welfare of the nation. It attempts to discard the traditional framework of an economy which has been singled out as a model for economic growth. Is such a move wise? The purpose of this chapter is two-fold. First, we will describe the approach taken by Japan to create its unique political economy. We will explain how the fundamental principle was formulated and implemented in order to produce economic growth and industrial development up to the present time. The discussion will show that the specific Japanese approach is currently being evaluated with a view to its being totally dismantled in an effort to proceed with future national development. Our second purpose is to discuss such questions as: What new form of economy will Japan build for the future? What will be its purpose and aims? Will the new economic system incorporate aspects of the traditional approach? Or will a completely new formula, quite foreign to the preceding traditional principles, be adopted with the aim of rebuilding the economy and society? Thus, the second aim of this chapter is to draw a picture of the future form of the socio-economic system in Japan.

THE MAKING OF THE `JAPANESE MODEL' We shall now examine what constitutes the Japanese approach to political economy by analysing its historical development. It was the US government's analysis in 1972 that discussed the relationship between government and business in Japan and coined the term `Japan Inc'.4 Following this, many researchers have attempted to evaluate the government's role in the phenomenal industrial development and economic growth of postwar Japan.5 In order to make our own evaluation of the role of government in Japan's growth, we consider three basic questions: 1

How

did

the

original

idea

of

cooperation

between

Japan's


2 3

13

public sector and business interests emerge at the outset of the country's industrialisation late last century? How did that idea become a fundamental principle of business practice? How did a `mixed' form of the economy develop in the postwar years?

In exploring those questions we observe the special importance of one of the conditions in which modernisation took place. From the beginning of industrialisation under the Meiji government the Japanese economy has relied on the availability of abundant, wellmotivated, well-educated labour of high quality. There was a relative paucity of other resources: land and natural resources, capital and technology. Together with some features of the national culture, the particular nature of the labour supply holds the key to the making of the specific economic system which took the nation through its first century of successful economic development. But an eventual effect of the development was the change, culminating in the 1960s, from a labour surplus to a labour shortage. I believe there is a neglected but vital connection between that change and the onset, since, of uncertainty and division about the national economic purpose. This chapter explores that connection.

Origins of Japan's economic ideology, 1868-80 To begin with we make an important observation that consensus management of the national economy and business corporations, identified by many researchers as being characteristic of Japanese society, did not develop naturally out of the preferred style of the people. Rather, it was introduced and developed by policy makers who sought speedy industrialisation of the economy. The Meiji government took a strong leadership role in consolidating the working efforts of the population, which were otherwise scattered, in order to serve the national purpose. It saw consolidation as an essential precondition for the planned industrialisation of the country. This attitude and the promotion of public leadership was not unique to Japan, nor did it relate specifically to the timing of the country's industrialisation. Communist regimes use shared motives to create a society of socialist human beings who are expected to work for `national aim' rather than for individual benefits, and Western democracies adopt a political and administrative approach which aims to balance the demands of different interest groups and individuals so as to encourage them to work for selected common purposes. While Japan shares with other societies this forming of common public intentions, in Japan


14

a specific form of consensus management and governance developed which laid the foundation of its unique form of `mixed economy'.6 It is now relatively well documented that the Meiji government introduced many imaginative devices to accelerate the industrialisation of a thus far traditionally agrarianbased economy. After 1868 it introduced a number of policies to establish a modern administrative structure. This supported the core fukoku-kyohei (rich country, strong army) policy, which was to build a strong defence capability through the establishment of a more sophisticated economy. The government believed that the people themselves had to contribute to the design and propagation of economic society. An important aspect of this consisted of guiding people's thinking so that they developed a disciplined attitude towards work. The leaders saw that it was essential first to build a stimulus for work in individuals and then to consolidate the individual work motivation on a national basis, thereby directly connecting personal motivations with the national efforts to build a modern and productive economic society. In 1955 Arthur Lewis first discussed the importance of `the will to economise', evaluating it as a source of economic growth as significant as accumulation and technical progress.7 Speaking of the importance of human effort in promoting economic growth in simple ways, he said that `men are not likely to get more unless they try to get more'.8 He argued that some societies fail to promote economic growth because the people direct their efforts elsewhere, while the greatest growth occurs in societies where people have an eye to the economic chance and are willing to stir themselves to seize it. Of course, the Meiji period predated this theory of `the will to economise' and the sociological study by Max Weber which connected the entrepreneurial spirit of modern capitalism and the view taught in Protestant Calvinist sects. But the Meiji policy makers saw how the teachings of Confucius might make modern entrepreneurs, business executives and well-motivated workers out of traditional samurai members, merchants and artisans. They saw that determining the values of the people was a core strategy for growth and industrialisation of the national economy. Their approach placed more importance on building the economic mind among the population than on building factories. This is well documented in the approaches taken by three Meiji leaders. Let us examine them. Okubo Toshimichi (1830-78) was responsible for most of the important industrial policies of the Meiji government. He believed that, in order to secure a nation's independence, it is not enough to promote the defence


15

industry alone. Rather, the nation's productive capacity — that is, the economy as a whole — must be promoted through modernisation and industrialisation of the bases of production and through changing people's thinking and behaviour so as to firmly establish the fukoku-kyohei principle. Okubo saw the importance of increasing people's willingness and ability to take an active part in economic activities. He held that economic growth was so great and urgent a task that it could not be left to the efforts of industrialists or the general population alone. Government, with its central authority, had to take a positive role in mobilising the whole enterprise so that it could move in the planned direction — that is, government should facilitate and promote the nation's economic activities while leaving the actual entrepreneurial decisions and work input to the initiative of private business and individuals. This set the basis of the pattern on which Japan's model of `regulated capitalism' was developed. Okubo's plan found support from Fukuzawa Yukichi (1835-1901), who believed that the nation's future depended on the rise of a business middle class. Fukazawa consequently devoted himself to developing such a class by way of education in his school (which was developed into the present Keio University) and through his other activities as a writer of many bestselling books to promote modernisation of society and to enhance education of individuals, opinion leader, and owner and manager of newspapers which considerably influenced the attitudes of the general population. Fukuzawa believed that the country could not wait for a new business class to emerge naturally — such a social change should be generated. Through his writings he successfully taught the Japanese people to become enthusiastic about work. His school attracted ex-samurai members and wealthy farmers who studied economics and commerce and then founded modern industries such as railways, telecommunications, banking, insurance, paper and printing (enterprises in these industries were called bunmei kaika firms and were considered a key means of spreading `modern civilisation'), plus mining and steel making. They also promoted Mitsui and Mitsubishi, two zaibatsu enterprises which became modern corporations at the forefront of the commercial activities of the nation. Shibusawa Eiichi (1840-1931), the third Meiji business leader and industrial pioneer, helped to shape the business community by generating individual entrepreneurial activities and showing business leaders how to operate economic activities for national purposes. He influenced attitudes through his speeches and by helping to establish more than 500 companies from which many of today's leading corporations developed.9 Business ethics, he


16

believed, should be based on honesty, independence, a cooperative spirit and a sense of social responsibility; thus Shibusawa was instrumental in helping to upgrade the image of people engaged in business and commercial activities. These three pioneers gained support from new sources of influence, such as public administrators in local and provincial governments, wealthy farmers and merchants, and ambitious young people who saw that their future opportunities lay in the direction of economics and commerce.10 A new enterprise boom occurred: between 1886 and 1888 the total capital funds of all corporations rose 2.3 times, while over the next two years they further rose 1.9 times.11

Development of labour management prior to World War II The `mixed' formula first conceived by Okubo gained increasing support from the population after the turn of the century. In order to promote a cooperative relationship between business and government, attempts were made to set national goals and to fashion desirable behaviour in industry leaders and individual working populations. As part of this process, government leaders viewed their chosen economic system as a social organisation in which the actions of its participants (working individuals and groups employed in corporations) must be closely coordinated with the identified purpose. The leaders took the initiative in selecting an èssential' set of goals for the national economic system. Their behaviour was based on the belief that they had better intellectual resources and information than many others in society. With this selfconfidence and high sense of responsibility they proceeded to shape the values and ideologies of individual people. Japan's success in the Sino-Japanese War of 1894-95 and the Russo-Japanese War of 1904 appeared to vindicate the nation's choice of the fukoku-kyohei policy. Japan emerged from this period with a strong defence capability supported by a large economy which rivalled those of the advanced nations of the West. The willingness of the people to work to achieve national motives brought well-being to the country. However, most people were yet to experience personal rewards for their efforts. The approach of the Meiji pioneering leaders was to elevate the human motives of individual people by linking them with national motives. However, a gap had emerged between what was achieved for national well-being and what was achieved for the welfare of individuals. This gap became wider and more distinct as the fukoku-kyohei national aim was realised. The majority of


17

the population was left at a subsistence level, puzzling as to why poverty was still evident everywhere despite the new enterprise boom and the expanding size and activities of the national economy.12 To understand the importance of our present discussion in an historical perspective, we must be reminded of the fact that the same situation arose in a more affluent Japan in recent years, notably in the 1970s, causing the population to question the relative poverty (lack of quality of life) of many people in the midst of great national prosperity. Consequently, we have to ask why has Japan been unable to solve this problem? Why has the problem recurred during a period of remarkable economic development and industrial progress? The answer, I would argue, lies in the way in which Japan's mixed economy is structured and promoted. In other words, the problem is part and parcel of the economic system itself. If Japan is to build a truly successful industrial economy and eliminate the current national anxiety, this problem must be solved. At the beginning of the era of modern industrial development, many attempts were made to counter this problem. Two attempts which paid close attention to local cultural traditions have had a lasting influence on Japan's economic system. The individuals responsible were Muto Sanji (1867-1934), the young managing director of a cotton spinning enterprise who was strongly influenced by Fukuzawa at his school, and Kawakami Hajime (1879-1946), an academic whose influential book, Binbo Monogatari (Tale of Poverty), influenced many labour economists, business leaders, and social, economic and business management systems.13 A strong sign of the trend towards independent thinking in the business sector — though still attuned to the needs of government — appeared during the 1910s when employers encountered an acute shortage of skilled labourers. Despite the government's push to industrialise the economy, modern industrial skills lagged considerably behind the scale of expansion. Competition among employers to secure the available skilled workforce led not only to wage increases but also to a high turnover of workers. The government was greatly concerned, fearing that the turbulence among the workforce would reduce the nation's cost competitiveness in the export market. The public solution was to introduce an industrial regulation to peg the level of wages for the workers concerned and to control their turnover and mobility between employers. Business leaders in large corporations opposed such a regulation. Among them was Muto Sanji, who believed it would not provide a permanent solution to the problem. He saw the cause of the problem as the lack of training of the workforce.


18

From this observation he proposed to establish in-house training programs in his factories to generate skilled workers and to introduce better working and employment facilities to attract and then retain skilled workers for life. By the 1920s, his formula had become the original model for the future Japanese employment and corporate welfare systems, with the development of lifetime-based employment, seniority-based promotion, and the provision of welfare programs to workers and their families. Muto's system spread to other modern factories and enterprises such as Mitsubishi's shipbuilding works which aimed to find an effective management and employment system that was not only internationally cost competitive but also humane. In effect, it was designed to become Japan's answer to the welfare policies that had been formulated and developed in the West, as well as to fill in the gap between the nation's prosperity and the welfare of the individual population, which lagged behind. In the West, public social policies began to be formulated and advanced to protect workers and improve their living conditions as their `right'. At the same time, Japanese light industries such as spinning and clothing manufacturing launched their export drive into the world market. Western industrialists demanded that the Japanese follow their approach and take responsibility for protecting the welfare of their workers. However, the Japanese were reluctant to succumb to this pressure. They felt that as a latecomer to the international market, they had to work out an effective corporate strategy of their own in order to build cost competitiveness. As the high cost of production was due largely to the shortage of skilled workers, they developed a strategy based on the effective organisation of employment and work systems, plus the formation of a new skilled workforce through in-house training. Cultural traits and traditional customs, norms and approaches which were practised in workplaces in villages, factories, and large trading and commercial houses were carefully evaluated. The idea of a `corporate welfare system' spread, based on Muto's experience in his factories. This system was to provide improved working conditions and payment to skilled workers not only as devices to retain them but also as part of an industrial plan to provide a fair share of the rewards of economic growth to employees. It could be said that the idea which originated as a managerial device to reduce job hopping among skilled employees soon developed into a corporate welfare system which aimed to see national prosperity being shared by employees. In the early stages of the experiment the benefits of such a corporate welfare system were enjoyed by only a selected few employed in large companies with modern management. The


19

majority of the population were still existing at a subsistence level. In 1917, Kawakami Hajime wrote Tale of Poverty, which analysed why Japan's economic mechanism had been unable to reduce poverty through economic growth and industrial development.14 He believed that the problems created by Japan's industrialisation were not entirely economic but were also social and ethical in nature, and he sought an explanation in the actual make-up of Japanese society and the ways in which people think and behave. Tale of Poverty begins with a discussion of the world economy, where large sections of the population, even in the richest economies like the United States, the United Kingdom and a number of European countries, lacked the basic necessities of life. Kawakami concluded that even if Japan promoted industrial development for another 100 years, the majority of the population would still be living in poverty unless the fukoku-kyohei principle was replaced with some other model. He observed that poverty was a consequence of the unequal distribution of national wealth, and concluded that Japan's economic system was designed not to fulfil the needs of the general population but, rather, the demands of the class structure. In other words, business enterprises allocated their production facilities first and foremost according to the demands of the rich (because the rich can support their demands with their real purchasing power), while the needs of the poor were ignored because of their inability to express those needs as monetary demands. Thus, the growth of the productive capacity of the economy would serve only the non-essential needs of the rich, thus leaving the poor permanently denied their daily essentials. How did Kawakami propose to solve a problem which seemed intrinsic to the economic system itself, making poverty the inevitable obverse of excessive wealth? His proposal was simple: he demanded restraint and frugality on the part of the rich. The Tale garnered support from a broad section of society during the 1920s, mainly because of Kawakami's depiction of economics as a humanistic science and despite criticisms that his argument was naive. Of importance here is the long-lasting influence Kawakami had on the thinking of many leading labour economists and economic policy writers in the matters of wage determination, union activities and employment systems in corporations in the postwar years. Among these leading liberal reformist economists were Nakayama Ichiro (18981980), Okochi Kazuo (1905-84) and Tohata Seiichi (1899-1986), who were active in the Central Labour Relations Commission as well as other government economic and labour councils and committees which shaped Japan's employment systems following World War I.15


20

Kawakami's condemnation of the poverty that deprives people of life and the aspiration to live fully in some ways preshadowed the development of economic thinking today. At the close of the twentieth century, we are questioning why people work and the basic meaning and purpose of economic activities, and revising our industrial policy and corporate labour and management systems in an attempt to find answers.

The war effort, 1931-45 As early as 1931 the Japanese economy moved in the direction of central planning in preparation for the impending outbreak of war against the Allied Forces. Central control tightened as military aggression took over and intensified until the eventual defeat of Japan in 1945. During the period up to the end of World War II, Marxian economic theory was popular in the leading intellectual circles. The basic principles underlying Japan's war economy were developed from Marx's two-sector model, which proposed increasing the output of raw materials and energy supply and then using these as the input for increased industrial activities from which a further increase of raw materials and energy supply was planned to generate an expanding cycle of growth and expansion of national production activity. Up to 1940 this policy resulted in national growth, but the government planned to expand the national productive capacity by generating the industrial output required to build up national defence reserves and support the war. The increase in the output of raw materials which had been used for industrial activities would sustain this aimed-for growth. To achieve this, public controls were introduced to determine the allocation of raw materials, labour and capital. But the war began to drain the country's reserves, and with limited domestic sources of raw materials the scale of national industrial activity began rapidly to decline. The planners saw a general increase in productivity across the industrial base as the only solution. Both management in business and workers in the factories were forced to make a greater contribution. Managers were required to come up with ways to economise on inputs. Wherever possible they renovated production and organisational arrangements in order to increase productivity, but increasingly the burden fell upon the workers to increase their work intensity. This policy was devised during a time of political mayhem and could be viewed as an exceptional response to extraordinary circumstances. However, it was promoted with zeal, and strategic importance was placed on building a consensus in planning the


21

economy. Industry associations, business councils and labour organisations were established across the country and took an active part in the national mobilisation plan for fighting the war.16 A basic framework for developing a `mixed economy' was laid out during this period which enabled useful lessons to be learnt and experiments explored which might not have been possible in normal peace time. This experience was expanded on in promoting cooperation between government and business following the war.

Postwar development, 1946-73 As a result of the pioneering efforts of people like Muto and Kawakami, the preferred approach of the Japanese became a social-industrial policy, where the welfare of individuals is generated internally as part of the natural course of growth of the economic system. This approach, which was put forward by Muto and his supporters as an àlternative' to the `welfare economy' and `social policy' approach of the West, set Japan on a distinctive course of development. Japanese leaders rejected Western approaches because those approaches introduced welfare provisions into the economy from the outside. They feared that provisions of this kind would become an idle (non-productive) resource in the total production activities and thus act as a drain on the growth of the economy. They rejected the Western view that the well-being of the nation (growth of the economy) and the welfare of the individual — the two main objectives of economic planners — are incompatible or incongruent objectives within the system. Rather, the Japanese believed that the two aims could be and ought to be promoted side by side. They saw that successful accomplishment of this task would require a skilful blend of public policy. Government and business are required to share roles, with government drawing up plans and public policy for industrial and economic development, and business promoting a harmonious and productive labour management system based on a corporate welfare system within the economy. A successful formula is expected to meet both public purposes and individual personal motives to ensure maximisation of joint benefits. A general and strong support for such a formula emerged among the population in around 1955 to form what is loosely called 1955 taisei, or `the 1955 politico-economic order' under which leaders of labour unions decided to alter their former confrontationist attitudes and cooperate with government and management in an effort to achieve economic growth.17 This was the beginning of Japan's `miracle' years. Labour unions changed


22

their strategy in a bid to gain their fair share in the growing economy; they focused on achieving increased wages and improved working conditions, rather than on revising the course of the nation's capitalist development. The general population also began to support the way economic growth and industrial development had progressed, on the assumption that the economy's high growth would be sustained and that it would automatically bring about welfare and personal happiness. Summing up, Japan's postwar industrial development was built on the results of its prewar experiences and the lessons learnt from its wartime efforts. It aimed to find a system where individuals' hard work was connected with the national purpose — but this time in a more `democratic' way. The government's efforts in coordinating what were basically two different activities, those of private individuals and collective national activities, were important in preventing any move of the population towards class divisions. For instance, the anti-class ideology of consensus and cooperation was programmed into major government industrial policies such as the National IncomeDoubling Plan of 1960 which aimed, among others, to reduce differences in wages and working conditions between larger firms and their smaller counterparts across industries. The government had an important role to play in achieving two economic results. One was to create full employment by expanding economic growth and mobilising all the working population to engage in the expansion of national economic activities. Various national economic plans and industrial policies were formulated to create full employment in the 1950s and 1960s.18 The other function of government was to bring equity to the working population in terms of wage and salary payments and the working conditions in which they operated. Business leaders responded to the government's efforts by revising employment and management systems to further the `corporate welfare' system that had been developed prior to the war. An attempt was made to formulate a Japanese `quality circle' model. Government industrial policy (which provided an industrial environment of nationalistic enthusiasm and corporate ideologies in the context of a `catch-up nation's mentality' in the 1960s and 1970s) supported these efforts of managers and workers. Positive messages from government, in the form of national economic plans and `vision' policies for industries, assured the population that the government believed the economy was capable of achieving high growth and that government planned to use its achievements to raise the living standards of the population and achieve full employment.


23

A missed opportunity Looking back, it is possible to see a critical change in the national economy in the 1960s, and a strategic choice taken which might have been promoted differently. At around this time, fast growth turned a capital-poor, labour-surplus economy into a capital-rich, labour-shortage economy. We may say that L K gave way to K L, where L denotes supply of labour and K denotes supply of capital. Government and business responded with policies designed to bring about two important effects. For the first time, they acknowledged the changed bargaining strength of labour by allowing wages to keep pace with economic growth. And they aimed to improve equity and reduce inequality within the workforce, and to maintain national consensus in conditions of labour shortage, by extending some of the benefits of the distinctive Japan labour system from skilled workers in big firms to less skilled workers and workers in smaller firms. Both changes brought about progress, but it was all within the traditional strategy of making the best use of the available labour to ensure the measured economic growth of GNP. More imaginative leaders might have seen a wider opportunity in the high income achieved by the èconomic miracle' and the passage from labour surplus to labour shortage. They might have coupled the continuing aim of economic growth to new aims of equity and quality of life outside the workplace. And they might have done much of it in a Japanese way by shaping the economic system to deliver the desired social effects, rather than by developing a separate, Western-style welfare system outside the working economy. We briefly explain this argument as follows. On the one hand, Japan after World War II was desperately poor, and short of physical capital, fuel and other raw materials. On the other hand, the Western world could supply all the materials and technology that a late developer needed. But how was Japan to pay for it? By a coherent set of three mutually supportive policies: 1

2

3

Scarce resources should go only to key industries which promised industrial growth and exports: steel, petrochemicals, automobiles, any industrial machinery, and electrical machinery. Production of any consumer goods which competed for the scarce resources must accordingly be restrained. Available foreign earnings and aid should finance the import of materials and capital goods for the key industries. The import of consumer goods, except the necessities of life, must accordingly be restrained. Wage growth should lag behind economic growth for three reasons. It would allow a rising profit share to finance high


24

investment. It would restrain consumer spending to match restraint of the production and import of consumer goods. And restrained wage costs, and therefore prices, in the export industries would expand the demand for exports, which would earn foreign exchange and sustain total demand despite some restraint of domestic demand and output of consumer goods. From about 1955, as in earlier phases of Japan's modernisation (described above as 1955 taisei), labour believed it was best to act in concert with employers and government — rather than in conflict with them, as in some strongly unionised Western countries — as the way to improve their wages and working conditions. With that general belief they combined a willingness to let wages and conditions vary with the size and profitability of firms and with the backward or advanced technology of particular industries. Many distinctive features of Japanese employment and management were made possible by the strategic choice that labour made to cooperate in producing a bigger pie, rather than contending for a bigger labour share of it. It does seem to have been a widely shared decision, rather than merely an effect of weakness or feudal docility. Japanese workers chose some militant action in the 1920s and again in the early postwar years, and could have chosen it at other times.19 When they did not, government as well as employers responded. The presence of abundant, educated, cooperative labour was an important condition of the planners' choices as they did their best to structure the economy for rapid industrial growth. The strategy appeared to work. Very roughly, we may estimate that real wages rose by a multiple of 17 or 18 between 1887 and 1987, from a level which was perhaps one tenth of the average Australian wage in 1900. Until the 1960s, wage growth always lagged behind economic growth, so that the labour share declined. But both rates grew so quickly that many Japanese workers, especially skilled and white-collar workers, gained steadily increasing incomes and living standards. Then in the 1960s came the change from labour surplus to labour shortage — from K L. With rapid growth in the industrial demand for labour — and especially for high skills — and an end to the inflow of surplus labour from rural Japan, some skilled workers and others began to shop around from firm to firm for the best wages and conditions. As employers bid to attract them or hold them, wages rose. There was also some stronger wage pressure from workers conscious of the extraordinary new rate of economic growth. Between 1960 and 1973, the workforce as a whole got its first fair share of economic growth. Two


25

important policy developments mark this period. There was heavy public investment in infrastructure: in roads, bridges, ports and airports, and in education and research. In response to the new labour situation, the market effects of the labour shortage were reinforced by government efforts to reduce inequalities within the wage structure. Partly, this arose from efforts to sustain economic growth by modernising the remaining backward industries. As the productivity of those industries increased, so did their wages. But there was a deeper purpose. The labour shortage made it more important than ever to spread the benefits of economic growth to the whole workforce. It became public policy to take full advantage of fast economic growth to close two gaps: the gap between high and low wages in different firms and industries, and the gap between economic growth and wage growth — between `national economic prosperity' and the `delayed improvement of individual well-being'. To that end, the employment and management system was revised to spread secure employment and items of `corporate welfare' as widely as possible to blue-collar workers and employees of smaller firms. Such reforms responded to more insistent demands for a fair share of the benefits of growth, and they were expected to restore and sustain the `will to economise' of the whole workforce. There were thus two creditable responses to fast-rising productivity and the passage from labour surplus to labour shortage. There was heavy investment in infrastructure, and there were partly successful efforts to give workers a fair wage share and to reduce inequalities within the workforce. With those policy developments, how can it be said that the nation was missing a strategic opportunity? I believe that what was missed was an opportunity to extend the fundamental purposes of economic policy from the development of the private sector to the economy and society as a whole. Most of the investment in infrastructure was in the public infrastructure needed by private business: transport systems, services to business, research, and education of the workforce. There was much less investment in housing and in the public space, facilities and services that people can use to improve their household productivity and quality of life. Similarly, the improved equalities within the workforce did more for the workers at work than for them or their families at home in increasingly crowded, polluted and unattractive cities. Their rising wages, of course, brought valuable improvements to household life, especially through the revolution in household equipment. But there was relative neglect of other benefits to family life and leisure, benefits which would


26

have to be provided by differently planned public and private investment rather than by the wage earners' market spending. This is not to argue that Japan should have copied the Western `dual economy' system in which the state provides elaborate public income transfers and welfare services òutside' the productive economy. Rather, it is to argue that Japan's determination to make the productive economy itself meet as many of the people's needs as possible could have been extended to the direct service of many family and household needs, as well as the needs that could be met from wage income plus some company welfare. The productive economy was producing consumer goods and household equipment — cars, refrigerators, land subdivisions, streets, all forms of housing, piped and wired services to households, shopping and service and recreation centres, town parks, playgrounds, sports fields, tennis courts, golf courses, and other public and private capital which people use to make productive and enjoyable use of their own unpaid labour and leisure time. Those capital provisions serve the quality of life directly, rather than through households' market spending of their wage income. But once in place, most of their uses are not marketed, so they are not measured into national product and income. They were too easily undervalued by the generation of planners and business leaders whose efforts had taken Japan from defeat and poverty to a leading place in the world, and who had done so by shaping the economy to concentrate on the measured rather than the unmeasured elements of economic growth. We may leap ahead of the story to find striking evidence of the effects of that bias. In 1985, government publications showed that Japan had overtaken Australia in wealth and income per head. Through the three following years the two countries happened, independently, to survey their citizens' housing, time use, income and spending. An Australian researcher compared the results and found that — among other disparities — new Sydney houses averaged more than twice the floor area of new Tokyo houses; those with private land had three or four times as much of it as their Tokyo equivalents; and to buy the land cost about ten times the wage-earning hours that Tokyo allotments cost, and three or four times the earning time required in other Japanese cities. Per million of population, Sydney had between fifteen and twenty times the public open space in Japanese cities, and between ten and twenty times the number of playing fields and tennis courts.20 That narrow focus of the economic program — its industrial bias and neighbourhood neglect — underlies some of the current unease between the Japanese people and their government, and


27

between the contrasting Japanese and American economic strategies which discordant voices are recommending for Japan. Present troubles give strength to the belief that valuable social opportunities were missed through the `miracle' years of the long boom, when the economic miracle could have extended from the workplace to the provisions for family and neighbourhood life. Already in the 1960s there were popular movements for a change of direction. People asked explicitly for less industrial emphasis and more communal and environmental emphasis in the national economic strategy. The cry of `To hell with GNP' was first heard in 1971, but the feelings which it expressed had been brewing for some years. Throughout the 1970s, then, there was a double failure. The wage and workplace reforms stopped short of the household and lifestyle reforms suggested above. And the workplace reforms themselves were interrupted, and some of them reversed, when the oil crisis struck the economy in 1973 and again in 1979.21 Business and government were thrown into chaos, and became preoccupied with problems of oil supply and price. The high-growth economy plunged into general depression. Japan's real GNP actually shrank in 1974, an experience the economy had never suffered during its century of industrialisation except in the last years of World War II. The decline was most serious in manufacturing, where output declined by 9.4 per cent in 1974 and was still 4.4 per cent below its former volume in 1975. In the national consciousness, recovery replaced reform as the urgent task, and the tried-and-true methods seemed to be the best way to go about it. Workers were asked to work longer hours and accept wage caps or cuts, and they complied. Managers did what they could by other means to sustain morale and cooperation, appealing — as they had a generation earlier — to national spirit in the face of external threats. That and other traditional measures worked. Recovery was swift. Within three years of the first oil crisis the economy was back on a growth path, though a much slower path than previously. A quicker recovery came after the second oil crisis in 1979, helped by the lessons learnt in the first crisis. Eminent authorities praised the Japanese economy as `flexible' in its structure (Dore 1986) and `creative' in its operation (Pempel 1982). Approval of the superficial economic recovery worked to delay the much-needed reform of the foundations of the economic system. Rather than `flexible and creative', the method of achieving the recovery could as well be seen as a retreat, with a loss of the will and vision that were needed to adapt the economy to its new conditions of affluence and labour shortage. Throughout the same period another adaptation to changing


28

conditions was occurring. Partly to qualify for advanced-nation status under the General Agreement on Tariffs and Trade (GATT) and for membership of the Organisation for Economic Cooperation and Development (OECD), and to keep in step with world practice, Japan began to liberalise its trade controls in the 1960s, and in the 1970s it greatly reduced the regulation of its banks and foreign exchange dealings. The financial deregulation added a fatal new element to the longstanding lack of effective urban planning, land-use policy and control, and land pricing policy. A speculative boom in city land prices developed in the 1980s to a point at which the value of metropolitan Tokyo's land was estimated to exceed the value of the whole land surface of the United States. The bubble burst between 1989 and 1991, bringing many bank failures and a general setback to economic progress, to the economic planners' selfconfidence and to the people's confidence in their government.

THE JAPANESE ECONOMY AT THE TURNING POINT Has the government failed? At the time of writing, the movement towards quality circles appears set to continue in Japanese firms, as if to assure the continuing success of the Japanese approach to national and corporate management.22 However, it is our observation that both government and individuals — in the workplace and at home — are casting a critical eye at the way in which the economy is being conducted. The approach taken in evaluating the economy differs from individual to individual, depending on their position in society, their personal background, what they expect out of work, and the future they project for the country.23 In attempting to identify the fundamental working mechanism of Japan's economic system I conclude that it comprises a mixed form of economy in which the government takes two important roles. First, the government must encourage individual people to take an active part in economic activities and enhance their `will to economise' so as to increase the total national economic activities which will ensure economic growth. Second, the government must attempt to structure the economic system and develop the management of business activities in a balanced way so that individuals' efforts are fairly rewarded in the form of improved well-being and increased happiness. In other words, the public role in Japan's mixed economy lies in its task of ensuring a


29

balanced parallel development of national well-being and individual welfare through economic growth and industrial development. We observed earlier that many people surveyed in 1995 in Japan responded that they were happy and content with their working career and life.24 We interpreted this response to mean that the government has fulfilled its roles as defined above. But when we see the same people projecting a pessimistic future for their children, this casts doubt on the government's ability to continue to maintain its `good' record. Is the government's `mixed economy' formula failing? Is a revised economic system needed to guide what is now an affluent, highly industrialised and internationalised Japan? Is what we are now seeing just a delayed reaction of the general populace to the hardships of a war-time controlled economy? Is it due to the hasty writing-off, by the generally ill-informed masses, of the experience of the Soviet Union and a suspicion of anything `planned'? Or does it indicate the eventual arrival of the `level playing field' approach, which aims to replace some parts of Japan's traditional keisei-saimin political economy with the Anglo-American free market principle?

What lies ahead for Japan? In 1995, MITI announced in its publication Policy Guidelines for the Fiscal Year 1996 that the country needed to reform its economic system. This was spelled out in the subtitle, `Building a new economic community'.25 The same message was contained in an Economic White Paper published by the Economic Planning Agency in 1996. Whither Japan? The question is an important one, both for Japan and for the world economy, given the relative size of the Japanese economy and its rapid expansion due to the accumulation of capital and technology at home and abroad, assisted by the traditional practice of building networks for development and a national enthusiasm for international and global activities. A range of possible futures lie ahead for Japan. Table 2.1 describes the main characteristics of four possible scenarios. The scenarios described in Table 2.1 refer to a post-industrial Japan as currently envisaged by the Japanese. The scenarios are based on speculation about whether the Japanese economy has reached a stage of industrial development from which it may lead society in a direction capable of producing large outputs of primary and secondary industries with a relatively small input of labour. The first three scenarios cast some doubt on the capacity of the Japanese economy to do this at present. There is a danger


Table 2.1 Possible future scenarios for Japan Characteristics Scenarios People continue to A. On the way to a work for the economy. post-industrial Japan 1. Natural-trend Japan High productivity growth in both agricultural and industrial sectors. Can afford to leave a part of the population outside the workforce. Not high enough 2. Mend Japan productivity; need to increase economic growth and efficiency.

What to do

Leaders in society

Mode of society

Business: Find new markets in the newly transformed society. Government: Balance and coordinate hard-working and leisure-seeking people. Business: Aspire to be innovative. Government: Deregulate the economy so as to encourage free enterprise competition.

Government: With administrative skills and social policy writing.

Civilised society

Business: Experimental, with more innovative management activities as before.

Extremely competitive society; people seek individual career and wealth advancement.

30


3. Advance Japan

Continue to seek higher productivity that provides higher quality of life in the workplace.

B. A post-industrial Japan 4. Reform Japan

The economy serves the people and society. High productivity across the economy. People have more free time for their own leisure and selfdevelopment.

Business: Improve employment and workplace practices to produce happier and harder-working employees. Government: Assist business to achieve their aims through basically traditional economic and industrial policies.

Business and government: Further activities along traditional lines, as before.

Competitive society; people seek a career and welfare satisfaction.

Business: Develop in a new direction and serve people's living and family activities in areas such as housing, child care, care for the aged and sick, education and self-development activities. Government: Provide a better social infrastructure to assist business to promote the above activities.

Citizens and government (regional): To cooperate in advancing female talent, and family and community activities.

Truly civilised society with development of networking and cooperative devices among the population; people seek self-development.

31


32

that the economy will prematurely stabilise at a relatively low level of wealth and thus fail to reach the post-industrial stage. These scenarios also present a picture of Japan, in the next decade or so, undergoing the transition to a post-industrial society. When Japan eventually reaches the post-industrial stage, its citizens will have more disposable time to spend on leisure activities. There is therefore an expectation that such a society will be an improvement on the current one where everyone must work hard for a living. However, much will depend on Japan's political-economic management skill in mitigating the expected conflict between those who stand to lose and those who will gain from this new society. Many people assume that an affluent, post-industrial society will place special emphasis on the declining marginal utility of material goods and services. They assume that when society becomes richer, people gradually place less value on acquiring more of the goods that were customarily produced in the past and, instead, desire other goods and services. On this basis, the future society tends to be examined in terms of industry structure and the employment system and practice in the new economy. We ask, `What type of people will emerge in the future society when Japan's production capacity rises to a high enough level to allow the economy to reach a true post-industrial stage?' and `How will post-industrial people go about building an economic system that is better than the current one?' We will consider these questions when discussing the fourth scenario below. The following four scenarios of Japan's possible course of development in the next decade or two are based on interviews conducted with leaders in government, business and academia between 1992 and 1996 in Tokyo, supplemented by my reading of various economic and social studies in academic publications, government reports, newspapers and journals. I do not expect Japan to make a sharp break with current trends given such a time frame. However, I believe it is important to remember that the selection of one among the four possible courses of action will have a major impact on the kinds of choices and challenges the country is likely to face in the future. There is a growing sense among Japanese intellectuals that Japan is embarking on a period of `restoration'. This indicates that the Japanese people are expecting to see a change of course introduced in the economy, leading to a corresponding change in society in general. They envisage the change as being possibly as radical as that experienced during the Meiji Restoration. Our scenarios are confined to possible directions of change given a familiar external environment and are presented in the


33

order in which they are generally considered most likely to occur. The first most likely scenario, called `natural-trend' Japan, emphasises an affluent Japan with a Japanese model of welfare and a leisure-oriented direction of development. The second most likely scenario is that Japan will adopt a `mend-the-economy' approach in order to maintain its growth potential. The third alternative, àdvance' Japan, presupposes reforms of the structure and organisation in the workplace, employment, management, education and training systems; while the fourth scenario, called the reformed Japanese model, seeks an active government contribution to the formulation of policies and plans to increase the quality of life of individuals. `Natural-trend' Japan Let us begin our discussion of the plausible futures for Japan by asking whether the majority of Japanese are materially well provided for, thus enabling them to lead a complete life. Just over one quarter of the 81 officers aged in their twenties and early thirties whom we interviewed at MITI answered `yes' to this question. They also believed that Japan's economic development has accomplished the long-awaited national task of high accumulation of economic assets at home and abroad, and that a considerable base of human capital and technological know-how has been built up. In addition, they are of the view that Japan's position in the international economic and political world is now such that it can influence international strategic decision making and thus defend its national interests. They are convinced that the Japanese economy has reached a stage where problems of poverty have been effectively eradicated. Arguments that some members of society still have unsatisfied material needs will be countered by skilful public administration and policy implementation and not by further efforts to increase national output. In sum, adherents to the `natural-trend' Japan view that the productive capacity of Japanese industry has reached such an internationally high level that it can safely allow part of the country's working population to opt out, if they so prefer, from daily regular work and become the beneficiaries of government handouts. Consequently, they envisage that the future economy will consist of two groups of people: those who rely on government handouts and welfare provision and who seek their life's purpose and happiness outside the workplace and employment as such; and those in the traditional workforce who adhere to their hard-work ethic and actively involve themselves in the economic activities of the country. The latter group continues to seek


34

life-fulfilment in the process of work and employment to a greater extent than does the casual `company man' in Japanese society. The successful management of such a ùtopian' economy, it is believed, will depend on the skilful allocation of productive facilities, public administration and policy writing between these two distinct groups of the population. Government must provide an adequate social infrastructure within which the former group may obtain happiness and satisfaction through pursuing their selected way of life. In addition to the people interviewed at MITI, I came across sizeable groups of people in innovative, small to medium-size industrial firms and in high-tech service industries who saw this `natural-trend' scenario as a plausible future for Japan. They expressed their optimistic views in their expectation that new demands and markets will be created from the needs of the former group. Many leaders of large, well-established businesses also approved of a move in this direction. Their reasoning, which was set out in a report published by Keidanren (Japan Federation of Economic Organisations) as follows,26 is that if the Japanese economy is to be revitalised and regain its previous dynamism, a fresh foundation should be laid on an economic and industrial basis by introducing drastic reforms in employment and workplace structure. Such reforms will be organised through selecting and training a number of highly productive and motivated `company men' with the aim of creating a core staff of imaginative and creative employees who are committed to life-time employment).27 The process would require staff who were unwilling to be so trained to be laid off. `Mend' Japan MITI officers who were more senior in age and rank than the supporters of the `naturaltrend' scenario tended, when interviewed, to express strong reservations about the likelihood of that scenario developing. The grounds for their scepticism varied. Some objected on the grounds that Japan has not yet accumulated sufficient economic assets to sustain the required growth without involving the whole of the working population in the nation's economic activities in one way or another.28 Many in the general public have also expressed uncertainty about whether the country's accumulated economic assets are large enough to secure future economic expansion without continuous work efforts coordinated by labour, industry and government. They are thus reluctant to move away from the traditional mixed economy formula. This general feeling has tended to become more widespread when the


35

economy has experienced difficulties, as indicated by the rise in unemployment, inflation, international conflicts, and so on. People preoccupied with the `demise' of the economy are likely to ask such questions as: `How might the economy be revitalised?'; `What form of industrial structure should the economy adopt?'; `What should the public do?'; and `What strategies should business take up?' Effective answers to these questions have yet to be found. Instead, proponents of this view believe that the removal of public regulation measures and policies in order to create a free competitive market will generate economic growth. They argue that the current `demise' of the economy, and the sense that the population is not enjoying an adequate level of quality of life (access to a wide range of goods and services at low prices) results from over-regulation of the economy. The removal of almost all regulations would encourage capital and the workforce to move freely across industries and markets and thus build efficient production structures. In addition, they expect the freer market system to generate an active entrepreneurial spirit which would create new industries and markets to meet the new needs, tastes, work motives and life patterns generated by the transformed economy. Other objections arise from their concern over the projected widening of the inequity of income and asset holdings among the population, in particular between the unemployed and the employed if the natural-trend view is adopted. That is, it is expected that those who become the beneficiaries of government handouts may have to satisfy themselves with moderate economic means, while those who make active progress in the workplace will demand and gain a high income with perhaps higher social status as well. All of this, so this group believes, will lead Japanese society to follow a divided path with varied interests and preferences and, eventually, to lose its traditional and highly valued unity and integrity as a nation. They envisage such a Japan would not survive for long. Yet others find the scenario implausible on the grounds that few people may select to opt out of the workforce, given the traditional preferences of the population who value employment above higher pay and better working conditions. This attitude implies that, in Japan, working is not just a means of obtaining an income but is seen as an opportunity for learning and a means of personal development (as was the aim of Muto's corporate welfare system). There is no denying that many Japanese people see the workplace not only as the location where they sell their time and effort in order to gain an income, but also, and perhaps more so, as a place where they communicate and make contact


36

with society — that is, where they live life.29 As long as the work incentive as such remains evident in Japan, the two-tiered society forecasted in `natural-trend' Japan will be unlikely to evolve. Àdvance' Japan Given the importance of increasing the welfare provisions made to the Japanese working population, the third scenario, àdvance' Japan, emerges as a plausible future for the country. It asks, `How may we provide a fuller life and greater happiness for people through economic activities?' This question arises when the economic development of a country has reached that happy stage where `poverty' no longer has to be tolerated. Kawakami asked the same question some 80 years ago. In 1986 a government-commissioned study report (referred to generally as the `Maekawa report'), compiled by a group of seventeen selected from business and academia, was published. The study committee was established in response to a request by the then Prime Minister, Nakasone, for a new form of economic system to be introduced in Japan to ensure its continued development and growth at home as well as overseas.30 The report strongly advocated restructuring management practices in the workplace, particularly in the manufacturing and service industries. It commented that reform of the country's employment systems and practice, business organisations and networks was necessary in order to evaluate the effectiveness and desirability of the socalled Japanese management system. The report recommended that welfare increases and `quality of life' improvements must be pursued in the area of production systems and processes rather than distribution.31 Of the four scenarios under discussion, this one takes the most traditional approach. Muto's initiative in instigating Japan's corporate welfare system is re-evaluated in response to the currents of the economy. In this approach, government planners and business ensure that more paid free time and opportunities are provided to employees so as to encourage their self-development and elevate them beyond traditional `company men', while at the same time making them efficient workers in the modern setting of a high-technology and internationalised economy. Since 1994 working hours have been reduced and a number of new public holidays have been added to the calendar. Employers are encouraged to revise the traditional seniority-based promotion and pay practice so as to allow employees to transfer their accumulated work experience and training across companies. The àdvance' Japan formula is of particular interest in the context of continued cooperation between government and


37

business. In this sense it proposes a new form of mixed economic system to be explored in response to changes in economic conditions and people's desires in an affluent, post-industrial Japan. However, there is a weakness in this scenario as a model for a workable future Japan: the failure, thus far, of government to draw up a convincing program of the tasks it needs to carry out in order to achieve the àdvance' Japan ideal. The government's efforts, so far, consist of revising the concept of infrastructure facilities which the public must provide. It created the term `new infrastructure' and announced the allocation of public funds for the construction of such facilities and services as a long-term national project. What does `new infrastructure' consist of? It consists of public supply of goods, services and production facilities; the provision of capital and know-how for modern computer-based communications systems and transport networks; education, training and research activities beyond the traditional school and university frameworks; health care and care for babies, youth and the aged; and the promotion of participation by women in the economic and social activities of the country. This all sounds important and relevant, but how will those facilities contribute to the development of a new economic system in Japan? A decade has passed since the publication of the Maekawa report, and the structure of the àdvance' model has not emerged beyond a rough sketch. However, the fact that it follows closely the traditional approach of corporate welfare and a mixed economy helps people to understand the general thrust of the model and thus assist its development. `Reform' Japan The fourth scenario calls for an even greater contribution from government than do the other scenarios. This is the scenario that projects that the Japanese economy has reached a post-industrial stage. This scenario sees people placing greater emphasis on the quality of life, especially with the increasing influence of women on economic life. For this reason it is not a popular scenario under the current mood of deregulation and is thus the last scenario discussed here. Nevertheless, it is, as we will see below, a plausible future for Japan. The original form of this approach emerged in the early 1970s before the oil crisis. It developed further with the emergence of popular movements which voiced a `To hell with GNP' sentiment, reflecting people's strong discontent with the growthoriented economic management practices of the 1950s and 1960s which saw the quality of life steadily deteriorate as a result of pollution and the congested living environment, the àlienation' of workers at factories, price hikes of daily necessities, and so on.


38

The movements expanded and mobilised an increasing number of the general public who demanded improvement of social infrastructure facilities as the `civil minimum' requirement. Every person in Japan should have a decent life arising from the national economic prosperity which they had built through their hard work. Specifically, they demanded that a larger and increasing proportion of the government budget be allocated to building better facilities for public transport, communication, shopping, housing, education and leisure pursuits. We noted earlier that these movements met their unfortunate fate in 1973 when the oil crisis shook Japan's economy. People, including those in the movements, had lost confidence in the economy and readily accepted the view that the nation's priority must be to rebuild the economy. A decent life and comfortable living environment became of secondary concern. Thus, the scenario ended prematurely, but there is a strong possibility that it will re-emerge as a viable future option for Japan. The issues that drove the movements in the past, and the ingredients that formed the `civil minimum' conditions, are still relevant today. In discussing its plausibility as the future Japan, I note the increasing importance of women in this scenario. While their overall contribution is not clear at this stage, an increasing number of women are taking on influential positions on the basis of their quality of education and training and high selfesteem. They are voicing their concerns about the way in which cities and villages are structured, houses are built, buses, trains and subways are serviced, child-care facilities are provided and supervised, schools, colleges and universities are administered, and so on. How they will actually direct their abilities and efforts to gain improvement in those areas and help to build a better society in Japan, however, awaits further research.32

CONCLUSION In the analysis given above we made two fundamental observations. First we observed the end of the effective working of mixed formula of the country's economic system. The nature of Japan's economy must be explained in terms of the importance of the government's role which was developed to create a balanced increase in national wellbeing (economic growth) and individual welfare (rise in living standards) through the industrialisation of the country. Government has carried this responsibility and formulated various public devices which business, on their part, responded to; developing specific corporate structures and relevant


39

management devices most effective given the stage of economic development and cultural support in society. The working population similarly supported the whole mechanism with their hard work, which contributed to the rise in national welfare of the country, leading to the development of Japan's mixed economy throughout the national efforts for industrialisation. It has been an effective, if not the only, approach conceivable to a country which had virtually no endowment of natural resources, energy or land. Japanese capital accumulation and technical progress was not adequate to achieve their ambition to speedily industrialise the economy. What was left for the economic planners in government and business to utilise was their working population who were motivated and relatively well educated for the purpose. The planners did not see labour as an abundant cheap resource. Instead they saw it as the only available and moreover as an important resource with which the national industrialisation plan could be programmed. They made great strategic use of it. Consequently, planned economic growth and development came to Japan. So did the accumulation of capital and technological development. With such a wealth of capita as its base, natural resources and energy and even land could be purchased. In the present abundance of these production resources, people have begun to see labour as replaceable. As we observed earlier, when the country moved away from a labour surplus to a capital and technology surplus economy at the beginning of the 1960s, the economic planners in government and business turned to adopt a technical way of thinking, viewing labour as L (working hands) compatible to K (capital) and T (technology) so as to reduce the importance of it being merely one of the production inputs for conducting economic activities. That is, in its relative shortage of labour, labour, ironically, has lost its importance and self identity. Along with this has come the loss of the basis of `mixed economy' in Japan. So we come to ask if this tells us that the Japanese economy is experiencing `government failure' and it at last may join many of the industrial economies in seeking her future in a deregulated free competitive direction. We don't think so. We should be cautious about falling into accepting a ready made solution because of our appreciation of Japan's past efforts and accumulation of experiences and cultural settings, which support the effective development of her unique `mixed economy'. We also assessed the direction in which the Japanese economy might evolve in the near future. As our second observation we drew four scenarios to picture the likely future of Japan. What do these four scenarios tell us? Three of the four


40

models — `natural-trend', àdvance' and `reform' Japan — emphasise the importance of public programs. They envisage a positive role for government and call for a better form of economic society that is both efficient and productive as well as civil. People are seen not only as a working population willing to take part in production activities but also, and more importantly, as the rightful beneficiaries of their economic activities. It is envisaged that what will distinguish Japan's mixed economy in the future is the fact that individuals will seek this rightful benefit not from distribution but through the production process, so that the traditional `will to economise' will be placed in a new context and promoted as the driving spirit of Japan's younger generation. Future members of society will be expected to hold positive values and to experience other cultures, while also working hard with the aim of eliminating personal and global poverty and helping to bring about the worldwide self-development yearned for by Kawakami. This may sound simplistic and idealistic. However, given Japan's record in tackling the problem of poverty through the cooperative efforts of all members of its economic society, as well as the amount of its already accumulated capital, its high technology and, most importantly, the know-how to develop a socio-economic organisation in the form of a mixed economy, steady progress can be assured.

NOTES 1. 2.

3. 4. 5. 6.

1 January 1995. To be more specific, the results are as follows: 82 per cent of executives said their life as a manager had been happy and rewarding; this positive response was supported by only 43 per cent of the younger managers. Pessimism about the prospects of their children's generation (the belief that the next generation will have less affluence) rose with the respondent's age. In response to the question, `Would you like your children to repeat your career by working as a company manager in Japan?' 15 per cent said `Yes', 17 per cent said `No', and 10 per cent said `No, but it will be unavoidable'. Yomiuri Shinbun (1994). US Department of Commerce (1972). See Sheridan (1993), Ch. 9 in particular. I will not discuss here the various processes involved in selecting the agreed direction of society, although they are an important study concern. There are a number of scholarly analyses on the subject by historians in the social, political, economic, labour and other fields,


7. 8. 9. 10. 11. 12.

13. 14. 15.

16. 17. 18. 19. 20. 21. 22.

23.

41

with both modern and Marxist orientations. For further information see, for example, Banno (1992). Lewis (1955), Ch. 11. Ibid., p. 23. For his works and personal profiles see, for example, Sugiyama (1988) and Hirschmeier and Yui (1975), particularly pp. 100-2. It was in fact Okubo's policy to call upon the support and assistance of the governors of prefectures to enhance people's `will to economise' widely across the nation. See Sheridan (1993), pp. 38-40. Poverty spread across the villages and cities, threatening them with hardships which took various forms unknown in the previous agrarian society — deteriorating health, psychology, living environments and work relationships. Many were left to counter these problems through their own efforts. Kawakami (1965) — see pp. 19-20 below for further discussion. Kawakami (1965). It is interesting to note how they were influenced by Kawakami. Their own writings tell us that the impact came not so much from the analysis in the Tale, as from the high-minded moralistic passion and specific approach of the author, expressed as: `[E]conomics is never merely the study of the production and distribution of wealth. On the contrary, the ultimate object of economics is to make human beings more fully human.' (Tsujimura 1984, pp. 8687). For further discussion on this point see, for example, Ito (1989). For further discussion of the system see, for example, Otake (1996). Sheridan (1993), Ch. 7. For further discussion of this question see, for example, Smith (1988, Ch. 10) for the prewar period and Kamata and Takamura (1988, Ch. 2) for the postwar period. Information from Ian Castles, `Living standards in Sydney and Japanese cities — A comparison' in Sheridan (1992), pp. 92-121. The preceding `delayed wage increase behind economic growth' had come back again in more intensified extent in this period. A discussion between S. Takahshi, chief adviser on quality circle activities in Ishikawajima Heavy Industries and Professor Ikezawa T., former chairman of Japan TQC Association, was reported in Nihonkeizai Shinbun, 1 October 1995. During an interview held in June 1996 with Mr Y. Morozumi, the former vice-minister of MITI (1971-73), he observed that Japanese people have lost their trust in government, effectively depriving them of authority and endorsement of their public mission. He observed that the people, on the one hand, place little reliance upon public guidance and judgment while government, on the other, has lost the sense of public obligation that once drove public administrators. Was he alluding to the coming decline of the mixed economic system in Japan?

EMERGING ECONOMIC SYSTEMS IN ASIA 24. 25. 26. 27. 28.

29. 30. 31.

32.

42

See the discussion on pp. 10-11 above. MITI (1995). Keidanren Review of the Japanese Economy (1994). Imai and Komiya (1989) have observed that many companies in Japan are taking this direction. In order to decide whether the national accumulation of capital and knowledge has reached a high-enough standard to allow the Japanese to select the natural-trend approach, a few attempts have been made since the mid-1980s to estimate the extent of capital and asset accumulation in the national economy as a whole, in individual corporations, and in households. In a similar manner the knowledge and skills of corporate management, public administration and human resource development were measured in order to estimate the comparative advancement, power and influence which Japan has acquired relative to other economies in the world. In sum, an attempt has been made to estimate the nation's economic achievement and the strength and capacity of its `cultural' heritage in order to evaluate the size of the total assets and resources available for the domestic and international development of the economy. Uzawa (1991), p. 221. The committee was chaired by H. Maekawa representing the zaikai (business circles) — thus the name of the report. See Takemura (1986) for further discussion on the report. Lane made a similar proposal in 1991, addressing readers in the West. It is a thoroughly researched work but has no reference to the experiences and efforts made in Japan (Lane 1991). See Sheridan (1993), pp. 232-50.

BIBLIOGRAPHY Banno, J. 1992 `Senzen Nihonniokeru "Shakai minshu shugi", "Minshu Shakai Shugi", "Kigyo Minshu Shugi"' in Tokyo University Shakaigaku Kenkyu Jo (ed.) Gendai Nihon Shakai Tokyo University Press, Tokyo, vol. 4, Ch. 5. Castles, I. 1992 `Living standards in Sydney and Japanese cities — A comparison' in K. Sheridan (ed.) The Australian Economy in the Japanese Mirror University of Queensland Press, St Lucia, Ch. 6. Dore 1986 Flexible Rigidities, Industrial Policy and Structural Adjustment in the Japanese Economy 1970-80 The Athlone Press, London. Fukuzawa, Yukichi 1875 The Complete Works of Fukuzawa Yukichi Iwanami Shoten, Tokyo, vols 3, 4 and 19, 1989 ed. Hirowatari, S. 1993 Introduction to vol. 6 of Tokyo University Shakai Kagaku Kenkyujo (ed.) [hereafter Shaken], 3rd ed., pp. 1-30. Hirschmeier, J. and Yui, T. 1975 The Development of Japanese Business 1600-1973 George Allen & Unwin, London.


43

Imai, K. and Komiya, R. (eds) 1989 Nihon no Kigyo Tokyo University Press, Tokyo, Ch. 1. Ito, T. 1989 `"Kokuze" to "Kokusaku" "Tosei" "Keikaku"' in T. Nakamura and K. Odaka (eds) Nihon Keizaish, Iwanami, Tokyo vol. 6. Johnson, C. 1982 MITI and the Japanese Miracle — The Growth of Industrial Policy: 1925-75 Stanford University Press, Stanford. Kamata, Y. and Takamura, J. 1988 Sengo Keizaishi, Anotoki no Shinjitsu Nihonkeizai Shinbunsha, Tokyo. Kawakami, H. 1965 Binbo Monogatari Iwanami Bunko, Tokyo, originally published in 1917. Keidanren Review of the Japanese Economy 1994 Special Issue, Tokyo. Keizai Kikakucho (Economic Planning Agency [hereafter EPA]), Sogo Keikaku-Kyoku (Planning Bureau). ——— 1987 Nihon-no Sogo Kokuryoku, Japan's National Economic Wealth and Capacity. ——— Kokumin Keizai Keisan Nenpo, annual. Keizai Koho Center Japan, An International Comparison Tokyo, annual. Lane R.E. 1991 The Market Experience Cambridge University Press, Cambridge. Lewis, Arthur 1955 The Theory of Economic Growth George Allen & Unwin, London. McClelland, D.C. 1961 The Achieving Society The Free Press, New York. Minami, R. 1986 The Economic Development of Japan, A Quantitative Study The Macmillan Press, London. MITI 1995 Policy Guidelines for FY 1996 (outline), Building a New Economic Community. Nihon, Keizai Shinbun, 1 January 1995, p. 1. Otake, H. 1996 `1955 — nenno Seiji Taisei Ron' University Press, no. 6. Pempel, T.J. 1982 Policy and Politics in Japan, Creative Conservatism Temple University Press, Philadelphia. Power and the Contribution in the International Scene Demanded Ministry of Finance Printing Office, Tokyo. Prince, R. et al. 1992 Australian Economic Statistics 4th edn, Warringal Publications, Melbourne. Rostow, W.W. 1952 The Process of Economic Growth Norton, New York. Sheridan, K. (ed) 1992 The Australian Economy in the Japanese Mirror, Queensland University Press, Brisbane. ——— 1993 Governing the Japanese Economy Polity Press, Cambridge. Shimada, M. 1990 `Nihonteki Rodokankei-no Genkei' in Sugihara et al. (eds) Nihon-no Keizaishiso 400 — nen Nihonkeizaihyoron, Tokyo. Shinohara, M. 1961 Nihonkeizai no Seicho to Junkan Sobunsha, Tokyo. ——— 1986 Nihon Keizai Kogi 2nd edn, Toyokeizai Shinposha, Tokyo. Smith, T. 1988 `The right to benevolence: dignity and Japanese workers, 1890-1920' Native Sources of Japanese Industrialization 1750-1920 University of California Press. Sugiyama, C. 1988 `Fukuzawa Yukichi' in C. Sugiyama and H. Mizuta (eds)


44

Enlightenment and Beyond, Political Economy Comes to Japan University of Tokyo Press, Ch. 2, Part 2. Takemura, K. 1986 Nihon no Shorai no Shishin, Maekawa Report no Tadashii Yomikata Tokyo Agency Press, Tokyo. Tokyo University Shakai Kagaku Kenkyujo [Shaken] (ed.) 1991-93 Gendai Nihon Shakai University of Tokyo Press, Tokyo, 7 volumes. Tsujimura, K. 1984 Nihon-no Keizaigakusha-tachi Econo Books, Nihonhyoron, Tokyo. Tsusho Sangyo-sho (Ministry of International Trade and Industry [hereafter MITI]) 1991 Rodojikan Tanshuku-no Eikyoni-kansuru Kenkyukai Hokoku (study reports on the reduction of working hours), Mimeo. US Department of Commerce 1972 Japan: The Government-Business Relationship, A Guide for the American Business, Government Printing Office. Uzawa, H. (ed.) 1991 Nihonkigyo-no Dynamisum University of Tokyo Press, Tokyo. Vogel, E. 1979 Japan as Number One: Lessons for America Harvard University Press, Cambridge. Yano, T. 1991 Sujidemiru Nihon no 100-nen Kokuzeisha, Tokyo. Yomiuri Shinbun 1994 `Ganbare Nihon Keizai' in This is Yomiuri November special edition.

3 Taiwan's economic success Fred Robins Taiwan's recent superlative economic growth has attracted international attention. Indeed, it has been recognised for well over a decade as one of Asia's `tiger' economies (The World Bank 1993). By 1995, with a population of just 21.4 million and an income per head of US$12 300, Taiwan had become the world's twelfth largest trading nation (Hiscock 1995). Taiwan is also a focus of scrutiny for a host of academics and others seeking to understand the mainsprings of economic growth (for example: Galenson 1979; Winckler & Greenhalgh 1988; Wade 1990; Simon & Kau 1992; Aberbach et al. 1994). The academic literature relating to Taiwan's achievement is diverse, comprising contributions from economists, political scientists and sociologists of many different hues. As might be expected, differences of interpretation are legion. In particular, liberal economists profess to see in the policies of Taiwan's government a happy propensity to remedy `market failure' and thereby facilitate the productive operation of market forces (e.g. Balassa 1981); others interpret the same government policies differently and profess to see a powerful, interventionist state successfully developing new industries and self-consciously steering the economy towards a vision of the long-term national interest (e.g. Wade 1988). Each of these opposing interpretations has been succintly summarised elsewhere (Wade 1990, pp. 298-9). The `government-managed' view of economic development posits that politically or administratively determined requirements, imposed on business by regulation or administered prices, promote and channel the process of capital accumulation. Put simply, capital accumulation is encouraged but channelled away from real estate and short-term speculative ventures towards more highly productive activities. Wade (1990, p. 297) lists those policy mechanisms most


46

frequently employed by development-oriented governments to achieve this. Indeed, Wade (1990) considers the particular case of Taiwan at much greater length and in much more detail than is possible here. This chapter follows the history of Taiwan's modern economic development, though this is not the main purpose. This history has been summarised many times. Indeed, one of the key architects of much Taipei economic policy, Li Kuo-ting, has directly contributed to this documentation himself (1988 & 1995). The selective history offered here pays particular attention to factors and institutions responsible for initiating, facilitating and implementing economic policy. The chapter concentrates on broader aspects of Taiwan's system of economic management. These include: the role of foreign development aid; the responsiveness of government to established economic interests; the character of business organisations; and lastly, the importance of international trade and investment. This approach serves to highlight the way in which the Taiwanese economy as a system works and, occasionally, the ways in which it is similar and dissimilar to other comparable systems. To this end, attention is limited to those elements of that system just mentioned. Throughout, particular note is made of business's own responses to economic policy. This is for the straightforward reason that national economic success, in a market system, ultimately rests on the performance of individual businesses. To the extent that these businesses are free actors, their individual and sectional interests inevitably influence the effectiveness of economic policy; that is, the actual economic outcomes as distinct from the policy choices of officials. An attempt is therefore made to gauge the degree to which public policy makers and business leaders, whether the latter be appointed officials, `mainland' capitalists or local entrepreneurs, have shared similar or at least compatible objectives.

ORIGINS OF TAIWAN'S MODERN ECONOMY It is worth beginning with a brief comment on the island's pre-industrial economy. This provides one standard of comparison against which the magnitude of Taiwan's contemporary achievement may be judged.

Colonial development, 1895-1945 Following Imperial China's defeat in Korea, Taiwan was ceded to Japan under the Treaty of Shimonoseki in 1895. The Japanese

TAIWAN’S ECONOMIC SUCCESS

47

developed the island as a source of rice and sugar. As a direct result, Taiwan's share of total Japanese sugar imports rose from 8.7 per cent in 1903 to 81 per cent in 1935 (Ranis & Schive 1985, p. 88). Irrigation projects, agricultural extension services, and improvements in transportation and power supplies led to substantial increases in gross domestic product (GDP). Yet a simple view of Taiwan's economy at this stage as just an agricultural appendage to Japan is not quite accurate. By 1930 nearly 20 per cent of Taiwan's national income was being generated industrially (Ho 1978, pp. 25-40). Prior to 1924, Taiwanese entrepreneurs were not permitted to form joint stock companies without Japanese participation. Even after 1924 a maze of regulations and licensing procedures provided for the virtual exclusion of non-Japanese from corporate life. In the 1930s, Japanese companies utilised Taiwan's relatively cheap hydroelectric power to establish aluminium refining and feroalloy manufactures. The economy the Japanese fashioned on Taiwan resulted from deliberate planning and rested on government ownership of major resources (Amsden 1979, p. 343); production was geared to the demands of Imperial Japan. Nevertheless, by the late 1930s Taiwan's per capita income had doubled. The Japanese improved public health and eliminated most tropical diseases. They also established a universal elementary school system and some secondary technical education; Japanese was the medium of instruction. Even after World War II, Japanese remained the lingua franca of many better-educated Taiwanese; a factor to be of value to some of them in negotiating commercial arrangements with resurgent postwar Japanese businesses.

The economy following World War II, 1945-49 In 1945 the Taiwanese economy was in a poor state. Power facilities, infrastructure and industry had been heavily bombed by the Allies. Facilities which escaped were run down. Agricultural production was only slightly higher than in 1910, having fallen to about half the level of 1939. To make matters worse, the extremely high inflation being experienced on the mainland spread to the island (Li 1988, p. 48), despite having a separate currency. Growing civil dislocation on the mainland preoccupied the central government, and the provincial authorities on Taiwan were in no position to begin largescale reconstruction on their own. In any case the quality of the newly arrived Chinese provincial administration was very low indeed (Kerr 1965, p. 235), giving the island a reputation in this period as a `thieves' market'. This was partly because those who had been leaders of the community in the


48

colonial period were wiped out in government massacres on 28 February 1947. `Those who did not flee were either liquidated or suppressed' (Gold 1988, p. 182). This event left the Republic of China's `nationalist' or Kuomintang (KMT) party in absolute control of Taiwan's civil society (Hsiao 1992, p. 156). Further, China's labour laws were repressive and effectively removed workers' rights to collective action and both economic and political influence. The situation did not immediately change when the Kuomintang government evacuated to Taipei in 1949 except that martial law was imposed. At least 1.6 million people arrived from the mainland in a short space of time, increasing the population by more than one quarter. Insufficient local production in the face of suddenly increased demand added to inflation, with price increases of 3400 per cent in 1949 alone (Ranis & Schive 1985, p. 90). This was exacerbated by the jump in commodity prices following the outbreak of the Korean War in June 1950. The latter, however, caused the US government to resume both military and budgetary aid. The result was reduced inflation plus enhanced security and business confidence. Yet it took until 1952 before total agricultural and industrial production regained 1939 levels. In 1949 60 per cent of the Taiwanese population were farmers. Therefore, one of the most important early decisions of the government was to carry out a thorough land reform aimed at making tenants into land owners. This was carried out on strong US advice. Indeed, there was at this time a Sino-American Joint Commission on Rural Reconstruction whose position to influence policy was greatly strengthened by its capacity to influence US aid decisions. Land reform also reflected General Chiang Kaishek's awareness, derived from his earlier loss of peasant support on the mainland, of the political importance of the rural population. The KMT government's own slogan at the time was: `Developing agriculture by virtue of industry and fostering industry by virtue of agriculture' (Ho 1978, p. 105). The reform proved to be both an economic and a political success. However, it is noteworthy that it was not the outcome of free market forces but of state management (Amsden 1979, p. 353). Further, the government was instrumental in engineering the transfer of resources out of agriculture necessary for renewed industrialisation and modern development. Under the land reform program it established a system whereby rural producers had to barter a large part of their rice production for the fertiliser they needed to grow their rice. This administered exchange was highly unfavourable to the farmers but yielded more than half the total rice collected by the government in the 1950s and 1960s. The hidden rice tax collected


49

by this means and through other compulsory rice purchases by the government exceeded total income tax revenue every year until 1963 (Kuo 1976). As Amsden (1979, p. 358) observes in this context, it is interesting to note that despite the high degree of commercialisation of Taiwanese agriculture, the government placed minimum reliance on market forces to extract a surplus from agriculture. However, the land reform yielded lower rents, higher output, higher rural living standards and helped to establish the `mainland' government's credibility. Indeed, it is one reason why the brutally imposed `mainland' government was able to gain some local support. Of course, another reason was that the elimination of the local elite in 1947 had left a vacuum at the top. This helped the KMT to monopolise economic power as well as military and political power (Gold 1988, p. 182).

TAIWAN'S LADDER OF DEVELOPMENT Understanding of Taiwan's modern industrialisation is aided by recognition of both its unique features and the sequence of events. In what follows, two local factors — the extremely high level of foreign development assistance and the particular nature of the local planning system — are first given attention. Then, the clearly distinguishable phases in the island's industrialisation and development are examined sequentially.

United States' aid Between 1951 and 1965 the United States gave Taiwan more than US$4 billion in grants, loans and military equipment. Some US$1.5 billion of this was non-military, which financed roughly 40 per cent of investment and imports during the period. As a proportion, US civilian aid constituted more than 10 per cent of Taiwan's gross national product (GNP) in 1951, falling to less than 2 per cent of the much larger GNP of 1965 when US aid, except for subsidised sale of surplus agricultural commodities, was terminated (Li 1988, p. 55). An early benefit, in the years 1951-53, came from aidfinanced imports of US$150 million of basic foods and consumer goods. These were instrumental in breaking the destabilisingly high rate of inflation. A longer-term benefit came from technical assistance: American personnel provided expertise to assist the government in land reform, agricultural extension services, civil aviation administration, public health, education, and other infrastructure projects. Between 1952 and


50

1958, US aid also provided 24 per cent of private investment. Virtually every major firm received something (Li 1988, p. 58). When government came to assess the òverall performance of US aid', as published in the 1965-66 Republic of China Yearbook, four benefits were documented: From 1951 to 1964, US aid had met 93 per cent of Taiwan's foreign exchange deficit. The sale of US aid commodities for local currency had removed excess purchasing power from the economy and, thereby, stabilised prices. The United States had provided investment funds utilised for the development of electric power, transportation, communications, manufacturing and mining, as well as for military projects. The United States had trained 2700 senior Taiwan technical and managerial personnel. The termination of American aid in 1965 came after just one year's warning and sooner than either America or Taiwan had expected. Nevertheless, after 1965 exports continued to grow rapidly and the economy to prosper. In fact the economy had taken off; the objective of American civilian support had been realised. Whilst American aid was undoubtedly very helpful, especially in the early 1950s, its overall importance in achieving self-sustained economic growth remains a matter of debate. Of the current account deficit of US$1.3 billion between 1953 and 1962, aid financed approximately $1.1 billion or 85 per cent (Jacoby 1966). Yet even at its peak in the 1950s, US aid contributed only about one third of Taiwan's gross domestic investment (Ho 1978, p. 246). Moreover, of 86 cases of direct foreign investment in the 1950s, 58 were by overseas Chinese (Haggard & Cheng 1987, p. 88). Then from 1961 to 1970, arguably the years of most dramatic expansion in manufacturing output, domestic savings provided about 85 per cent of gross domestic investment (Ranis & Schive 1985, p. 91). So overall, it is hard to argue that US aid by itself was ever the decisive factor in laying the foundation for future economic success. Yet at the same time US aid was very important both in quantity and timing. It may reasonably be argued that it provided the necessary confidence, as well as very useful supplementary finance, without which Taiwan might not have been able to achieve either political stability or economic growth. One respected writer on the subject describes American aid to Taiwan as àn indispensable [my italics] part of Taiwan's economic success at this stage' (Wu 1989, p. 114). In other words, US aid may well


51

have been a necessary, albeit not a sufficient, condition for economic success at that time.

Economic planning Formal economic planning has existed in Taiwan since 1953, when the Economic Stabilization Board (ESB) was created and the leading role of the private sector reaffirmed. In fact, Taiwan's first two four-year plans were prepared by the ESB as a condition of receiving US aid (Balassa 1991, p. 103); four-year plans, and sometimes longer ones, have been a clear feature of the Taiwan government's economic management ever since. The historic sequence has been as follows: 1953–56: 1957–60: 1958: 1961–64:

1965–68:

1969–72: 1973–76:

1976–81:

1980–89: 1982–85: 1986–89: 1986–2000: 1990–93:

1991–96:

First Four-Year Plan; ESB formulated, autarchic, following US advice. Second Four-Year Plan; ESB formulated, again autarchic in concept. ESB disbanded and planning decentralised. Third Four-Year Plan; produced by coordinating committee under K.T. Li (incorporated a 19-point program of economic and financial reform). Fourth Four-Year Plan; recentralised under Council of International Economic Cooperation and Development (CIECD) policy coordination. Fifth Four-Year Plan; CIECD coordination rather than planning. Sixth Four-Year Plan; partial decentralisation under new Economic Planning Council (abandoned in wake of first oil shock). Seventh Six-Year Economic Development Plan; introduced a year early (included ten major public, heavy industry development projects). Ten-Year Projection Assessment. Eighth `New' Four-Year Plan; capital-intensive, high value-adding phase. Ninth Medium-Term Economic Development Plan; basic continuity. Perspectives on the Taiwan Economy to the Year 2000. Tenth Medium-Term Plan; emphasised non-polluting, high-tech industries (soon overshadowed by overlapping six-year plan). The Six-Year National Development Plan; major infrastructure projects (highlights eight key technologies and ten high-growth industries).


52

It is misleading to regard these èconomic development' plans in isolation. Government economic planning in Taiwan since the 1950s, and especially since the 1970s, has been broadly based and well integrated. Parallel plans are prepared for agriculture, national construction and labour policy. Particularly noteworthy is that Taiwan has had official guidelines for the development of science and a National Council on Science Development since 1959; well ahead of similar organisations in many more advanced economies. Further, all of these elements of government economic planning are formally integrated with fiscal and monetary policy decisions at the macreconomic level. Nevertheless, excluding a few major heavy industry and infrastructure projects, the content of these plans has not been imposed on the economy. Taiwan has never been a command economy. The industrialisation of Taiwan has been geographically dispersed and the ownership structure is for the most part similarly dispersed. There is a major state-owned sector, mainly comprising assets expropriated from the Japanese but also including important KMT party-owned companies; an important `big business' private sector of `mainland' origin and ownership; and a native Taiwanese business sector originally of mostly small or medium scale. Although the authorities have had very considerable means of both persuasion and coercion at their disposal, they have not been heavy handed. In practice, they have largely relied on direct use of economic and financial levers to influence the business community; both those elements close to the ruling KMT and those privately distant from it. Given that the majority of firms are privately owned and relatively small, it is hardly surprising that planning has been a bureaucratic process, often amounting to little more than written statements. As K.T. Li, who participated in the planning process at a senior level for many years, has written (1988): `. . . what we as policy makers did on Taiwan was to help various parts of the economy first to start and then to walk; and then we let go.' Implementation of this loose planning was never mandatory. Indeed, it was not even ìndicative' in the sense that it lacked the standing consultative committees with private industry normally associated with indicative planning (Little 1979, p. 488). In Taiwan, government-private business liaison has been ad hoc and the willingness of the former to exert pressure on the latter has not been great. For example, in 1973 the textile industry was warned that it was overinvesting, but it went ahead anyway. Contemporary planning in Taiwan really only amounts to `suggestions' to private business supported by sympathetic fiscal, monetary and trade policies plus the provision of infrastructure. There is consequently plenty of room to disagree about its importance.


53

Major economic achievements cannot convincingly be explained in terms of government policy alone. Moreover, the detailed figures included in the plans are often way off the mark. For example, in 1967 the actual national income was more than 10 per cent higher than had been estimated at the time of the plan in 1965. Furthermore, some important features of the macroeconomy, like employment levels, hardly receive a mention. So although Taiwan has achieved full employment, it is hard to claim that this is a simple result of planning (Little 1979, p. 487). At the same time, government continues to play a proactive and often driving role in major priority areas, as is evidenced by the early establishment of export processing zones in the mid-1960s, establishment of the Hsinchu science-based industrial park in 1980, the World Trade Center in Taipei, also established in 1980, and the new bioscience park near Tainan. It is, perhaps, in such forward-looking and high-risk ventures that planning, in the sense of mobilising and coordinating public sector support for private industry, has had its most valuable impact. So one commonsense approach to the role of planning in Taiwan could be to insist on assessing the quality of public economic management as a whole and to avoid the temptation of attaching undue importance to the so-called plans in isolation. This is the perspective of this chapter. The first basic point to note, though, is that government in Taiwan has deliberately sought to guide and support the private sector; it has not just stood by awaiting events. Government has deliberately tried to look ahead, to be proactive and to take initiatives. Of course, it has not always succeeded as it would wish, but it has more often than not. The second basic point to note, as will further emerge from what follows, is that it is naive to understate the importance of this purposeful government role.

Import substitution, 1950-60 The first phase of modern economic development was underpinned by a currency reform of 1949 and the very substantial American aid documented above. In these years, policies were designed to increase local food production and save foreign exchange through import substitution by manufacturing non-durable consumer goods at home. Between 1952 and 1957 the share of such consumer goods in total imports fell from 20 per cent to 6.6 per cent (Ranis & Schive 1985, p. 92). The period was characterised by multiple exchange rates combined with a system of administered foreign exchange allocation, with tariff and non-tariff protection. Between 1948 and 1955 the average nominal tariff rate for all imports rose from 20 per cent


54

to nearly 45 per cent (Tao 1969, p. 175). The currency was overvalued and foreign exchange allocations were without economic logic. The overvalued currency penalised exports and discouraged the development of export industries, whilst the larger government enterprises enjoyed easiest access to foreign exchange (Ho 1978, p. 194). Businesses competed against each other to obtain government licences rather than to reduce costs and win customers; corruption flourished. However, the government was besieged by inflation and balance of payments crises, so strict controls on foreign exchange and imports were virtually inevitable. As a result, Taiwan's manufacturing sector expanded rapidly. Import substitution proceeded in textiles, rubber and leather products, petroleum, coal and metal products (Ho 1978, p. 190). By 1958, manufacturing production was double that of 1950 (Balassa 1991, p. 97). New firms were able to establish strong domestic market presence free from import competition and from foreign-owned competitors (Haggard & Cheng 1987, p. 88). Yet as early as 1954 the small size of Taiwan's domestic market became a constraint and the high manufacturing growth rate of the previous few years began to decline. Import substitution in such things as beverages, tobacco, textiles and clothing, paper and cement was virtually complete. This easy phase was over and as the policy lost momentum Taiwan moved towards the outward-oriented development strategy of the early 1960s. This change started tentatively in 1955 with rebates of indirect taxes for exports and a currency devaluation (Little 1979, p. 474). It is notable that the limits of the policy of import substitution were reached quickly in Taiwan due to the small size of the domestic economy. For the same reason, the government quickly grasped the need to move on to new policy goals. That is, the government accepted economic development as its own responsibility. This government involvement, and the necessary switch from import substitution to new policies, was aided and abetted by US advisers. It is worth noting that this policy change required a considerable ideological adjustment on the part of the KMT, which arrived in Taiwan with a decidedly statist economic orientation. The Nineteen Project Program of liberalisation and reform in 1960 can be regarded as marking à triumph of liberal planners over more conservative control-oriented elements of the KMT and even over business itself, which seemed to favour domestic cartelization' (Haggard & Cheng 1987, p. 115). In a nutshell, the first liberalisation of the domestic economy and reorientation of business towards world markets was promoted by influential US aid officials and their US-trained Taiwanese associates, accepted with reserve by the political leadership, and carried through by a regime


55

which ultimately relied on military rather than civilian support; a regime with sufficient independence of action to override vested economic interest if it so desired.

Export-led industrialisation, 1960-73 It should be noted that industrial export growth, especially of textiles, actually began in the 1950s. Although often overlooked, annual growth rates in these early years, starting from a very low base, were impressive (Hsing 1971, p. 177). As a planned state priority, however, export-led industrialisation was introduced by changes in trade and exchange rate policies between 1958 and 1960. These changes included exchange rate unification, further devaluation and the removal of many import controls. They also included a 1961 Statute for the Encouragement of Investment which, unlike Korea's Foreign Capital Inducement Law, was applicable to foreign as well as domestic investors. It included tax holidays, accelerated depreciation, a ceiling on the corporate income tax rate and a tax regime generally favourable to enterprises. Freedom to repatriate profit and the option of full ownership and managerial control also made Taiwan an attractive location for investment by overseas manufacturers. Policy changes continued through the 1960s with some further liberalisation, the establishment of export processing zones (EPZs) and bonded factories, and the streamlining of some export incentives. By 1970 Taiwan was virtually free of export trade controls. In assessing the impact of Taiwan's policy switch from import substitution to export promotion, Ian Little, a frequently cited commentator on economic development patterns (1979, p. 474), comments: `[T]here can be few such clear cases in economic history of cause and effect.' With hindsight, the explanations of the change in policy are clear. They include slowing growth, high dependence on US aid, a poor domestic resource base and a rapidly growing population. The logic is obvious. Yet as Little adds, the logic of the situation is often not enough. In the late 1950s there was no model for Taiwan to follow. Moreover, the economists of that time believed in industrialisation through protection of infant industries focused on their domestic markets. Even Chinese tradition ran counter to free trade. So why did Taiwan pioneer this course? One part of the answer is probably political. Taiwan's leaders had military and political defeat on the mainland fresh in their minds and were very aware of their need of success on Taiwan; reconquest of the mainland was non-feasible, their remaining option was to outperform communism in economic achievement on Taiwan. They


56

appreciated that raising local living standards would help to consolidate the legitimacy of their rule on the island. As Wade has put it (1988, p. 160), `[T]he geopolitical situation of the country has made it simply too risky for the elite, in its own perception, to take an umpiring, let the market work, view of its responsibilities. The elite has therefore needed (economic) success for the perpetuation of its own power.' In this context it is notable that although the government strongly encouraged inward direct investment, it did not follow a free market policy; rather its Industrial Commission handled all applications on a case-by-case basis. In this process the government facilitated foreign entry into targeted sectors but discouraged foreign equity participation in other sectors. After 1970, indeed, these administrative discretions were strengthened. Further, in all cases, local content requirements and import controls were utilised to develop linkages with domestic component suppliers. Put simply, `screwdriver' plants were discouraged and, unofficially, some sectors were off-limits to foreigners. It is relevant that these particular policy changes could be made through macro-level adjustments of exchange rates and taxes without directly involving the business community. The ruling elite were thus able to encourage exports themselves and, moreover, were able to do so without being too concerned about those local interests which might prefer the existing system. The elite had already imposed themselves militarily and ruthlessly suppressed opposition, so they were not in any appreciable way beholden to local interests. These factors gave the elite virtually complete independence of action. In any case, as Chu (1987, p. 66) tells us, the government explicitly prohibited the technocrats from developing personal ties with the business community, so the local private sector had minimal policy input. Interestingly, Little explains the character of the policy changes in terms of the influence of just one or two named individuals; notably K.Y. Yin who is described as `the chief advocate and architect of the reforms' (Little 1979, p. 475). This human rather than institutional perspective serves to remind us of the power of individual human purpose in matters of public policy. Little also emphasises the sophistication of the new policies. He argues that a kind of dual economy was created; not laissez-faire conditions for all. Within a still heavily protected economy, exports, alone, could be manufactured under virtual free trade conditions. To make this possible, a complicated system of domestic tax rebates was introduced so that exporters could afford to buy from domestic producers rather than from overseas without loss, and domestic


57

producers of inputs remained protected despite selling to local buyers at roughly world prices. The result was an extraordinary non-inflationary boom. Great increases in exports came in clothing, textiles, light electrical machinery, radio and television, electronic components, and shoes. From 1963 to 1973, the value of industrial exports (excluding processed foods) rose from US$136 million to US$3794 million, a rate of almost 40 per cent per annum. Moreover, from 1963 to 1973 gross national savings doubled to 33 per cent of GNP and gross private savings rose at 22.6 per cent per annum, which suggests that exporting was extremely profitable. Even so, the partially liberalised Taiwan of the 1960s still included protected industries whose costs were such that they could only sell in the domestic market. A movement towards full liberalisation came with the halving of many tariff barriers and easing of quantitative import restrictions in 1971. Only after 1985, however, was there any significant move to decontrol foreign exchange and substantially ease access for imports to the domestic market. Exchange controls were only finally lifted in 1987, at which time the maximum tariff was still 58 per cent (Li 1988, p. 137). With hindsight we can see that the decade of the 1960s was decisive for the internationally successful industrialisation of Taiwan. Yet this was not an open, free market economy. On the contrary, it was a very highly regulated — and very highly protected — economy. How, then, is this economy best characterised? How, then, is Taiwan's success best explained? There are a number of partial answers. First, Taiwan gained from the establishment of import substituting industries in the 1950s. Arguably, Taiwan squeezed all it could from this policy by establishing sufficiently high levels of protection to yield near self-sufficiency in a large number of basic items. Second, unlike many Latin American countries, Taiwan gained further, this time in industrial efficiency, from gradually reducing levels of protection of selected industries after 1958. At the same time the government introduced coordinated fiscal and firm-level policies to nudge companies into exporting. Precisely how and why these policies worked so well in Taiwan may be debated, but aggregate output and trade figures leave little doubt about their overall success. Third, protection was not dismantled in any comprehensive or doctrinaire manner; rather, it was reduced only slowly and in a highly selective way after the practical implications, often at an individual plant level, had been carefully thought through by the `distant' bureaucracy. In fact, while some industries were increasingly being forced to compete on their own in the global marketplace, others were still being cosseted by the state. However, the state simultaneously


58

assisted the former with a new range of export promotion incentives and supports. Fourth, the bureaucracy which largely devised the detail and implementation of these policies was competent and professional; it was drawn from the educated elite and strengthened by years of American tutelage and a cadre of young technocrats who had graduated from American universities. It was also the highly centralised, powerfully authoritarian arm of a one-party military state which at that time made no pretence of being democratic. No open political opposition was tolerated and martial law was in force. Finally, the policy priority was to outperform communist China in economic growth and development. Moreover, the politico-military leadership were well motivated to succeed; some saw their survival as dependent upon it. After 1971, when they might otherwise have begun to feel more secure and relax, they faced the new challenge of diplomatic isolation.

Deepening of the industrial base, 1973-80 (secondary import substitution) The 1970s were a period in which the Taiwan economy experienced notable changes internally and externally. Internally, it was the period during which an èxportorientation' spread across the entire economy and an export surplus emerged. Externally, it was the period of the two oil price shocks and the emergence of `stagflation' in Taiwan's major trading partners (Kuo & Fei 1985, p. 76). Continuing reliance on exports of simple, labour-intensive manufactures was recognised by the government as a growing liability. Export market growth was slowing, new lower-cost Asian countries were now industrialising, and First World governments were becoming more protectionist and demanding so-called voluntary export restraints (Haggard & Cheng 1987, p. 118). The state, if not yet much of business, recognised the need to move towards higher industrial productivity at home and new, more diversified markets abroad. The quadrupling of oil prices in 1973 exacted a heavy toll on Taiwan, which imported 98 per cent of its oil. The immediate impact on Taiwan's trade-dependent economy was crippling. However, the government acted swiftly to counter rising inflation which rose to over 40 per cent per annum. The many government-controlled prices were raised substantially and a contractionary monetary policy was introduced. Government expenditure in real terms dropped by nearly 33 per cent in the fiscal year 1974 (Chu 1987, p. 85). As a result, 1974 experienced the lowest output growth of the modern period: just 1.1 per cent in real terms. From


59

1976 Taiwan again prospered and in 1978 annual growth was back to 13.9 per cent. The years between the two oil shocks were a period of stability and industrial expansion. Importantly, a significant part came from new public sector expansion under the Seventh Plan (1976-81). Under the plan there was a program of `Ten Major Projects', reflecting a renewed push for capital-intensive, heavy industry, mainly to meet domestic demand rather than for exports. New state-owned enterprises were established to set up an integrated steel mill, the Kaohsiung shipyard and petrochemical installations. As a result the share of the public sector in Taiwan's manufacturing output expanded against the long-term trend to 15.4 per cent in 1979. Developing these heavy industries also required new types of foreign investment and new public sector expertise; in addition to attracting inward investment, the knowledgeable evaluation of new production technologies was required. In addition, there were major infrastructure developments, including the North-South Expressway, which yielded productivity gains to almost the entire economy, the new Taipei airport, harbour development and the East Coast railway. The ten major projects were completed on time, encouraging the development of several new heavy industries (Schive 1992, p. 103). In consequence, these were years in which Taiwan's industrial base deepened and diversified. There was also some secondary import substitution of intermediate products and capital goods. In contrast to the earlier phase of export-oriented growth, the state was the principal agent in carrying out all the planned capital projects. The two largest, China Steel and China Shipbuilding, were originally meant to involve the private sector but did not do so (Chu 1987, p. 91). This was apparently because the government could not interest private investors in minority positions carrying only little managerial control. Perhaps for security reasons, perhaps for political reasons, development of the petrochemical industry was reserved for state-owned China Petroleum from the start. Indeed, the government repeatedly refused the privately owned giant, Formosa Plastics, any involvement. There were, anyway, political reasons for deep state involvement, both domestic and diplomatic. The former was residual concern among the KMT hierarchy and military brass over allowing native-born Taiwanese to gain too much influence and commercial autonomy. Though seldom articulated, this background factor certainly played on the minds of powerful individuals in the period. The external factor was Taiwan's growing political isolation. In 1971 the island lost the China seat at the United Nations and by the end of the decade, in 1979, even


60

the United States transferred its diplomatic recognition from Taipei to Beijing. Consequently, international commercial relations steadily grew in importance. Direct investors were seen as having a stake in the island's future, so the wooing of new foreign investors, especially from Europe, `became a strategy of high politics' (Haggard & Cheng 1987, p. 126). At the same time, many of Taiwan's own small and medium-sized firms benefited from the state's infrastructure investments and, encouraged by export incentives, prospered from overseas markets. Due to their low demand for capital equipment imports they contributed positively to Taiwan's strong balance of payments; a major macroeconomic policy objective throughout the 1970s (Chu 1987, p. 112). The government's overall policy direction in this period was facilitated by two social factors. First, the top political leadership and the economic bureaucracy remained relatively unconstrained by entrenched interest groups. Second, within the bureaucracy itself, sound economic performance and changes in the security environment were steadily eroding the influence of those opposed to policy reforms and modernisation (Haggard & Pang 1994, p. 83). It is also important in this context that on major issues, planners and technocrats in the bureaucracy were able to secure the backing of the President. Not surprisingly, in a political structure which made no pretence to be democratic, this permitted comprehensive policy flexibility. This was the environment in which industrial deepening continued after completion of the ten major projects. In 1978 a further program of `Twelve Major Development Projects' was launched. In 1979 the government announced a plan for an export-oriented `large car plant' to be developed by state enterprises. In the end this became Taiwan's best known ìndustry policy' failure. However, the second oil shock intervened and brought lower growth over the period 1979-82. The impact of the 1979 shock was less than that of 1973, so drastic economic responses were avoided and the economy was allowed to adjust itself more gradually. Taking a longer-term view, the government responded, in 1980, with a systematic program for the development of science and technology to help raise industrial productivity. The first step was to upgrade many public research organisations. The state-led drive for industrial deepening was to continue but with a shift of emphasis from traditional capital-intensive industry to higher technology-intensive, non-polluting, energy-efficient sectors. Some were designated for preferential treatment under a new Strategic Industry Development Program and supported by a new, more liberal Statute for the Encouragement of Investment. There were a number of contributory reasons


61

for this but no ambiguity about the objective, which was to promote the development of a more sophisticated, `high-skill, high value-added' economy. Taiwan's policy makers focused on this now familiar policy objective before the end of the 1970s, after Japan but long before most. From 1980, policy decisions and public resource use reflected this priority goal. It is not easy to relate Taiwan's more diversified trade structure and very strong export performance in the early or mid-1980s to the industrial deepening of the 1970s. What is clear is that in the early 1980s Taiwan emerged as the world's leading exporter of a surprising range of intermediate and consumer items, from machine tools to bicycles to footware. Equally, based on 1983 data cited by Chu (1987, p. 110), it is clear that small and medium-sized firms of less than 300 people accounted for 65 per cent of the island's total exports, representing a highly decentralised production structure. The overwhelming majority would be native Taiwanese. These firms are widely regarded as extremely flexible and resilient but, due to the high cost of capital on the informal market, extremely short-term in orientation with, typically, a three-year payback horizon. As late as 1991, more than 40 per cent of the finance raised by the small and mediumsized business sector still came from the private loan market rather than the banks (Hsiao 1995, pp. 84-89). Overall, the 1970s and early 1980s were a period of rapid modernisation on Taiwan. Despite the oil price crises, virtually all sectors of industry prospered, new heavy industries were established and communications were enormously improved. By 1980 manufactured exports accounted for about one third of all manufacturing production, with textiles and electronics together amounting to half the total (Kuo & Fei 1985, p. 60). Industrialists, small as well as large, became more self-confident. Even the KMT slowly modernised and happily accepted native-born Taiwanese. Only the moribund and non-performing political institutions of central government, which still purported to represent all China, and the imposition of martial law remained unchanged. As the years passed, more native-born Taiwanese entered the top echelons of public service and the bitter division between `mainlander' and `Taiwanese' slowly began to erode.

Towards innovation, higher technology and higher value, 1980present The role of the state in Taiwan's utilisation of technology for industrial upgrading has been carefully documented by Simon (1992, Ch. 6), who regards the state as àn initiator, facilitator,


62

and supporter of programs in research and development (R&D), education, and economic and technological restructuring'. In short, a massive contribution. Simon also points out (1992, p. 127) that in different industries the state has acted variously as ìnitiator, regulator, strategic decision maker and entrepreneur'. This aspect of policy in the development of Taiwan's modern high-tech sector has been subtle but of unquestionable importance and effect. For example, Wu (1992, p. 177), after documenting the development of Taiwan's integrated circuit industry, concluded: `The government of Taiwan has played a leading role in the development of Taiwan's IC industry.' Writing somewhat more broadly, after documenting the development of the semiconductor industry as a whole, Meaney (1994, p. 172) similarly concluded that the ìnitiative for the development . . . came from the entrepreneurial state and not local capital's search for profits'. Interestingly, she also highlighted (1994, p. 174) the importance of named individuals: `Former Premier Y S Sun together with a network of overseas Chinese engineers in the United States played a key role in launching the semiconductor industry in Taiwan.' However, technology policy developed largely outside the frame-work of national plans (Balassa 1991, p. 103) and, in fact, there were no national statistics about R&D activities until the early 1980s. Yet, as pointed out earlier in this chapter, Taiwan's authorities gave specific attention to science from the late 1950s. A separate National Science Development Plan (1969-80) was drafted in 1969 and the influential Industrial Technology Research Institution (ITRI) established in 1973. Then in 1975 an Electronics Research and Service Organization (ERSO) was established to develop an integrated circuit production facility and generally to nurture the semiconductor industry. These more focused planning developments, rather than the four-year èconomic' development plans, were to lead to the establishment of commercially successful United Microelectronics (UMC) in 1978, a joint state-privatesector venture, and later to Taiwan Semiconductor (TSMC), also a joint venture involving the government but this time with the participation of foreign as well as Taiwan capital. In other words, the role of government institutions was vital to success. This is beyond doubt since it is known that the two largest electronics firms, Tatung and Sampo, decided at this time not to enter the semiconductor market. The result was that when UMC was spun off from ERSO in 1979 it was the only Taiwanese firm with wafer fabrication facilities until the establishment of TSMC in 1987. In fact, the government launched a total of eight national technology programs in the early 1980s and a further four in 1988. It is said that the example of Japan's very large-scale integrated circuit


63

national program gave impetus to a more active government role at this time (Chiang 1990, p. 533). In 1980 the highly successful Hsinchu science-based industrial park was established. Planned and funded by the government, the park was given the task of establishing the infrastructure needed to create and attract high value-added enterprises in Taiwan and to establish state-of-the-art R&D capabilities (Meaney 1994, p. 177). The government provided generous assistance to high-tech enterprises locating in the park, including tax holidays, duty-free import of key equipment and materials, exemption from commodity taxes on exports, low-interest loans and matching funds for research. Interestingly, Meaney's detailed documentation of the origin of Taiwan's semiconductor industry highlights the pivotal role of one or two particular individuals and, indeed, of the policy impact of chance events. There seems to be a double lesson: namely, that human intellectual endeavour can and does impact on the economic development of nations, independently of impersonal economic forces, and that this may occur both at a collective or organisational level, in terms of policy, and on occasion at the level of a single individual's personal initiative or decision. That this is so can be illustrated by the role of sometime Minister of Communications and Premier, Dr Y.S. Sun, who championed Taiwan's semiconductor industry and who `held a conviction that dynamic economic development could not be based on complete acceptance of current comparative advantage' (Noble 1987, p. 704). By 1990 Taiwan had become the sixth largest producer of computer hardware in the world (Simon 1992, p. 130). Yet Dr Fredrick Chien, then Minister of State and Chairman of the Council for Economic Planning and Development (CEPD), was still saying: `[T]he major challenge facing Taiwan is to adopt modern technology and restructure industry and, faced with high labour costs, move into technology-intensive products.' However, by 1995, at the end of a Ten-Year Science and Technology Development Plan (1986-95), Taiwan had reached the stage where its firms were entering contractual relationships of technological inter-dependence rather than dependence with many of the major technology-based firms of the industrialised world. For example, HewlettPackard's ÒmniBook 4000' product range includes features licensed from Taiwan's Twinhead Corporation. Moreover, at the time of writing, Taiwan's Institute for Information Industry (III) claims that if the output of Taiwan-owned factories overseas is included, Taiwan is today the top PC supplier worldwide (Her 1996, p. 8). So, in one sector at least, government endeavour has contributed positively to a chain of events leading


64

to realisation of the government's desired objective. Without that government endeavour, it is most unlikely the desired outcome would have been realised at all; at best, it could only have been realised years later. In other words, the empirical evidence teaches us that a state-crafted industry policy can succeed. Of course, generalisations cannot be made on the basis of a single example. However, there are other examples of successful industrial policy formulation and implementation both within and beyond Taiwan. Indeed, what Taiwan achieved in this particular sector does little more than parallel the well-documented achievement of the Japanese government in developing a domestic computer industry in the 1960s (Anchordoguy 1989). While detailed research of such developments may not always be available, that is no valid reason for assuming such cases are either uncommon or other than as they seem. It is also worth emphasising that the success of any one development-oriented government is most unlikely to rest solely on country-specific factors. The fact that comparable policies have been followed with some degree of success in a range of countries, across most of East Asia in fact, strongly suggests otherwise. The decisive success factors are likely to be of a general, non country-specific character. Here it is rather helpful to think in terms of the generalised quality of governance or of governmental capability (Wolf 1979; Lal 1983; Landes-Mills & Serageldin 1992) as the key success factor and to utilise the twin concepts of `market inadequacy' and `government inadequacy', both of which can bring about partial or complete policy failure. These ideas are commonly expressed in the more absolute economic terms: `market failure' and `government failure' (Datta-Chaudhuri 1990; Islam 1992).

Internationalisation of a modern economy, 1987-present There is a sense in which the internationalisation of Taiwan's economy commenced decades ago when the internally oriented import substitution phase gave way to the externally oriented export-led phase. By 1980 Taiwan's reliance on trade had already surpassed 100 per cent (Schive 1992, p. 102). However, it was only well after the second oil shock in the later 1980s, with trade surpluses snowballing, that the government seriously pushed forward with liberalisation and internationalisation of the economy in a modern sense. In 1987 the island's trade surplus reached 21 per cent of GNP, government-approved outward investment jumped 80 per cent, and a turning point may have been reached. Within a year the trade surplus precipitated a rapid appreciation of the New Taiwan


65

dollar, reduction of many tariffs, elimination of many non-tariff barriers, and removal of foreign exchange controls (Li 1988, p. 131). The next year, 1988, the government established an International Economic Cooperation Development Fund (IECDF) to encourage use of the large foreign exchange reserves for investment in other regional countries (Schive 1992, p. 119). In the following two years, foreign investment doubled and doubled again. In 1989, after a decade of preparation, the Banking Law was amended to remove all controls on deposit and lending rates and to permit foreign banks to play a bigger role (Kuo 1994, p. 99). This was a decisive step and financial deregulation has steadily continued in the years since. Internationalisation of the economy has also meant opening the domestic economy to foreign imports. Access has been gradually eased but the process remains incomplete. At the beginning of 1990, Taiwan applied to join the General Agreement on Tariffs and Trade (GATT). Although this move was effectively frozen by Beijing, it did represent a clear willingness by Taiwan to abandon discretionary trade barriers and open up its markets to the world. The magnitude of this task can be illustrated by the car industry. At present, the eleven local car assemblers, most of which are associated with American or Japanese manufacturers, are protected by 30 per cent tariffs on American and European cars, quotas on Korean and Malaysian cars, and a total ban on fully imported Japanese cars. Interestingly, Taiwan's auto-component industry is quite different. It is largely locally owned and, unlike the domestic market assemblers, is internationally competitive. Despite Beijing, Taiwan trade officials have been negotiating Taiwan's membership of GATT/WTO (World Trade Organization) with officials since 1993. As a result, monopoly systems for tobacco, alcohol and public procurement are ready to be abandoned and prepared for international competition. The Taiwan Tobacco and Wine Monopoly Bureau will necessarily lose its monopoly status when Taiwan joins the WTO, so it has already begun to import foreign cigarettes and alcoholic beverages. They have even exported a first shipment of Taiwan beer to China's Fujian province and Shanghai. It is quite clear that given further tariff cuts, especially for agricultural goods, and the phase-out of remaining quantitative and area restrictions, Taiwan will soon be technically eligible to join the WTO. Given the political and diplomatic importance of WTO membership to Taipei, there is no doubting Taiwan's ability or will to meet the requirements. Indeed, even if membership remains stalled, all but the most sensitive of the changes are likely to be introduced anyway. Overall, there is


66

every reason to suppose that the growing internationalisation of Taiwan's business and trade will continue to accelerate.

FUTURE PROSPECTS The foregoing provides a summary of Taiwan's economic development and steadily increasing internationalisation. In each phase, the government has played an important part. We may note that Taiwan's economic policies have proved to be flexible rather than doctrinaire in the face of changed or unanticipated circumstances. Policy adjustment has been and remains continuous. Perhaps this explains why some liberal economists have viewed these policies in simple `market-conforming' terms. These same policies may, equally, be viewed otherwise. The closer one looks at the evidence, the more one can identify examples of government action directly leading to the creation of new industries (e.g. semiconductors) and directly influencing the commercial appeal to individual firms of particular business policies (e.g. development of IBM PC clones). We may also note that no single set of policies has proved successful for more than about ten years (e.g. import substitution) and that some have not been successful at all (e.g. the big car plant project). At the same time, many policies appear to have proved successful for up to about ten years (e.g. the Kaohsiung export processing zone and the establishment of United Micro-electronics), and many of the policy objectives set by government have been achieved (a positive trade balance and the establishment of some high-tech industries). Commonsense therefore suggests that the overall Taiwan experience supports the proposition that purposeful involvement by government in support of economic development can be enormously helpful. Yet as Taiwan's economy becomes increasingly complex and sophisticated and, not least, more internationally integrated, new questions arise about the nature and value of the government's economic role. The final section of this chapter looks to the future and briefly examines this issue. It is no easier to forecast the future of Taiwan's economy than that of anywhere else. As always, one is left extrapolating existing trends while remaining blind to significant changes of trend and the timing of turning points. To the extent that past economic growth rates do portend the future, we may confidently assert that Taiwan's economy will continue to grow more vigorously than most. Taiwan achieved an annual average growth in GDP of 7.7 per cent from 1980 to 1993 (FEER Yearbook 1996, p. 14). Taiwan's international trade expanded at over 11 per cent per


67

annum, in US dollar terms, over the same period. As a result, by 1993 Taiwan's per capita GDP was US$10 852 and was roughly two thirds that of Hong Kong and Singapore, twenty times that of mainland China and 60 per cent that of Australia. We may also be confident about the continued internationalisation of Taiwan's economy. Trade and investment in both directions is rising. Taiwan's own outward investment is rising rapidly throughout the region, including mainland China. There are also moves towards direct cross-straits trade and investment; towards further privatisation and deregulation of the economy; and to prepare Taiwan for WTO membership. At the same time there is accelerating internationalisation at the firm level, through Taiwan firms growing and expanding overseas and through an increasing number of licensing, joint venture and alliance relationships between domestic and foreign firms. Taiwan is currently the world's fourteenth largest trader and has larger foreign exchange reserves than all but Japan and China. Despite its small population it is a major participant in the global economy. In particular, despite political tensions it is one of the largest investors in mainland China as well as in most of the ASEAN countries. Within a few years Taiwan could easily become, given full deregulation, a major regional financial and logistics centre and an entrepôt for trade with China. The only possible reasons for pessimism at present are political: one is a chaotic or bellicose China, the other is major global trade conflict and consequent economic stagnation. We must hope that both risks are remote. Against this background it is entirely reasonable to predict that Taiwan's economy, by the end of the century, will be significantly larger, significantly stronger technologically, significantly more integrated with that of the region and also more closely integrated with the economies of its most important trading partners, China, Japan, the United States and Europe. The corollary for the Taiwan government is that greater international economic integration means reduced freedom to intervene unilaterally in the marketplace.

Tomorrow's political economy Political economists believe that an assessment of the role played by governments in promoting economic take-off and subsequent progress adds to our understanding of the development process. In the case of Taiwan, many believe the government has played and continues to play a pivotal role. In this chapter there is repeated mention of government policy and plans, particular policy decisions and, at times, deliberate government efforts to


68

achieve specific industrial and commercial results. In short, the economic influence of the government has been found to be more than just pervasive: it has been seen to be purposeful and often successful. Political economists like to investigate such matters as the degree to which governmental influences on the economy are `globalist' (that is, due to supranational, worldwide pressures) or `statist' (that is, a reflection of national institutions and pressures). Much has been written on these themes (e.g. Winckler & Greenhalgh 1988; Aberbach et al. 1994). Such analyses may then be variously interpreted from `liberal', `conservative' or `radical' perspectives. However, it is worth noting that all these theoretical approaches derive from the experience of Western countries and may in the end fail to identify the causes of Taiwan's success. Here, attention is limited to just a few illustrative actions and objectives of the Taipei administration. Orthodox economic analysis offers little, either when seeking to differentiate between firms, or between the human and institutional structures which shape development. Typically, the internal mechanisms of firms have not been part of comparative advantage. Indeed, the firm has had no role in theories which assume constant returns to scale. Even economic theory which does recognise increasing returns to scale (e.g. Helpman & Krugman 1985) fails to investigate why a firm exists in the first place. Against this background, Taiwan's important semiconductor industry is of more than passing interest. The largest of Taiwan's electronics firms, Tatung and Sampo, first opted not to enter the industry. So government took the initiative and established the Electronics Research and Service Organization (ERSO) by grant in 1975. ERSO developed its own integrated circuit (IC) production facility, offered design and production services to the private sector, and became the source of a number of spin-offs for Taiwan's semiconductor industry. ERSO has been central to the operation of new firms in the industry (Mody 1990, pp. 291-314). Prior to 1987, the only Taiwanese firm with wafer fabrication facilities was United Microelectronics which was spun off from ERSO in 1979. So it is very hard to understate the importance of the role played by government in this particular industry. While nobody can deny that the industry might have come into existence unaided, eventually, without government initiative it most certainly would not have done so when it did. Examples like the above demonstrate that when the actions of Taiwan's government are compared with the Western economic and philosophic orthodoxy of the 1990s, Taipei may fairly be described as ìnterventionist' in the state's economy. The govern-


69

ment accepts a direct responsibility for maintaining strong economic growth and openly implements whatever ìndustry policy' it believes to be in the national interest. As a consequence, government-business links are often more intimate and varied than is usual in, say, the United States or Australia. A reflection of this is that outside observers of Taiwan on occasion characterise the island's commercial `system' as `Taiwan Inc' (cf. `Japan Inc'). This label captures the degree to which government and business can speak the same language, cooperate to mutual advantage and present an apparently united front to outsiders. Typically, Western observers, at least, sense a greater government-business cohesion in Taiwan than they are used to at home. Although only anecdotal, such impressions can be revealing and ought not to be assumed away without review of the evidence. One example of intimate business-government collaboration is provided by the entry of Taiwan's firms into the personal computer (PC) market. This began with a copy of Apple II in 1981, 56 months after the original product introduction. `Detecting a great opportunity, ERSO joined the local industry and modeled an IBM PC based on Intel 8088' (Chiang 1990). Twenty-five months after IBM, Taiwan's industry introduced clone computers which IBM soon confirmed did not infringe its proprietary rights. When IBM introduced their PC/AT in 1984, Taiwan clones were on the market just eleven months later. This represented a great success for the joint effort of ERSO and local firms; it is the seamless quality and apparent effectivenesss of such government-business collaboration that gives rise to the `Taiwan Inc' epithet and offers parallels with Japanese experience and notions of `Japan Inc'. Yet Taiwan's government is not always successful. As briefly mentioned above, the `big car plant' project of 1984 completely failed to get off the ground. Taiwan's auto industry had begun in 1956 when the Yue Loong company began making engines under licence. This development was as much a response to the availability of US grant monies earmarked to stimulate the private sector as a direct result of any domestic industry policy. However, this did mean that when the government eventually sought to develop an export-oriented car industry, there were already domestic assemblers and component suppliers in existence. The fact that established members of the industry succeeded in gaining the personal intervention of senior politicians on behalf of their vested interests (Arnold 1989, p. 206), exactly that which does not as a rule impinge forcefully on economic policy making in Taiwan (Chu 1987, pp. 64-66), was one of the reasons for policy failure in this sector. Other reasons were a change of Premier and departmental


70

disagreement over the best policy option (Arnold 1989, p. 202; Chu 1994, p. 157). Together, these factors delayed and eventually derailed the project. Altogether, the history of Taiwan's car industry strongly underlines the danger of generalisation when evaluating the effectiveness of the Taipei government's developmental role. Yet at the same time it can be interpreted as an outstanding example of what may happen when there is no coherent industry policy, or an inability to generate one. In other words, the failure was not one of industry policy but, rather, government failure to craft one. When comparison is made between the car industries of Taiwan and Korea in 1970, one finds great similarity (Chu 1994, p. 125). When the comparison is made in 1990, Taiwan's industry is scarcely able to compete with imports in its home market and has no world presence, while Korea's car industry is vibrant, efficient and, albeit assisted by heavy protection at home, an important global market supplier with huge export sales. The most obvious difference between the two cases is that the Korean government and its chosen (chaebol) industry partners proceeded with a development plan for an exportoriented car industry while that of Taiwan did not; in other words, explanation of the difference lies partly in the presence or absence of an industry development policy. Whether one emphasises inaction in Taiwan or action in Korea, it is the difference in the industry development policy of the state that helps explain the outcome. On balance, though, the historic record of successful interventions is judged by the Taiwanese themselves to far outweigh their failures. To Taipei, a free trade zone like that of Kaohsiung in the mid-1960s or a science-based industrial park like Hsinchu in the mid-1980s demonstrates that government can effectively promote development. Further, as for example with semiconductors, the success can be dramatic. For politicians and bureaucrats who can look at their past record of industry policy intervention with pride, the question for the future is not whether to intervene but how best to intervene. Of course, it is by no means certain that interventions which have arguably proved themselves in the past, such as free trade zones, science parks, incubation of start-up companies, and sponsored importation of advanced technologies, will remain appropriate policy mechanisms. Indeed, there are reasons for doubting the future relevance of most of the mechanisms of the past, but there is no such doubt about the intent of government to promote what it considers desirable development of the Taiwan economy. Continuing growth in the size of many firms suggests they could easily become more inclined to make their decisions


71

independently and choose to disregard the government's wishes and advice. Growth in managerial sophistication, corporate resources and internationalisation will all tend to give large companies global horizons and distance them from the priorities of their own governmment. As Taiwan's economy becomes more integrated with that of the region and also more closely integrated with the economies of its most important trading partners, the direct business influence of the government in Taipei will be circumscribed. The power and leverage of the state vis a vis private firms will steadily reduce as the latter gain independence and countervailing leverage from their offshore activities and partnerships. Internationalisation increases both the likelihood of and scope for a divergence of interest between firm and state while simultaneously diminishing the state's capacity to exert direct influence on firms. The government also faces new constraints. Application for membership of the WTO will inhibit official use of hidden subsidies and other ùnfair' means of industry support. Indeed, new `fair trade' requirements are quite likely to emerge in time and Taiwan will want to behave with acute sensitivity to the needs of its major trading partners. In the more commercially open and globally integrated future, unlike the past years of early industrialisation, the government in Taipei will have to accept international constraints on its freedom of action at the microeconomic policy level of the firm as well as at the macroeconomic level of tariffs and diplomacy. It follows that if it remains seriously interested in market intervention at the firm level, it is going to have to rely on persuasion and WTO-compatible inducement rather than the blunt instruments of the past. It follows that there will be a need to develop new and more sophisticated mechanisms of policy implementation, irrespective of whether such interventions are regarded by Western economic tradition as market-conforming or market-distorting. Past phases of development — import substitution, export promotion and technologyenhanced productivity growth — have each required the development of new industry policy mechanisms. The same will be true of tomorrow's more open, innovation-driven economy. There are two possibilities. Either `catch-up' with First World living standards will be deemed achieved, such that industrial development will recede as the overriding political priority of government, or maintenance of the `development-priority' is going to require more sophisticated and far-reaching policy innovation than any of the earlier phases of growth. In the opinion of this author there is little reason to expect the government in Taipei to reduce its close involvement in the


72

progress of Taiwan's economy. After all, Taipei views its record of involvement with pride and regards it as one of very considerable success. There is little reason for it to abandon what is seen as a successful set of policies. Further, the sense of intense politico-economic competition with Beijing remains. Moreover, the official view of past experience has been well documented by one of Taiwan's most influential insiders and decision makers, K.T. Li. However, Li emphasises (1988, p. 152) that policy implementation has throughout remained highly pragmatic and that this pragmatism provides a major explanation of its success. This suggests that the authorities in Taipei are likely to retain confidence in their ability to intervene in the economy to achieve their developmental objectives. At the same time they are likely to display total pragmatism as to means and methods. Successes like Hsinchu science park are definitely to be replicated. Active government support for commercially relevant research may well be increased. In short, a confident, interventionist spirit will remain. The mechanisms of intervention will evolve to meet the new requirements of the future; but the underlying posture of government policy will probably remain unchanged. In the predictable event that totally new forms of state support for desired industrial development emerge, they are likely to attract global interest. This is not an improbable scenario. Should it indeed come about, it will almost certainly influence conventional Western economic thought. The development of new policy mechanisms and institutional linkages will not be easy. The requirements of tomorrow will be very different. To promote development from the `front', once the `catch-up' phase is over, will be more demanding as the relevance of the model provided by the more advanced economies like Japan recedes. At the political level, Taiwan has transformed itself since 1987 into a pluralist, multi-party democracy (Hsiao 1992, p. 151). Indeed, despite continuing political and commercial corruption, Taiwan has made a quite remarkable, smooth and rapid transition from political repression and martial law to a relatively open and free society. It follows that the days of a distant, unresponsive government and bureaucracy, largely free from public and interest group pressure, are over. So whilst Taipei's record of successful political adjustment is excellent, this will not ease the practical, administrative and social difficulty of accelerating the economic adjustment from a capital investment-driven economy to a technological innovation-driven one. Nevertheless the government's record to date gives ground for optimism; Taipei has long supported science and technology, directly established research institutes, and itself engaged in company ìncubation'. However, requirements are likely to multiply in the future and the


73

government may not remain willing or able to play as big and direct a role as in the past. Completely new mechanisms will probably be needed. The development of new mechanisms which are commercially effective at the local level and internationally permissible in the emerging global economy will be a major test of political sophistication and creative ingenuity. Governments like that in Taipei inherit an unequivocal popular expectation that they will continue to deliver rapid industrial advance and impressive economic growth. The political and bureaucratic leadership, in turn, recognise this as their foremost responsibility after provision of national security. It is therefore likely that important new tools of micro-economic management, suited to an innovation-driven economy, will eventually emerge. These are likely to be of universal application and value. The rest of the world will not just watch and take note; East Asia, at least, will eagerly copy.

LESSONS FOR OTHERS So what can Taiwan's undoubted success on the ladder of development teach others? Academic economists and others argue among themselves about the answer. One professor of international economics (Riedel 1995, p. 39), who is also a consultant to the World Bank and the Asian Development Bank, believes: `The export-oriented industrialization strategy followed by Taiwan [in the 1960s] is made to order for Vietnam' [in the 1990s]. So, at the very least, the Taiwan experience is probably worthy of close scrutiny by those who would seek to follow in Taiwan's economic footsteps. For this commercially oriented contributor, however, there are two powerful, general lessons to be learnt. First, Taiwan's experience shows that deliberate government involvement, or ìntervention', in the economy can bring long-term, material gain. It is neither credible nor desirable for a government to pretend it has to be micro-economically inert, ineffectual or inefficient. The Taipei government has demonstrably played a major, beneficial role in spurring economic development through several decades. This emerges most clearly from examination of actual business and industry history rather than from the published figures alone or from aggregated data. Second, Taiwan experience shows that the effective policy mechanisms reflect their time, purpose, and particular government and business environment; there are no completely standard tools available. At any one time, a government may employ an array of mechanisms to implement its national economic development policies. For


74

example, in the 1960s Taiwan developed export processing zones with great success but in parallel with many other inward investment and export promotion incentives. Similarly, through time, the appropriate policy objectives as well as the implementation mechanisms evolve and change. For example, the EPZs of the 1960s were no longer appropriate to Taiwan's later task of technological upgrading, which became the priority in the 1980s. New priorities required the identification of new implementation mechanisms. Taiwan's experience amply demonstrates that changing times mean new objectives and new approaches. The general lesson for others is that pragmatism pays. Taiwan found no simple key to rapid and sustained economic growth; there was no mono-causality in economic development. Nor was there any guide in ideology, any ideology. When Taiwan's authorities acted contrary to the conventional wisdom of the day, in a straightforwardly problem-solving way, events mostly proved them right and the conventional wisdom wrong. For example, when Taiwan first promoted growth through exports, the economic wisdom of the day was critical. Yet governmentsupported exporting, which was a pragmatic response to a growing problem, proved successful and confounded the experts. Ranked priorities, linked to focused, coordinated attention to them by a capable public service, out-performed the mainstream economic thinking of the day. Maybe that is the most important lesson from Taiwan's successful history of rapid economic development.

BIBLIOGRAPHY Aberbach, Joel D., Dollar, David and Sokoloff, Kenneth L. (eds) 1994 The Role of the State in Taiwan's Development M.E. Sharpe, Armonk. Amsden, Alice H. 1979 À case of etatisme and a challenge to dependency theory' Modern China vol. 5, no. 3, July. Anchordoguy, Marie 1989 Computers Inc. Harvard East Asia Monograph no. 144, Harvard University Press, Boston. Arnold, Walter 1989 `Bureaucratic politics, state capacity, and Taiwan's industrial policy' Modern China, vol. 15, no. 2, April, pp. 178-214. Balassa, Bela 1981 The Newly Industrialising Countries in the World Economy Pergamon Press, New York. ——— 1991 Economic Policies in the Pacific Area Developing Countries Macmillan, London. Chiang, Jong-tsong 1990 `Management of national technology programs in a newly industrialized country — Taiwan' Technovation vol. 10, no. 8, pp. 531-54. Chu, Yun-han 1987 Authoritarian regimes under stress: The political econ-


75

omy of adjustment in the East Asian newly industrializing countries, Ph D thesis, University of Minnesota, Ann Arbor, UMI Dissertation Services. ——— 1994 'The State and the Development of the Automobile Industry in South Korea and Taiwan' in Joel D. Aberbach, David Dollar and Kenneth L. Sokoloff (eds) The Role of the State in Taiwan's Development M.E. Sharpe, Armonk. Datta-Chaudhuri, Mrinal 1990 `Market failure and government failure' The Journal of Economic Perspectives vol. 4, no. 3, Summer, pp. 25-39. FEER 1996 Far Eastern Economic Review Àsia 1996' Yearbook Review Publishing Company, Hong Kong. Galenson, Walter (ed.) 1979 Economic Growth and Structural Change in Taiwan Cornell University Press, Ithaca. Gold, Thomas 1988 Èntrepreneurs, multinationals and the state' in Edwin A. Winckler and Susan Greenhalgh (eds) Approaches to the Political Economy of Taiwan M.E. Sharpe, Armonk. Haggard, Stephan and Cheng, Tun-jen 1987 `State and foreign capital in the East Asian NIC's' in Frederic C. Deyo (ed.) The Political Economy of the New Asian Industrialism, Cornell University Press, Ithaca and London. Haggard, Stephan and Pang, Chien-kuo 1994 `The transition to export-led growth' in Joel D. Aberbach, David Dollar and Kenneth L. Sokoloff (eds.) The Role of the State in Taiwan's Development M.E. Sharpe, Armonk. Helpman, E. and Krugman, P.R. 1985 Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy MIT Press, Cambridge. Her, Kelly 1996 ÒEM contracts, notebooks boost Taiwan's PC exports' The Free China Journal 3 May, p. 8. Hiscock, Geoff 1995 `Saving the future' The Australian, 1 April, p. 23. Ho, Samuel P.S. 1978 Economic Development of Taiwan 1860-1970 Yale University Press, New Haven and London. Hsiao, Hsin-huang Michael 1992 `The labor movement in Taiwan: A retrospective and prospective look' in Denis Fred Simon and Michael Y.M. Kau (eds) Taiwan: Beyond the Economic Miracle M.E. Sharpe, Armonk. ——— 1995 `The state and business relations in Taiwan' Journal of Far Eastern Business vol. 1, no. 3, Spring, pp. 76-97. Hsing, Mo-huan 1971 Taiwan: Industrialization and Trade Policies for the OECD, Oxford University Press, London. Islam, Iyanatul 1992 `Political economy and Asian development' in Asian-Pacific Economic Literature vol. 6, no. 2, November, pp. 69-101. Jacoby, Neil 1966 US Aid to Taiwan: A Study of Foreign Aid, Self-help and Development Praeger, New York. Kerr, George 1965 Formosa Betrayed Houghton Mifflin, Boston. Kuo, Shirley W.Y. 1976 À study of factors contributing to labor absorption in Taiwan, 1954-71' Institute of Economics conference on population


76

and economic development in Taiwan, Academica Sinica, Taipei; cited by Ian M.D. Little Àn economic reconnaissance' in Walter Galenson (ed.) 1979 Economic Growth and Structural Change in Taiwan Cornell University Press, Ithaca. ——— 1994 `The Taiwanese economy in the 1990's' in Gary Klintworth (ed.) Taiwan in the AsiaPacific in the 1990's Allen & Unwin, Canberra. Kuo, Shirley W.Y. and Fei, John C.H. 1985 `Causes and roles of export expansion in the Republic of China' in Walter Galenson (ed.) Foreign Trade and Investment: Economic Development in the Newly Industrializing Countries The University of Wisconsin Press, Madison. Lal, Deepak 1983 The Poverty of Development Economics IEA, Hobart Paperbacks, London. Landell-Mills, P. and Serageldin, I. 1992 Governance and the External Factor Proceedings of the World Bank Annual Conference on Development Economics 1991, World Bank, Washington DC. Li, K.T. (Kuo-ting) 1988 The Evolution of Policy behind Taiwan's Development Success Yale University Press, New Haven and London. ——— 1995 The Evolution of Policy behind Taiwan's Development Success 2nd edn, World Scientific Publishing Co. Pte Ltd, Singapore. Little, Ian M.D. 1979 Àn economic reconnaissance' in Walter Galenson (ed.) Economic Growth and Structural Change in Taiwan Cornell University Press, Ithaca. Meaney, Constance Squires 1994 `State policy and the development of Taiwan's semiconductor industry' in Joel D. Aberbach, David Dollar and Kenneth L. Sokoloff (eds.) The Role of the State in Taiwan's Development M.E. Sharpe, Armonk. Mody, Ashoka 1990 Ìnstitutions and dynamic comparative advantage: The electronics industry in South Korea and Taiwan' Cambridge Journal of Economics vol. 14, no. 3, September, pp. 291314. Noble, Gregory W. 1987 `Contending forces in Taiwan's economic policymaking' Asian Survey vol. 27, June, pp. 683-704. Ranis, Gustav and Schive, Chi 1985 `Direct investment in Taiwan's development' in Walter Galenson (ed.) Foreign Trade and Investment: Economic Development in the Newly Industrializing Asian Countries The University of Wisconsin Press, Madison. Riedel, James 1995 À new Taiwanese clone?' Far Eastern Economic Review 23 November, p. 39. Schive, Chi 1992 `Taiwan's emerging position in the international division of labor' in Denis Fred Simon and Michael Y.M. Kau (eds) Taiwan: Beyond the Economic Miracle M.E. Sharpe, Armonk. Simon, Denis Fred 1992 `Taiwan's emerging technological trajectory: Creating new forms of competitive advantage' in Denis Fred Simon and Michael Y.M. Kau (eds) Taiwan: Beyond the Economic Miracle M.E. Sharpe, Armonk. Also, `Taiwan's strategy for creating competitive advantage: The role of the state in managing foreign technology' in N.T. Wang (ed.) Taiwan's Enterprises in Global Perspective M.E. Sharpe, Armonk.


77

Simon, Denis Fred and Kau, Michael Y.M. (eds) 1992 Taiwan: Beyond the Economic Miracle M.E. Sharpe, Armonk. Tao, Yu-chi 1969 The Tariff System of the Republic of China, cited by Samuel P.S. Ho 1978 Economic Development of Taiwan 1860-1970 Yale University Press, New Haven and London. Wade, Robert 1988 `The role of government in overcoming market failure: Taiwan, Republic of Korea and Japan' in Helen Hughes (ed.) Achieving Industrialization in East Asia Cambridge University Press, Cambridge. ——— 1990 Governing the Market Princeton University Press, Princeton. Winckler, Edwin A. and Greenhalgh, Susan (eds) 1988 Contending Approaches to the Political Economy of Taiwan M.E. Sharpe, Armonk. World Bank, The 1993 The East Asian Miracle: Economic Growth and Public Policy A World Bank Policy Research Report, Oxford University Press, New York. Wolf, Charles 1979 À theory of nonmarket failure: framework for implementation analysis' Journal of Law and Economics, vol. 22, no. 1, pp. 107-39. Wu, Se-hwa 1992 `The dynamic cooperation between government and enterprise: The development of Taiwan's integrated circuit industry' in N.T. Wang (ed.) Taiwan's Enterprises in Global Perspective M.E. Sharpe, Armonk. Wu, Yuan-li 1989 `Taiwan's open economy in the twenty-first century' in Wolfgang Klenner (ed.) Trends of Economic Development in East Asia, Springer, Berlin and Heidelberg.

4 Emergence and transformation of the South Korean model Sejin Pak The growth of the South Korean economy over the last three decades has been quite remarkable.1 In the early 1960s, Korea was one of the poorest countries in the world. It was certainly poorer than most developing countries in Asia and Latin America, such as Malaysia, Thailand, the Philippines, Argentina, Brazil and Mexico. By the late 1980s Korea had surpassed all of these countries in terms of GNP per capita, which had grown to over US$5000 from under US$100 in the early 1960s. It is expected that this trend will slow down but continue throughout the 1990s. Beside the absolute and per capita growth of the economy, the structural change in the economy is also remarkable. Until the 1950s, Korea was predominantly an agrarian society, nearly 80 per cent of the working population being engaged in farming and fishing. By the early 1990s this figure was less than 10 per cent. These two indicators alone are testament to the scale and rapidity of the social and economic transformations that Korea has experienced over the last three or four decades. Korea is not a small country in terms of population, the population of South Korea alone being around 44 million. Therefore, in terms of absolute size of the national economy, Korea has become an important player in the world economy and it is expected to become even more important in the future. The aim of this chapter is to examine the character of the contemporary Korean political economy and its dynamics so that we may understand better what sort of economy is emerging. The approach taken in this chapter is sociological, historical and comparative rather than narrowly economic. First, I have tried to examine how political and sociological factors interact with economic ones in Korea's industrial development. In terms of major actors, the basic framework of this chapter is to examine the

THE SOUTH KOREAN MODEL

79

interactions among the state, big business and labour. The most important debated issue in Korean development is the role of the state. But as we shall see, this in itself is variable in time and dependent on the stage of development. Korea's big business, which was fostered by the state, now poses a challenge to the state.2 Since the late 1980s, organised labour has emerged as a new and powerful actor in the local economy. The chapter also takes the view that in order to understand Korea now and in the future, one must understand the basic dynamics of Korean industry which evolved in an earlier period. For the sake of simplicity, we adopt a simple political periodisation of Korea's industrialisation: the 1960s and 1970s, the period of industrialisation under President Park (Chung Hi); the period since 1980: first, the period of economic liberalisation under President Chun (Du Hwan), and then the period of political liberalisation since 1987 when a new presidential candidate, Rho (Tae Woo), relaxed political control of society in preparation for the 1988 Seoul Olympics. It is argued in this chapter that much of what makes possible, and also constrains, current developments in the Korean economy is heavily conditioned by the system set up by Park during the first period, so that it is necessary to examine the causal chain: environment — strategies — consequences = new environment — new strategies . . . In this manner we hope to gain a historical understanding of the Korean economy today. The strategies adopted and the pattern of industrial development that appeared during the period of Park's government is sufficiently distinctive that we may call it the `Korean model' of development. During the second period, the Korean economy and society entered a more complex stage; big business, the middle class and organised labour have matured, and there is a move away from the strong dirigist pattern that was the key characteristic of the Korean model. Therefore, the period since 1980 is usually described in terms of liberalisation. However, the state continues to play a significant role in the economy in comparison to most liberal Western economies. The third aspect of the approach of this chapter is comparative: frequent comparisons are made between various aspects of Korea's economic organisations and those of betterknown Japan in order to provide a clearer understanding of the Korean economy. This chapter is organised into two major historical parts: Korea's industrialisation under Park (1961-79), which constitutes the period of formation of the Korean model; and the period after


80

that up to the early 1990s, which represents a period of transformation.

KOREA'S INDUSTRIALISATION UNDER PARK, 1961-79 This part is organised into three sections: the state, big business and labour, each representing one of the three major actors in the Korean model.

The state and market in Korea's economic development Examination of Korea's economic development often starts with the negative environment it inherited; the fact that, compared to many developing countries, Korea was in a disadvantageous position in the early 1960s. It is pointed out that Korea was poor in natural resources, that it was exploited under Japanese colonialism when average food consumption per capita went down, and that it was divided by foreign powers at the point of independence, leaving much of the country's industrial base with the North. It is added that this division led to a war of unification in the 1950s which in turn destroyed much of what was left of the economy on both sides. More recently, some scholars have argued that, far from being disadvantaged, Korea in fact benefited from the environment it inherited; that, compared to other countries, Korea was endowed with several favourable factors at that point. One is in relation to Korea's experience as a colony of the Japanese Empire, and another relates to Korea's strategic significance in terms of the security policy of the United States. As a colony of Japan, Korea experienced industrialisation, even if it was for the purpose of satisfying the needs of the Japanese Empire. As a frontier of America's Cold War and a military ally, Korea benefited in many ways from its relations with the United States, such as by receiving large amounts of aid and, later, as an extension of this special relationship, by the special role Korea was allowed to play in supplying the US military during the Vietnam War and by having privileged access to the US market.3 Some commentators would add to this list Korea's Confucian cultural tradition, which used to be thought of as an obstacle to development. It is difficult to deny that these factors did indeed play a meaningful role in Korea's economic development. However, for a student of development, it is more instructive to note that, despite all of these advantages vis a vis other developing countries at a comparable stage of development, it is difficult to identify


81

the seeds of development in Korea in the 1950s. Korea was not simply poor at this point; it was a fairly typical case of a rent-seeking society where both the government and business were engaged in rent-seeking activities of a zero-sum game nature in an economy largely dependent on aid. Emergence of a developmental state: Organisational innovations A developmental question that should be asked, then, is how Korea transformed itself from a largely rent-seeking society to one in which developmental activities began to take place on a large scale, spurred on by the same entrepreneurs who previously engaged in rent-seeking activities. Two views exist on this issue: one neoclassical and the other statist. In the neoclassical view, in the 1960s, after a regime change from Rhee to Park, the incentive structures were changed to encourage free trade and a free market, so that it became profitable for Korean entrepreneurs to be engaged in production for export. In the statist view, the changed structure of incentives for entrepreneurs is regarded as important, but why and how this change occurred is seen differently. In the statist view, the process by which the state itself is transformed into one with a developmental orientation, as well as the capacity and organisation to pursue the new goal, is regarded as a crucial step in the transformation of the economy. The emergence of a developmental state with strong executive power with respect to local businesses or the landed class was an important difference between Korea and a typical Latin American country in a similar situation.4 The absence of a well-rooted and powerful landed class was the heritage of Japanese colonialism, as well as of the land reform that was carried out soon after independence. However, the high level of power the new Park regime was able to exercise over society and the economy was not simply due to the conditions it inherited. Rather, it was due to organisational innovations in both the political and economic spheres: the formation of the Korean Central Intelligence Agency, and the later drafting of a new constitution, to control civil society; the setting up of the Presidential Secretariat and the Economic Planning Board (EPB) to oversee the economy; and nationalisation of the banking system to centralise and control the flow of credit. In the process of instituting these changes, the new regime overhauled the state bureaucracy and purged hundreds of bureaucrats, considered either corrupt or incompetent. It is worthwhile to note at this point a contrast between the organisation of the


82

developmental states in Korea and Japan. By concentrating the decision-making power in the EPB, the economic bureaucracy in Korea became highly independent of private business and also eliminated the inter-ministry in-fighting commonly seen in the Japanese bureaucracy. This concentration of power produced speed and flexibility in state action in Korea. At the same time, it is important to note that what was innovative about the new organisational framework was not simply the centralisation of power. While decisionmaking power became more concentrated in a smaller group and executive tools more developed, there was also an effort to broaden consultation with and the participation of key actors, including private business associations, in the national decision-making process. It was a `forced' formation of `Korea Inc' under strong government leadership as a way of mobilising private business support for the new government's economic objectives (Mason et al. 1980, Ch. 8). The term `strong state', or even `relative autonomy' of the state (i.e. from other elite groups in society), alone is not adequate to convey the activist character of the developmental state that emerged after Park's takeover. Export orientation: Not quite a free trade policy To what degree was the Park regime's reorientation of the Korean economy to export and growth via the creation of new incentive structures a move in the direction of free trade and a free market? The export orientation of the Korean economy did not start out as a conscious strategy for industrial development. This point is clear from the fact that the stated goal of Korea's first Five-Year Economic Development Plan, which commenced soon after Park took power, was `self-reliance'. The plan envisioned a form of `guided capitalism' (Haggard 1988) under which infrastructure and basic industries, such as electricity, fertilisers, oil refining and cement, and so on, would be developed. Export was sought as a source of foreign currency with which to improve the balance of payments in the face of declining aid commitment by the United States. Further commitment to an export orientation came as a result of the combination of a favourable response at initial export efforts in the 1960s and the strong advice given by foreign advisers from the International Monetary Fund (IMF). A series of liberal economic reforms of the `getting the price right' kind were carried out in the early stages of the export orientation, between 1963 and 1965, in the areas of fiscal, exchange rate and trade policy, and the interest rate. These reforms succeeded in reducing market distortions in the textbook fashion and helped to stimulate export activities. However, very


83

much contrary to the philosophy of trade liberalisation, the import of completed goods was strictly controlled in the form of tariff and non-tariff barriers (Haggard 1988). In contrast, input materials to be used for export were freely imported and access to them linked to the performance of exporters. In addition to the macroeconomic policies cited above, the government organised various export support activities that had the effect of lowering transaction costs in export. With government support exporters' associations, such as Korean Trade Promotion Corporation and Korean Traders Association, were developed to provide marketing and quality control services. At the top level was the National Export Promotion Meeting, held monthly, in which President Park himself participated regularly. At these meetings, information about new products and new markets for export was examined and appropriate supportive measures were devised and put into action with government backing. In addition, the government sent trade missions to numerous countries to obtain trade agreements (Sakong 1993, Ch. 3). One of the most unconventional of the export promotion measures supported by the government was the establishment of a social atmosphere in which export effort was equated with patriotism. Export targets were set up by the government by product and regional destination, and achievers were publicly awarded with prestigious prizes. Just as in the case of the Meiji entrepreneurs, the idea of `serving the nation through industry' was propagated and established in society (Sakong 1993, Ch. 3). It was a social atmosphere where the `buy domestic products' movement took off and the use of foreign consumer goods met with the disapproval of one's neighbours. The discussion above suggests that the Korean economy's reorientation towards export may be better understood as a process of propagation of economic nationalism or of national mobilisation for development, rather than one of trade liberalisation through the establishment of less distorted market incentives. If market incentives were not the most important ones for Korean entrepreneurs, the social recognition incentives did not have to be the most important either, for there was another system of material incentives operating under the Park regime. State-controlled incentive system The system of incentives that emerged during the Park regime may be characterised as `guided capitalism with command components'. Some have called it `command capitalism' (Bello & Rosenfield 1990). The overall framework was clearly capitalist in the sense that it was taken for granted that private firms were


84

key economic actors and that the pursuit of their own interests by individuals and firms acting on price signals constituted the dominant dynamics of the national economy. A market mechanism was operating as a means of resource allocation in many areas. However, it was not the most important one in key areas. A market mechanism often operated only within the larger incentive framework set up by government policy. Moreover, the Park government often applied incentives and disincentives in a highly discretionary way to individual firms. At times, a particular firm would be picked on to obtain compliance. Use of discretionary control and command procedures naturally tends to encourage rent-seeking activities and often leads to corruption and inefficiency in resource allocation. Command economies are usually cited as an example of such inefficiency. As mentioned earlier, Korea under the Rhee regime was a fairly typical example of a rentseeking society under a rent-seeking government using discretionary policies for selfreproduction. How was the new system different from the earlier one, and how did it avoid the dangers inherent in the discretionary application of rules? The most important instruments of government policy that served as incentive structures for Korean firms were: access to bank credit and foreign loans; bank interest rates; and licences for major investment projects. In a situation of low capital availability, the Korean government had full control of the credit `market', which was bloodlines for private firms, by nationalising domestic banks and acting as a gatekeeper to access to foreign loans which required government guarantees. As in Japan in the high-growth period, Korean firms operated largely on borrowed money. The debt to equity ratio for Korean firms in the 1960s and 1970s was 300-400 per cent, as high as that in Japan in the 1950s. The equivalent figure in the United States and the United Kingdom was 50-100 per cent (Wade 1988). The heavy reliance on loans by Korean firms in turn gave the government greater influence over the direction of investment of the firms receiving loans. This influence was also mediated by the system of government licences for major investment projects. Control of interest rates by the government also strengthened its power over firms. Because the official interest rates were usually well below the curb market, producing negative real interest, obtaining credit was itself a major step towards profit. The high demand for credit created by the situation led to credit rationing, giving the government even more power over firms.


85

Many firms wanted to receive credit from the government, but funding was limited. Given the situation, the firms selected by the government were highly privileged. As a structure of incentives, this system did not differ radically from the previous one under the Rhee regime. The main difference was that there was foreign loan allocation instead of foreign aid allocation. Therefore, one could not expect a different kind of economy to emerge simply on the basis of the character of incentives. A similar kind of incentive had served as a basis of the rent-seeking economy under Rhee. What was new under the Park regime was that, for the first time, performance became the key criterion of allocation of credit. This change reflected the change in the character and orientation of the government from one that was mainly interested in political survival to one that put economic development as its raison d'être. However, not all firms started equally in the competition for access to governmentcontrolled credit. Ironically, the businessmen who were arrested, soon after Park took over power, for having engaged in rent-seeking activities under Rhee, then given a chance to convert themselves into export manufacturers in government-designated areas, were the first to obtain government-controlled credit. Access to credit and performance reinforced each other, and many of these early starters later became large conglomerates by joining up with government projects during the heavy and chemical industrialisation drive in the 1970s. From the government's point of view, large firms with a track record were preferred, given their experience and the desirability of a scale economy. The businessmen who were arrested, and later asked to contribute to the country's economic development, didn't have much choice to do otherwise. Of course, it was not by compulsion alone that they participated in new business activities. As we saw earlier, various reforms introduced by the government made export activities profitable on the one hand, and rent-seeking activities deriving from access to imported material not so profitable on the other. Leading firms were still engaged in the pursuit of profits and their own interests as before, but the government defined the framework under which they could do so on the basis of national development. It was in this manner that the zero-sum game was transformed into a positive-sum game, even though the character of the major businesses in Korea didn't change greatly at this point. The effect of the government-controlled credit market What was the effect of the government control of the credit market? It is now recognised that the emergence of a credit market


86

is natural and useful in developing countries where the capital market is underdeveloped (Lee 1992). As in Japan, Korean firms that relied on the credit market, especially from the government source, didn't have to act on the basis of short-term profit. By giving privileged access to credit to a limited number of firms, the government used the loans as `policy loans' and the key private firms as `policy firms'. The credit control system appeared a natural choice as an instrument of industrial policy for the Korean government at the time. The close relationship with a limited number of firms allowed the government to monitor their performances on a continuous basis and improve the communication that resulted from this reduced transaction cost for both government and business. Lee (1992) likened this close linkage between the government and a limited number of firms in Korea to a quasi-internal organisation, as in the case of the divisional structure of a large corporation, which in this case would be Korea Inc. However, not everything was positive under this arrangement. The reliance on discretionary methods in the selection of the firms that will receive credits, and in the assessment of performance, as well as in behavioural compliance, revived collusion and corruption in the close relationship between the government and key businessmen. Political connections became important again in gaining access to governmentcontrolled credit and foreign loans. Economic performance alone was not enough to be included in Korea Inc. One undesirable development from the government control of a credit market with low interest rates was the growth of an informal, or underground, credit market. Less-privileged smaller firms were often forced to rely on the underground credit market despite its high interest rates. Given this situation, the government could not entirely prevent large firms from engaging in rent-seeking activities in the informal market. Large firms also engaged in the real estate market, which was extremely profitable for those who had information on new real estate developments through connections to the government. Nonetheless, fortunately for Korea, the overall framework for the positive-sum game that was established by the Park government was solid enough that the rent-seeking activities which emerged under this arrangement could not alter it. But it is also clear that the large firms gained most under this framework. Large firms grew fastest when they joined the government drive for heavy and chemical industrialisation in the 1970s in which six strategic industries — steel, electronics, petrochemicals, shipbuilding, machinery, and non-ferrous metals — were chosen as target industries. The heavy industrialisation program was


87

launched by the Korean government in 1973 against the advice of domestic businessmen and international lenders. Given the environment of world recession in 1973 due to the first oil crisis, large firms were initially extremely cautious about joining the projects. However, when the Korean economy had recovered from the recession, partly through the Middle East construction boom in which Korean firms participated, large firms competed fiercely to expand in whatever fields they could. It became apparent during this process that the investment behaviour of Korea's large firms was highly geared towards capturing government funds and projects without due consideration being given to the nature of the industry in the context of the Korean economy. Large firms were willing to enter any field designated by the government as being strategic, as long as they could get approvals and the necessary funds. This contributed to the creation of a situation of overcapacity in key industries in the late 1970s. In 1979, the second oil shock hit the world market and brought about a drastic decline in exports when the newly established industries in Korea were already suffering from overcapacity. This combination of factors led the economy into a deep recession in 1980 which lasted for several years. In the 1980s the policy of targeting industries was abandoned. It is clear that without the incentives set out by the government, Korean firms would not have entered the targeted heavy industries at this point, as to do so worked against the static comparative advantage of Korea at the time. But were the government's efforts to change the country's industrial structure successful? Opinions are divided on this point. From the point of view of the neoclassical economists, the heavy industrialisation drive of the 1970s was largely responsible for the decline of efficiency and for the recession faced by the Korean economy in the early 1980s. However, some are willing to recognise that these industries became leading sectors in the Korean economy in the latter part of the 1980s and that the recession earlier in the decade was partly due to exogenous factors, such as the second oil shock and the assassination of Park, which created instability in the Korean economy.

The growth of chaebol Despite the central role played by the state in Korea's economic development, Korea remains a capitalist economy where private firms have been key actors. In contrast to Taiwan, where networks of small family firms functioned as the backbone in the drive for industrial expansion, in the case of Korea large conglomerates, known as chaebol (or jaebol), came to dominate the economy.


88

There are about 50 chaebol groups of varying sizes in Korea today. In terms of sales, the top three firms are responsible for an astounding 36 per cent of Korea's GNP (Amsden 1989), although in value-added terms, 50 chaebol produce about 20 per cent of GNP. Since the 1980s, names such as Hyundai and Samsung have become familiar as world competitors in their own fields. Only twenty years ago, the operations of these firms were insignificant by world standards; now they have become world giants by growing even faster than the Korean economy, the fastest growing in the world. Between 1971 and 1983, the top three chaebol grew 10- to 100-fold in terms of total sales: Samsung, 10-fold; Hyundai, 50-fold; Daewoo, 100-fold. By 1987, their annual sales reached US$24 billion, US$23 billion, and US$16 billion, with employee sizes of 160 000, 142 000, and 120 000, respectively. Chaebol specialise in certain sectors, but their fields are extremely diversified. Organisation and management The name `chaebol' comes from the Japanese word `zaibatsu', which refers to the prewar form of the Japanese conglomerate based on family control. In many ways it is similar to it, and therefore dissimilar to the postwar form of Japanese conglomerates called `keirestu' or enterprise groups. Like the prewar Japanese zaibatsu, chaebol are controlled by a key family through direct and indirect ownership of stocks. Most of the top ten chaebol are 30 per cent owned by a key family network. In addition to ownership, members of the key family occupy key positions in management; therefore, there is as yet no separation of ownership and management in the case of chaebol. With increased size and the spread into new business areas, the number of professional managers unrelated to the owner family has increased. However, their authority and autonomy are limited unless they are backed by the owner family. As chaebol are a recent development, even though some second-generation owners have emerged, the managerial style set by the founder will strongly influence the way the group is run. The founder typically has absolute decision-making authority and acts as a paternalistic and charismatic leader. Most Korean conglomerates have a central planning office composed of top managers, who make all the key business decisions for the group. The decision-making process is highly centralised and top-down. Observers in the past have likened the authoritarian style of business management in Korea to the military. However, it is important to note that the authority figure who dominates a Korean organisation is still a personal and patriarchal one, rather


89

than an impersonal and bureaucratic figure as in the military, even though this is changing. This type of management style creates problems for aspiring employees in terms of participation and identification, because the loyalty that is demanded is to be directed to persons rather than the organisation. The task of mobilising employees' initiatives in a large Korean firm is a difficult one when compared to the situation in a large Japanese firm. What accounts for this authoritarian and patriarchal style of management in Korea? Some have noted the difference between the organisational principle of the family in Japan and Korea.5 A more general factor to be considered, in terms of the organisation and management style of the Korean chaebol, is the shortness of its history. The influence of this factor runs counter to that of another commonly cited one: the continuity of the Confucian cultural tradition of hierarchy and paternalism in Korean (and also Japanese) organisations. The short age of the organisation accounts, to a significant degree, for the patriarchal role of the founder and the central role of his family. This reasoning is based on the idea that the personalistic and particularistic characteristics of the organisation will decline in importance as it expands and is forced to introduce more universal bureaucratic principles. It is difficult to deny the validity of the role of each of these factors. Nonetheless, it must be pointed out that they need to be examined in the national political context in which chaebol operate. This leads to the question of the connection between chaebol and the authoritarian state. The politics and economics of chaebol It may be an overstatement to say that the chaebol became what it is today largely through its political connection to government, but there is much truth in this assessment. Chaebol-government relations have undergone a significant change since the early 1980s, but the relationship has been a very close one throughout the highgrowth period. Critics have referred to the chaebol as a `political merchant', and to the relationship of chaebol with the government as `government-business collusion'. Again, an analogy has been made to zaibatsu and its relationship with the government in prewar Japan. We have seen that the reason why a non-market system of incentive worked in Korea was that performance was used as the main criterion for gaining rewards, of which one was access to government-controlled credit. Indeed, the absence of any banking organisation within the chaebol group is the most importance difference between the prewar zaibatsu and the chaebol of the 1960s and 1970s. Unlike prewar zaibatsu,


90

chaebol were entirely dependent on government for credit before economic liberalisation in the 1980s. Those who were selected by the government obtained preferential loans at special interest rates, licences for imports and investments and, most important of all, inclusion in the government's development plans. However, as mentioned earlier, economic performance was not the sole criterion in the distribution of government `favours'. Developing personal ties with key government officials, donating to the government party, supporting government campaigns, and so on, were equally as important as economic performance. Performance in this sort of political market was another requirement for chaebol growth. On the other hand, the narrow political interpretation of chaebol has not gone unchallenged. As in the case of zaibatsu, it has been suggested that the conglomerate form of chaebol was an institutional innovation for overcoming market deficiencies in a developing economy (Sakong 1993, Ch. 4; Imai 1992). The rapid growth in the size of chaebol has been explained by the pursuit of the advantages of scale in the production of standardised goods in competition against world-ranking firms (Song 1989, p. 313). In addition, the top-down decision-making style of Korean conglomerates has been attributed to the need for firms in a developing economy to expand into uncertain and risky new fields, and for a strong leadership that can provide speedy decisions and aggressive strategies (Hattori 1987, p. 167). According to this view, the organisation and management style of chaebol basically emerged to fulfil economic functions necessary for an entrepreneurial firm in a country in a catch-up stage. As already discussed, chaebol had to be good performers in both political and economic markets. It would be a mistake to regard them as political puppets, for they are exceptional entrepreneurs in their own right. On the other hand, it is difficult to ignore the basic similarities between the authoritarian management style of the Korean government and that of chaebol that grew under its auspices. In a political environment where the government can prioritise the economy and national security over politics and democracy, a private economic organisation would have an easy time doing the same when such a policy suits the needs of management.6 Industrial relations is an area closely tied to management style, where politics and economics necessarily meet. Let us now turn to the issue of labour in Korea's economic development.

The politics and economics of labour When the role of labour is considered in Korea's industrial development, two views, with an emphasis on somewhat different


91

points, are often cited. One view emphasises an abundant, freely moving, well-educated and hardworking workforce at relatively low wages as a key factor in development. Another view gives due credit to low wages and a competitive labour market, but links these factors to repression of labour by the state. This section will consider these views while discussing the character of the labour market and of industrial relations in Korea, and the relationship between the two. A good starting point is a comparison of Korea with postwar Japan, because of apparent similarities in the characteristics of labour and the labour market in the two countries. Education as a means of upward social mobility is as strongly rooted in Korea as in Japan. The percentage of students finishing high school or going on to university in Korea is similar to the figures in advanced countries rather than those in developing countries. University entrance examinations in Korea are as fierce as those in Japan, if not more so. Lifetime employment, seniority wage, enterprise union and enterprise paternalism are found to some degree in large firms in Korea, although they are not as well established as in Japan. Segmentation of the labour market along gender lines is also strong in both countries and follows a very similar pattern. To these similarities we may add one more feature, namely the dual labour market by firm size. Critics of Korea's approach to development have long criticised the big firm-oriented development policy that has created a dual economic structure and a corresponding dual labour market. Similar criticisms have been raised about Japanese government policy in the early period of Japan's high economic growth (1955-65). In Japan also, it has often been pointed out that the lifetime employment system is limited to a small core of the labour market, namely the male regular employees in large firms. It is quite tempting to think of the Korean labour market and employment system in similar terms. How, then, do we reconcile this idea with the suggestions of labour repression in Korea? Labour market segmentation Despite the superficial similarities in industrial structure and the labour market between Japan and Korea, empirical research on the Korean labour market, carried out in the latter half of the 1980s by local labour scholars, revealed that the segmentation in Korea's labour market has been quite different from that of Japan (Chung 1986; Song 1989; Cho 1992). The most significant finding was that, unlike in Japan, blue-collar workers in large Korean firms in general did not belong to the core part of the labour market.7 It is not just that the lifetime employment ideal was more


92

weakly established for blue-collar (male) workers in large Korean firms when compared to their Japanese counterparts. It means that, despite the empirical fact that both employment security and wage level were somewhat better in large firms, the labour market for production workers was not segmented by firm size. In other words, in contrast to Japan, the labour market for Korean blue-collar workers has been a homogeneous and competitive one. The relatively high level of wages in large firms was due mainly to workers' longer working hours and statistically higher educational level; while workers' relatively secure employment in large firms was accounted for by the relatively higher level of financial stability of those firms. Another feature that indicated that the regular blue-collar employees in large Korean firms were not a part of the core labour market was the high turnover rate among them. One reason for the high labour mobility was the need for large firms undergoing rapid growth to recruit mid-term entrants; however, the willingness of large firms to lay off employees during economic downturns, and blue-collar workers' willingness to switch firms, also contributed to the high turnover rate.8 Second only to labour market segmentation on the basis of gender has been segmentation according to educational qualifications. The career path, lifetime wage and benefits available to blue-collar workers are vastly different from those enjoyed by white-collar workers with a university degree. In Korea, the lifetime employment system, with entry at the point of graduation from school and internal promotion, has therefore been basically limited to white-collar employees with a university education. The social division between blue-collar and white-collar workers, based on a university degree, has become so profound in Korea that some have called it a status system. Bluecollar earnings in the 1980s were, on average, less than half that of the white-collar professional. Under this system, one did not need to be socialised in Confucian cultural values to be motivated to get a higher education. It was found that wage differentials by gender, education and job (blue-/white-collar) were stronger in larger firms than in smaller ones. The workforce reduction rate during business downturns was also found to be higher in the larger firms. It is no wonder that blue-collar workers in large Korean firms didn't have a strong identification with their firm. The turnover rate for blue-collar worker was about double that of technical professional workers and six times that of managerial staff (Chung 1986). Why was the blue-collar labour market more open in Korea than in Japan? In other words, why weren't large Korean firms willing or forced to offer their blue-collar workers the kinds of privileges that large Japanese firms had to provide? The answer to this


93

question must be sought in the politics of production strategy and labour subordination in Korea. Industrial relations Since 1980, labour unions in Korea have been mainly organised as enterprise unions. But industrial relations has been very different in Korea than in postwar Japan. Superficial similarities may be found in the management ideology and rhetoric of unitarian industrial relations, emphasising the common interests of management and labour, and the company as a family or community. But that is where the similarity ends. Korea's industrial relations has been largely shaped by the government, rather than by employers and the unions themselves. The government has often made and imposed rules on employers and unions without consulting either party. These rules usually benefited employers more than workers, without being entirely on the side of employers. For example, the government has imposed guidelines for working conditions with little consultation with employers or unions. Although approximately 20 per cent of workers have been members of labour unions for three decades, unions weren't permitted to engage in collective bargaining until 1987. The same can be said of employers: when industrial conflicts occurred, the government had to be brought in as an arbitrator. Due to this situation, there has been little autonomous development within institutions of industrial conflict resolution, and so both sides have little faith in bargaining and little trust in the other party. Equally significant is the fact that labour unions have never been accepted, either by the state or by employers, as a legitimate economic organisation on a par with a company. Given these conditions, strikes were used more as an expression of discontent and to make demands than as an instrument of bargaining. This picture of Korean industrial relations is a great contrast to that of Japan. How did this situation come about? Two key political factors were instrumental in shaping Korea's industrial relations. One is the division of the country in 1945 at the point of independence into two ideologically opposed `camps'. Given the presence of the communist North and the strength of the politically oriented leftist unions in the early post-independence period, all subsequent Korean governments have had a deep suspicion of autonomous union movements. Regarding them as potentially endangering national security, they have sought to suppress and replace them by government-backed organisations. The second factor is the emergence of a strong state which took initiatives in industrial development. As we saw earlier, big business growth in Korea was largely shaped by government policy:


94

Korean businesses were an instrument of government policy and never an equal partner. The same may be said of the government influence on the evolution of the union movement and industrial relations. The main difference between the government's policy towards business and that towards labour was that organised labour was never regarded as an equal partner, at the level of the employers, by the government and employers. Partly in consideration of the first factor, the government tried to control the spread of autonomous union movements by placing various legal limitations on the formation of unions or, when this was not possible, by supporting the formation of a second union or co-opting the union leadership by offering them government-related positions, etc. The formation of unions has been limited also in terms of industry sector, being prohibited at different times in the public sector, government-owned firms and defence industries, as well as in foreign investment firms. Since the 1970s the government has tried to foster cooperative `Korean-style industrial relations', not by strengthening institutions of collective bargaining, but by encouraging and forcing the use of government arbitration and labour-management consultation. In 1980, the new Chun government deliberately tried to model Korea's industrial relations after the Japanese pattern. Korean unions that had previously been organised at the industry level were reorganised into enterprise unions, and labourmanagement consultation was made compulsory, but òutside elements' were prohibited from participating in union activities.9 It is in the context of this government policy towards labour that Korean firms' labour management style should be understood. It is no surprise, then, to find that Korean employers have generally tried very hard, first, to prevent union organisation from emerging, and then, failing this, to create a pro-management union. Japanese industrial relations is often seen as an implicit model to be emulated by Korean employers. The language of `labour-management unity' has been equally popular among Korea's large employers. However, because the call for cooperation was not backed up by material benefits and recognition of basic labour rights at the level of blue-collar workers, the ideological mobilisation had little success in large firms. The high turnover rate among Korean workers, even in large firms, should be seen as a reflection of their dissatisfaction rather than as an open market of opportunities for them. Despite their advantage in numbers and organisation, weakened by the state and unable to carry out collective bargaining and strikes, production workers in large firms could not raise their wages vis a vis workers in smaller firms and defend employment security as in postwar Japan. The


95

so-called competitive labour market in Korea was a highly political construct.

THE KOREAN POLITICAL ECONOMY IN TRANSITION: SINCE 1980-PRESENT The assassination of President Park in 1979 marked the end of an era in Korea's political and industrial history. The political economy of Korea is characterised by two phases of liberalisation from this point on: economic liberalisation during the 1980s and political liberalisation since the late 1980s. In retrospect, liberalisation in these two senses was almost inevitable. Korean economy had become very large and much more complex by the early 1980s, and the major private firms had grown both in size and resources, as well as in confidence, to challenge the government. Also, two decades of rapid industrialisation had transformed Korea's industrial and class structures profoundly. Largely an agrarian society was transformed into largely an industrial one, with a sizeable middle class and an even larger working class. Given this transformation, democratic and anti-authoritarian government sentiments were no longer limited to students and intellectuals. The democracy movement in the 1980s was able to reach a much larger section of population than before, and became a major political force that the government could not suppress easily.

Economic liberalisation and changing government-business relations During the Park regime, until the end of the 1970s, the Korean economy was very much state-led. Even though chaebol played an important role in manufacturing and export, in close relationship with the government, their role was always circumscribed by state policy. In the early 1980s, the relationship between the state and the economy began to diverge from this state-led pattern. In this sense, the early 1980s may be regarded as a turning point. This change in state-economy relations also began to raise questions about the adequacy of the statist view of Korean development (Moon 1994). What were the direction of and reasons for the change? Economic liberalisation under continued authoritarian politics In 1979, Park was assassinated and another general, Chun, took over power by a military coup. The new direction in the economy


96

is therefore more or less identified with the policies of the Chun regime. However, signs of change could already be seen in the stabilisation program set up under Park just before his death. Following a period of super-high growth (11 per cent average) from 1976 to 1978, the Korean economy was faced with a series of problems in the late 1970s. Externally, the second oil shock in 1979 brought about a great oil price hike and an accompanying export decline. Internally, first, there was rampant inflation caused by the injection of earnings of Korean construction firms working in the Middle East; second, massive investment during the heavy industrialisation drive had created overcapacity and underutilisation in strategic industries. There was a rapid rise in the price of consumer goods, wages and land, and many firms were faced with either loss of competitiveness or bankruptcy. On top of this, there was increased protest by workers and students against government repression. In 1979, despite the `growth first' mentality of the Park regime, the seriousness of the situation forced Park to adopt a comprehensive stabilisation program. He was assassinated before the program went into effect. However, as soon as Chun assumed power, he vigorously pursued the short-term stabilisation program as well as a bold, long-term program of reorienting the economy away from state intervention and more towards free play of the market. In other words, the long-term program was a program for liberalisation of the Korean economy, both internally and externally, with an emphasis on stable and balanced growth rather than accelerated and unbalanced growth, in which chaebol acted as key agents and also benefited most. There were also promises to open up funds for smaller firms, to expand expenditure on social welfare, and to improve equity in income distribution in the new five-year plan. Chun was not concerned solely with solving the economic problems at hand or with instituting a different economic philosophy. He did not have the same kind of legitimacy that Park could command, having come to power as the result of a military coup. The popular movement against government repression was by this time more broadly spread and better organised, and Chun did not appear to offer an alternative political order. Chun imposed martial law when he took power and repressed all opposition. In these circumstances, the arrest of the opposition leader triggered a citizens' uprising in the city of Kwangju, the home town of the opposition leader. The uprising was brutally repressed by a special force, resulting in the death of over 200 people. With this beginning, Chun became the most unpopular and least respected president in Korean history. The significance of this fact in terms


97

of the change in the orientation of the state economy was that in his efforts to present his regime as a revolutionary one with an alternative program to that of the previous regime, Chun criticised the collusive relationship between the previous government and the chaebol and the concentration of economic power in the chaebol. This political program of attacking chaebol was linked to the program of economic liberalisation that was believed to be necessary in order to remedy the problems brought about by excessive government intervention in the economy. But it was also aimed at producing support from the growing middle class who were also critical of the chaebol but did not share the more radical view of the popular opposition movement.10 As government control of the credit market and privileged access to credit by the chaebol was a centrepiece of Park's economic policy, financial liberalisation was also a central part of the economic reorientation. In the early 1980s, all commercial banks were privatised; at the same time, establishment of two new nationwide commercial banks was allowed and, finally, preferential interest rates for policy loans were abolished, with policy loans themselves being gradually reduced in volume and eliminated entirely in 1988. Through this process, chaebol gradually lost the privileged access to credit that was the key to their growth in the past (Sakong 1993, pp. 72-73). Industrial restructuring In addition to financial liberalisation, industrial restructuring was a central concern of the economic reforms of the Chun regime. According to the new orientation, there was to be no more targeting of strategic sunrise industries by the government. The revival of industrial competitiveness was thought to reside largely in correcting the problems created by the policies of the Park regime. The industrial restructuring measures that emerged were based on the idea of `rationalisation'. One component of the rationalisation program was reorganisation of key industries to reduce duplicated investments and excess capacity. It was recognised that in the heavy industrialisation drive, too many firms were attracted to enter each field, bringing about excessive competition among themselves and preventing any firm from achieving sufficient economies of scale to be able to compete outside Korea. It was also recognised that the interventionist state policy was largely responsible for this outcome. For this reason, despite the declared new orientation towards less state intervention, the state's initiative was thought to be necessary to remedy the situation. What the new government wanted to do was to make chaebol firms which were competing


98

against each other in several product areas give up certain areas and concentrate on fewer product areas. Contrary to the professed anti-interventionism, the government still used discretionary commands, ordering firm A to give up area x and take up area y, and firm B to give up area y and take up area x, etc. However, the government found that the power of chaebol had grown so much that it did not always obtain compliance.11 Nonetheless, major restructuring was carried out forcefully in six key industries. In the shipping industry, only 17 of 67 firms remained after restructuring. In some cases, bigger firms were happy to absorb smaller and weaker ones; in other cases, they were not willing to merge even when ordered to do so by the government. It became clear that the government business relationship had changed. The second component of the rationalisation process was reorganisation of financially ùnhealthy' firms (bushil kiyop). These were firms that operated on credit at a high risk level, then obtained further credit to cover repayments, eventually reaching a level of no return after having swallowed a large amount of credit. Having excluded the option of either rescuing or abandoning these firms, the government chose to ask healthier firms in the same industry to absorb them. Since the unhealthy firms were, in many cases, of negative worth, incentives had to be offered to induce healthy firms to take them over. Some of these incentives involved a special tax rate and a low interest rate, which looked rather like the privileged credit access under the Park regime. Since the stronger firms that absorbed smaller, unhealthy ones were often large chaebol, despite the government anti-chaebol stance, large chaebol ended up benefiting from this type of rationalisation program (Moon 1994, p. 149). The third type of rationalisation program was geared towards reducing the business diversification of chaebol, but also their business concentration (Park 1992, pp. 114-120; Clifford 1994, p. 229). This policy represented best the anti-chaebol attitude of the Chun regime. When Chun first came to power, a section of the military junta argued that chaebol should be dismantled. Naturally, the major chaebol leaders resisted: they lobbied hard for their existence and expressed their willingness to cooperate with the government (Kim, E.M. 1987, p. 300). Soon the talk of dismantling was replaced by talk of controlling. Economic arguments aside, the political reason for this change was the declining popularity of the new regime and its need for financial support from the chaebol. Ironically, its lack of popularity and legitimacy also led the Chun government to feel the need to appear to be controlling the growth and concentration of economic power in


99

the hands of chaebol. In this regard, the Chun regime favoured the newer and smaller chaebol because they were thought to be more cooperative and loyal to the new government, and they could serve as a countervailing force against the large and powerful ones with stiff necks (Kim, S.K. 1987, pp. 301-2). Under this program chaebol were ordered to specify their mainstream businesses, with the view that many of the subsidiaries which were peripheral to the mainstream operations should be shed. This order was backed up by the government's willingness to starve the peripheral firms of credit. The idea was that chaebol firms should disengage themselves from unproductive activities aimed purely at expansion of economic power. The early obvious target was the involvement of chaebol in real estate speculations. However, it was extended to the large number of firms the chaebol acquired in their expansion. The chaebol leaders criticised the government's plan of control of credit as being against the policy of liberalisation, and resisted the government's measures, both individually and in groups, by lobbying at various levels of the government. At the same time, some chaebol tried to subvert the government order by merging firms within a group and disguising the equity ownership. On the whole, due to the resistance of the chaebol, the government did not achieve its original objectives (Park 1992, p. 115; Clifford 1994, p. 229).12 Contradictions and unintended consequences The discussion of the economic liberalisation program introduced by the Chun regime makes it clear that there was a contradiction in the way the program was carried out. The basic idea of liberalisation was to reduce state intervention and encourage competition by expanding the free play of market forces. However, the Chun government made the control of chaebol an integral part of the liberalisation program. In pursuit of the latter goal, the government continued to use discretionary methods aimed at individual firms whenever it deemed it necessary.13 This was made possible by withholding political liberalisation. Despite the government's efforts to control chaebol, however, they became stronger and more independent of the government. And despite the continued use of command methods, the actual power of the state to command chaebol continued to decline. This contradiction in the process of economic liberalisation under the Chun regime can be well illustrated in the case of financial liberalisation. One of the goals of financial liberalisation was to eliminate the state's control of the credit market and privileged access by big business, which were the key elements of the government-chaebol collusion under the Park regime. In the


100

process of privatising the banks, the Chun government tried to maintain de facto managerial control of banks by appointing their chief executive. In other words, while withdrawing from the practice of making policy loans to special sunset industries or special firms, the Chun government tried to maintain some power to discipline firms. The government was very cautious about the loss of power which privatisation of the banks would mean, and also about the potential for chaebol dominance in such a situation. Accordingly, the government put an 8 per cent ceiling on the maximum share by a single shareholder (Park 1992, p. 116). The chaebol, in turn, tried to maximise its share through indirect purchases or purchases from several banks.14 Another aspect of financial liberalisation was lifting the restrictions on non-bank financial institutions (NBFIs), such as short-term investment and savings companies, mutual savings and finance companies, and insurance companies. The NBFIs were allowed to have higher interest rates than banks, and for this reason were growing much faster than banks even before financial liberalisation. But in the 1980s they overtook the banks in the area of deposit share. The major chaebol competed vigorously in this area.15 Yet another new development that gave financial independence to the chaebol was the rapid development of the securities and stock markets, particularly in the second half of the 1980s.16 In this manner, despite the efforts to control the chaebol, the government policy of financial liberalisation contributed to strengthening the basis of their financial independence. In the process, chaebol also learnt to be more self-reliant. In 1986, the government introduced monopoly regulation and a revised fair trade law specifically to deal with the economic power of chaebol. Despite all the measures to control them, chaebol grew even more during the boom created by favourable conditions in the international economy since 1986 — the so-called three lows: lower interest rates in foreign loans, lower exchange rates of the US dollar in relation to Japanese yen, and the lower price of oil. In 1987 another general, Rho, became president, this time by peaceful means, barely winning in the election. In the face of the growing demand for democracy and the strength of the popular opposition to the government party, and in an attempt to distance himself from the unpopular Chun regime, Rho was forced to start the process of political liberalisation. First, the decision-making process became much more decentralised and open to societal voices. Second, due to the minority position of the government party, the National Assembly became much more important. Third, the power of the government to intimidate chaebol by means of discretionary commands declined in the face of a


101

declared government orientation towards democracy. The Rho government continued the anti-chaebol line of the Chun government, even though it oscillated in orientation. However, given the changed political situation, chaebol became much more vocal and assertive despite their lack of popularity among the general public. By the early 1990s, big business was better organised as an interest group. Large corporations were not only financially more independent, but they had also developed their own think tanks and policy research centres. (The information-gathering capacity of the larger chaebol is now reputed to be even superior to that of the government.)

Labour issues under political liberalisation In June 1987 the head of the government party, Rho, who became president the following year, made a declaration for democratic reform. This declaration created something of an explosion in Korea's labour movement. Strikes, which averaged around 200 a year until 1986, numbered 3700 in 1987, 2800 of them during the three months following the June declaration. The declaration was not particularly directed to the labour movement; it was the Rho government's response to the growing opposition movements at a time when Korea was preparing for the 1988 Olympics in Seoul. However, once the suppression of protests was relaxed, labour protests began to appear in the main industrial districts before spreading throughout the whole country — not only in manufacturing industries, but also in transport and other service industries. Many new unions were born in the process. Demands made in the wave of labour strikes were varied, ranging from a `simple' wage raise, even though large in sum, to a more `political' demand, such as the forming of a democratic union or a change in the current labour laws. In view of the fact that institutions of autonomous conflict resolution were little developed in Korea, and Korean workers had little experience in voicing their demands to management, the manner in which they voiced their discontent was often more like a protest than a strike as an instrument of bargaining. It was clear that the flood of labour protests that began in 1987 was an expression of a deep-seated discontent that had accumulated over many decades. Let us first consider the effect of political liberalisation on the labour market, then move on to the question of emerging labour relations. Changes in the labour market To most economists, the most immediate and visible effect of political liberalisation on Korea's labour economy may be a sharp


102

rise in the wage rate between 1988 and 1989. Until the first half of 1987 the average annual wage rise in Korea was 7 per cent. In 1987 and 1988, Korean workers were demanding up to a 30 per cent wage rise and achieved an average increase of 15 per cent (Han 1988, p. 172). Wage bargaining was affecting the wage rate for the first time in Korea's industrial history. It must be noted that despite the low wage strategy in the industrialisation policy, the wage rate in Korea had been rising steadily even before 1987, due to the increasing shortage of labour. However, the wage rise after 1987 caused a great deal of concern because, for the first time, the wage rise began to exceed the increase in labour productivity. From this point on, Korea's wage rate began to exceed that of Taiwan, which had a higher GNP per capita than Korea. Much of the concern that has been voiced in Korea about the wage rise was `loss of one of the key sources of Korean competitiveness'. Beside the wage rate, there was also the question of changes in the character of the labour market. We recall that, in comparison to the labour market in Japan, Korea's labour market was less segmented along firm size, but very strongly along educational (high school/university graduates) and occupational (bluecollar/white-collar) axes. What was the effect of political liberalisation on labour market segmentation? The surveys on the effect of the 1987 and 1988 strikes on Korea's labour market indicate that the changes that have occurred since 1987 have reduced the distinctiveness of the Korean labour market, noted earlier, moving it towards the pattern of the labour market in Japan (Cho 1992, Ch. 1, pp. 19-87). In addition to the fact that the overall wage increase exceeded the productivity increase, particularly for male production workers, the following facts emerged: 1 The wage differential based on academic credentials, and that between whitecollar and blue-collar workers, began to decrease significantly. 2 The wage increase was particularly pronounced for workers with long-term tenures in large firms, thus providing more incentives than before for workers to stay in one firm. This had the effect of increasing the wage differential based on firm size, therefore favouring large firms to have higher wages. 3 Working hours, which used to be notoriously long (54 hours a week), decreased significantly (by around 10 per cent for male production workers), partly due to the wage increase. 4 The turnover rate decreased, partly due to the wage increase and the shortening of working hours.


103

5

The wage level for female production workers also went up, but the wage differential between the sexes worsened due to the greater increase in the male wage. The analysis of the survey above suggests that the pattern of the Korean labour market has been moving towards the Japanese one since political repression of organised labour union activities was relaxed in 1987.17 How far this trend will continue and approach the Japanese pattern is still an open question and partly dependent on the future direction of industrial relations in Korea.18 Changes in industrial relations since 1987: Labour demands If the Korean labour market is patterning itself on Japan, might the same be true of industrial relations? This question is difficult to answer because of the fluid state of industrial relations since 1987. We shall examine the direction in which industrial relations in Korea is moving by examining the interaction of three factors: labour demands and union orientation since 1987; employer responses to labour; and the new state policy on labour union movements. A short characterisation of Korea's labour union movement that emerged after 1987 would be that it was epoch making: the wave of labour protests that started in 1987 affected all workers, whether they were actually involved in protest activities or not, because it identified the alternative possibilities in Korea's labour relations. Even though all labour protests made economic demands, the range of demands went far beyond economic ones. In many cases, the workers wanted to change the authoritarian style of labour management in their firms. It was a style that was embellished in the name of Korean tradition, but in reality made possible by the backup of the state's power against labour. Workers wanted to have a union that truly represented their interests and concerns rather than the existing ones that controlled them, set up by either management or the government. For production workers, decent treatment by managerial staff became a key issue, while intellectual workers such as teachers and newspaper employees argued for autonomy in their work. The establishment of a democratic and independent union was a dominant issue in all cases. However, the problem was complicated by the existing labour laws which prohibited multiple unions, political activities by labour unions, and any union in the public sector and in defence industries. Moreover, the process of establishing a democratic


104

union representing workers' interests was not a simple one, because a contending union might either exist already or be in the process of being established at the same time by another group of workers who supported management. This situation frequently led to physical violence between two groups of workers, or between workers and management. During 1987 and 1988, when the government had a `hands-off' policy on labour relations, both the absence of mechanisms for, and the lack of experience in, bargaining and negotiation led to numerous violent confrontations. It was not uncommon for workers to occupy company buildings in the process of staging a protest or strike, or to demonstrate in the main streets of cities rather than in front of factory buildings. This situation continued even after 1992 when a new civilian government led by Kim (Yong Sam) emerged and the level of strikes had already returned to the pre-1987 level.19 Meanwhile, the public perception of the union movement, which was favourable in the early phase of democratisation, gradually deteriorated after 1987. Even before the 1988 Olympics, some labour protest actions were perceived as being too radical. But the new change was partly due to a new economic situation that emerged: it was perceived that the workers had made a substantial economic gain between 1987 and 1989 but were still demanding more when the Korean economy faced a serious trade deficit in 1989. From this point on, the public began to see union demands less as a rightful part of the democracy movement and more as excessive self-interest, lack of responsibility and disregard for the state of the national economy. The reason for this change may partly be attributed to the middle class's turn towards conservatism. However, the union movement itself was partly responsible because, being too busy with their own local struggles, most unions lacked a clear and alternative vision of the movement's role in the national economy. For this, a national labour organisation with an alternative but encompassing national vision would be necessary. This is in the process of emerging. Employer attitudes and responses How did the major Korean employers react to the seemingly irreversible rise of the Korean labour movement? Did they accept and accommodate it as an inevitable new reality accompanying the new wave of the democratisation process? A brief answer by the beginning of the 1990s was `No'.20 Having been used so long to exercising extensive authority over labour, sustained with government support, the management of most major Korean firms found it extremely difficult to accept the workers' autonomous union as a bargaining partner of equal status. The consequence


105

of this `pre-modern', anti-union attitude on the side of management was a head-on collision with the emerging labour union movement. Until 1987, most firms belonging to chaebol groups did not have a union — not even an enterprise union. Managementlabour consultation committees were required by law, but management simply did not allow unions to be formed. But the situation changed in 1987 with Rho's declaration for democracy. Workers all over Korea were organising, protesting and demanding to be an equal-status bargainer. Employer responses were varied, but some common tactics can easily be recognised in their anti-union stance. Major efforts were made by chaebol firm managements to prevent autonomous unions from forming. In the past, any employee who talked about forming an autonomous union was regarded as a communist sympathiser, subjected to persecution by law and summarily dismissed by the firm. This tactic did not entirely disappear, but it could not be used as easily since the government policy had changed and unions were being formed in many firms. In these circumstances, a typical response by management when an autonomous union was about to be formed was to take the initiative in forming a union with `cooperative' workers. Under Korea's labour union law, multiple unions are not allowed and the existence of the company-initiated union prevented the autonomous union from registering with the government. However, this response by the management side invariably outraged the workers who supported the `democratic union', leading them to protest even more vigorously and sometimes to resort to ìllegal' activities. From the examination above of employers' response to the labour union movement, we can see that, although both unions and management sometimes resorted to violence, much of the violence was provoked by management's anti-union tactics. It is also apparent that Korea's major employers have been very ungraceful losers of past privileges over their employees. Most of them have been very reluctant to accommodate independent unions as an equal-status bargainer, let alone as a cooperative partner.21 The State attitude to the labour union movement The political liberalisation initiated by Rho in 1987 was without doubt a key factor that allowed the explosion in labour protests and independent union activities. However, it is difficult to attribute a straightforwardly progressive role to the Korean government after 1987 in its policy towards labour. We must remember that it was the continuous challenge of the opposition and the democracy movement that brought down the Chun government


106

and it was due to the momentum of this democracy movement, where student activists, labour activists and opposition politicians joined hands, that Rho made the declaration for democratic reforms. The Rho government understood well that at this point even the relatively conservative middle class was supporting the democracy movement against Chun. In other words, the Rho government was a reluctant reformer, especially in its policy towards labour. Although it was Rho's declaration of democratic reform in 1987 that released the wave of labour protests, the intensity of the explosion in the labour movement surprised everyone, most of all the Rho government. In 1987 and 1988 the government had a hands-off policy towards labour union activities, giving the impression to observers that Rho's was a relatively pro-labour government in allowing what used to be suppressed. When Rho took over power, the whole country was under the wave of the democracy movement, and economic growth was not a priority issue in the general public's mind. The Rho government's policy reflected this mood and initially put stresses on remedying the neglected areas of income distribution, welfare and housing, in addition to `democracy'. Luckily, a healthy growth rate in the economy helped bring about this shift in government policy. Despite criticisms from the major employers that the government was neglecting large-scale labour strikes that were destructive to the national economy, Rho could act out the role he had projected during the presidential campaign: the `common people's president' who would bring democracy to the people. He could do this because, unlike his predecessors, his legitimacy depended less on economic growth than on responding to various demands that were previously suppressed. However, as inflation reached 10 per cent and the trade balance went into the red in 1990, and looked like it would continue that way, a sense of crisis began to expand both in the business sector and within the government. Criticism of the government for `not doing anything' for the economy began to be voiced. The middle-class public was also becoming less sympathetic to labour's cause. It was at this juncture that the Rho government began to return to economic growth as a policy priority, and at the same time began to crack down on the labour movement. The number of workers and union leaders arrested jumped six-fold between 1988 and 1989, from 147 to 946, totalling 1736 in three-and-a-half years between 1988 and 1991 (Choi 1993, pp. 268-9). Radical Korean scholars believe that despite opening the door to the new wave of democracy, as an agent of the capitalist state


107

Rho could not but be anti-labour (Choi, 1993; Koo, 1993). However, the policy towards labour that emerged under the new Kim government in 1992 pleasantly contradicted this functionalist view of the state. For instance, in 1993 the Ministry of Labour under the Kim government decided, by following a Supreme Court decision, that workers should be paid at least a social security level wage during their strike. The Employers' Association was naturally shocked. However, though unhappy, many individual firms accepted it as an inevitable trend (Choson Ilbo, 22 May 1993). What is significant about the Kim government's policy towards labour is that while advocating, in principle, noninterference and autonomy in the industrial relations between the employer and the union, unlike the Rho government the Kim government tended to be harsher towards the employer side and more lenient towards the labour union side. The rationale given by the Kim government was that the management side should be more responsible in view of the past conditions that favoured the management side (Choson Ilbo, January 1994). This is a big turnaround in the government's thinking on the industrial relations issue.22 The Kim government's labour policy suggests that it is far ahead of the major Korean employers in searching for a way of accommodating organised labour in the new socioeconomic order. Unlike the view of radical Korean scholars on the Korean state, which was based on their study of the Rho government's behaviour towards labour, the Kim government has been willing to take the national labour union as a partner. The Kim government seems also to be willing to consider a change in labour laws in order to secure future industrial peace. Whether a political party will be allowed along the labour line is not clear at this point. On the whole, the direction of the new industrial order in Korea appears to be rather different from that of Japan. There is a limit to what a government can do. Employers have to join in actively in the process of building the new constructive industrial relations order. However, they are still the most backward player in this regard.

PROSPECTS FOR THE FUTURE A buzz word in Korea today is globalisation, of everything from education and politics to the economy. What is meant by this word in Korea is not entirely clear, because it is used in many ways. But what is clear is that it has become a normative word since the president, Kim, adopted it as a slogan for Korean society and economy. It has to do with opening up the country and


108

reaching out to the world in all spheres of social and economic life: upgrading of a sort, as in globalisation of all strategies. More concrete than this sort of upgrading, but one that reflects well the problem faced by the Korean economy today, is the issue of industrial upgrading. Korea is no longer a low-wage country. Already in the late 1970s Korea began to experience a labour shortage, but the political liberalisation in the late 1980s largely destroyed the low wage base of comparative advantage. Korea has been experiencing the rising protectionist mood of the United States, its biggest trading partner, and at the same time facing new challenges from the rapidly rising second-tier newly industrialising countries (NICs) in South-East Asia, such as Malaysia and Thailand. These countries, and the Japanese multinational corporations (MNCs) there, increasingly compete with Korea for the same market with lower wages. Still not good enough to compete with Japan in most upper-end product markets, but being chased by Malaysia, Thailand and, increasingly, China in the lower-end ones, Korea is feeling the squeeze from many sides. Will Korea be able to respond to this challenge successfully? A significant part of the answer to this question will depend on how the relationships among state, business, and labour are managed in future. Some observers see the government's bureaucratic regulation of the economy as one of the main obstacles in upgrading the economy. A lack of adequate accountability at the very top of the government bureaucracy is seen to be causing widespread and large-scale corruption in Korean society and producing incentive structures that create misallocations. As we have seen, the bureaucratic guidance of the Korean economy in the 1960s and 1970s produced both positive and negative results. Despite economic liberalisation since 1980, some of the negative aspects continue to operate today. Given the maturity of Korean society and the economy, it is clear that the proper role of the state is likely to be different from in the earlier period. The desire to introduce a political framework that can make the government more responsive to the public is shared by the majority of Korean people, and the government has been moving in this direction. Despite the cry among many economists in Korea to `remove the shackles of politics from the economy' and ìntroduce market principles', the role of the government in guiding Korea's national economy is likely to continue in some significant way. The proper role of big business, and whether corporations' power should be contained, are also being debated in Korea. While recognising the strategic role of chaebol in international competition, given the political history of their accumulation process and


109

the family control of national-scale business, compared to their Japanese counterparts, Korea's big business firms do not command a high level of respect from the general public. It appears that despite government efforts to curve their power, now that they have become financially independent from the state, the importance of chaebol in the Korean economy is likely to continue. On the other hand, family control of chaebol is likely to weaken in time as generational change progresses in the top management level, and this step will allow more and more professional managers to move into the top positions, thus increasing white-collar identification with the firm, as in Japan. The perceived dual need in Korea for chaebol as a tool for Korea's national industrial strategy on the one hand and, on the other, for controls on their power, provides a legitimate place for the role of the government. Korea's relative success in managing foreign capital left an ambiguous legacy.23 The tradition of bureaucratic regulation of foreign capital and foreign investment has created an environment that many foreign firms do not find attractive, and Korea is now faced with a difficulty in attracting foreign firms with the advanced technology that it now needs. The history of attracting Japanese capital and Japanese firms has also left a profound mark on the pattern of Korea's manufacturing industry. While the danger of becoming a mere economic dependency or satellite plant of Japanese MNCs was overcome, a production strategy that relied primarily on labour cost advantages resulted in the creation of manufacturing industries that are mainly based on large-scale, labourintensive assembly of mass production goods with key components imported from Japan. Even though there was continuous upgrading of products and a steady increase in substitution by domestically produced components, given the rapid pace of technological change many key components remain to be imported Japanese ones. As a result, Korea's trade deficit with Japan has been growing steadily from US$3.9 billion in 1988 to US$8.8 billion in 1991. This technological dependence on Japanese inputs reflects the weakness of Korea's industrial structure, as well as of its production organisation. First, having channelled much of its resource into large firms, Korea's manufacturing industry lacks the technically sophisticated small and medium-sized firms that supply and support the large firms. Although considerable funds have been channelled into smaller firms since the late 1980s, this effort will take time to bear fruit. Second, the production organisation in large firms is outmoded for a next-level competition. Korean firms' production organisation is still largely based on a Fordist, mass


110

production system, rather than on a skill-based, flexible system, as in Japan. Korea's efforts to upgrade its technology have been largely concentrated in research and development and investment in a few strategic areas, as in the case of the muchpublicised memory chip industry. What is lacking so far is upgrading of the skill base of its production workers. A rapid increase in Korea's foreign direct investment (FDI) in South-East Asia and China may be expressed positively in terms of increasing globalisation of Korean firms' operations. However, this outward expansion of Korean manufacturing capital coincides with the rise in the wage level in Korea. Running away from high wage rates and organised labour to greener fields overseas, rather than upgrading the skill base of Korean workers and moving into the production of higher value-added goods, will not produce a long-term solution for Korea. This discussion leads to consideration of Korea's new industrial relations. The direction of the organised labour movement is relatively clear in the sense that labour unions have established their presence solidly in the industrial scene, and national organisations are being solidified. The Kim government's policy towards organised labour has been relatively progressive during the first half of his term.24 It is the major employers' responses towards new union movements that have been least enthusiastic and forward-looking. Without having organised labour as a partner, Korea's employers are unlikely to be able to upgrade the skill base of their production organisations and industrial structure on a long-term basis. The prospects for this option are not clear at present. But Koreans themselves seem optimistic about the future.

NOTES 1. 2.

3. 4. 5.

South Korea; hereafter, referred to simply as Korea. To this list should be added foreign capital, but it has been omitted from this discussion due to considerations of length. The question of how Korea could manage dependency on foreign capital was an important one that concerned many Koreans, despite the differences in their political ideology. The question is still highly relevant in the context of Korea's technological dependence on Japan. A clear parallel to the role of the Korean War in the early postwar economic recovery of Japan has been drawn by Cummings (1984) and Woo (1991). The term `developmental state' comes from C. Johnson's book (1982) on the Japanese economic bureaucracy, MITI. It has been pointed out that the organisational principle of the


6.

7. 8.

9.

111

Japanese ìe' system, of which a heritage remains in the organisation of the Japanese company, is not based on blood kinship as in Korea or China. It is suggested that the principle of the pseudo-family system in Japan, under which an adopted son can become the head of the family, serves as a more universal base for a family-oriented company or community than blood ties. However, the transformation of Japanese zaibatsu from their prewar form to the postwar one is perhaps more significant than the heritage of the ìe' system. Without the changes brought about by democratic reforms during the occupation years, it is difficult to see how Japanese economic organisations would have developed as they have in the postwar era. However, the democratic reforms in civilian organisations in Japan would not have occurred without changes at the level of government. It took defeat in a war and the Allied Occupation for the reforms to occur. The past tense is used because the situation began to change after 1987. The change is discussed in the next section, `The Korean political economy in transition: 1980-present'. Since the general strike in Korea at the end of 1996, foreign media began to reflect Korean employers' concern that the Labour Standard Law placed a too strong limitation on employer dismissal of employees and the employer. Some foreign journalists began to use the term `lifetime employment system', with reference to the employment system in Korea backed up by Labour Standard Law. This is a misleading usage. The employment protective feature of the Labour Standard Law reflected the government concern about the poor employment conditions of workers which was prevalent throughout contemporary Korea. During the period of rapid growth, the legal protection of employment did not pose a problem to large employers because of the situation of labour shortage. However, the existence of the law did not prevent massive layoffs by large firms in the 1980 recession (Chung, 1986, pp. 154, 1667). Enforcement of the law under an authoritarian regime was highly arbitrary. The same law becomes a problem in the 1990s when the government cannot act so arbitrarily, the organised labour has become a major social force, and economy growth has slowed down and employers want to carry out downsizing operations. It should be clear from this discussion that, in the case of Korea, export-oriented industrialisation or the attempt to attract foreign direct investment were not the most important factors bringing about labour repressive policies, as some critics of dependent development have suggested (Fröbel et al. 1980). Rather, it was the aggressive policy of the state-led national development in the context of national security concerns that mainly accounts for the labour repression, and for the style of labour repression. An analogy to the labour repressive policy of prewar Japan seems more useful in understanding the sense of the two developmental states' attitudes towards organised labour,


112

even though the international contexts in the two cases were quite different. 10. This point is particularly stressed by Moon (1994). 11. A well-known case of this difficulty is the reorganisation of division of labour in two fields, electricity generators and automobiles, between two giants, Daewoo and Hyundai (Clifford 1994, pp. 185-7). 12. But Moon (1994) believes otherwise. 13. The best known case is the collapse of Kukje chaebol as a result of a government decree aimed at a single chaebol. Discussed in Clifford (1994, pp. 219-26) and E.M. Kim (1987, pp. 234-43). 14. An investigation in 1984 revealed that many of the top chaebol owned more than 8 per cent of a single bank. For example, Daewoo owned 20 per cent of Jeil Bank. As a group, the 30 top chaebol owned 48 per cent of all banks. 15. In 1984, 13 of the 32 short-term finance companies were owned exclusively or jointly by 10 top chaebol, and 29 were owned by the top 30 chaebol. Chaebol also used financial institutions to circumvent government restrictions on chaebol activities — for instance, real estate business (Kim, S.K. 1987, pp. 283-5). 16. The listed capital and total market value increased from 2.4 and 2.5 trillion won, respectively, in 1980 to 13.7 and 70.3 trillion won in 1989. By 1990, the Korean stock market was the ninth largest in the world in terms of stock market capitalisation (Woo 1991, pp. 200-1). 17. It must be noted, however, that this trend was not entirely due to political liberalisation. In the early and mid-1980s the growing shortage of labour, particularly in production jobs, and the glut of university graduates were reducing the relative market value of a university degree. This trend has continued steadily in the 1990s (Choson Ilbo, 2 February 1993, 16 September 1993, 22 August 1994, 15 October 1995). In the 1990s it has become easier for high school graduates to find employment than university graduates. 18. Ironically, the Japanese employment system and labour market has undergone a radical change under the recession that started in the late 1980s. 19. The strike at Hyundai Heavy Industry, Inc. in 1994, which lasted over two months, produced, besides a US$300 million loss in exports, 144 injured workers in the infighting between the two factions, one of which wanted to continue the strike and the other to go back to work (Choson Ilbo, 24 August 1994). 20. A good account of the Korean labour movement as a whole, and of its development between 1987 and 1990, is given in Ogle (1990). Our discussion relies on Ogle (1990), Cho (1992), Koo (1993), Park (1990) and Choi (1993). 21. Interestingly, however, according to a large-scale enterprise survey carried out in 1988, in contrast to their actual behaviour, the majority of managers answered that collective bargaining with labour unions was good for industrial peace (Cho 1992, pp. 105-6). It is important


113

to note, however, that top managers were significantly less enthusiastic (62 per cent) than the middle managers (72.2 per cent) in responding so. This fact supports the view that the concentration of ownership and decision-making power in many Korean firms, particularly in the chaebol firms, is a contributing factor to delays in the emergence of democratic industrial relations in Korea. 22. Another surprising development of the Kim government's labour policy was that it was willing to support the newly emerging national labour organisation (Chon'nodae, the National Association of Representatives of Labour Unions) despite opposition from many members of the government party itself, as well as from the Employers' Association (Choson Ilbo, 15 December 1994). 23. The issue of the danger of becoming subordinate to foreign capital during the process of industrial development was one that concerned Koreans a great deal. See Sumiya (1976) and Chang (1985) on the issue of the Korean economy becoming subordinate to Japanese capital. Then see Evans (1987), Haggard (1990), Mardon (1990) and Doner (1992) on how Korea managed to avoid this problem of dependency. 24. It turned out that the Kim government became very conservative later on.

BIBLIOGRAPHY Amsden, Alice H. 1989 Asia's Next Giant: South Korea and Late Industrialization, Oxford University Press, New York, NY. Bello, W. and Rosenfield, S. 1990 Dragons in Distress: Asia's Miracle Economies in Crisis Penguin Books, London. Chang, Dal-joong 1985 Economic Control and Political Authoritarianism: The Role of Japanese Corporations in Korean Politics 1965-1979 Sogan University Press, Seoul. Cho, U.H. 1992 Nosa Kwankae Kehyukron [Towards a New Industrial Relations] Changjak kwa Bipyungsa, Seoul. Choi, J.J. 1993 Hanguk Minjujui ui Iron [The Theory of Korean Democracy; in Korean], Part 3, Ch. 1, Ìssues in the rise of the Korean working class as a political actor' Hangilsa, Seoul. Choson Ilbo [Choson Daily]. Chung, S.K. 1986 `Hanguk ui Nodongshijang Imgum ui Kujobyundong kwa Nosakwankei [Structural Changes in the Korean Labour Market and Wage, and Industrial Relations]' in Hanguk Sahoe Yeonku [Studies in Korean Society] vol. 4. Clifford, Mark 1994 Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea M.E. Sharpe, Armonk, NY. Cummings, B. 1984 `The origins and development of the Northeast Asian political economy: Industrial sectors, product cycles, and political consequences' International Organization vol. 38, no. 1.


114

Doner, Richard 1992 `Limits of state strength: Toward an institutionalist view of economic development' World Politics vol. 44, no. 4. Evans, Peter 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, Cornell University Press, Ithaca and London. Fröbel, F. et al. 1980 The New International Division of Labour Cambridge University Press, Cambridge. Haggard, S. 1988 `The politics of industrialization: The Republic of Korea and Taiwan' in H. Hughes (ed.) Achieving Industrialisation in East Asia Cambridge University Press, Sydney. ——— 1990 Pathways from the Periphery: The Politics of Growth in Newly Industrializing Countries Cornell University Press, Ithaca. Han, H.Y. 1988 Kankoku Kikyo Keiei no Jittai [The Actual State of Korean Enterprise Management; in Japanese] Toyo Keizai Shinposha, Tokyo. Hattori, T. 1987 `Zaibatsu to sono Keieishadachi' [Chaebol and its managers] in T. Hattori (ed.) Kankoku no Kogyoka, Hatten no Kozo [Industrialization of Korea: The Structure of Development] Ajia Keizai Kenkyujo, Tokyo. Imai, K. 1992 `Japan's corporate networks' in S. Kumon and H. Rosovsky (eds) The Political Economy of Japan vol. 3, `Cultural and Social Dynamics' Stanford University Press, Stanford, CA. Johnson, C. 1982 MITI and the Japanese Miracle University of California Press, Berkeley, CA. Kim, E.M. 1987 From dominance to symbiosis: State and the chaebol in the Korean economy, 1960-1985, PhD thesis, Brown University. Kim, S.K. 1987 Business concentration and government policy: A study of the phenomenon of business groups in Korea, 1945-1985, PhD thesis, Harvard University. Koo, H. 1993 `The state, minjung, and the working class in Korea' in H. Koo (ed.) State and Society in Contemporary Korea Cornell University Press, Ithaca, NY. Lee, C.H. 1992 `The government financial system, and large private enterprises in the economic development of South Korea' World Development, vol. 20, no. 2. Mardon, R. 1990 `The state and the effective control of foreign capital' World Politics vol. 43. Mason, E.S. et al. 1980 The Economic and Social Modernization of the Republic of Korea Harvard University Press. Moon, C. 1994 `Changing patterns of business-government relations in South Korea' in A. Macintyre (ed.) Business and Government in Industrialising Asia Allen & Unwin, Sydney. Ogle, G.E. 1990 South Korea, Dissent within the Economic Miracle Zed Books Ltd, London and New Jersey. Park, I. 1992 Kankoku NIES ka no Kuno [Korea's Painful Process of Becoming a Newly Industrialized Economy] Domunkan, Tokyo. Park, S. 1990 Ìndustrial relations policy in Korea: Its features and problems'


115

in J.K. Kwon (ed.) Korean Economic Development Greenwood Press, New York. Sakong, I. 1993 Korea in the World Economy, Institute for International Economics, Washington, DC. Song, H.K. 1989 State and the working-class labour market in South Korea, 1961-1987, PhD thesis, Harvard University. Sumiya, M. 1976 Kankoku no Keizai [The Korean Economy] Iwanami Shinsho, Tokyo. Wade, R. 1988 `The role of government in overcoming market failure: Taiwan, Korea and Japan' in H. Hughes (ed.) Achieving Industrialisation in East Asia Cambridge University Press, Sydney. Woo, J.E. 1991, Race to the Swift: State and Finance in Korean Industrialization Columbia University Press, New York.


PART II The South-East Asian economies: second-tier Asian economies


5 The ASEAN economies: growth and change in newly emerging socio-economic systems Bruce McFarlane The apparent success of the ASEAN countries in attaining record and sustained rates of economic growth and the deepening of the industrialisation process in South-East Asia has attracted a great deal of attention and praise. However, two more fundamental issues remain to be further explored: the looming barriers to future acceleration of the growth rate of GDP in individual ASEAN countries and the nature of the new socio-economic systems emerging in this most dynamic sector of the world economy. More specifically, this chapter will ask the following questions: 1 What have been the main features of the historical development of the ASEAN region since the founding year, 1967? 2 What goals were set at the formation, for each country and for the region, and how much have they been revised and/or fulfilled? 3 In the individual member states, how have the rather successful economic outcomes been related to their decision-making structures and to their legalpolitical and ecological environments? 4 What are the political problems emerging in the ASEAN states that might slow both the internal dynamics of growth and the trend to economic integration which has been sought by leading ASEAN politicians? 5 Are the political and governmental institutions within ASEAN (and prevailing levels of graft, nepotism and corruption) as they are today congruent with the ambitious goals and economic targets that have been set for early next century (for example, in Malaysia and the Philippines)? 6 Is the political culture within the ASEAN states changing quickly enough to serve more adequately the new socio-


120

economic systems that are emerging in the transition period up to the new century?

HISTORICAL EVOLUTION OF THE ASEAN BLOC The regional grouping known as ASEAN, founded in 1967, became more important in the 1980s and 1990s. Originally conceived as a diplomatic bloc based on anticommunism, it has played a major role in giving political space to Indonesia and Thailand and international prestige to Singapore and Malaysia. The Philippines, tied tightly to the United States until 1991, gained much less politically and economically from ASEAN in the twenty years after its founding, partly as a result of weaknesses in its political structure and a heavy indebtedness to foreigners which was allowed to grow without being properly funded.

Aspirations of the ASEAN bloc A series of goals for the region was observable from the earliest days. These objectives included the rapid expansion of defence forces; opposition to Asian national liberation movements in China and Vietnam; increased inter-ASEAN trade; and steadily deepening economic integration. ASEAN has been forced to modify and change its defence and foreign policy stances. Singapore and Thailand, formerly antagonistic towards and critical of China, have drawn closer to China. The victory of the Vietnamese in the US-Vietnam war rendered military intervention by the ASEAN states irrelevant. This was followed by a period in which Thailand and Singapore led a militantly anti-Vietnam stance (although trade between Singapore and Vietnam was proceeding apace all the time). The Philippines and Indonesia maintained cordial relations with Vietnam, a position that was eventually adopted by Thailand at the time of the Choonhavan government, setting off a chain of events which led to Vietnam's entrance to ASEAN as a full member in 1995.

Integration goals From the beginning, ASEAN officials and politicians identified a limited number of `civilian' objectives which accompanied the overwhelming emphasis on military issues in the 1960s and 1970s. One of these goals was closer economic cooperation, the meaning of which at that time was left deliberately vague. As the religious and political tensions between the individual member states (e.g. between Thailand and Malaysia, Thailand and Singapore, Indo-

THE ASEAN ECONOMIES

121

nesia and the Philippines) were overcome gradually, and a sort of unity became apparent, especially after 1980, these objectives became more concrete in character. One was to promote mutual tariff reductions between the member states; another was the desirability (on economic grounds) of having only one or two major heavy industry plants (petrochemicals, fertiliser, steel) to serve the whole of ASEAN instead of one in each country. As background to measuring the degree of movement towards economic cooperation (and the further stage of regional economic integration), it must be remembered that a number of rather specific factors propelled ASEAN to a new position as a dynamic sector of the world market. These factors must be clearly understood if ìntegration' within ASEAN is to proceed as successfully as ASEAN expected from its successive ministerial meetings after 1980. The first factor was the exceptional rate of structural change in the form of industrialisation achieved by Singapore, Malaysia and Thailand between 1960 and 1994, as well as accelerated industrialisation by Indonesia after 1986, and the recovery of the Philippine economy in the 1990s. The second factor concerns the restrictions which have been exercised by the United States to limit exports by these ASEAN countries into North America, and also the barriers and other trade difficulties that these countries encounter in their relations with the European Community. The third element consists of the Japanese factor. Japan finds in the ASEAN area, especially in Thailand, Singapore, Malaysia and Indonesia, growing markets for its industrial goods. Given that Japan has become the most important producer of capital goods, exports of ASEAN countries sustain these imports from Japan — even though the lack of investment by Japanese companies in the area creates an increased demand for imported Japanese goods as far as the technology of machine tools and machinery in general are concerned. (This issue is explored further in the penultimate section below.) A problem that has arisen for a large section of this trade is that Japan has used Australia as a major raw materials supplier, so Japan does not represent a strong market for the raw materials coming from Indonesia and Malaysia. At the same time, Tokyo has tended to be rather vulnerable in its aid and trade policies towards the Pacific Rim because of pressures from the United States and frequent threats to unleash a trade war. Thus we have witnessed the formation of certain opinions about Japan and its impact on ASEAN growth prospects which can be summarised as follows: without active coordination among the ASEAN countries it will be impossible to maintain the present processes of ASEAN growth and accumulation. In other words, investment will slow down


122

because of pressure coming from the United States and the blockages set up by the European Community. Simultaneously, ASEAN members could remain in a position of dependency in terms of the development of machinery imports and technology transfer coming from Japan. The first of the politicians to raise this issue of ASEAN economic integration was the Malaysian Prime Minister, Mahathir, who suggested the creation of a free trade area in Asia to include ASEAN, but to which we should add South Korea, Taiwan, Japan, China and eventually also the countries of the Indo-Chinese peninsula. The basic assumption of the Malaysians was that it is absolutely necessary to consolidate a wide coordinated market if ASEAN countries want to gain a bargaining strength vis a vis the United States and the European Community. These themes have been discussed at various summits of the foreign ministers of ASEAN. There is also a corpus of academic work, to which the financial press has relentlessly referred, which has canvassed the future economic allegiance of ASEAN (East Asia Analytical Unit 1995). However, the perception of the problems of inter-ASEAN trade and ASEAN integration varies from country to country, which is largely a reflection of the difference in the respective levels of achieved industrial and political development. Malaysia and Singapore have consistently supported a policy of transforming ASEAN into a free trade zone in a relatively short time. The Philippines has favoured a more modest change, fearing for the viability of its textile and apparel industries in the face of Thai competition while Indonesia's closer relations with Japan and its thirst for heavy industry projects has meant that it has dragged its feet on ASEAN-wide industry specialisation in these areas. Indonesia and the Philippines are still preoccupied with the development of sectors working in very protectionist ways, judged in Asian terms. It is interesting to note that Thailand has, so far, in the political evolution of ASEAN, played a limited role and this is due to the confusion which is still dominating the country after the series of coups d'état. It seems also that, contrary to Malaysia, Singapore and Indonesia, the construction and industrial expansion undertaken by Thailand in the 1990s entered a phase of uncertainty, with many problems of infrastructure, public education, public health and the environment yet to be solved. It is precisely these differences in attitudes of the economic officials of ASEAN nations which, since 1986, has prevented, at the level of ministerial meetings, any basic agreement being finalised about the form and content of regional cooperation. Because these themes have been continually raised within ASEAN, they have contributed to a shift of the discussion from

THE ASEAN ECONOMIES

Table 5.1 Growth rate of GDP in ASEAN (% per annum) Base year 1971–80 1981–90 Singapore 1985 7.9 6.3 Malaysia 1978 7.8 5.2 Indonesia 1983 7.7 5.5 Thailand 1972 7.9 7.8 Philippines 1985 6.0 1.0 Vietnam 1989 — 6.1 Source: Asian Development Bank, Asian Development Outlook (1994).

123

1991–94 6.1 8.1 6.4 8.0 1.7 7.5

the issue of an Asia-Pacific Economic Co-operation Forum sponsored by Australia and the United States, to the actual modalities of economic integration among Asian countries.

STRUCTURAL CHANGE AND RAPID GROWTH: ANATOMY OF THE ASEAN ECONOMIC MIRACLE The background to the political changes discussed above is the operation of two fundamental forces: the accelerated industrialisation and the emergence of new sorts of socio-economic systems inside the ASEAN grouping itself. These two forces form the core of the analysis which follows. The ASEAN growth performance, dubbed by over-enthusiastic academics and trade officials as an èconomic miracle', is invariably assessed by them in terms of growth rates of GDP. Table 5.1 shows growth rates demarcated into three periods. It is assumed that in each country, excluding Vietnam, a real industrialisation process was already under way. What we see here are the high annual growth rates, persistently maintained over a quarter of a century, the best performers being Malaysia and Thailand with a 6 per cent plus growth rate annually. It is to the imagination one would have to turn to comprehend the effect of compound growth rates of this order not just on the economy but on the whole structure of social life. Anyone who visited Thailand or Malaysia in the 1950s and revisited today would find it hard to recognise their surroundings. Accompanying the high growth rates and the industrialisation process has been structural change. A starting point in comprehending this idea is the shift in sectoral shares in total output, as illustrated in Table 5.2. It is clearly the case from a study of these trends in Table 5.2 that in all the ASEAN members, even in the weakest link — the Philippines — there has been vast structural change. Industry has


124

Table 5.2 ASEAN: Changing sectoral shares in GDP (%) as a macroeconomic guide to structural change, 1970–92 Agriculture Industry Services 1970 1980 1992 1970 1980 1992 1970 1980 1992 Singapore 2.2 1.1 .3 36.4 38.8 37.5 61.4 60.0 62.2 Malaysia — 22.9 16.1 — 35.8 43.9 — 41.3 40.0 Indonesia 35.0 24.4 17.9 28.0 41.3 42.9 37.0 34.3 39.3 Thailand 30.2 20.6 13.1 25.7 30.7 37.4 44.1 48.7 49.5 Philippines 28.2 23.5 22.6 33.7 40.5 35.0 38.1 36.0 42.5 Vietnam — 42.7 38.2 — 26.3 24.6 — 31.0 37.2 Source: Asian Development Bank, Asian Development Outlook (1994).

steadily increased its share of national output, while the percentage share of agriculture has dropped in all countries except the Philippines; this drop is large, and in comparison with European experience (as reviewed in Stone 1983) it is quite remarkable. By `structural change', I mean here both the changed composition of total output and the changing relative importance of particular industries in the process of change (Hoffman 1958; Limqueco et al. 1989). This is a rather wider use of the term than is usually found among official economists, who tend to mean by structural change the effects of tariff reductions and deregulatory policies. I believe, though, that the understanding of structural change adopted here links up more usefully with the idea that ASEAN is also undergoing transition to a new sort of economic system. (On which more below.) Behind the portrait of growth and structural change, there are other factors at work. First, the high rates of investment and saving have ensured an adequate flow of loanable funds for new avenues of both state and private investment in vital industrialisation. (Singapore has the highest investment ratio within ASEAN and the Philippines the lowest.) Second, high rates of investment have been in large part responsible for the high growth rates of GDP. This also implies that the high investment rates were not dissipated in ineffective investment projects — in other words, internal capital and credit markets and government decision-making processes in the economic sphere were operating effectively. It should not be forgotten, however, that Tables 5.1 and 5.2 do not reveal the story of unchanging income distribution which has persisted amongst all the fruits of the fast economic growth. It is noteworthy that official and semi-official reports (East Asia Analytical Unit 1993 & 1994) do not attempt any serious analysis of this important fact, which has had to be studied by others

THE ASEAN ECONOMIES

125

(Limqueco et al. 1989). Such reports also lack any attention to the implications for continuance of the trends in growth rates posed by widespread social strife (especially, in the 1990s, in Brunei, the Philippines and Indonesia). It is perhaps not so surprising that they have totally failed to incorporate into their discussions the problems posed by rising public consciousness about the adverse ecological effects of headlong industrialisation under Asian conditions (as discussed in a later section below). But it is truly a surprise that the tense labour upheavals that have accompanied the rapid industrialisation process (Limqueco et al. 1989) have hardly been mentioned.

THE POLITICAL PROBLEMS IN ACCELERATED ECONOMIC GROWTH We must remember that ASEAN was founded when the Cold War was intense. Several ASEAN nations (especially Thailand and Singapore) benefited from the US war against Vietnam as suppliers of military logistics. The anti-communist stance of ASEAN nations led directly to intensified industrialisation, due to the atmosphere of political rivalry and tension. This was the essential backdrop for the emerging legitimation of state interference in the economy and industry. The main problem for ASEAN researchers is this: on the one hand, it is vital to get data and to interpret the processes at work in achieving miracle growth; on the other hand, most ASEAN states (the Philippines is the exception) are authoritarian systems which discourage criticism. Hence we are now in receipt of all the misleading talk that capitalism in East and South-East Asia is `specially effective' — because of `Confucianism' in some and `strict discipline' in the others — although much of this talk in the elite circles of Singapore, Malaysia and Indonesia is little more than bluster to defend or legitimise the rule of such elites (Chan 1996). When Lee Kwan Yew visited Manila in 1993 he gave the Filipinos a lecture on the evils of `too much democracy' and linked this to the Philippines' economic growth rate which, at that time, was the lowest among the ASEAN states. However, he did not refer to `cacique' interference with democracy, nor to the legacy of the Philippines' experiment (pre-1986) with `lack of democracy' in the form of the state capitalist model constructed for the personal enrichment of Ferdinand Marcos and his cronies. The pick-up in growth rates since 1993, the decline of the cacique systems of private army control in regional areas, and the move to more orthodox political party competition means that Lee's


126

assessment was inadequate, while his own model of authoritarianism has also experienced difficulties (a growth rate slump in the early 1980s, and the suicide of the Minister for Development, Teh, after charges of corruption, etc.). Public agencies in places like Singapore and Malaysia exist to fulfil governmental aims, a project made possible by the politicisation of bureaucracies especially at the provincial and/or district levels. In the Philippines, such a politicisation is undertaken primarily to reward political, and especially electoral, supporters. The highest level of political corruption in the Philippines and Thailand is a result of the very heavy expenses of vote buying during elections and the subsequent need to reward backers and to recoup part of the cash outlayed on such vote buying. Behind the outward show of these political problems of democracy, oligarchy and authoritarian regulation of political life, lie social relationships and especially the attitude of the state and of capital to the rights of organised labour. Although evidence so far is admittedly a bit sketchy, it would seem that Capital and the state oppose the Labour movement savagely in the earlier phases of accelerated capitalist industrialisation (Thailand in the 1950s, the Philippines in the 1970s, and Indonesia in the 1980s are clear examples), but are more relaxed in the presence of higher technology and large numbers of foreign companies bringing with them more enlightened attitudes. Since Capital and Labour need each other, being, after all, two (antagonistic) sides of the same coin (the `labour process' as Marx called it), this is perhaps not so surprising, and we might speculate that as ASEAN develops over the next twenty years, its member states will come under both internal and external pressure to accept and respect organised Labour. This pressure will come about not only through Amnesty International and other human rights groups concerned about `disappearances' of union leaders, but also from Capital's own recognition of the benefits to be gained from cooperation with labour unions. (The experience with The Accord in Australia after 1983, which held down real wages, was, from this point of view, a revelation to many individual corporations and employers' groups.) It is now time to ask where we are at the moment in particular ASEAN member states: to embark on a brief stocktaking of the situation, and explain how the evolution of institutions is affecting the functioning of the socio-economic systems.

Malaysia Although the group surrounding Mahathir have kept Muslim fundamentalists at bay, and have thereby checked their threat to

THE ASEAN ECONOMIES

127

further industrialisation and modernisation, they still implement restrictions on women's working time, launch attacks on `loafing', and denounce non-conformist social attitudes or behaviours. However, there has been a big leap in confidence compared to the `New Economic Policy' days of the 1980s, when the Chinese were held back in relation to state education, access to shareholdings and jobs in the government bureaucracy. All the targets and aspirations associated with `Malaysia 2020 AD' sloganeering reflect the more relaxed attitude in economic decision-making circles concerning foreign investment, export prospects, the poverty line, and competition between Malays and Chinese. More fundamentally, they reflect the successful development of a range of engineering skills and of heavy industries since the early 1970s.

Indonesia The regime in Indonesia likes to call itself the `New Order'. In practice it is an old-style military dictatorship harassing its opponents under the guise of fighting communism. In the process, a relatively small group of military officers linked to overseas investors has accumulated vast wealth. Moreover, as is well known from the research efforts of Jenkins and Robison (Robison 1990), the immediate family of Suharto is a `businessminded' family, lucky in obtaining government contracts. This has tended to weaken the accumulation process, which has been shared between the local bumipatras, the Chinese and international investors. Splits have occurred between these factions of capital, with some negative effects such as a diversion of funds from productive manufacturing to real estate, speculation and uneconomical large projects. However, a civilian political faction centred around Industry Minister Habibi has achieved notable successes in bringing about structural change which favours heavy industry. (For example, it has successfully developed an aeroplane-building capacity.) With the passing of the elderly incumbents who currently run the `New Order', it is conceivable that the fortunes of this group will flower and that a more technocratic approach may become more wide-spread. It is unlikely, however, to curb the present interest in developing engineering industries, and that bodes well for the chances of continuing rapid growth.

Thailand The Thai leaders like to claim that they have reached newly industrialised economies (NIE) status and that industrially they are the leaders in ASEAN. That position, however, is taken by Malaysia. It is considered by most experts that Thailand's growth


128

continues to be supported by a very strong rice economy at the economic base and by an astonishing export record in textiles and apparel. The succession of unstable governments has not damaged the economy as much as one would expect, because of a competent civil service and well-organised, large-scale finance capital in the form of Chinese-Thai finance houses that have been quite willing to invest in industrialisation (Choonhavan 1984), though less active in financing social overhead capital. The recent growth of civil society vis a vis the military and the serious splits opening up within the elite may well be paving the way for more social planning, environmental consciousness and democratic participation in the making of economic decisions.

The Philippines A special feature of the Philippines' experience was the attempt to construct a comprehensive, albeit corrupt, form of state capitalism. A chapter of this book is devoted to analysing that process, so here it is sufficient to note that after twenty years of being tabbed the weakest link within ASEAN the Philippines in the mid-1990s has begun to chalk up a few `tiger's stripes': the economic growth rate of 7 per cent in fiscal year 1995-96, following 5 per cent the previous year, has lifted the growth rate to the ASEAN-wide average. As well, the tax system has been modernised and monetary policy has brought inflation under some sort of control. One key to these successes has been the record of the Ramos regime in loosening the hold of the powerful landed families and regional mafiosi on the legislature. While Ramos has promoted his own `cronies', more of them have been modernisers. A further factor has been the development, since 1989, of a public consensus in favour of economic reform and the curbing of the old politicians and their ways of doing things — prompted by public disaffection with power blackouts and incompetent government of the years of the Aquino administration. The main question marks surrounding the Philippines' evolution and its chances of achieving the ambitious economic targets identified under Ramos's `Philippines 2000' program are the continuing Communist and Muslim-separist rebellions and the split that has opened up in the ruling coalition — the Lacas-Laban — and the series of wildcat strikes in 1996 which reflected the extreme social tensions arising from Labour's perception that it has not shared in the fruits of the economic recovery.

Vietnam Due to its very recent membership of ASEAN, Vietnam represents a special case and has not been analysed in depth here; it has

THE ASEAN ECONOMIES

129

been allocated a separate chapter in this book. It is worth recording, though, that the economy has been stabilised following a series of policy struggles over economic reform, and a derailed economic reform in the early 1980s. Since 1992 the GDP growth rate per annum has accelerated to 8.8 per cent, prices are stable and exports are improving rapidly. The decision to solve the fiscal crisis of the state by closing down many loss-making state enterprises and absorbing the expelled workers in the private petty-trading sector indicates that problems are being tackled resolutely. Although Vietnam has rejected a number of pressures from the IMF/World Bank for further economic reform, it is proving that a well thought-out, step-by-step process of reform has many advantages over the `big-bang', overnight reform approach urged on the former socialist regimes of Poland and Russia. The main barriers to continuing high growth rates would appear to be internal bickering over the role of foreign investment in the economy; the need for changes in the political system to reflect economic base alterations; and the ever-present ecological problems, some a hangover from carpet American bombing and some of the Vietnam authorities' own making. Looking at the ASEAN-wide political trend, specifically on the political party and parliamentary fronts, it is now clear that the middle classes will want the introduction of Western-style forms of `democracy'. Continuing industrialisation has brought about the organisation of the middle class, which is important for consumption and import patterns and which has become an agent for political change, most developed in Thailand and Malaysia; emerging now in the Philippines and Indonesia.

ENVIRONMENTAL AND PHYSICAL BOTTLENECKS AS CURBS ON ACCELERATION IN ASEAN FUTURE GROWTH There is now a growing literature (Beresford & Fraser 1992; Apichai et al. 1992; Hirsch 1996) on the emerging role of environment restraints and constraints on those who propose the endless acceleration of growth in Thailand, Vietnam, Malaysia, Indonesia and the Philippines (as well as in the West), but the neglected factor in the assessment of economic growth potential is the presence of physical bottlenecks (McFarlane & Acharya 1966). The recent enthusiasm for the ASEAN economic `miracle' (East Asia Analytical Unit 1992 & 1994) has rather skipped over these awkward constraints on headlong growth and certainly has not analysed their likely effects in any detail.


130

I want to make it clear at this point that there are both `natural' and institutional forces at work which create the problems that are to be discussed in this section. Under the first category one starts, of course, with expanded population and ever-increasing internal migration. However, with the development of a vigorous sort of capitalism during the post-1960 period, and coinciding with the period of serious structural change and intensified industrialisation, there are a number of factors at work which are clearly linked to the greed and profiteering that the ASEAN form of capitalism has engendered. It is also important to concede that the `market socialist' systems of China and Vietnam have experienced similar problems of environmental trade-off, as has now been revealed by specialists in this field (Muldavin 1996; Beresford & Fraser 1992). This aspect of ruthless greed is at its most stark in the case of logging and de-afforestation, but it appears in other sectors as well, and necessarily so, since the logging licences in the forestry case have their counterpart in monopoly control over such crucial intermediate goods as cement (Thailand) or cartel-style control over wage-goods (rice in the Philippines, Vietnam and Indonesia).

Environmental barriers to accelerating the rate of GDP growth within ASEAN In connection with the constraining role of environmental damage or potential damage, the most serious problems being generated by very high growth rates among the economies of South-East Asia occur in the areas of small-scale coastal fishing, land-use and de-afforestation (Ghee & Valencia 1990; Shiva 1991; Apichai et al. 1992; Hirsch 1993; Thompson & Duggie 1996). In all ASEAN countries there is conflict over landuse between governments and their rural peoples. The social conflict thereby generated has been made worse by bureacratic resource management, most notoriously in the cases of dam building and de-afforestation in Thailand, and de-afforestation in the Philippines, Indonesia and especially in the Sabah region of Malaysia. As forests are destroyed, so too are 50 per cent of their animals and plants, which are major sources of food and income for the very poorest sections of Asian society. These people have, quite literally, been overwhelmed by the plundering perpetuated by powerful logging and bureacratic interests. Case studies for this process now exist for Indonesia (Thompson & Duggie 1996), the Philippines (Broad & Cavanagh 1993) and Thailand (Apichai et al. 1992; Hirsch 1993). The social conflicts engendered have already caused the cancellation of dams in Thailand, restricting

THE ASEAN ECONOMIES

131

hydropower prospects; increased outlays on police and army activities in rural areas, since the disenchanted rural populations have become more sympathetic to the rebels; and parliamentary upheavals. The shifting of the environment issue to the political sphere is bound to curb the excesses built into headlong growth strategies which damage the environment (as well as people's health, which is part of the stock of human resources and damage to which, through pollution, will directly reduce productivity). One should also pay attention to the drives to modernise and industrialise housing and transportation, in Manila, Bangkok and Jarkarta especially. The high level of individual and social stress caused by these transitions in the economy has now attracted scholarly medical attention (Jain 1987). Such stress was noticed in Japan some twenty years ago and steps were taken to correct it, but elsewhere in Asia the problem has grown. Indeed, the psychological effect of overcrowding would appear to constitute a new and serious terrain for reducing headlong growth through the negative productivity effects it engenders, being analogous to air pollution in its impact on health. The implications of what has been written so far in this section are clear enough: as investment rates reach what is socially and politically recognised as a maximum or ceiling, there will be constraints, growing more and more powerful, from the need to slow down the negative environmental effects being generated, which were summarised above. Restraints on the total rate of national investment will mean that further GDP leaps will depend increasingly on the better utilisation of investment. The stage has already been reached within ASEAN where the evolving socio-economic systems, still dominated apparently by logging, oil refining and bureaucratic interests, are no longer able to ignore the spectre of environmental damage as a constraint on their growth plans. The time is not far off when not only scientists and environmentalists, but also official and academic economists, may have to concede that an emphasis on the efficient allocation of resources will inevitably need to be based on new policies incorporating a reduction of valuable genetic resource losses a decreased supply of fresh water pollution of estuaries and coastal waters, loss of tropical forests and associated plant and animal life, and, for the longer run, depletion of atmospheric ozone and climatic deterioration.

Physical bottlenecks: A key constraint on ASEAN `miracle' growth The background to the physical bottlenecks problem is really quite easy to comprehend. ASEAN, like East Asia, has been experiencing


132

a steady migration to urban areas which is necessitating huge additional spending on infrastructure projects in water supply, power and road building. While estimates vary, some nations could find themselves involved in spending between 5 and 7 per cent of GDP on these `social overhead capital' projects. The bottleneck of clean water shortage Since ASEAN is in a monsoon area, it may seem strange to raise this topic. But when one realises that the Pasig (Manila), Whampoa (Shanghai) and Chao Phraya (Bangkok) are dying rivers, one can see that the problem is one of human interaction with water. Pollution via sewage and garbage, as well as chemicalisation of the waterways, has been a strong feature of the period of accelerated capitalist industrialisation. According to the Asian Development Bank's Water Utilities Data Book, such problems really do exist (Asian Development Bank, 1993) and only more efficient delivery and metering — and a reduction in ùnaccounted for' (i.e. stolen) water — can keep pace with population and urban growth in Asia. In most Asian countries, population is running a little ahead of piped water supplies. An investment of several billion US dollars will be necessary throughout ASEAN. With the possible exception of Singapore, the ASEAN states have insufficent funds available to develop and clean the water supply system, without taking out massive foreign loans. One country with serious dilemmas about its water supply is the Philippines where, as one writer has put it, there are `warning bells about an impending water crisis' (Luib 1995). Table 5.3 illustrates the water supply trends in Manila. A continuing source of concern is that while water production and delivery has increased, Manila, where the growth in the workforce and new industry is located, leans heavily on the Angat dam for metropolitan connections. (In rural areas, people also use wells or steal from pipelines rather than pay for connections.) The main problems, besides doing something about the 60 per cent ùnaccounted for' water consumption, are as follows: Pipes used to distribute water around Metro Manila are too old to withstand further pressure for outer-area connections (Manila Business World, 10 June 1994). Although foreign funding accounts for 40 per cent of water supply capital works, new funds are in short supply due to budget constraints. The cost of cleaning polluted rivers is astronomical, and there are some 40 rivers that are heavily polluted. (One Danish

THE ASEAN ECONOMIES

133

Table 5.3 Water in the Manila system, 1984–93 Population in area of Year MWSS (million) Connections ('000) 1984 7.44 371.64 1989 8.70 627.31 1993 10.57 798.42 Source: Metropolitan Waterworks and Sewerage System (MWSS).

Total water output (million cubic metres) 667.8 888.1 932.8

estimate put the cost of cleaning up and restoring to health Manila's Pasig River at US$5 billion.) Difficulty in solving the supply bottlenecks and the investment lag in an area so vital to the health and productivity of the workforce has meant that 18 million Filipinos have no access to regular supplies of safe water. There are no substantial plans scheduling new water projects, despite the fact that an expanding population and improving economic growth both fuel a rising demand. The World Bank has estimated that overall investment requirements for social overhead capital in the Philippines will be US$40 billion for the period 1995-2004. Some US$20 billion of this is estimated for power, but there is nothing in this estimate set aside to secure clean water — this will surely have to be adjusted in the face of the unrelenting pressure of the population and of rural-urban migration. A more favourable situation exists in Indonesia, when compared to the Philippines, but the government is already aware of clean water security as a looming issue. At present, Jakarta water authorities can supply 16 hours of service per day, and only six cities (so far) are on bottled water. This is due to the general availability of ground water. Even so, some 57 per cent of water is ùnaccounted for' (the same as in Manila), but water management seems fairly good and operating costs are quite reasonable. Singapore, a small island state in a monsoon area, has covered its water supply problem. However, due to political conflict over the building of new dams in nearby Chantaburi province, Thailand has a looming water problem, apart from the advanced state of pollution in the Chao Phraya River which runs through Bangkok and Tonburi. The bottleneck of energy and electricity supply Given the recent high rates of growth of the economies of ASEAN and East Asia, the possibility that a `brake' might come from physical bottlenecks and energy shortages is very great. An Asian


134

Develpment Bank report, in its interesting `profile' chapter, concedes: Ìt seems necessary to encourage developing countries to introduce new technologies and efficient systems, developed by industrialized countries, in their energy conservation efforts' (Asian Development Bank, 1993). Among the ASEAN nations, one can see a certain concern with supplies of energy and the security of those supplies, but this is not universal. Malaysia has achieved a higher level of self-reliance in energy. By contrast, the Philippine blackouts of the late 1980s were largely the result of the inept policies of the Aquino government, so that electricity growth, like GDP growth, was nil. The region as a whole will require terrifyingly high infrastructure investment to allow energy supplies to move parallel with the accelerating growth of GDP. The World Bank estimate for the 1990s is $US6.8 billion. The Asian Development Bank report also raises the issue of the pattern of consumption for energy. In 1990, residential and commercial sectors took about one fifth, averaging over the countries (the range is 11 to 33 per cent). Industry, not unexpectedly, took the lion's share of electricity. An additional task for ASEAN policy makers is identifying ways to widen energy bottlenecks in the face of medium-term rushes in demand. The efficiency with which energy is supplied is clearly a key determinant here, and is one way of expanding output. This involves tapping economies of scale and transport, better calculation of the benefits of rival sources of development, etc. Èffectiveness of investment' in terms of power and water supply overhead capital outlays is therefore inescapable. It involves mobilising skills, borrowing funds and improving management, as well as ASEAN governments being innovative in their regulatory mechanisms and actions. Malaysia, it may be reported, has been foremost in organising private sector involvement in power and water. The Philippines, perhaps having learnt from the disasters of the Aquino Presidency, has decided to privatise parts of the water supply system (Luib 1995), and has plans to carve up the water supply franchise in Manila into separate areas, with the aim of comparing levels of service. The Philippines' power supplies are also being reorganised: the roles of generation and distribution are being split in an attempt to encourage more private investment in the sector. (The orthodox economists recommending the changes argue that, since the cost of capital is higher for private sector operators than for government departments and managements, private firms must deliver productivity gains.) Improved demand management and economising on consumption is another, equally important, way

THE ASEAN ECONOMIES

135

of ensuring a stable energy balance. The need is to link demand management to ecological concerns quite explicitly, noticing the greenhouse gas danger as a factor promoting the urgent demand for policies impinging on the demand side, including pollution taxes and petrol taxes.

THE ECONOMIC ROLE OF THE STATE IN ASEAN COUNTRIES In other chapters of this book it is noted that vigorous but intelligent state intervention has played a major role in restructuring the economy, boosting exports and accelerating economic growth. In particular, it has been suggested that East Asian governments such as Japan, Taiwan, Hong Kong and South Korea have seen `strong states', relatively free of corruption or cooperation of the state with rent seekers, commercial vested interests and self-serving bureaucratic groups. To what extent does this picture apply to the ASEAN region? The answer to this question centres around two main issues: 1 To what extent do South-East Asian states remain involved with rent-seeking, rent-capital interests and the encouragement of a `primitive accumulation of capital' which includes these features, as well as straight-out corruption? In other words, is there less `relative autonomy of the state' in ASEAN compared with East Asia? 2 Are fundamental interventionist strategies, proven to be successful for promoting overall economic growth in the East Asian case (Wade 1990), present or lacking in the South-East Asian states?

Primary accumulation processes within ASEAN states In the Philippines, the period after 1970 was dominated by President Marcos's attempt to construct a `model' of a particular kind to serve vested interests (Manapat 1991). The main beneficiaries were his cronies and the Presidential family. In Indonesia, the same comment applies to the regime of Suharto (Robison 1986 & 1990). In Malaysia the `new economic policy' of the 1970s, the successful development of heavy industry, local capital financing of projects and government promotion of infrastructure suggest that a more modernised economy had been achieved through more orthodox financial institutions. However, it should be noted that at a meeting of the ruling political party, UMNO,


136

the Prime Minister, in an emotional speech, denounced the prevalence of `money politics' (Stewart 1996). In Thailand, both the Chattichai civilian government of 1987-91 and the new government elected in 1996 were brought down by graft and corruption allegations. It is true that this first phase of industrialisation was undertaken for the benefit of `rent seekers'; it was only later that movement to bourgeois democracy brought checks and balances. However, we should not accept the view that the regimes referred to above, some undoubtedly tainted by graft, did not carry out industrial transformation, accelerate capital formation and promote economic growth — they did. However, the mechanisms were different — they were not those of orthodox bankers or those promoted by the World Bank and neoclassical economic diehards. A number of ASEAN governments dared to allow a substantial period of import-substitution; they maintained controls over private foreign investment (and prohibited foreign ownership of land); they initiated heavy industry (Marcos's industrial `major projects' (Lichauco 1993) and Malaysia's heavy industry program in the 1980s and 1990s (O'Brien 1990).

Effectiveness of activist state intervention It will be conceded, I suppose, that South-East Asian governments are less efficient than East Asian states, judged solely from the economist's point of view, given South-East Asia's superior holdings of natural resources. The two main reasons advanced for this belief that have credibility are the following: 1 The implementation of development planning in East Asia was carried out by well-trained cadres of bureaucrats assisting the objectives of a developmentminded state apparatus, although this aspect loses some of its importance when one notes the role after 1979 of World Bank technocrats (e.g. in the Philippines). 2 The chosen strategies of development included export orientation, which SouthEast Asia found more difficult to implement than its northern neighbours, since South-East Asia faced more formidable trade business in the US market and lacked the degree of integration with Japan and the North-East Asian region taken as a whole. We can illustrate this by comparing Japan's attitude to investment in South-East Asia with its activity in East Asia (see the discussion below).

THE ASEAN ECONOMIES

137

FUTURE CONSTRAINTS ON ASEAN'S ECONOMIC PROSPECTS On the assumption that miracles do not go on forever, it is possible to list likely limitations on the future course of the ASEAN èconomic miracle'.

Developments in North-East Asia What will impinge on economic events in South-East Asia in the near future are the rapidly changing trade and investment patterns (and growth) in the northern extremities of the East Asia region. They include the international division of labour which includes specialisation in production; new regional trade blocs and other institutions of economic integration (e.g. the two Koreas with Japan, the growth triangle of China coast-TaiwanHong Kong); a strengthening market economy within China; and the aggressive marketing and export promotion of Taiwan and South Korea.

Japanese direct investment in ASEAN Foreign direct investment has up to now played a significant role in the development of ASEAN industries and in the implementation of ASEAN's export promotion policies (East Asia Analytical Unit 1994). Joint ventures, acting with foreign-affiliated companies, accounted for 80 per cent of Singapore's manufacturing exports in 1988, 60 per cent in the case of Malaysia, 35 per cent for the Philippines and more than 20 per cent for Indonesia (East Asia Analytical Unit 1994, p. 94, quoting Japanese statistics). In the case of Japanese attitudes and strategies adopted towards ASEAN, the lietmotif is very transparent: trade comes first; Japanese direct investment follows. In the first decade of ASEAN's economic spurt, Japan had already taken over a quarter of the region's trade (Wong 1979, p. 9), surpassing the United States and the European Community. On the Japanese side, ASEAN gradually became important — in 1976 about 10 per cent of Japan's total exports went to ASEAN, which supplied 12.6 per cent of Japan's total imports. Progress was restricted, however, by Japan's trade barriers against industrial imports from ASEAN. As a result, Japanese direct investment was overwhelmingly in Indonesia which did least to annoy the Japanese on the trade front (McQueen 1991). A sharp rise in Japanese direct investment by volume to ASEAN occurred after 1981, at a time when Japanese direct investment to Asia as a whole was dropping. In the 1970s, food processing and textiles attracted Japanese direct investment in ASEAN. In the case of chemicals and sintering


138

Table 5.4 Japanese Investment in major Asian countries, 1982-93 FY 1982 FY 1986 FY 1988 Value % of Value % of Value % of Asian Asian Asian share share share ASEAN Indonesia 410 30 250 11 586 11 Singapore 180 13 302 13 747 13 Thailand 94 7 124 5 859 15 Malaysia 83 6 158 7 387 7 Philippines 34 2 21 1 134 2

1 676 670 657 704 160

26 10 10 11 2

NIES Hong Kong Taiwan South Korea China

735 292 225 1 070

11 5 4 17 (3.1) 4 100

Other Asia Total Notes:

400 85 103 18

29 6 7 1

502 291 436 226

22 13 19 10 (1) 1 100

1 662 372 483 296

30 7 9 5 (0.6) 1 100

FY 1992 Value % of Asian shar

7 1 16 41 236 1 384 100 2 327 5 569 6 425 ... 22 320 47 022 34 137 The figures in brackets refer to the percentage share of China in Japanese total overseas investment. FY refers to fiscal year, from 1 April to 31 March of the next year. Sources: The figures between 1982 and 1988 are from Fan Yongming (1992), p. 179; the 1992 figures are from Australia-Japan Institute (1993), p. 4.

aspects of the iron and steel industry, increased pressure from the anti-pollution agencies forced Japanese direct investment offshore to the ASEAN area if Japanese firms wished to carry out this sort of production. In the 1980s a spectacular internal boom in Japan meant that more speculative activity also took place in ASEAN. The Stock Exchange was awash with loanable funds (after 1989 in particular). The speculative bubble burst at the end of 1990, and Japanese foreign direct investment has decelerated in some sectors since then. Before 1985, many manufacturers involved in Japanese direct investment were relocating to ASEAN and were seeking to assemble for the local market because of import tariffs and other measures taken against Japanese exports (Phongpaichit 1990). Relocation to ASEAN was also fuelled by: (a) rising wage levels in Japanese manufacturing; (b) a sharpening of Japan's anti-pollution laws and penalties compared to the relative leniency in ASEAN countries; (c) the appreciating Japanese yen which made it much cheaper to install new capacity in ASEAN; and (d) a high percentage of trade surpluses to GDP, leading to èxcess' savings levels for the profits available within the Japanese economy itself.

THE ASEAN ECONOMIES

139

The picture given in Table 5.4 means that despite recession in Japan in the 1989-95 period, Japanese direct investment in ASEAN has been solid. The factors driving it have changed somewhat after the years of rapid internal Japanese expansion, but geopolitically, it is vital for Japan to maintain a strong ASEAN (Izawa 1993), and a powerful influence can be exerted in the form of Japanese direct investment. The result is that after 1985, Japanese direct investment in ASEAN also maintained its share in total manufacturing Japanese direct investment abroad at 9 to 10 per cent, at a time when the share of other Asian NIEs dropped markedly. This means that, within the Asian region as a whole, ASEAN plus China have become dynamic areas of reception and likely to remain so, since ASEAN and China have not yet reached the point on a `reverse Kuznets' curve where growth of per capita incomes will tend to decelerate. It is important at this point to list some of the wider political economy elements in the ASEAN-Japanese direct investment relationship, as they will be the key to future prospects of ASEAN importing growth processes from Japan. They include: Japanese direct investment and trade relationship; recycling of large external accounts surplus of Japan (Healey 1991); patterns of division of labour; technology transfer and its contribution to accelerated industrialisation of ASEAN members; and the perception of various interest groups within the ASEAN countries, and within Japan itself, concerning the experience of Japanese direct investment in ASEAN. While some of the experiences listed above have been positive, there were problems in relation to two countries — Indonesia (Sadli 1990) and the Philippines (Ofreneo 1991; Ofreneo 1992; Constantino 1989). A major threat to the continuing processes of aid and investment being received in ASEAN would arise if new Japanese direct investment now flowing strongly to ASEAN nations were to be redirected to China or even to Eastern Europe and Russia.

Transfer of technology from Japan to ASEAN As well, exports from Japan to ASEAN of capital goods and technology have, until now, been crucial in getting the technical-physical aspects of ASEAN industrialisation going, as shown in Table 5.5. However, with China now attracting a major share of Japanese investment abroad, and a possible slowdown of Japanese


140

Table 5.5 Japanese percentage in total machinery imports of ASEAN, 1990 Malaysia Philippines Singapore Thailand Vietnam Source: Healey (1991).

% 70.5 61.6 71.0 64.5 65.4

exports of capital, South-East Asia will get much less impetus from Japan for its accelerating industrialisation. Offsetting this change could be the overall impact of a burgeoning regional growth rate which would integrate ASEAN further into the international division of labour being shaped by the transnational corporations of Japan and the NICs. The strength of this influence will depend on whether ASEAN quickly turns into a tight regional entity. So far, conflicts of interest within ASEAN have prevented it from emerging as a powerful new trading bloc. The `Pacific Rim' economy built in the 1950s and 1960s was such that the United States was willing for a period to operate as a heavily import-dependent economy absorbing a huge volume of inputs from Japan, North-East Asia and South-East Asia. This was especially useful to South-East Asia in the 1970s when the rest of the world was suffering from a slump.

CONCLUSION In an ideal analysis, this chapter would have dealt with a range of issues needed to fully illuminate the ASEAN story. I suppose that more could have been said about the nature of the ruling regimes and the social bases of the ASEAN states; as well, these topics needed to be approached from the angle of external pressures and not only the internal alignment of forces. This has not been possible within the present confines, but remains for some future project. I would also like to have delved more into some of the issues that were only mentioned, including such extra-territorial factors as mass migration, free trade zones, internal corporations, and foreign investment's effects on local capital markets and industrial relations between Labour and Capital. Nevertheless, I have tried to conform to the idea that this chapter should not only cover `nuts and bolts' issues involved in economic growth and structural change which have been seen by

THE ASEAN ECONOMIES

141

economists as the major and most dominating aspects of ASEAN over the last 30 years, but to focus as well on the issue of the kinds of socio-economic systems that have emerged in ASEAN over this period, as well as the environment in which decisions affecting whole populations have been taken, economic behaviour and the vexed question of whether ASEAN has met its social goals. Given the existence of current and potential bottlenecks in such sectors as clean water and energy supplies, and given the growing consciousness of ecological costs as growth accelerates, it is astonishing that journalists and government reports continue to speak of the ASEAN economic miracle as if it could go on forever. But capitalism is an unstable, not a stable, system. ASEAN capitalism has always been characterised by crises and by frequent puncturing of growth rates (McFarlane 1988). This is unlikely to change. As to the nature of the emerging socio-economic systems, there is, of course, a considerable difference as between the nation-state members of ASEAN: the almost anarchical freedom available to people in the Philippines may be contrasted with routine suppression in Indonesia and the stifling surveillance of the individual in Singapore, to say nothing of the implementation across Malaysian society of Muslim attitudes (on top of the ànti-loafing' campaigns). It is to the political sphere that one must look in the medium term for clues on change, and especially sudden changes in systems. It would appear from recent political history that splits in the elite may be required to allow enough political space for accelerating industrialisation with reasonable economic efficiency, as well as for ensuring the respect for the `capitalist rules of the game' and for the middle class's thirst for democracy. Whilst Indonesia and Burma are the most obvious examples of this contention in the late 1990s, we saw the same thing operating in Thailand in 1987-90 and then being renewed after the democracy monument massacre, while the emergence of Ramos' more familiar mixed economy in the Philippines of the 1990s was only possible after the Aquinos led the middle class in the overthrow of Marcos, and then Ramos split from the Aquino forces. A major emphasis in this chapter has been on the simple point that `miracle' growth rates so far achieved by ASEAN cannot go on forever, as they will be restrained by the need to limit environmental damage and by physical bottlenecks. It is conceivable that the latter might be reduced or even overcome by the `miracle of market forces' or by improved functioning of the newly emerging systems in ASEAN; however, the environmental issue will not go away — it is unbudgeable and will necessarily dominate future ASEAN thinking about the role of high growth rates in achieving societal goals.


142

BIBLIOGRAPHY Apichai, P., Chaiyuth, P. and Somboon, S. 1992 Èucalyptus, business, bureaucracy and the Thai Government' Journal of Contemporary Asia, vol. 22, no. 2. Asian Development Bank 1993 and 1994 Asian Development Outlook Manila. ——— 1994 Water Utilities Data Book, Manila. Australia-Japan Institute 1993 Data on Japanese overseas investment, Sydney. Beresford, M. and Fraser, Lyn 1992 `Political economy of the environment in Vietnam' Journal of Contemporary Asia vol. 22, no. 1. Broad, R. and Cavanagh, J. 1993 Plundering Paradise: The Struggle for the Environment in the Philippines. Ataneo University Press, Quezon City. Chan, A. 1996 `Confucianism and development in East Asia' Journal of Contemporary Asia, vol. 26, no. 1. Choonhavan, K. 1984 `The role of domestic capital in Thailand's industrialisation' Journal of Contemporary Asia vol. 14, no. 1. Constantino, R. 1989 The Second Invasion: Japan in the Philippines Kariel Books, Quezon City. East Asia Analytical Unit 1993 Australia's Business Challenge: Southeast Asia in the 1990s Department of Foreign Affairs & Trade, Canberra. ——— 1994 ASEAN Free Trade Area Department of Foreign Affairs & Trade, Canberra. Fan Yongming 1992 China's foreign exchange rate policy and economic development, PhD thesis, Macquarie University. Ghee, L.T. and Valencia, Mark J. 1990 Conflict over Natural Resources in Southeast Asia and the Pacific Ataneo University Press, Quezon City. Healey, Derek T. 1991 Japanese Capital Exports and Asian Economic Development OECD, Paris. Hirsch, P. 1993 Political Economy of Environment in Thailand Journal of Contemporary Asia Publishers, Manila. ——— 1996 Environment and Environmentalism in Thailand. Mimeo. Asia Research Centre, Murdoch University. Hoffman, W.B. 1958 The Developing Economies Manchester University Press, Manchester. Izawa, Y. 1993 Asia-Pacific Symbiosis, Kyushu Sangyo University, Japan. Jain, U. 1987 The Psychological Consequences of Crowding Sage Publications, London and New Delhi. Limqueco, P., McFarlane, B. and Odhnoff, J. 1989 Labour and Industry in ASEAN Journal of Contemporary Asia. Lichauco, Y. 1993 The Lichauco-Ramos letters Foundation for Nationalist Studies, Quezon City. Luib, R. 1995 `The water shortage: Will privatisation solve it? Manila Business World, 31 March. Manapat, R. 1991 Some are Smarter than Others: A History of Marcos' Crony Capitalism Aletheia Publishers, New York.

THE ASEAN ECONOMIES

143

McFarlane, B. 1988 `Growth and cycles in Southeast Asian development' Journal of Contemporary Asia vol. 18, no. 2. McFarlane, B. and Acharya, T.K.T. 1966 `The role of physical bottlenecks in economic development' Asian Economic Review August. McQueen, H. 1991 Japan to the Rescue Heinemann, Melbourne. Muldavin, J.S.S. 1996 `The impact of reform on environment sustainability in rural China' Journal of Contemporary Asia vol. 26, no. 3. O'Brien, L. 1990 Ìndices of industrialisation: Capital goods production in Malaysia' Journal of Contemporary Asia vol. 20, no. 4. Ofreneo, R. 1991 `Japan and the environmental degradation of the Philippines' World Bulletin vol. 7, no. 4. ——— 1992 (ed.) Japanese Industrial Relations Interface in the Philippines Japan Foundation, Manila. Phongpaichit, P. 1990 The New Wave of Japanese Investment in ASEAN Institute for Southeast Asian Studies, Singapore. Robison, R. 1986 Indonesia: The Rise of Capital Allen & Unwin, Sydney. ——— 1990 Power and Economy in Suharto's Indonesia Journal of Contemporary Asia Publishers, Manila. Shiva, V. 1991 Ecology and the Politics of Survival Sage Publications, London. Stewart, I. 1996 `Maharthir maintains his rage on graft' The Australian, 10 October. Stone, N. 1983 Europe Transformed 1878-1919, Fontana Books, London. Thompson H. and Duggie, J. 1996 `Political economy of the forest industry in Indonesia' Journal of Contemporary Asia vol. 26, no. 3. Wade, R. 1990 Governing the Market Princeton University Press, Princeton. Wong, J. 1979 ASEAN Economies in Perspective Macmillan, London.

6 The state and capitalist development in the Philippines Bruce McFarlane One of the most interesting debates among social scientists (and the economic historians) studying ASEAN these days is that concerning the actions and role of the state in economic development. There is agreement that the Philippines today is predominantly capitalist, even if the overall capitalist development of the country is highly uneven and relatively weak in comparison to the other ASEAN states. This chapter is concerned with the policies the Philippines has used in order to accelerate development. Specifically, four questions will be posed: 1 What were the main features of the process of capital accumulation in the Philippines, and what was the role of the state in that process? 2 Given that powerful families and regional mafiosi have dominated political life, was the erratic development the result of the weakness of the state or the result of a fractured society over which any state would have had to rule? 3 The Marcos regime, which was overthrown in 1986, has been seen as especially corrupt and as forming a unique system — `crony capitalism'. Is this a correct way to approach the events and economic policy of the Marcos period, or was this regime part of a wider species that Myrdal in his famous Asian Drama (Myrdal 1970) called the `soft state', and which can be found in a number of countries? 4 To what extent have the social and economic contradictions that emerged under Marcos been corrected by the state machines of the successor presidents, Corazon Aquino and Fidel Ramos? The chapter consists of four main sections. The first section looks at some characteristics of capitalist development in the Philippines.

STATE AND CAPITALIST DEVELOPMENT IN THE PHILIPPINES

145

The second section considers the role of the state. The third section considers state development policies. The fourth section discusses the dilemmas of accumulation and of growth since 1990 and summarises the current contradictions of the Philippines' development.

THE CHARACTERISTICS OF CAPITALIST DEVELOPMENT IN THE PHILIPPINES The Philippines was opened to world commerce at the beginning of the 19th century. This development attracted the British and American commercial and shipping companies, which set up trading houses in Manila and, together with the local Chinese middlemen, developed the exchange of locally produced agricultural products and imported goods. They began exporting sugar, tobacco and other agricultural products; as a result, the market for the food-producing sector expanded. The initial burst of capitalist development representing òriginal accumulation' in the Philippines was merchant capital in the last century of Spanish rule. During its experience as a colony of Spain a feudalistic agrarian order was implanted, through the establishment of haciendas, and the development of the kasamahan (or sharecropping arrangement), with the institutionalisation of private property ownership (Ofreneo 1980; Hayami et al. 1990). All these developments marked the beginnings of capitalism in the Philippines. In a narrow sense, the signs of capitalist development were reflected in the growth of wage labour in some sugar haciendas, and in the trading and service establishments in the new urban centres (Doeppers 1984). In the broad sense, capitalist development was mirrored in the tremendous expansion of commerce, although a mature banking system developed only in the period 1852-82 and has remained rather a brake on development with its high interest rates and continuing political interference in banking policy. Under the American colonial regime the free trade policy fuelled a tremendous growth in export agriculture and investments in sugar centrals and coconut mills. Capitalist relations were evident in the sugar haciendas, rubber and pineapple plantations, timber companies, mining industry and in the related export companies in Manila (Ofreneo 1982). In the coconut, tobacco, hemp and abaca farms, capitalism developed in a highly uneven manner (Ofreneo 1980; Hayami et al. 1990) but agriculture had come under the dominant influence of capitalism by 1920. Of course, there were survivals of pre-capitalist forms of production,


146

especially tribal subsistence agriculture in Bontoc and North Luzon. But capitalism in general held sway over the agrarian landscape (Ofreneo 1980). The sort of capitalism it was had been decisively shaped by its origins, for the last decades of Spanish rule saw not only the opening up of commercial and export agriculture, but a drive to private land ownership and consolidation of that ownership. Here was the origin of the big, powerful and influential families that have dominated Philippines' politics. It is more or less traditional to say that little industrialisation took place in the Philippines before World War II and, if compared with the advanced industrial nations, this is certainly true. But among the countries of South-East Asia, the Philippines on the eve of the war was probably the most industrially advanced. Some estimates show that for 1938, 16 per cent of net value of product was produced in the manufacturing sector, while industry as a whole (including mining, transport, construction and public utilities) accounted for about 30 per cent (Hartendorp 1961). Admittedly manufactured goods were produced largely in the handicraft sector rather than under a modern factory system, but this still compares favourably with the 21 per cent prewar share of industry for Vietnam (1931). The significance of the manufacturing sector was also much greater than for Malaya, with less than 7 per cent of total employment in 1947. The major stimulus to industrial growth during the colonial period came from the growth of export commodities. The chief of these was sugar which, by its nature, requires some processing on the spot immediately after harvest. By 1910, the introduction of sugar centrals in competing sugar-growing regions of Louisiana, Puerto Rico and Cuba meant that, to stay competitive, the Philippines had to introduce them too. Another major area of manufacturing production was coconut oil refining and the production of desiccated coconut for export to the United States. The Spaniards had established tobacco manufacturing, notably hand rolling of cigars for export and cigarette production for the domestic market. California Packing Company established a pineapple cannery. Abaca fibre was largely exported as raw fibre, but some rope and cordage factories were established. Sawmills were established to cater for the domestic and export markets. Embroidery, using imported American cotton as raw material, was another important industry. This was carried out according to a `commission system' which was run by a handful of middlemen who supplied raw materials to home workers. Weaving of straw hats, also for the export market, was yet another cottage industry run in this manner.


147

Development of industry for the home market prior to 1940 was not, however, very extensive. Some impetus to the development of industry arose during the `Commonwealth period' after 1935 in response to Filipino concerns at the prospect of diminishing access to the American market after independence. The Tydings-McDuffie Act (1934) specified a period of adjustment from 1940 to 1946 during which the hitherto free access of Philippine exports to the US market would be reduced, at first by the application of quotas and then by an export tax levied by the Philippine government on sugar and other restricted exports. At the same time, US goods would continue to have access to the Philippine market, so that the implementation of the Act could be expected to have a deleterious effect on the Philippines' balance of trade unless import replacement industries could be established. The impact of the Great Depression may have affected the thinking of wealthy Filipinos, as doubts about the ability of Philippine sugar to compete in the absence of imperial preference surfaced. In spite of low Filipino wages, the sugar industry was not highly productive and could not easily compete with more efficient producers from other countries. In 1938, however, sugar alone had accounted for over 40 per cent of Philippine export income. In 1935 the Commonwealth government set up the National Economic Council (NEC) to advise on industrialisation strategy and the National Development Company (NDC) to establish desired public enterprises. An integrated textile mill, some fish canneries and a can manufacturing plant were set up by the NDC in the late 1930s. The National Power Corporation (now NAPOCOR) was also established in 1937 and made plans to build hydroelectric power plants — plans which were interrupted by the Japanese invasion. An atmosphere favouring industrialisation seems to have prevailed in the late 1930s. A number of private enterprises were also set up during this time, notably in the textiles and fish processing industries, and Japanese private capital was active in establishing a number of plants in Mindanao.

Capital formation The main source of capital formation in manufacturing in the prewar Philippines was Filipino and Chinese mestizos diversifying out of their earlier established sources of capital accumulation in plantation agriculture and trade. Sometimes this occurred under the impact of competitive pressures — for example, after the introduction of sugar centrals in the Philippines' main competitor countries. A number of Filipino hacienda owners invested in sugar


148

centrals during the US colonial period and in fact tended to dominate the industry. Mestizo families also became the main investors in coconut processing, which developed quite rapidly during World War I when, because of a shipping shortage, it became more profitable to export refined coconut products rather than the bulkier raw copra. The tobacco industry, which had originally been owned by Spanish interests, also passed into the hands of local companies during this period. Most of these developments were thus directly related to the agrarian and mercantile interests of the Philippine capitalist class. Probably the only significant Filipino initiative in import substituting industries was the Malabon Textile Mill of Filipino shipping magnate Vicente Madrigal, established in 1922. It had, however, failed by the 1930s (Doeppers 1984). American companies established some branches of manufacturing — for example, the del Monte Corporation (or California Packing Company) set up a fruit cannery — while US citizens were also instigators behind engineering firms like Atlantic Gulf and Pacific and the Honolulu Iron and Steel Works, both established in the first decade of the century. However, the majority of US capital was mercantile. Towards the end of the period, some textile manufacturing was set up by Japanese investors.

Labour Total employment in manufacturing in 1938 was 610 445, of which about 100 000 were dressmakers, mainly working under a putting-out system (Mitchell 1942). Other cottage industries included shoe and sandal manufacture. Relatively few worked in what might be called a modern industrial environment. Much larger numbers of wage labourers worked on the sugar plantations where wages were determined not so much by the combination of labour as by the employers in whose patronage all jobs were held. Conditions of workers were generally poor, with high levels of unemployment and disguised unemployment (Ofreneo 1980).

POST-1945 CAPITALISM Capitalist development in the postwar period was not only uneven but also involved a complicated array of capitalists, including the following: American business companies engaged in either local franchising or in maintaining subsidiaries to protect their shares in the local market;


149

Filipino industrialists engaged in import-replacing production (but dependent on imported inputs); and foreign and Filipino business interests involved in the traditional extractive industries (export crops, mining and logging). Capitalist development in the Philippines in the post-1960s period has the following characteristics: the emergence of dependent capitalist industry state capitalism inadequate industrialisation crony capitalism

The emergence of dependent capitalist industry As well as other developing countries, the Philippines changed its development strategy from Import-Substitution Industrialisation (ISI) to Export-Oriented Industrialisation (EOI). The Philippines was one of the first countries to implement the strategy of ISI after 1949, but the 1970s and 1980s saw a dramatic shift from ISI to EOI in the industrial policy regime, from an inward-looking to an outward-looking agro-industrial strategy. The new economic gospel openly sought a tighter integration of the national economy with the global economy through the promotion of labour-intensive and export-led industries (Hawes 1987). It did not, however, industrialise the country. As Philippine economist Joseph Lim has remarked, À simple look at historical data shows that export-led industrialisation never took off in the Philippines' (Lim 1985), although some orthodox economists (Bautista & Power 1979; Virata 1972) believe that Marcos opened up a promising development. This policy shift ushered in sharp qualitative changes in the structure of the economy. Most of the home-oriented industries of Filipino industrialists were penalised by the removal of protection measures, but other firms in the post-1970 export-oriented sub-sector expanded (including garments and electronics). These changes made the Philippines' economy increasingly integrated with the world economy. At the same time the lack of an engineering and machine-building sector, and of a solid core of entrepreneurially minded independent industrialists, made it difficult for local industries to become self-reliant. Those producing for the home market in the 1990s are receiving less and less protection. The industrial policy changes still require a pool of cheap and productive labour, and labour rights are restricted. New forms of exploitation are allowed. Subcontracting of both output and of labour recruitment had become a way of life in the


150

Philippines' economy by 1990. Multi-level subcontracting, even down to barangay level, is practised as a way of `taking the heat off' a particular corporation. For example, a Manila-based company subcontracts to regional agents who, in turn, often subcontract to family units who are willing to mobilise women and children at low pay and under poor labour conditions. (The eight-hour day, minimum wages, and medicare, in this case, no longer apply.) Unions are made virtually irrelevant in this structure, except at the final assembly stage in the factory.

State capitalism The Philippines has long been regarded as a `weak' state by political scientists and economists who consider that the state's main concern is the encouragement and succour of the business of the private sector (Hutchcroft 1994). Despite Marcos's assurances that he supported dynamic free enterprises, there was too much evidence to the contrary. The state took control of numerous enterprises which would normally have been the bailiwick of the private business sector (Manapat 1991). These enterprises (including banks) were run for the benefit of Marcos and his friends. By 1982 there were more than 100, and by 1984 approximately 260 such government-owned or crony-controlled corporations, largely under-performing in terms of strict economic criteria. Almost all of the key industrial companies were put under the control of Marcos and his cronies and relatives. State capitalism in this form resulted in a controlled economy, characterised by mismanagement and inefficiency, which impeded expansion and restricted output. Jesus Estanislao, head of the Centre for Research and Communication, has tried to point out the inefficiency of such companies. He noted that the slow, unbusinesslike grind of regulatory agencies usually resulted in decision delays and unnecessary paperwork, especially in export-related industries. It was also pointed out that such agencies could not have a full understanding of individual company, or even industry-wide, peculiarities (Manapat 1991). These problems followed the type of intervention of the state in the Philippines' economy which was to promote cronyism, thereby distorting economic policy, since the Marcos state offered protection to crony companies through legislation. The main purpose of this protection was to favour the cronies engaged in manufacturing, but it offered no incentive to compete internationally. Critics of the Marcos regime concluded that state intervention had resulted in higher prices and restricted output, slower growth of employment and real wage rates, and failure to expand market opportunities


151

(McDougall 1987; Hutchcroft 1994). However, it could perhaps be pointed out that despite the corruption and economic inefficiencies, the Marcos era was still one in which a sort of primary or primitive capital accumulation process was carried through by Disini, Cojuango and other cronies, and that their corruption and rent-seeking activities were by no means unique to the Republic of the Philippines. Rather, these features are also to be found in the modern economic history of Indonesia and Thailand and could be analysed more soberly by means of Gunnar Myrdal's `soft state' concept (Myrdal 1970) just as fruitfully as the use of Ricardo Manapat's moral outrage at the crimes of the Marcos entourage.

Inadequate industrialisation Industrialisation does not take place without certain internal bottlenecks and constraints, as argued above. However, external shocks (such as changes in the world economy) and external constraints which resulted from the imposing of state policies, were also crucial in the Philippines' recent industrialisation. The five most controversial aspects of the economic anatomy of the Philippines have been: devaluation of the exchange rate of the peso after 1960; lower tariffs on imports, and export orientation, as pursued since 1968 starting with the Bataan free trade zone; foreign debt and internal debt which affected expenditure on social infrastructure and social welfare, higher taxes on population (tax exemption for foreign investors continued) and higher public utility charges; an integument of official ineptitude and corruption; and the special nature and function of `Filipino' banks. (Foreign banks had, until the 1990s, only up to 40 per cent equity in local banks.) President Ramos agreed in 1994 to lift those ceilings somewhat and to allow more full-blooded competition between foreign and local banks. The structural weaknesses of the economy are now well enough known, and have been particularly underlined by Lichauco (1973). During the period from 1965 to 1987 the industrial sector registered the lowest average annual growth rate in ASEAN; the same situation arose in 1991-94. This reflected the government's policy of deliberate neglect of serious industrial linkages as part of an integrated industrialisation program. The comparative performance of the Philippines is strikingly poor, as shown in Table 6.1. Despite the rise in the shared producer goods in total output (Table 6.3), the Philippines in 1992 yielded a lower share of


Table 6.1 Growth rate of value added in industry, 1971-81 to 1991-94 (% per annum) 1971–81 1981–90 Singapore 8.1 5.2 Malaysia 9.6 7.4 Indonesia 11.3 5.9 Thailand 12.1 9.9 Philippines 8.2 – 0.8 Source: Asian Development Bank, Asian Development Outlook, 1994. Table 6.2 Sector share of GDP, 1970–92 (%) Agriculture

1991–94 7.2 10.7 8.6 10.7 1.6

Industry

1970 1980 1992 1970 1980 1992 Singapore 2.2 1.1 0.3 36.4 38.8 37.5 Malaysia — 22.9 16.1 — 35.8 43.9 Indonesia 35.0 24.4 17.9 28.0 41.3 42.9 Thailand 30.2 20.6 13.1 25.7 30.7 37.4 Philippines 28.2 23.5 22.6 33.7 40.5 35.0 Source: Asian Development Bank Asian Development Outlook, 1993.

152

Services 1970 91.4 — 37.0 44.1 38.1

1980 60.0 41.3 34.3 48.7 36.0

1992 62.2 40.0 39.3 49.5 42.5

Table 6.3 Structure of Philippines' industry 1956–86 % employment % value added % establishment 1956 1986 1956 1986 1956 1986 Consumer goods 65.1 58.1 61.6 62.8 59.0 53.7 Producer goods 34.9 41.9 38.4 37.2 41.0 46.3 Source: Calculated from Asian Development Bank, Asian Development Outlook, 1994.

industry in the whole economy compared to other ASEAN countries (Table 6.2) and it is necessary to briefly trace out this process. After the change in government in February 1986, the new administration of Aquino seemingly placed a high priority on the role of the private sector in successful economic recovery. Aquino persistently emphasised that a sustained attempt to reduce government involvement in the economy was one of three key principles of the state while she was in government. The role of the state was clearly seen as ìntervening' in the economy only in those areas where the private sector was unable to meet social needs and where there was a clear comparative advantage for public action. Ìnterference' with labour markets (in the form of presidential decrees over the minimum wage and cost of living adjustments) was abandoned by President Aquino and was not renewed by Ramos. It is estimated that during the period of


153

controlled economy by state capitalism as operated by Marcos, approximately US$2.1 billion was lost to state treasuries and in economic incompetence, so Aquino was pointing to real factors at work and legitimising her withdrawal of state dirigism.

Crony capitalist system: Its political modus operandi The central characteristic of Marcos's crony capitalism was the use of political power for material gain. This is the most coherent and consistent explanation possible of what occurred in the Philippines during Marcos's rule. The `policy zig-zag' that occurred during Marcos's time presupposed the abuse of political privilege (Manapat 1991). The motif of corruption, however, was not peculiar to Marcos's rule. Marcos was merely continuing the longstanding tradition of corruption in Philippine politics (Simbulan 1965). Marcos' corruption was not an aberration from the normal political traditions of the Philippines; it was merely the most transparent, best-developed example of that tradition. Corruption, graft, cronyism, patronage, the abuse of political office, and the use of government and state power to further personal ends are the defining characteristics of mainstream Philippine political institutions. The trappings of Max Weber's rational state, clean government, efficiency, promotions based on merit, public service and socially responsible behaviour, were really the exceptions in the behaviour of state-appointed officials in public office (Hutchcroft 1994). As explained above, in a relatively short period after Marcos declared martial law in 1972, power and wealth became concentrated in the hands of him and his wife, relatives and closest friends. How did this come about? The public sector of the economy was controlled by placing loyal bureaucrats or businessmen in key government positions. Government projects were implemented not because they provided public services but because they were sources of kickbacks. The private sector of the economy was sliced into different spheres of influence. Each section of wealth production was handled by a relative, a close friend or a trusted crony. Each company, every industry, all sectors of the economy, provided that they were sources of money, became the object of greed and eventual acquisition. The whole economy came to be divided into different fields managed by relatives and cronies who regularly shared their earnings with the dictator (Manapat 1991). The country's entire financial system was placed at their disposal. Monetary policy was formulated and conducted on the basis of the benefits it would bring to the industries and companies Marcos and his cronies owned. Marcos appointed only those who


154

were loyal to his interests to the posts of central bank governor and finance minister. The central bank governors who served under Marcos and one finance minister prided themselves on being apolitical `technocrats' but displayed absolutely no independence from the dictator's monetary and financial policies. At this time the entire banking system was dependent on Marcos's cronies. The country's principal export crops — coconut, sugar, bananas, and tobacco — were placed under the control of the most trusted cronies. Monopolies in the production, milling, local marketing and international trading phases of these industries were created through a series of presidential decrees, resulting in extreme poverty for the agricultural workers in these industries and great wealth for the few who benefited from the monopolies. Trading monopolies over the country's main imports were established as well. Trusted members of Marcos's cabinet were put in charge of trading the country's most essential imports, such as rice and oil. The stated rationale for such trading monopolies was to acquire cheaper imports. Due to invoicing forgery, however, the exact opposite often occurred. The gains from trade were then enjoyed mainly by those who administered the trade. Marcos and his cronies used many other techniques to enrich themselves. The country's natural resources, such as its mines and forests, were given to the cronies to exploit by the issue of logging licences, etc. Extremely liberal government incentives and tax exemptions were selectively granted to corporations owned by favoured individuals. Relatives and friends were awarded lucrative government contracts. Captive markets (in primary products) were created through presidential decree to benefit the corporations owned by Marcos's cronies. Marcos's crony capitalism was explained by Manapat through a historical analysis of the concrete ways in which wealth and power interacted to produce a new elite. His analysis of how government or state power was used to further the wealth of the individuals, families and economic groups close to the Marcos family provided us with a most consistent and coherent approach to the history of Marcos's crony capitalism (see also Manapat's second work on the telephone monopoly, 1993). While there were also some achievements in the manufacturing sphere, and while the accumulation process did continue, it is undoubtedly true, as Manapat suggests, that a lot of necessary social and economic planning was abandoned because of neglect of the arenas of technical and allocative efficiency which were, in the day-to-day running of the state, treated as secondary to the government's support of the business interests of Marcos's cronies. Moreover, the over-rapid expansion of these crony conglomerates was


155

founded on easy access to funds from the government and so-called political banks, and resulted in the loss of loanable funds, of important sources of national savings which could have been used to pump-prime a very sick economy and to improve the industrial core of the economy in such a way as to promote forward and backward linkages to other sectors and to reduce the over-dependence on imported capital stock and imported components and semi-finished goods.

THE SOCIAL BASES AND FORMS OF THE PHILIPPINE STATE The much troubled discussion on the economic and social role of the state (especially in the Asian context) has yielded only a few theoretical insights since Marx and Weber wrote (Skocpol 1985; Hewitson et al. 1993). Weber made the point that in a period dominated by a more `rational' bureaucracy, the divisions between the legislature, the executive and the judiciary are made clear by law and custom, while the demarcation between state activity in relation to infrastructure and welfare is also kept distinct. Marx, in his Eighteenth Brumaire of Louis Napoleon, also suggested that there are periods of relative autonomy of the state, a point developed by such followers as Nicos Poulantzas for conditions of highly developed bourgeois society. In the conditions of the modern Philippines, Weberian notions do not fully apply. The discrete division between the state apparatus and the legislature has been cut across by land owners' direct domination of the legislature and the judiciary, as well as by the influence of regional power blocs. In modern times, the state machine has not confronted a situation of a near-equilibrium in the balance of the classes. Rather, the state apparatus has always sided with the strongest social power. As a consequence, an activist state policy in relation to economic development could not involve, as it might in Western economic systems under certain conditions, a compromise between various capital fractions and the labour movement, but reflects a change in the composition of the leading social power or coalitions of the ruling elite. While some similarities with the experience of Western countries appear from time to time, in the rhetorical assurances of the leading figures of the Philippine state, such as Macapagal, Marcos and Aquino, that they favoured this or that democratic process or institution, the reality was that state policy has reflected the interests only of the landed and business elites. The latter have,


156

indeed, been ex-land owners who made their way into banking and light industry. The old guard, Spanish-Filipinos (or mestizos), as well as foreigners, largely invested in sugar; while the Chinese-Filipino business families invested in a range of light industry (Kunio 1985). The state apparatus had to preside over a process of capital accumulation already taking place in the private sector. Its more active role was to assist the transfer of economic surplus around the economy, to make sure that the bulk of money was invested in production and did not end up merely as real estate speculation. The state introduced laws to facilitate the operation of capital markets and set up government banks to encourage credit policies and to provide a loanable funds pipeline to industrialists. As will be argued, it did not succeed in promoting any extra successes in the process of capital formation above what the private sector achieved. There has been considerable dissatisfaction with the Philippine state's performance in and management of economic policy over the last 25 years (de Dios & Villamil 1991). Business does not consider that the state succeeded in setting adequate macroeconomic policy signals, or in handling debt and World Bank demands in a proper way; nor did it succeed in encouraging more efficient capital markets until well into the Ramos presidency. A common series of complaints has it that interest rates had been too high, that there was a continuing policy of inflationary financing of deficits (Ferrer & Montes 1990). Agrarian reform has not extended much beyond Luzon province and rice. Moreover, it has been overly legalistic (Hayami 1990; Samson 1991). Successive governments failed to address the problems associated with a lack of engineering industries and the high import-dependence of both domestic production and export industries (Lichauco 1973). While all the problems of the Philippines' economy since the 1960s cannot be put down to `cronyism', or even to corruption (Manapat 1991), the paralysis in the political sphere was occasioned by the long-term influence on the state apparatus of technocrats and of the power exercised by regional bosses and big landed families, against which Recto and others had fought (Constantino 1978). My conclusions at this point of the argument may be summarised as follows. In considering the economic role of the Philippine state, these factors are to be taken into account: the social base of the state (the dominant class or coalition of classes); the form of the state (whether a dictatorship, parliamentary congress, etc.); and


157

the state's relationship to the market economy (the business and household economy). To take the first point. The social basis of the Philippine state is one in which social power has been shared by four elite factions: 1 Regional mafiosi (e.g. the Osmena family in Cebu, the Mitra family in Palawan and the Cojuangco family in Tarlac and Bacolod City) (Simbulan 1965). These historically powerful influences on the state machine are still able to influence the rules of political and economic action set by particular presidents. Although they have been weakened by intra-elite rivalry (fights between politicians within different regional regimes), the mafiosi still have a disproportionate influence on politics and economic policy, though less these days in the working of the modern sectors of the economy. 2 Politicians influenced by Western neoclassical economists allied with the World Bank and the IMF (e.g. Virata and Estanislao; see also Virata 1972). These highly placed politicians became more important after 1979 and played a role in blocking Marcos's scheme to launch heavy industry. 3 Financial capital banks and related institutions, which became much more significant after the election of Aquino. It is true that some banks played an important role under Marcos (e.g. the Coconut Planters Bank run by Cojuangco, and the Philippine National Bank, which guaranteed the country's foreign debt) but they also retained backward attitudes to the whole issue of financing economic plans and the general process of economic development. Their positions in the 1990s have been undermined by the decision to allow more foreign banks to operate in the Philippines as competitors. 4 National industrialists, a faction engendered by the circumstances of the period of foreign exchange controls, who have lost ground since the 1960s (Constantino 1978; Bautista & Power 1979; Lichauco 1973). They have been less able to feather their own nests through tariff protection and increasingly have been forced to accept the need for tariff reform, although they continue, with the aid of some sympathetic academics, to wage political campaigns in favour of protectionism. To this consideration of competition and conflict between significant factions of capital, one must add historical legacies. The Philippine state today is still partly influenced by its past as an appendage of the United States (Ofreneo 1982). It is also shaped by the fact that since the 1920s, a section of the state


158

bureaucracy has itself been immersed in patronage politics. This means that the clear divisions made in Western states between legislature, executive and judiciary do not apply. The executive committees of the state and the Congress/Senate complex are especially open to influence by such social groups. This means that when state policy changes it is not because of compromises, but because of shifting strengths within the elite faction. (In the Philippines there are strong elements of instrumentalism and less relative autonomy of the state than in the West.) The form of the state in the Philippines, whether the dictatorship of Marcos or an oligarchic pattern under earlier and later regimes, has meant that developmental strategies have not been consistently applied. The social structure with which the Philippine state has had to deal is the result of an interaction of oligarchy, patron-client relations, the demands of traditional nationalist businessmen, and the growing influence of politicians and technocrats representing the IMF-World Bank line (Jose 1982 & 1991). The social structure has a weak foundation and this is seen in the constant reliance on crisis assistance from abroad, as well as an underdeveloped capital market and a low level of infrastructure. The state is called upon to intervene in capital accumulation and growth to compensate for this weak structure, but the Philippine state, because of its lack of `relative autonomy', has not been successful in doing this, compared with (for example) the Singapore state. The reason for this failure is that the traditional elite is still able to block land reform (Samson 1991), neglect modern education, starve research funding, and cut back funds for renovation of the infrastructure. The social relationships of society have not led to efficient accumulation of productive capital. Moreover, the refusal to reach a lasting compromise with the interests of workers and peasants has contributed to instability in this regard.

THE PERFORMANCE OF THE PHILIPPINE STATE Cultural factors need to be fully taken into account by political economists evaluating the state's performance (Villacorta 1987; Fegan 1983). As well, it can be argued that the cultural-political role of the state, once it has satisfied its legitimacy function, is to assist what capital accumulation is taking place and to make the system as a whole as stable as possible, given the constraints of cronyism (Manapat 1991) and landlord control of the state (Rivera 1994). Accumulation is one of the major factors of the development process. In the Philippines, capital accumulation reached its


159

highest rate at the end of the 1970s but the benefits of this suitable national rate of investment were partly dissipated in the circumstances of the accumulated amount of capital flight for the period 1981-86, which some commentators (Jose 1991) believe may have reached US$22.9 billion, or nearly half the outstanding external debt. As the Philippines is a predominantly agricultural country, the marketed net surplus generated in agriculture contributes a big share of the accumulation process. In general, under the Marcos and Aquino administrations, limited land reform was attempted (Hayami 1990; Batangantang 1989). The leaders of the state in the Marcos and Aquino periods gave these reasons for assisting farmers and state revenues at the same time: 1 Agriculture still accounted for about half of total employment, about 30 per cent of GDP, and more than one third of export revenues; hence, it had to yield surpluses for accumulation. 2 Two thirds of the country's population continued to live in the rural areas and are directly or indirectly dependent on agriculture for their livelihood. (In 1988, agricultural employment accounted for about 52 per cent of total employment and in 1990 for 46 per cent). Hence, jobs in rural areas also had to be created. As part of the program, a surplus was seen as an important part of accumulation. Coconut and sugar had proven to be a substantial earner and saver of foreign exchange; hence, they needed state help. 3 The average family income in rural areas was 67 per cent of the average urban family income in 1975 and 46 per cent 1988. It was argued that the state must intervene to regulate rent and leasehold charges to stop landlord exploitation and regulate plantation profit so as to prevent social instability and limit peasant unrest. The Marcos land reform people thought that social stability required land reform in order to narrow the gap between the standard of living of rural and urban areas. Under the Marcos state, land reform aimed at a significant, if limited, transferring of land from the land owners to the tenant-tiller. However, it covered only tenanted rice and corn lands and allowed a seven-hectare retention limit. The farmer-beneficiary had fifteen years to pay an amount equivalent to 2.5 times the average `normal' harvest of three crop years, at an annual interest rate of 6 per cent. The farmer-beneficiary also had to go through six stages of implementation before acquiring title to the land. The major achievement of this land reform program was the transfer of a significant portion of economic surplus to rice and


160

corn land from landlords to share tenants through the transfer of a part of the bundle of land property rights (Samson 1991). The reform succeeded in achieving the intended goal of handing over `land to the tillers' to a limited extent only. For example, in the central Luzon, southern Luzon and Bicol regions, comprising some 8.34 million hectares and dominated by rice, corn, coconut, sugarcane and abaca, some half of the disposable land was planted to crop in 1985. Of this area, about 30 per cent of the region's income went to the 60 per cent of the poorest farmers' households and 20 per cent of the 48 per cent went to the richest. As well, the Operation Land Transfer (rice and corn land) referred to above covered only 20 per cent of the target in 1987 (Batangantang 1989, p. 20). Aside from these achievements, Marcos's land reforms had some flaws, notably a clear lack of political will on the part of the Marcos state to redistribute land in favour of the poor farmers (Samson 1991). Thus the program suffered from poor implementation. But even if the Marcos land reform program had been fully implemented, it would hardly have changed the basic contours of the existing structures of ownership. The program itself was so severely limited, being confined to certain crops and areas, that it was bound to fail as a thoroughgoing reform. On 22 July 1987, President Corazon Aquino signed executive order no. 229, instituting what was called the Comprehensive Agrarian Reform Program (CARP). In general, CARP expanded somewhat the scope of the Marcos reforms (Batangantang 1989). Politically, the goal of this particular bow towards agrarian reform was to redistribute wealth so as to reduce social unrest and thereby promote stability. Economically, the purpose was to raise agricultural productivity which, by increasing food supplies, would keep the price of food low and wage demands down. Compared with Marcos's land reform program, Aquino's was to be almost 25 times larger than the total area of rice and corn lands distributed between 1972 and 1986. Nevertheless, the pace of implementation would have been hastened if the state had seriously considered (at an early stage) the opportunities offered by existing and newly emerging nongovernment organisations or cooperatives. Although Aquino's land reform appeared to be comprehensive, she didn't seize the political opportunities to effectively initiate such a reform (Hayami et al. 1990; Batangantang, 1989). Instead, she abdicated the task of defining land reform to a land owner-dominated Congress so that her land reform failed. Taking into account the limited achievements in the areas of savings, industrialisation and agricultural reform, it is no wonder that in the whole period up to the early 1990s the Philippines'


161

economy had been unable to prosper, because industry and accumulation, even with an accelerated role for foreign investors, could not promote the potential of the sectors most needed in the struggle to achieve stable economic growth. For example, to promote industrialisation prematurely without developing agriculture more fully first was clearly unsound. As a result, foreign investment and foreign loans had to be brought in to fill the resources gap, and to cover other significant and unavoidable infrastructure expenses (Jose 1982 & 1991; de Dios & Villamil 1991).

ROLE OF THE FOREIGN SECTOR Foreign investment represents an important augmentation of the accumulation of capital stock. The ability of the economy to undertake investment projects productively, and to finance these projects through external borrowing and savings, is a test of the state's ability to carry out its accumulation function. The Philippines has had a long history of foreign participation in its economy. As pointed out above, for more than seven centuries the Chinese had been trading in the country. Spanish rule came in the 16th century and was to last for 350 years. Between the Spanish domination and the American annexation, there was also a period of Japanese influence over the whole of central Luzon. This was followed by another 50 years of American domination. An American Ambassador — Michael Armacost — commented in the early 1980s that the Philippines should rely more on foreign investment than on foreign loans to boost the economy. Singapore, Hong Kong and Taiwan aggressively seek foreign equity investment, and they have experienced the most rapid growth in their investment over the last twenty years. The Philippines, by contrast, relied on foreign investment for a relatively low percentage of its net financial inflows, and the larger part of supplied external funds came from borrowing. This structure of the external sector of the Philippines' economy in the 1980s coincided with an achieved growth rate that, in the 1980s and early 1990s, was the lowest in ASEAN (see Table 6.1). The countries which contributed the most foreign investment under Aquino's state administration were Japan, Hong Kong, Taiwan, the United States and the United Kingdom (de Dios & Villamil 1991). These investments went mostly to manufacturing, construction ventures, energy projects and tourism-oriented projects. In the year after Aquino took over the presidency, foreign investment accounted for 7.34 billion pesos out of an increment


Table 6.4 New foreign investment levels in the Philippines, 1986–91 (US$ million) 1986 1987 1988 1989 1990 17 34 81 93 171 Source: Board of Investment, the Philippines.

162

1991 127

of 13.4 billion pesos in total investment. Taiwanese investment contributed 2.28 billion pesos (then equivalent to US$107 million), mainly destined for an ill-fated petrochemical plant in Batangas. The overall national investment rate was a disappointing 16 per cent of GDP, much below the rates prevailing in ASEAN as a whole. Such figures meant that the difficulties of the Philippine state in encouraging mobilisation of domestic savings, and the relative failure to quickly promote the participation of domestic and foreign direct capital investment in the period up to 1989, were evident to all (Table 6.4 indicates the foreign contribution). After 1990, things improved in relation to foreign investors. The overall capital inflow of private investors increased, while the level of foreign investment in exportoriented manufacturing accounted for 548 million pesos (US$160 million) or 60 per cent of the total investments in the export processing zones (EPZs). Koreans (investors, although not second on the list) accounted for a further 110 million pesos. The Japanese preferred to invest in Cavite and the Calabarzon project, while the Taiwanese were willing to invest US$100-200 million in the expansion of the Mactan industrial site (Board of Investments 1992). Japanese investments dropped 44 per cent to 3.7 million pesos in the first three quarters of 1991, while British investment ballooned due to a 17 billion peso oil refinery project of the Shell Corporation. Meanwhile, US investment, which declined from 3.2 billion pesos in 1988 to 2.9 billion pesos in 1989 and 1.4 billion pesos in 1990, appeared to be perking up. The Board of Investments (BOI) records show that from January to September 1991, US investments reached 1.5 billion pesos, or 47.46 per cent more than that for the same period in 1990. ASEAN countries, particularly Taiwan, contributed to the overall increase in Philippines' foreign investment in the early 1980s. According to the BOI, in the Philippines foreigners are not allowed to own land, but foreign investment in Philippine export-oriented industries will, according to this official body, increase Philippine production and export capability, and thus contribute to economic growth and to mitigating the foreign exchange shortage. For this purpose, the development of an attractive investment


163

environment in the Philippines is seen to be vital. Foreign investors have praised the industriousness and skill of Filipino workers, and some have worked quite well with trade unions, but they complained loudly throughout the 1980s about electricity shortages and continued to draw attention to poor telecommunications and the policies of the telephone monopoly before its break-up by resolute state action (Manapat 1993). The Foreign Investment Act of June 1991 substantially liberalised the environment to the advantages of foreign investment. This legislation was different in two important respects: 1 It allowed entry into all but a few specified sectors on a short `negative list'. The shift to a negative list was said to make the legislation transparent and was accompanied by removal of the requirement that foreign investors obtain authorisation from the BOI. The Ramos regime loosened restrictions on foreign investment still further. 2 One hundred per cent foreign equity was to be allowed in all but a few sectors such as banking. As a result, there was an increase in the foreign investment level: some US$692.7 million, a 33 per cent increase over the level of 1991, was recorded in 1992 and accelerated in 1993-96. Export of labour Over a million Filipinos work abroad, a phenomenon that was much studied in the 1980s. Such studies show the necessity of the state, in seeking to solve its fiscal crisis, keeping a share of foreign remittances and the urgent need to boost the country's foreign exchange reserves. These requirements put the Philippine state in a bind: it cannot really remonstrate effectively with foreign governments over the mistreatment, constantly documented, of Filipinos abroad, while allowing labour `brokers' to flourish. Export of labour is an important element in breaking the bottleneck posed by the shortage of foreign exchange (Rashid 1980; Ofreneo & Habana 1987). The use of export processing and free trade zones has meant cheap labour was recruited and `loose' labour laws favouring employers were publicised in order to attract foreign investors (Ofreneo & Habana 1987).

THE STATE, THE DEBT ISSUE AND BUSINESS DEVELOPMENT The state in the Philippines has faced a perennial fiscal crisis (de Dios & Villamil 1991, Ch 1). The very active role in investment


164

Table 6.5 Financial flows and external debt, the Philippines, 1986–88 (US$ million) 1986 1987 1988 Total net financial flows Official development assistance: grant 516 Official development assistance: loans 439.9 Other official flows 176 Direct investment (privat3e) 176.1 Portfolio investment (private) 81.3 Export credit (private) –283.2 External debt outstanding Short-term 5 378 3 792 Long-term 22 878 24 018 Use of IMF credit 1 342 Debt-service payments Principal repayments 998 1 006 Interest payment 1 938 2 051 Total 2 936 3 057 3 361 Debit-service ratio (%)* 34 33.3 29.68 * Note: Defined here as the ratio of debt-service payments to exports of goods and services. Source: OECD, Geographical Distribution of Financial Flows to Developing Countries, 1990.

played by the Philippine state occurred, in spite of this, by cutting down on education, health and other `social' expenditures. The current high involvement of the state is also largely a result of the fact that the crisis years of 1983-86 hit hard at the `modern' and ùrban-based' sectors, jerking the professionals and technocrats dominant there into a realisation that more had to be done for the ailing social and economic sectors. The crisis of those years brought on a new determination on the part of the modernists in the state machine to clip the wings of several regional mafiosi families and the cronies of the previous Marcos regime. The purpose of the state's overseas borrowing should be to finance industrial, agricultural and other economic development projects for which resources cannot be found from revenue collections. Borrowings should be limited to capital projects which can produce revenues, build up infrastructure and yield long-term benefits like higher export levels or job promotion. This, however, has not been the consistent policy of the state in the Philippines. Foreign investments are considered as a significant supplementary tool for development, but foreign investment is only one among many considerations in running a developing country. In the Philippines, foreign investment in the form of direct investment rather than portfolio investment or speculation has not featured as a major consideration.


165

Table 6.6 Debt service on foreign loans, the Philippines, 1986-91 (billions of pesos) Year 1991 1990 1989 1988 1987 1986 Note: Source:

Ratio to annual budget*(%) Annual budget Total debt service 254.4 170.1 66.9 211.8 128.4 60.6 224.7 99.3 44.2 190.7 71.2 37.3 160.4 118.4 73.8 118.8 40.6 34.2 * Average ratio of debt service to annual budget. Annual Report, Central Bank of the Philippines; see also Lamberte (1992), p. 86.

In the Philippines, foreign borrowings in the 1970s were facilitated by a highly liquid international capital market flooded with dollars from OPEC. In 1974 the state borrowed US$165 million from the World Bank. Foreign debt grew from US$2.6 billion in 1975 to US$10.5 billion in 1980. By 1983 the debt level had blown out to a state foreign debt of US$26 billion. From 1986 to 1991, the level of the country's foreign borrowings recorded an aggregate increase of US$9.07 billion. What followed? At the beginning of 1986, the unpaid balance of the country's foreign borrowing stood at US$26.25 billion. Table 6.5 shows the condition of indebtedness facing Mrs Aquino in her first years — late 1986 to 1988. By the end of 1991, or six years after Aquino took power, the balance outstanding totalled US$29.96 billion, posting an increase of 14 per cent, or US$3.7 billion. The average annual increase was US$617.33 million. During the six-year period, the highest annual increase of US$2 billion occurred in 1986. In 1988 and 1989, however, the balance of foreign debt owed went down. Under the Aquino administration, the state spent an average of 105 billion pesos annually in the payment of principal and interest on its foreign and domestic borrowings. The biggest increases were recorded in 1987 and in 1991, amounting to 41 billion pesos for each year (National Bank of the Philippines 1992). Table 6.6 shows the trend of growth of total debt service and its ratio to the national budget from 1986 to 1991. In 1991, principal and interest payments reached 170.1 billion pesos, which came to 48 per cent of total expenditures of the national government and 66.9 per cent of the total national budget for the same year. For a poor country like the Philippines, spending 170.1 billion pesos on principal and interest payments for one


166

year alone is quite onerous. To give an idea of priority-reshuffling possibilities, this amount could have been used either to: Feed some 200 000 refugees from Mt Pinatubo for more than 23 years at 100 pesos per person each day. Finance the 14-year modernisation program of the entire Armed Forces of the Philippines; or fund the budgetary requirements to implement all the programs, projects and services of the government for one fiscal year, including agriculture, the environment and natural resources, trade and industry, public works, transportation and communication energy, irrigation, education, health, defence and the general public service. The state policy on domestic and foreign debt is an important aspect of its management of the economy. In the Philippines the burden of debt is seen as a problem by many economists (de Dios 1984; Jose 1991) for two major reasons: first, the Philippine state presides over a weak economy and therefore finds it hard to pay back its foreign commitments as they fall due; and second, the potential of the budget policy to help the domestic economy has been consistently weak because of low tax collections as a percentage of budget receipts, a shortfall which squeezes funds otherwise needed for welfare safety nets, social overhead capital, and research and development. According to some economists, debt is not bad if the money borrowed is utilised to expand exports and reduce imports. But in the Philippines there are two persistent problems in connection with debt. The main problem is that not all foreign sources of funds have been directed to export industries and productive manufacturing (apart from tourism). Another problem, now being reduced in severity, was that of high levels of debt service. (In the early 1990s, debt servicing was 28 per cent of exports, down, rather hearteningly, from 45 per cent of exports in 1984.) Deterioration in the debt service position would mean, however, a renewed drain of funds from the national budget which might otherwise have been used for social overhead capital (infrastructure, education, training, research and welfare). Table 6.7 shows that external debt as a percentage of GNP rose steadily during the run-up to 1990. This forced the new Ramos government, together with the International Monetary Fund, to take remedial action during 1992-96. While investment is more significant than savings in promoting economic growth, the savings rate remains a key variable in economic development, particularly in Third World conditions. Sustained economic growth is accompanied usually by sufficient


Table 6.7 Debt burden estimates, the Philippines, 1970–90 Ratio to nominal Year GNP (%) 1970 33.90 1972 32.60 1974 25.52 1976 37.52 1978 44.50 1980 48.99 1982 62.83 1984 80.49 1986 93.71 1988 71.58 1989 62.40 1990 61.29 Source: Lamberte & Lim (1992).

167

Ratio to exports of goods and services (%) 174.02 188.02 105.51 196.46 217.84 215.38 308.31 317.05 327.30 261.38 222.56 219.14

domestic savings that are, hopefully, efficiently channelled into investment. The raising of savings (as opposed to efficiency of their use) has been only partly successful, forcing the state to introduce value-added taxes for the first time in 1995 as a way of plugging the savings gap. However, to keep this in perspective, we should note that — admittedly from a low base, that over the 1973-81 period — foreign savings only reached 4-5 per cent of GNP, while the domestic savings rate reached about 16 per cent. The problem was that the 1980s slowed this trend at the very time that other ASEAN states were accelerating their national savings and investment rates. When her new government was established in 1986, President Aquino initiated a brief economic recovery, but savings continued to be quite weak. National saving during the recovery period of 1986-90 remained stagnant, ranging from 16 per cent to 18 per cent of GNP. The state's own ability to save proved to be practically nil, for two main reasons: 1 The state, under pressure from the IMF and the overseas banks, had to assume much of the foreign debt service, while domestic debt servicing was growing due to the dependence on treasury bills to finance the budget deficit and to mop up excess liquidity. 2 The state could not cut back its accelerating level of expenditure significantly during the time of recovery, when the opportunity to do so was provided by relatively buoyant private savings. Ramos inherited this problem: domestic and foreign debt remained high; new foreign investment in productive manufacturing remained sluggish; under-employment


168

was growing in rural areas; and the rate of capital accumulation failed to meet national needs for accelerating the growth rate of GDP. However, as noted below, he was able to turn this situation around because of accelerated growth following the overcoming of power shortages, improved fiscal measures and international assistance.

OVERVIEW OF STATE STRATEGIES DURING THE WHOLE INDUSTRIALISATION PROCESS The relatively poor efficiency of the Philippines' manufacturing sector over the years reflected to a large extent the industrial and trade policies pursued by the state in the past. As the pandering to vested interests was so blatant on the part of the state machine this inevitably led, under IMF pressure, to pressure for the state to initiate radical reforms in recent years. The present industrial and trade policies in the Philippines are the result of limited reforms originating in the early 1980s and of further intensification of those reforms in the 1990s. The reforms, however, have led to the elimination of only some of the major structural weaknesses in the economy. Philippine industry, which developed behind protective barriers in the 1970s, has been subject to major attempts of the government to liberalise trade since the beginning of the 1980s. The state's policy after 1986 was to provide prudent macroeconomic management and to imaginatively utilise tariffs and import controls as its main tools. For decades, continuing up to the present, the overall trade policy of the Philippines has generally been protectionist in nature, although applied by the state in varying degrees during the period. This began inadvertently in 1950, when the Philippines imposed strict foreign exchange controls in response to a severe balance of payments difficulty resulting from the Bell Trade Act and a drop in US economic assistance. Foreign exchange was rationed according to èssentiality'. Virtually, only producer goods, such as machinery and equipment, could be imported, as foreign exchange was difficult to obtain for `non-essential' consumer goods. The system became a permanent policy feature for the rest of the decade, fully entrenching an import substitution policy which, as such, necessarily favoured the finishing stages of manufacturing while effectively penalising backward linkages and exports. As well, the failure of the Philippines' economy to develop backward and forward linkages was due to a narrow and weak domestic market, caused by very low levels of rural and urban income (Lim


169

1985). Real wage levels and rural poverty were beginning to emerge as problems in the 1960s, and remained so in the 1990s. By the late 1960s, government planners had become more aware of the bias against exports. Instead of reforming the protection structure, however, export promotion measures, mainly through the BOI, started to be adopted in the 1970s. As well, in the 1970s import controls became more widespread. The Central Bank started the system of classification by type of product. In the majority of cases, the motive for import licensing was the protection of local industry in the domestic market. The system of quantitative restriction, in general, buttressed the effect of the tariff structure. A neglected feature of the state's accomplice role in IMF-sponsored tariff reductions is that there has been a continued bias against the production of capital goods and intermediate inputs, pointed out over many years by Lichauco (Lichauco 1973). Yet a report for the ILO by Ranis commented favourably on the efficiency of what capital goods sector existed and recommend that it be encouraged (Ranis 1979). By the end of the 1970s, the inherent biases of the protection structure were recognised and the inadequacy of an offset approach through various incentives became more and more apparent. Thus in 1981, the government finally launched the first major reform of the protection system. First, the tariff reform program (TRP) was implemented. Second, a schedule of import licensing liberalisation was formulated. The process continued under Ramos. Under the Aquino administration there were also new trade reforms. More than 1600 items were liberalised betweem 1986 and 1990. Another major change was the removal of all export taxes (except for logs), which had heavily burdened the already disadvantaged agricultural sector. There were some tariff adjustments implemented at this time, supposedly to provide temporary assistance to industries affected by import liberalisation. These came in two forms. First, it was intended to replace to some extent the protection arising from the import restriction with its tariff equivalent. This involved raising the tariff on imports of the protected output. The other adjustment reduced the tariff on inputs of affected sectors. These tariff changes were implemented under executive orders. The trade reforms under Aquino effected tariff changes on a total of 138 tariff lines, of which 55 were lowered while the rest were increased. The average tariff rate for all imports merely moved from 30.2 per cent in 1985 to 30.1 per cent in 1988. In August 1991, a new tariff code (EC 470) was introduced with the objective of encouraging export-oriented growth by lowering


170

nominal and effective protection, stimulating investment by reducing tariffs on capital goods and simplifying customs administration by reducing tariffs dispersion and the number of tariffs bands. In 1992 a renewed trade liberalisation program was launched. This reduced the èffective' tariff protection levels in manufacturing to an overall 32 per cent, which is lower than in Thailand (51 per cent) although slightly above that of Malaysia (27 per cent). However, the state has failed to develop an export strategy which is linked to an improvement in income distribution, which postKeynesian analysis suggested (Lim 1985) was the key to improved growth via export orientation. All of this neglect was reinforced by the essential ènclave' characteristics of the Philippines' export sector, which had failed to link with domestic-oriented industry to raise demand, productivity and wage rates there.

Wage conditions and labour policy of the Philippine state According to one source (which may be slightly inaccurate), in 1980 the Philippine manufacturing wage was 54 per cent of the Malaysian wage. By 1989 it had increased to 69 per cent. The Filipino manufacturing worker received twice the average wage of workers in the manufacturing sector in Indonesia, but only one third of the Thai manufacturing wage. So the `record' is patchy (Far Eastern Economic Review, 10 June 1993, p. 50). The Philippine state's labour policy is full of contradictions and often unsuited to a modernisation process. For example, as is well known throughout the ASEAN region, Filipino workers are skilled but are industrially combatative and prone to pursue their human rights. However, this disguises the weakness that only 3-4 million out of a workforce of 26 million are well organised into unions. The state machine knows this and has used a plethora of laws, regulations, police actions and semi-legal means to shackle worker militancy, hobble the labour unions and reduce real wages. The ensuing `coolie wage' mentality does nothing to encourage worker productivity or to inspire managers. Rather, it results in absenteeism, periods of illness and poor results at the point of production (Limqueco et al. 1989). The contradictory aspect is that to maintain political popularity and perform the legitimation function of the state, the top political leaders (including Marcos and Aquino) have periodically legislated to raise legal minimum wages and cost-of-living adjustment payments. This has been done even in periods when the state was advertising the cheapness of Filipino labour to attract foreign investors. Yet in 1990-91, for example, by contrast with the 1980s, stipulated wages rose above the levels prevailing in the


171

much more vigorous economy of Thailand, at a time when the Philippines' economic scene was bleak. In this way we see a contradiction between the political legitimacy interests of the state and the more objective requirements of accumulation and growth, with the state unable satisfactorily to juggle the two aspects of its role. The Philippines has a highly motivated and mobile labour force, which is welleducated, fairly skilled and English-speaking, and which can be trained relatively quickly to meet the needs of modern business. The protection of these workers' rights is unequivocally necessary and desirable. The state, it seems, has not been able to force compliance with its wage laws, making the conciliators the de facto enforcers. But since organised workers account for a small proportion of all workers, wage laws remain unheeded in many factories, on top of the widened practice of child labour. If the Philippine state remains weak relative to the requirements of wage-law enforcement, the alternative will have to be strengthening of the trade unions. The least that the state can do is to refrain from enacting laws that would set constraints on union organising activities, even if manufacturing wages rise. The alternative is a low-wage, unproductive coolie economy.

Education policy It should be emphasised that the domestic market remains restricted due to a lack of improvement in the distribution of wealth and income. The Philippine state has clearly failed to keep pace with the needs of modern capitalist society or the sectors of it that are being nurtured in the Philippines. Education is a prime example. It has a record that has deeply disappointed Filipino families. Under the Spanish, education simply served the needs of the church; under US occupation, education served American commercial and colonial interests, with the local state acquiescing in the miseducation of Filipinos (Constantino 1993). Nevertheless, it produced levels of literacy well above the SouthEast Asian average. The education system in the Philippines is characterised by a high degree of wastage. According to 1983 data, the wastage was highest among children in rural areas in the lowest decile of the income distribution. Among children in rural areas in the income distribution, the drop-out rate was 42 per cent compared with 5-10 per cent among children in the highest income distribution. In general, the education system in the Philippines tends to be regressive at all levels. At the elementary level, regressivity stems from the variance in quality between schools, where poorer


172

students receive a lower quality of service. At the secondary level, poorer students lack access to the higher-quality private system; and at the tertiary level, they lack access to subsidised public education facilities. The primary reasons for leaving school are the low motivation of children, due to the poor quality of schooling, and the financial burdens on parents of school-related social amenities. The state's policies in education officially aim to raise the quality of elementary and secondary schools, and to increase the attendance rates of low-income children. However, bureaucrats have failed to address these issues: in the 1990s the state continued to neglect those aspects of education best suited to modernisation. The essential educational inputs into a modernisation program would appear to be a well-funded primary school system, second and tertiary education sectors which stress vocational training, and investment in engineering and science as priorities. Education payments were allotted only 14 per cent of the total state budget, although the Constitution stipulates that the state shall assign the highest budgetary priority to it. The problem in the coming years is the need for the state to increase its expenditure on education. The failures of state policy between 1979 and 1994 in the areas of industry, trade policy, labour and education reflected not only poor vision, but also pressures from backward social layers in the elite and the squeeze due to heavy payments abroad. The cuts in allocation to education in successive state budgets from 1986 to 1990, counter-productive from the viewpoint of improved efficiency in the workplace and the overall productivity of the economy, are thus indirectly a result of foreign debt `hangover' and the political priorities of the elite. An ever-increasing debt service payment eats into the national budget, and the wealthy resist the taxation needed to modernise education. Their resistance is reinforced by the reality of the Filipino education system: the poor have no alternative to the public schools (which are understaffed by poorly paid teachers); the more fortunate pay separately for their own schools. Wealthy parents resist having to pay twice: for themselves and for the public education system patronised by the underclass. This helps to fuel the state's fiscal crisis.

FUTURE POSSIBILITIES: AN ACCELERATED ECONOMIC GROWTH PERSPECTIVE? After Ramos was proclaimed the Philippines' president in May 1992, he stated repeatedly that the Philippines had some difficult


173

problems, among them widespread poverty, sluggish growth, communist and Muslim insurgencies, a heavy foreign debt, power shortages, devastation from the Mt Pinatubo volcanic eruption, and a kidnapping wave which reduced local and Taiwanese investment levels. Even so, Ramos promised to make the Philippines an NIC, or little `tiger' economy, by the time his term ended in 1998. He insisted that the Philippines must catch up as quickly as possible with the other ASEAN countries. To get the Philippines' economy moving, he set as the country's economic goals: poverty reduction, job creation, GNP growth of 4.5-5 per cent per year, rising to 10 per cent by the end of his term in 1998. As well, he set an inflation rate of 8-9 per cent to be achieved within two years, falling to about 6 per cent by 1998; and interest rates sliding from 18-19 per cent to around 14 per cent by the same date. His aim was to attract foreign investors away from the Philippines' neighbours. Ramos demagogically argued that labour, investment and technological progress will be the key, though the Philippines' greatest strength at the moment is its people. Of course, people are one of the major sources of foreign income, and Filipino workers mercilessly exploited in the Middle East, Hong Kong and Singapore are likely to remain in demand in the region. As well as tapping labour's work effort, the state has decided since 1993 to further accelerate the national rate of investment. As Table 6.8 shows, the Philippines had lagged behind other ASEAN states in this respect. The foreign sector will, in the Ramos program, be a dominant force in total investment rates. Foreign exchange earnings are planned to rise by means of a sustained expansion of exports to an annual growth rate of 15 per cent, passing a benchmark of US$23.2 billion by 1998. Should the plan actually work, estimates by the state machine are that the export sector will contribute 37 per cent of GDP, compared to 19 per cent at the time of Ramos's election. Foreign debt is to be reduced somewhat (a US$2.3 billion reduction by 1998), which should reduce the dampening effect on investment of the `foreign debt hangover'. The older slogan of ìmproving the business climate' has been revised by the Ramos executive, aiming to leave behind the complaint of the US Agency for International Development (USAID) in May 1983 that: `The Ramos government has not drastically improved the business climate in the last six months, basically due to the law and order problems, power shortages and less than forceful political leadership' (quoted in Far Eastern Economic Review, 16 June 1993). Ramos's program of catching up to ASEAN relatively quickly met with a favourable initial response from the World Bank and the


Table 6.8 Gross domestic investment, 1971–80 to 1991–94 (% of GDP) 1971–80 1981–90 Singapore 41.2 42.2 Malaysia 24.9 30.7 Indonesia 19.3 30.4 Thailand 25.3 26.9 Philippines 27.8 21.9 Source: Asian Development Bank Economic Outlook, 1994.

174

1991–94 40.9 35.0 34.9 38.8 22.1

USAID. Allowing for American pique over lost US bases, it is necessary to consider their view seriously, as they have access to all government officials and documentation. The World Bank report of 1 April 1993 (quoted in Far Eastern Economic Review, 10 June 1993) saw infrastructure lags as a key bottleneck factor and an expensive one to overcome: 14 per cent of the Philippines' GNP would have to be spent in 1994 and 1995 to meet infrastructure and land reform costs and inescapable social services spending. Moreover, sustained growth rates of 5-6 per cent — almost impossible given telecommunication and transport bottlenecks — would be needed to get the economy moving into an ASEAN growth pattern. Even without the pillage of the economy of the Marcos state (Manapat 1991) which this chapter canvassed earlier, with a lessening of the debt crisis and relative political stability, all that sort of `visionary' growth could only be unrealistic. As the World Bank report noted (Far Eastern Economic Review, 10 June 1993, p. 41), the state machine would need an overhaul: `Sustained growth at even the modest rate of 5 to 6 percent depends on improvement in governance.' The politics of the situation in late 1993 required the IMF/World Bank commentators to be more positive about the Ramos `Philippines 2000' program and its goal of constructing the springboard for achieving NIC status early next century. We find the World Bank president saying in March 1994, for example, that the Bank was `satisfied with the Philippines' economic performance over recent years and congratulated President Ramos for the apparent success of the economic reforms implemented by his administration since 1992' (Philippine Star, 15 March 1994). The Bank expressed concern, however, àbout the government's ability to channel loan funds and other official development assistance to rural areas' (Philippine Star, 15 March 1994). A more favourable attitude by the World Bank as a foreign lender had not, in 1994, been matched by foreign private sector investors. This is, of course, partly because other economic regions in Asia have been


175

doing better in economic growth terms (see Table 6.2). However, the main reason is that the World Bank's call in June 1993 for òverhaul of the state machine' has not been heeded. Consequently, there are many `hidden costs' for the foreign investor. Such costs arise from low productivity; the need to pay bribes to clear goods from customs and bonded warehouses; long delays in refunding VAT taxes; highway checkpoints slowing down the flow of goods; and the extracting of tribute — `tong' in the language of Filipinos. As well, the ordinary macroeconomic signals that influence foreign corporations are not such as to encourage them to accept `Philippines 2000' as a viable program: low or zero growth, high inflation and interest rates of 17-25 per cent still existed in 1992. However, in 1995 the official growth rate was claimed as 5.6 per cent, and for 1996 6.2 per cent (estimated), admittedly coming off the low base year of 1990. As well, the prime lending interest rate dropped from 17 per cent to 15.5 per cent in 1996 (Far Eastern Economic Review, 9 May 1996, p. 81), and inflation (despite soaring rice prices) was officially estimated at 11.5 per cent for May 1985/86. There was some claimed success for the export drive: an increase of 23.7 per cent for May 1995/96 and an import surge of 32.7 per cent for the same period; perhaps, in part, reflecting the accelerating growth rates of the economy (Far Eastern Economic Review, 9 May 1996). This was about the same order of achievement as in Thailand and above the average for the ASEAN economy. There are a few signs that the political stabilisation that has been achieved by the state is being accompanied by economic stabilisation and that the continuing fiscal deficit is not now unacceptable to the `financial markets'. In 1993, only US$327 million had been invested by foreigners, less than was needed to accelerate the rate of overall investment, although quite a lot of the new direct investment did go into manufacturing, coal and chemicals. This shift to the direct form of investment after 1993 was better than the previous emphasis on portfolio foreign equity on the financial sector. Ironically, some of the funds are now flowing to areas marked out for Marcos's èleven major industrial projects' of the 1970s, hijacked when Western-oriented technocrats and economists took over the economic ministries and abandoned the industry strategy in 1979. Also, the pattern of financial flows from abroad is closely associated with the stage of economic development reached and with political stability. Hence, the test of Ramos's ambitions, that the Philippine state could by 2000 create the conditions of `runup' to NIC status, will be whether the pattern of financial flows continues an upward movement not only into retailing and banking but also into heavy industry, and especially into machinery, rather than into real estate


176

and finance. Ramos turned the Clark air force base and Subic naval base into `duty free' shopping areas, and together with new hotels this has restored some dynamism to these centres. In Subic a free trade zone has been established, attracting quite a lot of interest from foreign investors, especially Taiwanese. In explaining the role of the state in the economic development strategies of the Philippines, it is all too easy to emphasise `weak entrepreneurs' or the `confusion' of policy makers. What the above discussion has tried to show, by contrast, is that the Philippines' economic development has been characterised by slow and uneven capital accumulation, poorly redirected by the state, or redirected into speculation and real estate (rather than productive manufacturing output and jobs) by the private sector without effective state intervention, and that this situation is not yet resolved.

CONCLUSION This chapter has underlined the link between the social base of the state (the coalition of classes and sectional groups behind state policy) and the evident distortions of the economy, with low investment and growth rates the inevitable result. Economic recovery is now discernible, as noted above in several places in this chapter, but little has fundamentally changed with the Ramos Presidency in relation to the continuing influence of rent seekers and vested interests. New personnel have been brought into the state machine as a cosmetic device, but the system of patronage and a national parliament still strongly influenced by sectional interests suggests that not much will be done to improve the dismal record of the past in the matter of development planning, until more modern political forms are found to underpin the operation of the state. I do not suggest, however, that it is advisable to play around with the term `cacique oligarchy' in the manner of Ben Anderson (1988). One should first look at the critique of this complex, if trendy, categorisation, with the best being that of Santos (1992). Rather, the transition from oligarchy, cronyism and looting of the public purse to a democratic economy should be closely studied, as the Filipino masses are demanding and earnestly seeking such a change. Ramos, as President, has sought to channel this great flow of public opinion into support for an official program, `Philippines 2000', which emphasises the achievement of `tiger' status in Asia; that is, he is assuming that the selfrespect of Filipinos is best assured by projecting an image of the country as having reached at least the ASEAN average in


177

terms of the standard of living, available infrastructure and supply of basic amenities. However, given the present huge gap in the per capita income of the Philippines and the other members of the ASANA grouping (excluding, perhaps, Indonesia), this will be a long-term task and certainly will not be achieved by 2000. Moreover, the economic spurt, even if it were to be achieved in the medium term, will constitute a necessary but not a sufficient condition for fulfilling Filipino aspirations for change. Those aspirations can only be met by a fundamental break (which has not occurred under Ramos) with the political domination by the landed families, with cronyism and with the political system as it has operated in the past.

BIBLIOGRAPHY Anderson, B. 1988 `Cacique democracy in the Philippines: origins and dreams' New Left Review no. 169. Asian Development Bank 1993 and 1994 Asian Development Outlook Manila. Batangantang, H.C. (ed.) 1989 Agrarian Reform, University of the Philippines Press, Quezon City. Bautista, M.R. and Power, J.H. 1979 Industrial Promotion Policies in the Philippines Philippine Institute for Development Studies, Quezon City. Board of Investments 1980-95 Briefings Manila. Constantino, R. (ed.) 1978 Vintage Recto: Memorial Speeches and Writings Foundation for Nationalist Studies, Quezon City. ——— 1993 The Second Invasion Foundation for Nationalist Studies, Quezon City. de Dios, E.S. (ed.) 1984 An Analysis of the Philippine Economic Crisis University of the Philippines Press, Quezon City. de Dios, E.S. and Villami, L.G. (eds) 1990 Plans, Markets and Relations Philippine Centre for Policy Studies, Manila. Doeppers, D.F. 1984 Manila 1900-1941: Social Change in a Late Colonial Metropolis Yale University, New Haven. Far Eastern Economic Review 10 June 1993 and 9 May 1996. Fegan, B. 1983 `The establishment fund, population increase and changing class structure in Central Luzon' Philippine Sociological Review. Ferrer, R. and Montes, M.F. 1990 `Macroeconomic aspects of the mixed economy' in E. de Dios and L. Villami, Plans, Markets and Relations Philippine Centre for Policy Studies, Manila. Hartendorp, A. 1961 History of Industry and Trade in the Philippines Philippine Education Company, Manila. Hawes, G. 1987 The Philippines States and the Marcos Regime Cornel University Press, Ithaca.


178

Hayami, Y. et al. 1990 Towards an Alternative Land Reform Program: A Philippine Perspective Ataneo University Press, Quezon City. Hewison, K., Robison, R. and Rodan, G. 1993 South-east Asia in the 1990s: Authoritarianism, Democracy and Capitalism Allen & Unwin, Sydney. Hutchcroft, P. 1991 Òligarchs and cronies in the Philippine State: the politics of patrimonial plunder' World Politics vol. 43, no. 3. ——— 1994 `Booty capitalism: business-government relations in the Philippines' in A. MacIntyre (ed.) Business and Government in Industrialising Asia Allen & Unwin, Sydney. Jose, V. 1982 The World Bank and the Philippines Foundation for Nationalist Studies, Quezon City. ——— 1991 `Philippine external debt problem: the Marcos system' Journal of Contemporary Asia vol. 21, no. 2. Kunio, Y. 1985 Philippine Industrialisation: Foreign and Domestic Investment Ataneo University Press, Quezon City. Lamberte, M. and Lim, J. 1992 Philippine External Finance Philippine Institute for Development Studies, Manila. Lichauco, A. 1973 The Lichauco Paper: Imperialism in the Philippines Monthly Review Press, New York. Lim, J. 1985 `The distributive implications of export-led industrialisation in a developing economy' The Philippine Economic Journal vol. xxiv, no. 1. Limqueco, P., McFarlane, B. and Odhnoff, J. 1989 Labour and Industry in ASEAN Journal of Contemporary Asia Publishers, Manila. Manapat, R. 1991 Some are Smarter than Others: A History of Marcos' Crony Capitalism Alathela, New York. ——— 1993 The Philippine Long Distant Telephone Company Monopoly Animal Farm Series, Manila. McDougall, C.C. 1987 The Marcos File San Francisco Publishers, San Francisco. Mitchell, K. 1942 Industrialisation of the Western Pacific Institute of Pacific Relations, New York. Myrdal, G. 1970 The Challenge of World Poverty Pantheon, New York. National Bank of the Philippines 1989-92 Annual Reports Manila. Ofreneo, R. 1980 Capitalism in Philippine Agriculture Foundation for Nationalist Studies, Quezon City. ——— 1982 `The structure of the economy during American colonial period' The Journal of History vol. xxxiii, no. 2. Ofreneo, R. and Habana, E. 1987 The Employment Crisis and the World Bank's Adjustment Program University of the Philippines Press, Quezon City. Philippine Star 15 March 1994, Manila. Ranis, G. 1979 Industrial Development Strategy and Policies in the Philippines World Bank, Washington. Rashid, J. 1980 `Manpower export from Pakistan' in B. McFarlane (ed.) A Political Economy of Southeast Asia in the 1980s Veriken Publications, Adelaide.


179

Rivera, T.C. 1994 Landlords and Capitalists: Class, Family and State in Philippine Manufacturing University of the Philippines Press, Quezon City. Rueschemeyer, D. and Evans, P. 1985 `The state and economic transformation' in P. Evans, D. Rueschemeyer and T. Skocpol (eds) Bringing the State Back In Cambridge University Press, Cambridge. Samson, J. 1991 Àgrarian reform and market formation in the Philippines' Journal of Contemporary Asia vol. 21, no. 3. Santos, A. 1992 `Review of Anderson' Journal of Contemporary Asia vol. 22, no. 2. Simbulan, D. 1965 A Study of the Socio-economic Elite in Philippine Politics and Government PhD thesis, Australian National University, Canberra. Skopcol, T. 1985 `Bringing the state back in current research' in P. Evans, D. Rueschemeyer and T. Skocpol (eds) Bringing the State Back In Cambridge University Press, Cambridge. Villacorta, W.V. (ed.) 1987 Manila De la Salle University Press, Manila. Virata, C. 1972 `Foreign investment in developing countries: the Philippines' in P. Drysdale (ed.) Direct Investment in Asia and the Pacific Australian National University, Canberra.

7 Indonesia: the changing balance of commercial power? Colin Brown Indonesia is one of the major economic success stories of South-East Asia over the past 25 years. When the current Suharto government came to power in the mid-1960s, the country was in deep economic trouble. Its annualised inflation rate in mid-1965 was around 1000 per cent; its foreign exchange reserves were adequate to cover only a few weeks worth of imports; and its physical capital was in a state of disrepair or breakdown. On coming to power, the Suharto government set economic development on the top of its list of priorities, alongside national security. It has been remarkably successful in its pursuit of this objective. By the early 1970s inflation had been brought down, at least officially, to single-digit figures. Over the quarter-century from 1965 to 1990, annual rates of economic growth averaged 4.5 per cent: well in excess of the average for middle- and low-income countries (2.2 per cent and 2.9 per cent, respectively), and in excess even of the rates recorded in the other high-growth South-East Asian economies of Malaysia and Thailand (MacIntyre 1994, p. 244). In recent years growth rates have been higher than that historic rate: in 1995 the growth rate is estimated to have been about 7.2 per cent. This chapter examines some aspects of the political economy of contemporary Indonesia. The first section examines the history of economic policy making in Indonesia since 1996, scrutinising in particular the continuing struggle between two major schools of thought about the economy. The second section considers the contemporary Indonesian economy, and the place of business within it. The concluding section speculates on the future direction of the Indonesian economy through to the year 2000, examining factors which might advance or hinder further economic growth and development.

INDONESIA: THE CHANGING BALANCE

181

ECONOMIC POLICY MAKING SINCE 1966 The New Order government headed by Suharto came to power in 1966/67, in the wake of a massive social and political upheaval allegedly sparked off by an attempted coup d'état by the Communist Party of Indonesia (PKI) which was crushed by a coalition of forces led by the military under then-general Suharto.1 Suharto inherited not only a state whose economy was in a parlous state, he was also heir to a history of economic policy making which had helped to produce that barely functioning economy. In trying to understand the way in which the economy has developed since 1966, it is important to have a sense of context, a sense of the forces which had shaped the economy to that point, and which in some respects at least continue to be important to the present day. First, one of the great and lasting legacies of Dutch colonialism had been the almost complete destruction of the indigenous Indonesian merchant and trading classes. From the seventh century until well into the seventeenth — a period of 1000 years — Indonesian merchants and traders had been active in markets as far afield as southern China and the Indian sub-continent. But during the eighteenth and nineteenth centuries these Indonesian entrepreneurs had been overwhelmed at the level of international trade and investment by Dutch commercial power, and at the local level by the Chinese, whose immigration to the Indies, and business activities, the Dutch encouraged. This presented a dilemma to Indonesian policy makers after the country regained its independence in 1945. Spurred by the sense of nationalism and national identity which had fuelled the struggle for independence, these leaders wanted to reassert Indonesian control over the national economy. They concluded that the only way this could be achieved was through state intervention: the indigenous private business sector was simply not strong enough for this task. Through to the 1980s, and arguably to the present day, successive Indonesian governments, of various political persuasions, have retained the view that government intervention was needed in order to liberate the economy from foreign control. And ethnic Chinese, though Indonesian citizens, were frequently seen in this context as being alien. A further legacy of Dutch colonialism was that private capitalism was given a bad name. Political colonialism was seen as being backed by an economic system that Indonesians characterise as capitalist. Since colonialism was regarded by the Indonesian nationalists as being unquestionably a bad thing, so capitalism was tarred as well. Even had there been a substantial indigenous


182

capitalist class present in Indonesia in 1950, it is still likely that the government would have sought to regulate and to curb its activities. A second legacy of the past was that the state in the mid-1960s was weak, in stark contrast with the prewar colonial state. For a variety of reasons, on regaining independence the Indonesian state had been based on principles and saddled with structures which were foreign to most of its citizens — and not a few of its leaders — and to the defence of which few were committed. The state had become increasingly authoritarian and even arbitrary since the mid-1950s, but by the mid-1960s was substantially weaker than some of its component parts, including the military, and of elements standing partly outside it and partly within, such as the PKI. Third, even in the mid-1960s Indonesia had a substantial population: it was demographically the fifth largest country in the world. On the positive side, it could be said that this population represented a huge potential resource, and potential market. Certainly Sukarno, Suharto's predecessor as president, saw the country's population in these terms. But the population was also a huge potential drain on national resources. Suharto recognised that providing for the physical and social needs of such a large population in areas such as health, education, transport — and even more basic items such as food and potable water — would be a difficult and yet politically crucial job. The other important characteristic of the Indonesian population was its multi-ethnic composition. Like many other parts of South-East Asia, it has an ethnic Chinese minority which, though not large, is economically powerful. It is commonly said that the 3 per cent of the Indonesian population which is ethnic Chinese owns 70 per cent of the wealth of the country. The statement sounds logical, and is certainly repeated often enough. Its flaw is in its implication that all the members of this ethnic Chinese minority share in the ownership of 70 per cent of Indonesia's wealth. This is demonstrably untrue. There is as great a dispersion of wealth within the Sino-Indonesian community as within the Indonesian community at large. Nonetheless, within the indigenous Indonesian community there was in the mid-1960s — and still is today — a substantial degree of popular resentment of Sino-Indonesians for the extent of economic power they are believed to wield and the wealth they apparently control. Finally, the Indonesian economy was deeply divided along a number of fault lines. There was a clear geographical divide, between Java and Bali on the one hand and the rest of the country, the so-called Outer Islands, on the other. Java and Bali were by


183

far the most heavily populated regions, and the ones which consumed the bulk of the nation's economic wealth. The Outer Islands were the primary sources of that wealth, and in particular of its export earnings. Java's economic interests tended to be dominated by consumers and importers and the Outer Islands by producers and exporters. And political leaders from Java have dominated national governments since 1945. As a result, for most of Indonesia's independent history national economic policies have tended to favour consumers rather than producers, importers rather than exporters. Economic policy making in Indonesia since the establishment of the Suharto government in the mid-1960s has had to cope with these conditions. For much of the time, it has been characterised by a clash between two lines of thought: for the sake of brevity, one can be termed economic nationalist, the other economic rationalist. Adherents to the nationalist stream are primarily concerned with establishing clear indigenous Indonesian control over the national economy. They argue for a kind of economic autarky, with emphasis being placed on the development of importsubstituting industries, sheltered from the external economic world by tariff and nontariff barriers. The state is regarded as having a major role to play in national economic development, both in terms of providing a favourable political and legal infrastructure within which such industries can develop, and also as a direct participant in the economy through its ownership of major industrial enterprises. Foreign participation in the economy was to be minimised; domestically, this also generally meant minimisation of the economic role of Sino-Indonesians. The rationalists, in contrast, have placed more emphasis on the achievement of economic efficiency. They have argued for less rather than more state intervention in the economy, though to label them as free marketeers would be generously inaccurate. They have argued, though, for reductions in effective rates of protection and for the development of export-oriented industries mediated through government. There was an initial period of perhaps a decade from 1965 when the policies pursued by the Suharto government were shaped by the economic rationalists — the technocrats, as they were popularly known — located chiefly in the State Planning Bureau, Bappenas. Their policies aimed at restoring economic stability and maximising economic growth with little concern for the distributional or equity effects of such growth. This growth was to be produced through the encouragement of export-oriented industries whose development, in turn, depended very heavily on a substantial and continuing inflow of foreign capital. Initially, the


184

most important source of this overseas capital was the United States; fairly rapidly, however, the US was displaced by Japan. Indonesia also secured strong backing from the IBRD and the IMF for these policies. Its major creditor nations, including Australia, banded together to form the Inter Governmental Group on Indonesia (IGGI) to coordinate the flow of foreign aid and loans to Indonesia. Needless to say, these foreign states and institutions strongly backed the technocrats' policy line. Foreign capital clearly benefited from this policy setting; indeed, it was intended that this be the case. Amongst local firms the beneficiaries were those which had the resources to compete with these large foreign companies. Few could compete on grounds of efficiency or capital base. There were some, though, which could compete on the basis of their access to power holders in the state, and thus the licences, contracts and permits which they could allocate. These firms included many which belonged to ethnic Chinese entrepreneurs who had developed clientelist relations with state power holders; they also included indigenous firms directly owned by those power holders. Amongst the local business community, what was being encouraged was not entrepreneurship or enterprise, but rather rent seeking. The local business groups which were the major losers from these policies were the small- and medium-scale entrepreneurs: the retail traders, the light manufacturers, the medium-size construction companies. These businesspeople had of course had no easy time during the Sukarno era, but their fate was clearly far worse under Suharto, whose assumption of power many of them, ironically, had vigorously supported. It was, at least in part, the disillusionment of this group which sparked off the socalled Malari riots of 15 January 1974, formally occasioned by the visit to Indonesia of the Japanese prime minister, Tanaka. Indigenous entrepreneurs were protesting at the fact that a combination of foreign — especially Japanese — and Chinese capital, aided and abetted by senior officials of the state, was effectively shutting them out of profitable sectors of the economy. They found allies among certain army officers, men of a nationalist bent who resented the increasing influence foreigners — particularly the Japanese — were wielding in the country. Many of them were disgruntled, too, at the fact that they were not themselves directly benefiting from the economic activities of the government. The result was the outbreak of large-scale, and occasionally violent, street demonstrations in Jakarta during Tanaka's visit. Targets of the rioters included not just Japanese business enterprises in Indonesia, and the signs of Japanese eco-


185

nomic power such as Japanese cars, but also firms and shops owned by Chinese. These disturbances came at the same time that the government's coffers were beginning to swell with increased foreign exchange earnings resulting from the increase in international oil prices. The combined impact of these two developments was to produce important revisions in economic policy, reflecting a shift of power away from the rationalists to the nationalists. There was a shift away from export-oriented industries towards import-substitution ones, and some movement away from reliance on foreign capital and rather more support for local enterprises — but again, large rather than small ones, and state-associated ones rather than private. The private-sector firms which benefited most from these policies were once again those with connections to state officials and state corporations. Economic efficiency had never been a particularly high priority in economic policy making. Now that revenues from oil were on the rise, efficiency was even less important. Some efforts were made to ensure that these measures benefited small- and mediumscale businesspeople and indigenous Indonesians. Thus, for instance, for all government purchases below a certain level, only locally produced commodities would be considered. Certain other types of government contracts were to be reserved for indigenous Indonesian companies: that is, companies in which not less than 51 per cent of the capital, and no fewer than 51 per cent of the managerial positions, were held by indigenous Indonesians — not people of ethnic Chinese descent. But the impact of these policies across the economy as a whole was marginal. Apart from anything else, there were simply too many state power holders who had a vested interest in the maintenance of the commercial status quo to permit its disturbance by any substantial redistribution of economic power. These policies could be sustained so long as oil revenues were substantial enough to pay the bills. But by the early 1980s this was no longer the case. From this point on, Indonesian economic policy came back under the control of the economic rationalists or technocrats. The major hallmark of their policies was the series of moves made to deregulate sections of the economy, including banking, the stock market and insurance (Sjahrir & Brown 1992; MacIntyre 1992). In light of the earlier adherence to ideas of the centrality of the state to the management of the economy, this shift in policy was of considerable import. The economy itself began to record solid and, by Australian standards, very high rates of economic growth. The major beneficiaries of these reforms included the stronger,


186

internationally competitive, often Sino-Indonesian, companies, and many foreign businesses. But there was one development which represented the beginnings of an important shift in commercial power. At least in part as a result of the gradual liberalisation of the economy, a growing number of Indonesian businesspeople were able to build extensive and well-capitalised business empires, which rendered them rather less dependent on government favour for their commercial well-being than had been the case in the past. The Indonesian experience here was far from unique. Writing in the mid-1980s, Richard Robison could open his crucially important book, Indonesia: The Rise of Capital, with the statement: `The most important revolutionary force at work in the Third World today is not socialism or communism but capitalism' (Robison 1986, p. vii). One significant symbol of this growing strength of private capital can be seen in the 1987 law reorganising the national Chamber of Commerce and Industry, in which the principle of profit making as the defining characteristic of business enterprises was for the first time formally recognised as legitimate (MacIntyre 1991, p. 55). Some observers, too, noted a general increase in the political power of the private sector as compared with the state (MacIntyre 1991, pp. 244-5). These developments also gave rise to a substantial and increasingly wealthy, largely urban, middle class — in which, of course, Sino-Indonesians are over-represented as compared with their proportion of the total Indonesian population. Some of the characteristics of this middle class will be discussed below. Ironically, though, the general success of these policy reforms has come to constitute the greatest threat to their continuation. For one thing, those business enterprises which were not particularly efficient clearly felt threatened by the more open regime. These included many state-owned enterprises — probably the vast majority of them — together with privately owned firms whose profitability was based chiefly on the protection afforded them by government-enforced monopolies or the advantages they reaped from connections to state power holders. These firms were often those with close political connections to the presidency, and often close personal links as well. The business interests of several of President Suharto's children clearly fall into this category. So long as the Indonesian economy was still suffering the effects of the fall in oil prices, these interests could only hope for limited successes in trying to stem the tide of economic liberalisation. But by the early 1990s, although there were still important structural weaknesses in the Indonesian economy, by and large the measures taken in the previous five years had borne fruit. The resultant renewed prosperity has meant more resources being available to


187

the state and thus a greater capacity for the state to intervene in the business arena, and commensurately less incentive for the state to proceed further with deregulation.

CURRENT POLICY DEBATES In April 1993, following the general elections the previous year and the presidential elections in March, a Cabinet reshuffle took place which suggested that the policy seesaw might be tilting back towards a form of economic nationalism. The man most often associated with this potential policy shift is Professor B.J. Habibie, the Minister for Research and Technology and a close ally of Suharto. Habibie argues that in order to maintain and increase its level of economic prosperity in the future, Indonesia has to cease its reliance on low wages in order to attract foreign capital and give greater encouragement to the development of local capital, especially in high value-added, technologically advanced industries. The reasons for this conclusion were seen partly in ideological, nationalistic terms: the desire not to see Indonesia become or remain a `coolie among nations', and national pride in being able to master complicated manufacturing processes. This has certainly been an important element behind the creation of Habibie's showcase industrial project, the IPTN aircraft works in Bandung (McKendrik 1992). It is also probably one of the factors behind the proposal to build Indonesia's first nuclear power station by the early years of the 21st century. But Habibie also makes the argument on the grounds that the low-wage segment of the international market is being taken over by Vietnam and, particularly, China. His point is that in the long term Indonesia cannot compete in this market, because the Chinese labour supply is so much greater — and, implicitly, because Chinese workers are prepared to accept wages and working conditions which Indonesian workers are not prepared to accept.2 Thus rather than comparative advantage — which would promote the continued use of cheap labour in Indonesia — Habibie argues for competitive advantage. This means developing high value-added industries. Fortuitously, it will probably also mean gradual improvements in wages and working conditions, at a time when the United States in particular has been putting increasing pressure on Indonesia to improve conditions for workers. Habibie is also a firm believer in the principle that the state has a legitimate and proper role to play in the national economy, chiefly on the familiar grounds that only the state has the resources and the interests to lead the economy in facing the


188

challenges of the 21st century. This element of his policy is seen most clearly in his chairmanship of the Agency for the Development of Strategic Industries (BPIS), which groups together ten state-owned enterprises operating in a range of strategically important and/or high-technology areas. These include aircraft, ship building and repair, explosives and armaments manufacture, and the production of iron and steel. On economic equity issues, in general Habibie seems to argue that equity will follow from economic growth, that high technology leads to high productivity and high incomes, and that all will benefit from this development. To the extent that the strategy succeeds, it may very well produce this result, at least for those workers able to secure employment in the emerging high-tech industries. But in addition he has also pushed — or had his supporters push — the potentially powerful populist line that there needs to be a redistribution of wealth from non-indigenous to indigenous hands. Ginanjar, head of the National Planning Board, has certainly pursued this line quite hard in the past. It is not at all clear, though, that Habibie wants to see redistributions within the indigenous Indonesian community. And this is the real political challenge that equity considerations poses. One major barrier to the achievement of his goals, as Habibie himself readily acknowledges, is the productivity of the Indonesian workforce. Labour productivity in Indonesia is amongst the lowest in the region. A recent survey of expatriate managers in ten countries of East and South-East Asia ranked Indonesia ninth in terms of labour skills: only China was worse (Asian Intelligence, no. 437, 24 May 1995, p. 3). The Minister for Labour, Abdul Latief, noted recently: `Foreign investors came for cheap labour, but now we are talking about competitive workers, and we must increase training and productivity. There is no more cheap labour in Indonesia' (quoted in Macrae 1995, p. 37). Even fairly generous observers admit that the Indonesian education system today is rigid, and places much more emphasis on rote learning and memorising than on thinking, analysing and criticising. Moreover, it operates largely independently of the marketplace for its graduates. Control of the Department of Education and Culture by Habibie's associate, Wardiman Djojonegoro, is thus particularly important. Wardiman has been trying to address at least the second of these criticisms, stressing the importance of technical and vocational education and the need for coordination between the Department of Education and industry leaders to ensure that the output of the former is consistent with the needs of the latter. But Habibie has his critics. First, in terms of control over


189

economic policy making, we should note that his ideological opponents, the technocrats, have by no means vacated the political arena. They retain control over some crucial posts: Coordinating Minister for Economics, Finance & Development (Saleh Affif), Minister for Finance (Mar'ie Muhammad) and the Governor of Bank Indonesia (Soedradjad Djiwandono). Second, powerful elements of the military are at best dubious about and probably oppose his ideas, for several reasons. For one thing, there is the fear that the Habibie bandwagon, drawing support from Suharto and political Islam, might eventually create a civilian political power base which could challenge the position of the military in the political system. Moreover, ABRI's economic interests are not well-served by many of Habibie's activities. Both the air force and the navy, for instance, have been pressured into buying equipment from Habibie at prices substantially greater than those applying on the world market, and often for goods of dubious quality.3 Several other organisations also have an interest in Habibie's not getting too much control of the Indonesian economy. The World Bank has argued vigorously for the maintenance of an open economic regime; it has regularly rejected Habibie's ideas about the desirability of building high-tech industries, and been particularly critical of IPTN. Habibie's reaction has generally been to argue that the World Bank is not always right, and to point to success stories which were initially rejected by the Bank, such as Indonesia's Palapa satellite communications system. The Indonesian business community seems divided in its attitude to Habibie. In Habibie's camp there is an underlying current of feeling against ethnic Chinese businesses, which probably wins him as many friends in the indigenous business community as it loses him in the non-indigenous one. Big domestic business, like big foreign business, would benefit from Habibie's policies to the extent that it is engaged in the kind of upmarket, technology-driven industries he wants to promote. And it would suffer to the extent that it was not, or was in competition for funds, resources or markets, with any of the state-owned firms Habibie is promoting. But perhaps most importantly for many emerging businesses, there is the fear that the resurgence of state intervention in the economy under Habibie might signal a loss of even the modest degree of independence from the state such businesses had achieved in the late 1980s. Thus Husein Aminuddin, for instance, head of the Federation of Indonesian Textile Industries, probably spoke for many businesspeople when in 1993 he voiced the fear that the rise of Habibie might signal a return to the bad old days


190

in which only businesses with connections with the government would be able to survive (Asiaweek, 14 April 1993, pp. 51-52). More broadly, there is concern in the business community that the sheer cost of Habibie's projects would mean either that other projects are starved for funds, or that the economy would run out of control as more foreign funds are brought in. The environmental-cum-NGO lobby is critical of Habibie because of his high-tech, big-is-beautiful approach to the Indonesian economy. One of the major costs of Indonesia's rapid economic growth has been damage to the environment, especially through air and water pollution; Habibie's plans, including a string of nuclear power stations, seem likely to make this situation worse rather than better. It would be easy to dismiss the environmentalist lobby as one with little influence on policy making in Jakarta. And in terms of present-day politics, such an assessment would be correct. But the medium-term situation might be rather different. Environmentalism is an issue being taken up by the urban middle class as one of the few political or quasi-political issues where criticism of the government is reasonably safe. With access to satellite television, international air travel and the Internet, the middle class is being globalised in outlook more rapidly than any other group in Indonesia's history. Its members are increasingly unlikely to accept a narrow, jingoistic appeal to the supposedly unique values of Indonesian political culture as justification for what they see as heavy-handed government action which is destroying their environment. But, it must be emphasised again, any concrete realisation of this fact is still some way into the future. On balance, although the competition for influence or control over economic policy making is continuing, the position of Habibie and his colleagues today is not as strong as it might have seemed, say, two years ago. The evidence suggests that the economic rationalists are in a stronger position than the nationalists.

THE CONTEMPORARY INDONESIAN BUSINESS WORLD The Indonesian business world today is a reflection of both the country's geographical and historical experience and of the kinds of economic policies which have been followed, especially over the past three decades. This section of the chapter examines a number of characteristics of that business world, identifying in particular those aspects of it which reflect most clearly the kinds


191

of changes the economy is undergoing, and the problems with which it is having to cope. Probably the most significant of the recent developments have been the efforts to deregulate, liberalise and privatise segments of the economy. After a period of indecision in the early 1990s associated with the rise of Habibie, the process of rolling back government regulation of the economy begun a decade ago started to pick up pace again in 1995 and 1996. As a commentator in Asian Business noted recently: Not so long ago, privatisation was a dirty word in Indonesia. In a country that had suffered a bad colonial experience under the Dutch, and whose private sector was already dominated by Indonesians of Chinese descent, the idea of selling state companies to foreigners and non-indigenous locals was anathema. But times have changed. As Wall Street investment bankers have flocked to Jakarta hoping to pick up mandates to steer the biggest and best public sector firms onto the international markets, bureaucrats, local brokers and companies have seen the benefits of financial globalisation (Ford 1996, p. 40).

In 1994 the state-owned telecommunications provider and satellite owner Indosat was listed concurrently on the Jakarta and New York stock exchanges, the flotation bringing in US$1.2 billion. It was, in the words of one observer, à stunning success. It was way oversubscribed and won numerous accolades from the financial press for deal of the year' (Ford 1996). The following year two more companies were floated: the tin miner Tambang Timah and the other telephone company, Telkom. These flotations were not as successful as that of Indosat, at least not initially. Tambang Timah went first, into an international market which had turned against sellers. The offer was over-subscribed, but when the shares were traded on the secondary market the price fell considerably. Wary from that experience, the government cut both the volume of shares to be offered, and the asking price, for Telkom. Instead of US$3 billion, the government only realised $US1.6 billion (Ford 1996). The issue price of shares was Rp 2050, or about US$1. However, once they began to be traded on the secondary market, share prices rose rapidly, reaching Rp 3950 in May 1996 before dropping back in June to Rp 3325 (Gaol 1996). Telkom is by far the largest company listed on the Jakarta Stock Exchange, with capitalisation of something around US$12.4 billion (Ford 1996). Its flotation also doubled the number of domestic investors, to approximately 400 000 (Economic and Business Review Indonesia, 21 August 1996). But a clear majority


192

of its shares is held by foreigners: in June 1996 it was calculated that about 1.3 billion units, representing 68 per cent of the listed shares, were held by foreigners. This has caused some expressions of concern in Jakarta, especially amongst those who would like to see a more nationalist bent given to economic policy. But as Mitchell Shivers, president of the Jakarta branch of Merrill Lynch, observed in August: Ùndoubtedly, the [price of] shares of Telkom would be much lower without foreign participation' (Economic and Business Review Indonesia, 21 August 1996). Also scheduled for listing in 1996 was Bank BNI, a profitable state-owned bank, and then the following year four more: Jasa Marga, a toll-road builder and operator; Perusahaan Listrik Negara (PLN), the monopoly electricity utility; Krakatau Steel; and Aneka Tambang, a mining company (Economic and Business Review Indonesia, 21 August 1996). And then there are: . . . airlines, railway companies, plantation firms, chemicals and fertiliser companies, aerospace and shipbuilding firms, banks and finance houses, media firms, more public utilities and the biggest prize of all — Pertamina, the state oil company, one of the biggest firms in Southeast Asia (Ford 1996, p. 43).

In light of its experience with Tambang Timah and Telkom, though, it is likely that Jakarta will be reasonably cautious about these floats, to try to ensure that it squeezes the maximum value out of them. On the issue of the progress with the loosening of restrictions on foreign investment, the picture has also been mixed: after some backsliding two to three years ago, things seemed to be getting back on track by the mid-1990s. The government decree announced on 2 June 1994, in effect doing away with the divestment requirement for foreign investors, is potentially of substantial significance. The foreign business community greatly welcomed this development. One commentator noted that Indonesian leaders were unprepared for the huge response by foreign power, petrochemical, transport, and telecom providers to the investment deregulation package. Within weeks, she said, pledges of investment had rocketed, closing the year at almost US$24 billion (Ford 1995). Interestingly though, and perhaps ominously, just hours after the decree was announced the Ministers of Information (Harmoko) and Transport (Haryanto) indicated their dissatisfaction with parts of the decree and said that commercial activities within their portfolios would not be subject to it. In other words, they were not going to allow foreign ownership of newspapers or airline companies in Indonesia. It is still clearly one thing to issue decrees, but another to see that they are implemented. The power


193

of individual ministers to set their own policies in their departments is still substantial. A major package of tariff reforms was issued on 23 May 1995.4 This package reduced tariffs on 6030 items over the 8 years to the year 2003. Some economists have been rather critical of this package though, arguing basically that it does not go far enough, especially in terms of tackling the problem of monopolies and oligopolies in the Indonesian economy. Leading Indonesian economist Anwar Nasution complained in the August 1995 issue of the Bulletin of Indonesian Economic Studies that the package: . . . will not much improve the allocation of economic resources because it fails to correct many of the distortions in the economy . . . A bias against exports is apparent, with some import-substituting industries still enjoying higher rates of effective protection. Deregulation has not eliminated the monopoly and oligopoly rights of BULOG [the State Logistics Agency], some state-owned enterprises and politically well-connected members of the private sector (Nasution 1995, pp. 3-18).

There is little doubt that Nasution is correct in saying that more needs to be done; and the problem of the control that BULOG exercises in the market for essential commodities such as rice, sugar and kerosene is substantial. But it should also be acknowledged that at least the momentum of deregulation and liberalisation of the economy is continuing. The most recent package of changes, announced on 4 June 1996, has continued the process of tariff reduction, simplified export and import procedures, and facilitated the establishment and operation of industries located in bonded zones.5 The package has been presented as being a logical extension of the 23 May 1995 package, and consistent with Indonesia's `continuous and consistent compliance with the WTO, AFTA and APEC commitments' (`The June 1996 Deregulation Package', Economic and Business Review Indonesia, 12 June 1996). It is still too early to determine the extent to which its provisions will affect the business climate in Indonesia. One result of these moves towards privatisation and liberalisation of the economy, and tariff reduction, is that the role of state-owned enterprises in the economy is declining. A decade ago these enterprises were the dominant ones, in terms of their size and the shares of the economy they controlled. Today their market share has been substantially reduced, although they retain their hold in areas such as the plantation sector and the supply of electricity, for instance, and are very powerful in mining, banking, transport and petroleum supply. Of the top ten corporate tax


194

payers in Indonesia in 1994, eight were state-owned companies (Economic and Business Review Indonesia, 24 February 1996). Three have subsequently been privatised. This would, though, still leave five of the top ten companies in state hands. The private commercial sector is still dominated by firms owned by SinoIndonesians, commonly referred to by the generic name `conglomerate'. Of the top ten corporate tax payers in 1994 mentioned earlier, the two which were not state-owned were owned by Sino-Indonesians. The core business of both these firms is the production of kretek (clove-flavoured cigarettes, the unique Indonesian contribution to public ill-health) (Economic and Business Review Indonesia, 24 February 1996). Major players include Sudono Salim, Mochtar Riady, Mohammad Hasan and Ciputra; their groups include Astra, Sinar Mas and Lippo. These conglomerates are a major presence in banking, real estate development, manufacturing and import-export. A number of these companies have established, and benefited from, close political connections with Suharto and his family. Salim in particular is very close to Suharto, as is Riady.6 The fact that these firms are owned by Sino-Indonesians of course arouses suspicion in the minds of some indigenous Indonesians about their activities. It is common, for instance, when one of these companies makes a decision to invest in China, for some critics to talk about capital flight from Indonesia, about the lack of loyalty to Indonesia of the owners of these conglomerates, and so forth. In fact, there is little evidence that the owners of these companies invest in China for any reason other than the one recognised by many Australian entrepreneurs: there is money to be made there. There is little doubt that the privatisation of state-owned enterprises, hesitant though it might well have been to date, is nonetheless a development of major commercial significance for Indonesia. It has the potential to remove the state from substantial participation in the economy, and to empower the private sector to a degree unprecedented in Indonesian history. The past few years have also seen the emergence of a number of indigenous entrepreneurs large enough to compete with some of the SinoIndonesian conglomerates. Achmad Bakrie, for instance, currently chair of the Indonesian Chamber of Commerce and Industry (KADIN), heads the powerful Bakrie group with interests in plantations, construction and trade. But state connections still count. Other major indigenous businesspeople include several of the children of President Suharto: Bambang, Sigit, Tommy and Tutut are prominent among them. In 1994 Bambang was the fifth largest individual tax payer in


195

Indonesia, Tommy the sixteenth and Sigit the 29th (Economic and Business Review Indonesia, 24 February 1996). The companies they own, including Bimantara, Humpuss and Citra Lamtoro Gung, are amongst the biggest in the country.7 And in many business enterprises, these companies operate in collaboration with Sino-Indonesian firms. The day of the Sino-Indonesian conglomerate is clearly far from over; but their domination of private-sector big business is under greater challenge than ever before. Aside from the commercial changes, the Indonesian economy has also undergone massive structural transformation in recent years. One of its most spectacular shifts has been out of agriculture and minerals exploitation into manufacturing. Today agriculture produces about 19 per cent of GDP and industry about 41 per cent, of which manufacturing accounts for about 21 per cent. The manufacturing sector is growing at about twice the rate of industry as a whole, and making a sizeable contribution to exports. Thus manufactured exports grew from US$501 million in 1980 to US$2.5 billion in 1986, and then to a massive US$16.1 billion in 1992 (Aswicahyono et al. 1996). The figure for 1995 was US$29.4 billion (National Development Information Office 1996, p. 2). The goods exported are chiefly light manufactures, including clothing, textiles, footwear, furniture, toys, sporting goods and electrical goods. Together, by 1992, they constituted 60 per cent of Indonesia's total manufacturing exports (Aswicahyono et al. 1996). The growth in the export of electrical goods is particularly striking. In 1988 electrical goods produced US$105 million in export revenues; by 1996 this had risen to US$3.2 billion (Jakarta Post, 5 April 1997). And whereas oil and gas exports as recently as 1988 accounted for 41 per cent of export revenues, by 1995 the proportion had fallen to 23 per cent (Economist Intelligence Unit 1995, p. 70; National Development Information Office, 1996, p. 2). The growth in Indonesia's non-oil exports over the past decade has substantially reduced the vulnerability of its balance of payments to changes in the terms of trade. A third important characteristic of the contemporary Indonesian economy is that substantial inroads have been made into poverty. Poverty measures are notoriously difficult to produce, and even more difficult to operationalise. Nonetheless, however the term is defined and measured, there is little doubt that today there are vastly fewer Indonesians living below the poverty line than there were 25 years ago. It may be protested, of course, that such ought indeed to be the case, given that Indonesia as a whole is today much richer than it was 25 years ago. But it would be mean-spirited not to recognise the substantial degree of success


196

achieved by the anti-poverty programs. A recent World Bank report concluded that the distribution of income in Indonesia was, by regional standards, a very even one.8 This conclusion has caused a great deal of debate amongst observers of the Indonesian scene, many arguing that these data simply do not accord with what they see around them. These sceptics argue that the visible evidence is that the distribution of income and wealth has almost certainly become worse in the past 25 years rather than better. The gap between rich and poor has become wider than at any time in the recent past. Even the Indonesian government itself seems to have doubts about the data, in that it argues that over time the rich-poor gap will narrow; to which the critics ask whether Indonesia really has that much time at its disposal. The riots of 27 July 1996 seem to suggest that time is short. What is indisputable is that the past decade has seen the emergence of a substantial urban middle class. Measuring the size of the middle class is as difficult as measuring the number of people still living in poverty. A common estimate is that about 10 per cent of the population enjoys what many in Australia would recognise as a middle-class lifestyle. This may not be a very high proportion, but 10 per cent of Indonesia's population is almost 20 million people, more than the entire population of Australia and more than six times the population of Singapore. The rise of this middle class has enormous implications for the Indonesian economy, and for Indonesia's patterns of consumption and trade. Two examples of the changes must suffice. First, look at the youth segment of the middle class. This is where the real revolution in consumer habits is taking place. The tastes of these young people mirror more closely those of their fellow young people in places like Australia than they do those of their parents in Indonesia. The kinds of food they eat, clothes they wear, movies they watch and music they listen to are increasingly those of the global marketplace, not those of their homelands. One only has to look at the number of KFC, Pizza Hut and McDonald's outlets in Jakarta and other major cities, the number of local kids hanging around shopping malls wearing baseball caps on backwards and listening to FM radio stations, to see how profoundly international tastes have already influenced urban middle-class youth in the region. Yet a recent study has questioned how deep these changes run, suggesting that, these outward signs of change notwithstanding, young people in Asia — including Indonesia — in fact hold firmly to values which are more those of their parents than of the West: Òn the inside . . . most [young people in Asia] cling to the family as the bedrock of life; they are fiercely proud of their own


197

countries and cultures and often reject what they see as the "individualism" of the West' (Elegant & Cohen 1996, p. 51). Second, we need to note the changes which have taken place in where and how people shop. Until quite recently, most Indonesians shopped at local wet and dry markets, and did so daily: they had no home refrigeration. Today, middle-class shoppers shop at supermarkets, often located in multi-storey shopping malls or plazas, and do so once a week with all that that entails in terms of convenience and variety of product. Major international supermarket chains, such as Seibu, Sogo and Maruzen from Japan, Walmart and J.C. Penny from the United States, Marks and Spencer from Britain, and Makro from the Netherlands, all have a presence in Indonesia, as in other parts of SouthEast Asia. Since foreign enterprises are not permitted to operate in the Indonesian retailing sector, these companies are present through franchising or licensing agreements with local companies.9 However, their activities are directed very clearly at the upper end of the retail market. The middle and lower ends are still dominated by locally owned chains such as Matahari, Hero, Golden Truly and Galael.

FUTURE PROSPECTS All of these developments are, in some senses, positive ones. However, none of this is to say that business in Indonesia does not face problems today, and in the future. Indeed, there are likely to be many problems confronting the Indonesian business between now and the year 2000. There are, for instance, still major problems with the legal system, and in particular with the courts. There is widespread belief that judges can be, and are routinely, bribed. And court proceedings are painfully slow. Major court cases involving commercial law can routinely take up to five years to be resolved. It could be observed that the legal system in Indonesia is improving; this is true. But it has a long way to go before it approaches the standards of Singapore, let alone Australia. Businesspeople using the legal system in Indonesia cannot automatically count on getting a fair deal. But the legal system is used far less in Indonesia than it is in Australia. Australian businesspeople may not exactly relish using the courts to resolve a dispute, but certainly when they draw up contracts they have in mind that the two parties are making an agreement the details of which are enforceable through the courts. In Indonesia, this is not the way in which contracts are approached. Contracts represent


198

the positions that the signatories are taking at present, and ones which, in good faith, they expect to keep. But circumstances change; and as a result, local custom generally has it, contracts may need to be changed as well. Contracts depend for their validity not on their potential for enforcement by the courts, but rather on the personal relationships between the signatories and the trust those relationships engender. A businessperson who resorts to the courts to try to enforce a contract clearly shows that those personal relationships have broken down and that that trust no longer exists; they have already lost the crucial element of the deal. Few Indonesian businesspeople would take a partner or colleague to court, for just this reason. In a sense, then, the fact that the legal system is not entirely open and reliable should not be a major bar to transacting business: foreign businesspeople ought not to be banking on the law to resolve contractual disputes in the first place. These problems with the legal system are, in a sense, just a special case of a wider problem: corruption, the use of official position or resources for private gain. A 1995 survey of expatriate businesspeople gave Indonesia a corruption rating of 7.4 out of 10 — where 0 represented the absence of corruption. The Indonesian score put it on a par with India and only just below China. By way of comparison, Malaysia scored 4.3 and Singapore 1.0 (Asian Intelligence, no. 436, 10 May 1995, p. 4). Government departments are particularly susceptible to corrupt practices. They are popularly rated according to whether they are `wet' or `dry'. A `wet' department is one where opportunities for corruption are widespread, and a `dry' department where they are not. Needless to say, the department commonly agreed to be wettest of all is the Taxation Office, closely followed by Public Works and then the Police Service. Whether corruption is unquestionably an undesirable attribute in the modern economy has been the subject of considerable debate. However, good or bad, there is little likelihood that corruption will cease to be a crucial factor in the operation of the Indonesian commercial world in the foreseeable future. Frequently linked to the issue of corruption is the question of the commercial interests of the Suharto family. The issue of First Family influence in business remains a sensitive one, and one which has recently acquired added prominence. Up to the end of 1995, there were some indications that the bad old days of cronyism in the economy were, if not coming to an end, then at least beginning to decline in significance. There were moves towards greater transparency in business affairs, propelled by a variety of factors including the demands of the Jakarta Stock Exchange with respect to listed companies, the expectations of


199

foreign investors, and the pressures exerted by membership of international agreements and organisations such as AFTA, APEC and the World Trade Organization (WTO). But in January 1996 a development took place which seemed to herald a return to the worst elements of cronyism. For some time, the Indonesian government had been indicating it wanted to see a car manufacturing industry developed in Indonesia. The country is currently a major assembler of motor vehicles, but does not manufacture them. Several local and foreign companies were keen to secure the right to produce the Indonesian national car. But the contract was given to a company with no experience in car design or production and no manufacturing plant in Indonesia. What the company proposed to do was to manufacture a version of a car produced by the Korean company Kia, and at least initially have it manufactured by Kia in Korea and then imported to Indonesia. These imported cars were to be granted national status, which meant that they were exempt from the 200 per cent import duty levied on imported cars. Other companies, local and foreign, complained bitterly. The Japanese and American governments have threatened to take Indonesia to the WTO; Ford and General Motors have talked about disinvestment in Indonesia. The crucial thing about the company, and in many people's view the reason why it got this favoured treatment, was that it was owned by Tommy Suharto, the president's youngest son.10 Demographic growth remains a problem too. As noted at the outset, the Indonesian economy has recorded very respectable rates of growth in recent years: in the 7-8 per cent per annum range. But Indonesia faces a serious demographic dilemma which substantially dilutes the impact of this rate of growth. The demographic profile of the Indonesian population is such that, even if the current low rate of population growth were to be maintained, the population will continue to grow well into the 21st century. The basic problem here is that the Indonesian population today is a very young one: about 35 per cent of the population is under 15 years of age, and thus not yet even in the child-bearing age group (Economist Intelligence Unit 1995, p. 11). Just in order to provide jobs for new entrants into the job market, Indonesia needs to increase its stock of jobs by about 5 per cent per year; in effect, its economy needs to be growing at a rate of at least 5 per cent annually just in order not to slip backwards in terms of employment. In recent years it has managed to achieve this target but that 5 per cent must be a figure which haunts policy makers in Jakarta, especially those with an appreciation of the political implications of high levels of youth unemployment. Maintaining a GNP growth rate of 7-8 per cent in the future


200

will not be easy, especially as Indonesia's comparative advantage in cheap but relatively skilled or easily trained labour is eroded by competition from China, Vietnam and India. Indonesia is going to have to put a lot more resources into improving the productivity of its labour force to offset its falling cost advantage. It is in the light of this dilemma that Habibie pushes his idea of moving Indonesia out of cheap labour industries as quickly as possible, and into high-technology ones. Such a move, in his view, would give Indonesia a long-term competitive advantage over its regional neighbours. But as already noted, there are grave political and economic problems associated with following this road. In the last few years there has been considerable labour unrest in Indonesia and the formation of unofficial trade unions to represent industrial workers. Jakarta's reaction to these developments has been a mixture of carrot and stick. In the three years that Abdul Latief has been Labour Minister, minimum daily wages have increased nearly 100 per cent. From 1 April 1996, the lowest wages were set at Rp 3200 (US$1.40) per day, for Jogjakarta and Central Sulawesi. Apart from the special case of Batam island, the bonded industrial zone near Singapore, the highest minimum wages were reserved for Jakarta and much of West Java, where the majority of the nation's industry and workers are located. The minimum daily rates there were raised to Rp 5200 (U$2.26) (Economic and Business Review Indonesia, 15 May 1996). In fact, for workers being paid at the nominated minimum rates, take-home pay has increased even more. Until this year, workers were paid monthly on the basis on the number of days actually worked, normally about 25. From 1 April 1996, though, they should be paid for 30 days each month.11 Compliance with these minima, though, remains a significant problem. Many companies refuse to pay them, knowing full well that compliance mechanisms are, to say the least, not very effective. And efforts by labour activists to establish trade unions independent of the government have met with firm opposition from the government. Labour leaders and activists have routinely been subjected to government harassment, imprisonment and, on occasions, murder. In the short term at least, Indonesia can look forward to increasing social unrest, with economic, political and ethnic under-tones. The riots which took place in Jakarta on 27 July 1996 are illustrative of the situation. The government, rather incredulously, claimed that these riots were the result of agitation by a communist-inspired organisation, the PRD. And this despite the fact that the Indonesian Communist Party and all its affiliated or linked organisations have been banned for 30 years, and that even


201

vaguely communist literature is not allowed into the country. Few observers of the Indonesian scene, inside the country or outside, give any credence to this line. A much more common explanation of them is that they reflected the growing tensions in urban society, rooted in relative economic and social deprivation, and the political tensions surrounding the issue of the presidential succession. This leads to the great unknown: who will succeed Suharto as president, how and when. More importantly, what changes in policy might the transition bring? It now seems fairly clear that Suharto will seek another term in 1998. However, his age means that his choice of vice president will be viewed with particular interest, since that person will be in the box seat to succeed Suharto, either when he retires or when he dies. It used to be one of the givens of Indonesian politics that a post-Suharto president had to have four characteristics: they had to be male, military, Muslim and Javanese. It may now be possible to get away with satisfying only three of these criteria — but almost certainly not only two. If so, that would rule Habibie out of consideration, since he is neither Javanese nor military. However, it is clear that he will wield considerable influence in the period of transition, and in the selection of the next president. The military will clearly want a hand in the succession process, but what sort of a hand is by no means clear. Certainly many military leaders expect that once Suharto has vacated the presidency they will have the chance to reassert their primacy in Indonesian politics, a position they have gradually lost over the past decade. But there is also evidence that amongst younger officers there is some inclination to pull back from politics and from many economic activities, and to concentrate on developing a more professional military. At present I would say that these latter officers are in a minority, but it is certainly not outside the bounds of possibility that they will become more influential in the future. Organised political Islam will want a say in the decision making as well. During the 1970s and much of the 1980s, Suharto managed effectively to break the back of the major organised Muslim political parties which he saw as potentially threatening his regime. But of late he has been turning to a remoulded Islam to strengthen his position, particularly with respect to the army. Politically Islam today is probably stronger than it has been for three decades. It is unlikely to relish a diminution of its strength in postSuharto Indonesia, and will fight to retain influence. How successfully is another matter, given that it is likely to encounter opposition from some elements of the military at least. The wild card may be the Suharto family. Suharto's elder daughter, Siti Rukmana, commonly known as mbak Tutut, is said


202

by some to have lofty political ambitions. She has a high public profile and has already started on a political career with Golkar, the quasi-political party which carries the government's flag at election time. Yet it seems unlikely that she will have any major role to play in any post-Suharto government. The degree of public disquiet about the wealth of the Suharto children is sufficient virtually to guarantee that none of them will have much chance of retaining political influence; indeed, they may well have difficulty in retaining their economic positions as well. What virtually all parties and interest groups agree on, though, is that of greater significance than who will replace Suharto is the question of how the succession is managed, and what — if any — changes in public policy would result. Indonesia has only ever had two changes of political leadership in its national life: in 1945 and in 1965. On both occasions these changes were accompanied by violence and by death. Presumably no political leader in Indonesia wants a recurrence of these experiences. But equally, few would confidently assert that there is no possibility of the transition being accompanied by unrest. In terms of the results of the transition, it now seems less likely than it did two years ago that Suhartoism will survive Suharto, using the term `Suhartoism' to mean an authoritarian system of government, in which the crucial managing role is played by the president. Indonesia's third president is unlikely to wield anywhere near as much personal power as its second. More likely is that there will be a more collegial style of government under whose auspices the general parameters of the New Order will survive. By the same token there is little likelihood that the broad parameters of economic policy will change, basically because there are now too many people and institutions with a vested interest in the maintenance of the policy status quo. There may, however, be two exceptions to this general principle. First, it would not be surprising to see some action taken against the Suharto family firms; at the least, they are likely to lose some of their privileged access to power and the decision makers. But the impact is likely to be limited. One regional business weekly wrote in August 1996: Most analysts predict that any successor [to Suharto] will be wary of disrupting Indonesia's economy. Should a future President seek to dismantle the Suharto empire, an all-out witch-hunt would be too destabilizing: Practically every big businessman, military leader, or politician has benefited. But there could be some losers, particularly if outrage is turned against the Suharto family . . .


203

Even if Suharto stays healthy enough to set up a successor who will protect the family's business interests, his family is likely to lose perks such as ready access to investment licences, cheap credit from government banks, the ability to acquire the assets of state-owned enterprises at below-market prices, and first dibs on franchises to operate everything from telecoms to toll roads — all without competitive bidding (Engardio & Shari 1996).

And those managing the family firms are quite well aware of the potential dangers they face, and at least publicly say that they are ready for them. The Finance Director of Bimantara, probably the biggest of the family companies, noted that the company has assets worth US$3.3 billion and `plenty of cash flow'. He commented: Àfter Mr. Suharto is no longer President, we can prove we are like any other private company' (Engardio & Shari 1996). Foreign companies who have been tied in with family companies will probably not suffer much, if at all, as a result of the transition except as a consequence of the family companies' losing access to decision makers. This may well be a substantial blow, but presumably foreign managers have already factored this in to their investment calculations. If they have not, then they need to consider changing their political risk advisers. However, foreigners looking to invest in Indonesia probably ought not to be looking at a partnership with a Suharto family firm, unless they had a very short time horizon for their investment. The second exception is with respect to the huge, Sino-Indonesian-owned conglomerates. Depending on just how the transition takes place, and what political debts the new president owes, it is possible that action might be taken to clip the wings of some of these firms. It would certainly strike a nationalist chord if this were to be done. And no doubt some of the more hard-line Muslim groups would be pleased, along with some smaller indigenous Indonesian businesspeople. But again, as with the Suharto family firms, the impact of any action against these firms is likely to be limited, for at least two reasons. For one thing, in at least partial response to the possibility of action being taken against them, several of these businesses have recently been floated on the Stock Exchange, and others are likely to move in this direction soon. In doing so, of course, they have increased substantially the number of people who have a vested interest in the longevity of the company, and amongst the new shareholders will undoubtedly be a fair number of indigenous Indonesians, and also foreigners: two groups that a new president will not want to scare off. And second, the same qualification applies as was mentioned with respect to the Suharto family businesses: any action against Sino-Indonesian businesses


204

would almost certainly be tempered by the realisation that anything too vigorous would endanger the stability of the Indonesian economy as a whole. Which means that the companies might lose some of the privileges they had acquired through connections with the Suharto family, but not much more than that.

NOTES 1.

2.

3.

4. 5. 6.

7.

This bald statement belies the very real differences in interpretation of the events in Indonesia in the mid-1960s made by scholars and political figures. This is not the point to go into these differences; for a summary of the issues, see Cribb & Brown (1995), Ch. 7, pp. 97-111. In fact, Habibie seems to be exaggerating the likely competition from China. A recent survey suggests that average daily wage rates in manufacturing in Indonesia are about US$2.25, compared with US$4.32 in China. Indonesia's greatest competition in this matter is likely to be Vietnam, with daily wage rates of about US$2. See Bank of America (1995). Up to May 1993 the four branches of the Services between them had bought 88 aircraft from IPTN, the domestic plane maker controlled by Habibie, and had options on eleven more, one in three of IPTN's production. All the indications are that although the quality of IPTN aircraft is satisfactory, their prices are high by international standards. See Zain (1993), p. 9. The Indonesian navy found itself forced to purchase 39 ships from Habibie's PAL shipyards. These ships constituted virtually the entire East German navy, which Habibie had bought up at bargain-basement prices. Even when repaired and overhauled, these ships will still be old and designed for operations in the North Sea and the Baltic: environments which are very different from the South China Sea and its associated waters, which is where most of the Indonesian navy operates. For a very useful discussion of this package, see Nasution (1995), pp. 13-18. For a brief discussion of the package, see `The June 1996 Deregulation Package', Economic and Business Review Indonesia, 12 June 1996. The Riady family recently claimed American headlines with their donations to President Clinton's re-election fund. It has been alleged that these donations were intended to secure favourable consideration by the White House of political issues close to Suharto's heart, particularly on APEC and East Timor. In 1995 Bimantara ranked as the sixth largest conglomerate in the country, with annual revenues estimated at Rp 3875 billion and assets of Rp 2738 billion. Humpuss ranked seventeenth (revenue Rp 2115 billion, assets Rp 1600 billion) and Citra Lamtoro Gung 41st (revenue


205

Rp 950 billion, assets Rp 1750 billion). See Warta Ekonomi, 25 November 1996. Indonesia's income Gini coefficient — a measure of the distribution of income, in which a score of zero indicates absolute equality of distribution, and 100 absolute inequality — was reported as 31.7. Comparable figures for other low- and middle-income economies in Asia included India 33.8, Vietnam 35.7, China 37.6, Philippines 40.7, Thailand 46.2 and Malaysia 48.4, all of which suggest a less equal distribution of income than in Indonesia. Countries with lower Gini coefficients than Indonesia included Pakistan (31.2), Laos (30.4), Sri Lanka (30.1) and Bangladesh (28.3). World Bank 1996, pp 196-97. 9. See Thornton (1995a & 1995b). For a listing of twenty major international retail chains represented in Indonesia, together with the names of franchisees and owners, see Economic and Business Review Indonesia, 3 July 1996. 10. In fact, the situation is rather more complex than this. Other Suharto relatives and allies, including son Bambang, step-brother Probosutejo and ally Habibie have all announced plans to build national cars. None, however, has been given the same facilities that Tommy has, leading to a good deal of fairly public acrimony. See À tale of two brothers: Building a "national car"', Economic and Business Review Indonesia, 12 June 1996. A more recent, and in some respects more blatant, example of family favouritism is the conflict over control of a massive gold deposit in Kalimantan. The Canadian company which thought it had secured a licence to develop the deposit found that it could only do so in conjunction with companies controlled by Suharto's son Sigit and his daughter mbak Tutut. See, for example, Jakarta Post, 31 October 1996. 11. Economic and Business Review Indonesia, 15 May 1996, citing businessman Sofyan Wanandi, head of the Gemala Group; needless to say, Sofyan was critical of this change. 8.

BIBLIOGRAPHY Asiaweek 14 April 1993. Asian Intelligence no. 436, 10 May 1995. Asian Intelligence no. 437, 24 May 1995. Aswicahyono, H.H. et al. 1996 `What happens to industrial structure when countries liberalise — Indonesia since the mid-1980s' The Journal of Development Studies vol. 32, no. 3, February, p. 345. Bank of America 1995 World Information Service February. Cribb, Robert and Brown, Colin 1995 Modern Indonesia, A History Since 1945 Longman, London. Economic and Business Review Indonesia 24 February 1996 (http://www.indobiz.com/news_fin.htm#taxpayers).


206

Economic and Business Review Indonesia 15 May 1996 (http://www.indobiz.com/company/ebri/eb960515.htm#w1). Economic and Business Review Indonesia 12 June 1996 (http://www.indobiz.com/company/ebri/eb960612.htm#w4). Economic and Business Review Indonesia 3 July 1996 (http://www.indobiz.com/ebri/eb960703.htm#w1). Economic and Business Review Indonesia 21 August 1996 (http://www.indobiz.com/company/ebri/eb960821.htm#w1). Economist Intelligence Unit 1995 Country Profile: Indonesia. 1994-95 London. Elegant, Simon and Cohen, Margot 1996 `Rock solid' Far Eastern Economic Review 5 December. Engardio, Pete and Shari, Michael 1996 `The Suharto empire' Business Week 19 August. Ford, Maggie 1995 Ìnviting all investors' Asian Business vol. 31, no. 3, March, p. 38. ——— 1996 `Privatisation benefits apparent' Asian Business vol. 32, no. 3, March, pp. 40-43. Gaol, Helen Lumban 1996 Ìndonesia's Telkom eases on revised forecast — analyst' The Reuter Asia-Pacific Business Report 12 June, BC cycle (Internet version). Jakarta Post 31 October 1996 and 5 April 1997. Macrae, Maggie 1995 `Reforms to entice more foreign investment' Asian Business Review March. MacIntyre, Andrew 1991 Business and Politics in Indonesia Allen & Unwin, Sydney. ——— 1992 `Politics and the reorientation of economic policy in Indonesia' in Andrew McIntyre and Kanishka Jayasuriya The Dynamics of Economic Policy Reform in South-East Asia and the South-West Pacific Oxford University Press, Singapore, pp. 138-57. ——— 1994 `Power, prosperity and patrimonialism: Business and government in Indonesia' in Andrew MacIntyre (ed.) Business and Government in Industrialising Asia Allen & Unwin, Sydney. McKendrik, David 1992 Òbstacles to "catch-up": The case of the Indonesian aircraft industry' BIES vol. 28, no. 1, April, pp. 39-66. National Development Information Office 1996 Indonesia Facts: Trade Overview Jakarta. Nasution, Anwar 1995 `Survey of recent developments' Bulletin of Indonesian Economic Studies vol. 31, no. 2, August, pp. 3-18. Robison, Richard 1986 Indonesia: The Rise of Capital Allen & Unwin, Sydney. Sjahrir and Brown, Colin 1992 Ìndonesian financial and trade policy deregulation: Reform and response' in Andrew MacIntyre and Kanishka Jayasuriya The Dynamics of Economic Policy Reform in South-East Asia and the South-West Pacific Oxford University Press, Singapore, pp. 124-37.


207

Thornton, Emily 1995a `Cheaper by the dozen' Far Eastern Economic Review 20 July, pp. 73-74. ——— 1995b `Buyer's paradise' Far Eastern Economic Review 20 July, pp. 74-75. Warta Ekonomi 25 November 1996 (http://www.indobiz.com/company/warta/conglo.htm). World Bank 1996 From Plan to Market. World Development Report 1996 Oxford University Press for the World Bank, New York, 1996. Zain, Winarno 1993 `Memasarkan Masa Depan: Survei Beberapa Industri Strategis' supplement to Tempo 10 July, p. 9.

8 Òverseas Chinese' business in South-East Asia Colin Brown In recent years, a substantial amount of literature has been produced about the Òverseas Chinese' communities of South-East Asia, and the positions they hold in local and regional economies. This literature has generally been effusive in its admiration for the business acumen displayed by these Overseas Chinese and often urged Western businesspeople to seek strategic alliances with them to aid in their push into the developing Asian markets. It is not the objective of this chapter to rehearse yet again the arguments underlying this view in great detail. Rather, it is to take a critical look at some of the assumptions underlying the arguments as they are most commonly presented, with the object of testing their validity. It will be asserted that much of the popular literature on the Overseas Chinese, and not a little of the scholarly literature as well, romanticises its subject, is ahistorical, and is only tenuously grounded in the social, economic and political realities of the region.

THE OVERSEAS CHINESE OF SOUTH-EAST ASIA At the heart of much of the discussion of the ethnic Chinese of South-East Asia is the assertion that there is a single Overseas Chinese community in the region (and possibly the world), one held together by primordial ties of blood and culture, and acting in concert at least in economic terms. In effect, the primary loyalties of members of this community are to ethnicity, not to the countries in which they live. `This extraordinary group', Sender argues, constitutes a powerful regional network — informal though pervasive with local variations but essentially stateless, stitched together by capital flows, joint ventures, marriage, political

ÒVERSEAS CHINESE’ BUSINESS IN SOUTH-EAST ASIA

209

expediency and a common culture and business ethic (Sender 1991, p. 29). The community is argued to have strong ties not just internally but also with China. An editorial writer in The Economist argued: `The overseas Chinese have always felt the cultural, linguistic and often familial pull of the place they came from. "The family spirit elevated to a national scale" is how one Hong Kong businessman puts it'.1 The use of the phrase Òverseas Chinese' and the related term `Chinese diaspora' are reflective of this argument. It implies that those people referred to are Chinese who are scattered outside their homeland, who are literally òverseas'. Their real home is China; their current places of residence of much lesser significance to them and to their identity. Second, the primary employment of this Overseas Chinese community is seen to be commercial: trade, investment, financial management. These commercial activities have given members of the community dominance over local and regional economies, and made them wealthy; certainly substantially more wealthy than the indigenous communities in which they live, and dominating those communities. It is commonly asserted, for instance, that although ethnic Chinese communities are minorities in all the countries of South-East Asia in which they reside (with the exception of Singapore), they control the economies of those countries. Some authors go further: `The Overseas Chinese are a prosperous multi-national middle class with a small superclass on top', says one (Seagrave 1995, p. 3). Harvard University researcher John Kao argues that `perhaps the most important development that has consolidated the [Overseas Chinese] commonwealth is how rich many Chinese communities have become' (Kao 1993, p. 32). Third, the key to this business success is generally held to be some function of shared Chinese identity. In some studies, this is presented in terms of a unique combination of Chinese culture and values which constitute Chineseness: the state of being Chinese to which all Chinese, overseas or in China itself, are heirs. For many observers, Confucianism is seen as the key to this unique Chineseness. Confucianism, it is argued, teaches hard work, thrift, trust, and the obligations and responsibilities an individual has to his or her family or clan group. By implication — and sometimes quite explicitly — the possession of these characteristics is seen to give the Overseas Chinese not only a business edge over their indigenous fellow residents of South-East Asia, but a moral edge as well, a sense of deserved moral or cultural superiority. Other studies eschew this direct culturalist approach and focus on one particular result of shared Chineseness: the networks which


210

they see linking ethnic Chinese businesspeople together, networks based on common places of origin in China or shared languages. These networks are a vital source of market intelligence and credit, and thus give their members a substantial business edge over those who are not. These networks are international in character, enabling their members to cross national boundaries with ease. As a result, according to many observers, ethnic Chinese businesspeople treat the region of South-East Asia as a single, borderless economy across which they can move goods and capital with ease. This brief reprise of the argument undoubtedly does an injustice to some of its subtleties, but it is not fundamentally inaccurate. I now want to look at some of the assumptions underlying this picture.

A QUESTION OF IDENTITY First, perhaps the single most important underpinning of the Overseas Chinese argument is that there is indeed an Overseas Chinese community in South-East Asia. This may perhaps be accepted as a given; but such an acceptance begs the question of the characteristics of this community: what holds it together, and what separates it from other communities in the region. Much of the literature suggests, at least implicitly, that these characteristics are readily and obviously definable: ethnicity, language, family connections. But Chinese identity in South-East Asia is not unproblematic, as closer examination will show. The most basic of defining features of members of ethnic Chinese communities in the region is ethnicity itself. There clearly are millions of people living in South-East Asia whose antecedents came from China. But although ethnicity is, in general terms, a reasonably clear-cut marker of membership of the community, functionally it is not a very useful one in trying to examine business activities. For one thing, it makes no distinction between someone who was born in China and then migrated to South-East Asia, and someone whose ancestors had come one, two, three or more centuries ago. And yet even a casual observer would note that there are considerable cultural and occupational differences between those two different sets of people. The cultural ties to China, and to other communities of ethnic Chinese in the region, are likely to be considerably weaker in the latter group than the former. And today, the latter group is the larger in all countries in South-East Asia, even ones in Malaysia and Singapore whose experience of immigration from China is relatively recent.


211

Moreover, in most of these established communities, many members are of mixed descent. Until perhaps 100 years ago, there were few single Chinese women living in South-East Asia. Chinese men wanting wives had two choices: import a wife from China — which many certainly did — or marry a local woman — which more did. Given the role traditionally played by women in the transmission of culture, their descendants, again, are likely to have weaker links with other ethnic Chinese than those both of whose parents were from China. In terms of behavioural markers of identity, the habitual use of a Chinese language or dialect might be useful. But in fact the extent to which people of ethnic Chinese descent in the region speak a Chinese language varies considerably from country to country, and according to the time they — or their antecedents — have spent in the country. As one author notes: `[M]any ethnic Chinese living outside China, Hong Kong or Taiwan do not speak, read or write any Chinese dialect at all' (East Asia Analytical Unit 1995, p. 8). Propensity to speak a Chinese language is highest, as would be expected, in Singapore and Malaysia. It is probably lowest in the long-established communities of the Philippines, Thailand and parts of Indonesia, especially Java. Postwar studies have consistently found that ethnic Chinese households in Java, for instance, differ only slightly in linguistic usage from ethnic Javanese households of similar socio-economic standing. And the ability to read and write Chinese characters is substantially less evident in the region even than the ability to converse in a Chinese language. These factors notwithstanding, there is no doubt that for many ethnic Chinese in the region, recognising the linguistic origins of their families is important and significant, whether or not they continue to speak the language concerned, just as it is for many European migrants to north America and Australia. But it is worth noting that speech group associations which are the institutional reflections of these shared linguistic origins are almost exclusively related to regional Chinese languages, the bulk of them from southern China, the place of origin for most ethnic Chinese in South-East Asia. They rarely focus on northern Chinese languages, or on Mandarin, the national language of China. By definition these associations are not China-wide, in either the geographic or ethnic sense. Certainly those who do speak a Chinese language may be regarded as being in an important sense Chinese; but not speaking Chinese does not clearly mean a person is not, in some other ways, Chinese. Then there is the question of occupation. The stereotypical


212

image is of course that being Chinese is equivalent to being in business. There is no doubt that most of the biggest businesspeople in South-East Asia are of ethnic Chinese descent. But is it the case that most of the people of ethnic Chinese descent in South-East Asia are in business? This is a much more dubious proposition and, unfortunately, one which is impossible to test with the data currently available. As will be noted later, in most South-East Asian countries the data on ethnicity are estimates at best. In the case of Indonesia, which almost certainly has the largest number of people who have a claim to Chinese descent, the most reliable of recent data date back to the census of 1930. The Minority Rights Group (1992, p. 34), a highly respected London-based organisation, in a recent publication on the ethnic Chinese in South-East Asia asserted that the majority of them are poor fisher-farmers. Yet identity is not singular but multiple and contextual — for many, at least. In some circumstances, people will readily identify themselves as being Chinese; on other occasions, they will identify as (for example) Indonesians, and on others still as Christians. Being `Chinese' is not an exclusive condition — if, indeed, it ever was. As one writer — herself of ethnic Chinese origin — puts it: Chinese ethnicity, as a common reference point for this imagined community, cannot presume the erasure of internal differences and particularities, as well as disjunctures, as the basis of unity and collective identity. What then is still its use? Why still identify ourselves as Òverseas Chinese' at all? The answer depends on context: sometimes it is and sometimes it is not useful to stress our Chineseness, however defined. In other words, the answer is political (Ien Ang 1993, p. 14).

To this contextual self-identification we need to add identification by others. Many people of ethnic Chinese descent in South-East Asia may well want simply to be accepted as members of the national communities and societies in which they live. But if members of those communities and societies deny them that identification, and persist in identifying them as Chinese, then in a significant functional sense they are Chinese.2 Indeed, it may well be argued that much of the recent literature focusing on the ethnic Chinese communities in the region is also part of this process of identification by others. The focus of loyalties of these so-called Overseas Chinese communities is increasingly on their countries of residence and citizenship. Mackie notes: Increasingly, though slowly and at different speeds, the Southeast Asian Chinese are identifying as Thais, Indonesians, or


213

Malaysians, and so, too, are Southeast Asian Chinese businessmen (Mackie 1992, p. 184).

We are now looking at a set of communities which, admittedly to varying degrees, are increasingly tightly linked to their countries of residence by ties of language, culture and even marriage. This process has not been a smooth one in the past, and will not be in the future either. No doubt there will be periods when the ethnic Chinese in the region undergo a degree of cultural re-Sinification. Indeed, an argument can be made that we are in such a period right now: that the increased profile of China in regional political and economic affairs has led at least some ethnic Chinese to glance once again to China and to take pride in their connections with China. But few have actually moved to China. Indeed it is striking that the main movement of ethnic Chinese out of South-East Asia over the past 30 or so years has not been to China or even Hong Kong or Taiwan, but rather to Australia, Canada and the United States. The only exception — and it is an unusual and short-term one — is the movement of ethnic Chinese out of Vietnam to China and Hong Kong in the aftermath of the ending of the Vietnam war in 1975 and Vietnam's invasion of Cambodia in 1978. In light of the above, the notion of a single ethnic Chinese community in South-East Asia seems tenuous at the least and the terms Òverseas Chinese' and `diaspora' as they are applied in South-East Asia quite misleading. They may well have been accurate descriptors of many people of ethnic Chinese descent living in South-East Asia in the ninteenth century — though by no means all. Many certainly did see themselves as only temporary residents of the region, as sojourners. And indigenous populations most definitely did see them in that light. But such has increasingly been the exception rather than the rule during the twentieth century, and in particular since the ending of World War II. With only minor exceptions there has been no migration to South-East Asia from China for 60 years. Thus anyone aged 60 years or less was probably not born in China, and most people under 25 do not have parents born in China. It is questionable how many Australians with grandparents born, for example, in Britain or Italy or Greece would regard themselves as overseas Britons, or overseas Italians, or overseas Greeks, with their personal and commercial loyalties directed to those overseas countries. Simply defining the terms which are frequently used in the literature is, then, a complex process, and one from which there is no easy way out. It certainly throws into doubt the veracity of many of the detailed figures on the ethnic Chinese population of


214

South-East Asia, to which reference is often made. It is fairly easy to identify the ethnic Chinese populations of Singapore, Malaysia and Brunei. But it is much more difficult for the Philippines and virtually impossible for Indonesia and Thailand. In Indonesia, no formal census seeking information about ethnicity has been undertaken since 1961, and that census was considerably less reliable than the last conducted by the Dutch in 1930. And in Thailand `the Chinese have assimilated so successfully . . . that often it is now difficult to determine who is Chinese' (East Asia Analytical Unit 1955, p. 18). As for tables which purport to break down ethnic Chinese populations in South-East Asia by language group and regional origin, and with considerable precision, one can but admire the heroism of their authors.

SECRETS OF SUCCESS The second point I wish to consider is that of the explanations for the commercial successes enjoyed by businesspeople of ethnic Chinese descent in South-East Asia. As noted earlier, the standard explanations generally have to do with reasons which are represented as essentially adhering to Chineseness — following the tenets of Confucianism, the work ethic, family solidarity, relationships and so forth. Certainly it is not denied that culture has a role to play in business affairs, nor that different communities may have different norms of behaviour in business, and other activities, which can in some sense be regarded as culture-specific. But the culturalist argument is often deliberately used as a strategic tool by businesspeople in the region in the commercial competition with others in the region, and also with people on the periphery, such as Australians. Regional businesspeople, of ethnic Chinese descent and not, have generally proved to be much more adept at culture-switching than Australian businesspeople, able to demand that the latter conform to regional norms — or what are claimed to be regional norms — of behaviour when it is to their advantage to do so, yet also able themselves to follow Western business culture when that is necessary. It will be argued here that many — most — of these culturalist explanations hold little water, that we are better off employing more effective but undoubtedly much less exotic and more mundane considerations such as class, occupational opportunities, relationships with power holders and the like. These points emerge from looking more closely at some of the manifestations of the culturalist argument. Confucianism, much touted as a central element of the


215

culturalist argument, no longer has any legs as far as an explanation for success goes; or at least, not old-style, traditional Confucianism. If it were traditional Confucianism which was at the cutting edge of business success, then China would be leading the way, with the peripherally Confucian communities in places such as Japan and Singapore lagging behind. In fact, of course, the opposite is the case: the periphery is driving the core. The leading scholar of the ethnic Chinese in South-East Asia, Wang Gungwu (1991, p. 259), puts it this way: [It is paradoxical] that Confucian values were strongest in China and weakest in Japan, yet it was in Japan that industrialization took root and in Japan that capitalist development was achieved most rapidly. And where the little dragons are concerned, they are all on the periphery of China, with Singapore the furthest from the Confucian core.

It may be the case, though, that what a number of scholars have referred to as `neoConfucianism' is a little more useful in explaining business success. Neo-Confucianism does not carry with it the learned baggage of classical Confucianism, but simply the outward attributes of Confucianism: the work ethic, honesty, importance of the family, thrift and so forth. But once we reduce Confucianism to these values, then it is reasonable to ask whether they really and uniquely represent Confucianism of any sort, `neo' or otherwise. There could have been few heads of families of European ethnic origin in Australia at any time between 1788 and perhaps World War II who did not try to drum into their children these very same ideas. And is it really intended to argue that indigenous South-East Asians are not honest, do not care about family ties, do not want to work hard, are spendthrift and so forth? Presumably not — but this must be an implication of the argument. It is instructive in this context to note that decidedly nonChinese regional leaders such as Prime Minister Mahathir Mohammad of Malaysia have argued strongly that these same values are in fact Asian, in contrast to the individualistic culture of the West, including Australia. And these cultural values — whether exclusively Chinese or not — are certainly not the sum total of Chinese culture. As Mackie points out, `[T]he Chinese are also notoriously addicted to gambling and reliance on necromancy and numerology, something which has its origins in pre-Confucian beliefs about good fortune, luck and auspicious days' (Mackie 1992, p. 42). While not denying that many ethnic Chinese believe in lucky numbers, feng shui and so forth, and some take business decisions on this basis, it is


216

difficult to accept that this has anything to do with their business success. But the crucial test of the culturalist argument must be that of negation. If the argument has any weight it ought to be the case that failed ethnic Chinese entrepreneurs are somehow less culturally Chinese than the successful ones. There is no persuasive evidence that such is the case — in part, perhaps, because very few studies have been undertaken of cases of business failure by ethnic Chinese entrepreneurs.3 Indeed, even if it could be shown that failed entrepreneurs are less culturally Chinese, then this would hit hard at the argument that the ethnic Chinese as a group have these important cultural traits in common. It would put the emphasis back on individual ethnic Chinese in terms of whether they have particular skills or attributes. So, apart from `Chineseness', what other factors might come into play in determining business success? One often-cited reason is the use ethnic Chinese businesspeople make of networks of various kinds: local, regional and even global. These networks, it is said, allow members access to commercially valuable commodities such as credit, market intelligence, sources of supply and potential business partners whose bona fides are vouched for by reason of the fact that they are themselves members of the network, or have been guaranteed by someone who is. This is certainly a widely held view amongst indigenous South-East Asians, both in its positive form — ethnic Chinese succeed in business because of the extensive networks in which they work — and its negative form — the reason why we indigenous businesspeople have been less successful is that we do not have these networks. There is obviously a good deal of logic in this line of argument. Business networks of various kinds have played an important role in the economic life of ethnic Chinese communities in South-East Asia for years. It makes sense for them to use such networks; just as, in Australia and many other countries, it makes sense for businesspeople to belong to the Rotary Club, the Chamber of Commerce and other, similar organisations, even the Masons, perhaps. The commercial functions these organisations perform are similar to those performed by the ethnic Chinese networks, albeit usually writ small. Networks have been particularly valuable for the ethnic Chinese in the past precisely because they came to South-East Asia as strangers: operating on their own, without local connections, they were of necessity heavily reliant on the people they dealt with for credit, supplies, market intelligence and so forth. Today, many of the wealthiest ethnic Chinese businesspeople in the region have both personal and professional links with each other, and move easily between various countries


217

of the region, fitting in with local business communities with apparent ease. However, there are problems in relying too heavily on this argument. For one thing, we need to keep firmly in mind that not all the business activities of ethnic Chinese in South-East Asia are international or inter-regional in scope. Only the wealthiest of these businesspeople are in a position to create and benefit from those international networks. The bulk of ethnic Chinese businesspeople are not. Here again our view of the situation is often rather exaggerated by our tendency to look at the peaks of business activity, not the troughs. For every Chin Sophonpanich, every Robert Kuok, every Li Ka Shing, every Liem Sioe Liong, there are thousands — probably tens of thousands — of small and medium-size entrepreneurs whose business activities will never extend beyond national borders. True, within their countries of residence and citizenship they may be plugged into business networks, and this may be a clue to the success they enjoy. But these are hardly the networks with the kind of international clout on which so much attention is focused these days. And most of the commercial relationships small shopkeepers of Chinese descent, for instance, have in their home cities or towns will be with indigenous customers.4 For another, as several writers have pointed out, the very concept of networks and networking is rather nebulous, and has changed its shape over time. In the relatively early days of ethnic Chinese involvement in inter-regional trade here, personal links of trust and commitment were crucial to the development of business networks: they were the only things on which members of the network could rely. But these days the major players in international trade are not individuals but corporations. And to the extent that these corporations become more depersonalised, less focused on individual family members, closer in ethos to large firms in Europe, North America and Japan, so the significance of networks based on individuals will decline. There is, of course, a major debate about the extent to which major ethnic Chineseowned firms will in fact move in this direction. An interesting set of articles — admittedly anecdotal rather than scholarly — recently suggested that the major family owned and run firm in Asia is slowly declining, and that professional managers, for instance, are playing much more important roles than ever before. In some cases, these managers are not merely not members of the owners' families, they are not ethnic Chinese either (Far Eastern Economic Review, 17 November 1994, pp. 78-86). The East Asia Analytical Unit (1995, p. 152) seems to confirm this general view: Às Chinese enterprises grow, they tend


218

to lose many of their traditional Chinese characteristics', albeit then the qualifier: `but not all'. In Thailand, the same report asserts: `[O]ften it is now difficult to determine who is Chinese. Perhaps for this reason, the Thai-Chinese Chamber chose to open its doors to all Thais, not only Sino-Thais' (1995, p. 18). The question should thus still be regarded as open. What we need to keep in mind here is that to the extent that family firms do move in this direction, so the importance of business networks based on personal and family ties are likely to decline, and networks based on common commercial interests to rise. Business networks, in other words, may end up looking like nothing more and nothing less than cross-national Chambers of Commerce, losing many of the specifically Chinese characteristics they might previously have had. If the broad culturalist paradigm, then, seems a bit tatty, we must look for alternative explanations of ethnic Chinese business successes. We ought perhaps to shift to more conventional paradigms, as represented for instance by political economy. This would suggest we look at interests, costs and benefits, options available and so forth. Contemporary studies of ethnic Chinese business in South-East Asia rarely include consideration of the histories of the communities. Yet a crucially important question to ask might be that of what employment options there were which ethnic Chinese had open to them when they moved to South-East Asia: and indeed, what options are open to them to the present day. In virtually all countries of the region, the main employment areas in which the indigenous populations worked were closed to the ethnic Chinese. Most importantly, effectively nowhere could they own land and become farmers, the occupation traditionally at the heart of indigenous economic and political life. In most cases, too, ethnic Chinese were prevented from entering government service and the armed forces. There were minor exceptions, but broadly speaking the rule held true. So how were they to earn a living? The only major opening left was of course business. So virtually all the talents and energies of the ethnic Chinese were directed into business, unlike in China where the best and the brightest usually went into government service. Even today, in many parts of South-East Asia, there are formal or informal barriers to ethnic Chinese working in sectors other than commerce. To the extent that this is true, then both the prominence of ethnic Chinese in business, and their relative success, seems fairly easily explained — as easily as the dominance by indigenous South-East Asians of regional governments and militaries. Ironically, though, it may well be the case that as other types


219

of employment opportunities open up to the ethnic Chinese, their standing in the business community will decline, as talents and resources are diverted to those other activities. Another line of argument worth pursuing is that the key to the success of at least the largest of the ethnic Chinese firms lies in the political connections of their owners. In the case of Thailand, for instance, Lynn Pan notes: `[T]he symbiosis of Chinese capital and indigenous ruling power is so inescapable, and seems to date so far back, that it has become a fact of life, something normal to the country' (Pan 1990, p. 235). The most powerful of the ethnic Chinese families in Thailand is Sophonpanich. Born in Thailand but educated in China, the founder of the firm, Chin Sophonpanich, certainly showed an aptitude for trade in his early years. And he did forge connections with other, more established ethnic Chinese-owned firms: the network argument. But the crucial point in his development from merely a well-off businessman to an enormously wealthy and powerful one was the set of links to powerful Thai military politicians that he developed in the early to mid-1950s. To quote Pan again: `[H]is case seems a classic illustration of the truism that in those days no businessman could hope to grow rich without cultivating a military patron' (Pan 1990, p. 237). The same kind of argument can just as readily be made for the emergence of Liem Sioe Liong, the richest man in Indonesia, the owner of companies reputedly responsible for creating 5 per cent of Indonesia's total GNP. Liem was born in Fujian province, southern China, but came to Indonesia at an early age and went into business as a pedlar of foods and agricultural produce. Like Chin Sophonpanich, Liem obviously had a smart business brain, and he made effective use of his connections with other ethnic Chinese businesspeople. But unlike many other ethnic Chinese businesspeople, during the Indonesian revolution against the Dutch from 1945 to 1949 he sided with the Indonesians, smuggling goods in and out of Indonesian territory blockaded by the Dutch. Some of the goods he smuggled were ordinary: sugar, cloves, textiles. But he also smuggled medical supplies and weapons for the Indonesian army. After the revolution, he extended his connections with the military, eventually, by the mid-1950s, establishing a strong relationship with the military commander of the region in which he lived, a certain Colonel Suharto. As Suharto's star rose — and obviously it rose quickly and to great heights after the so-called coup attempt of 1965 — so Liem's star rose in parallel. It is difficult to reject the view that Liem, like Sophonpanich, would never have achieved his level of incredible wealth had it


220

not been for his connections with the military, and especially with Suharto. Of course, not all the leading ethnic Chinese businesspeople owe their success to political connections. And political connections alone would not suffice in the absence of keenly developed business skills. But it is hard to avoid the conclusion that in many cases it was political linkages that were the crucial factors in the emergence of some of the most powerful ethnic Chinese businesspeople. What was it about ethnic Chinese entrepreneurs that enabled them to make these kinds of connections with state power holders, either indigenous or colonial? Certainly they could offer business acumen, experience and connections. But probably more important still was what they did not offer: political competition, real or potential. As a general rule they posed no political threat to the rulers of the state, largely because they had no power base within the local community. Finally, in terms of recent developments, the re-emergence of China itself as a major economic player in the region and the world has clearly benefited some ethnic Chinese entrepreneurs in South-East Asia. Those who have working family or clan connections to China, especially to southern China, have taken advantage of those connections to their financial advantage. It is interesting to note, though, that virtually all the businesspeople of American or Australian nationality who have run afoul of the Chinese bureaucracy or legal system in recent years have been people of ethnic Chinese origin, often formerly citizens of the PRC. Clearly their cultural knowledge of China could not protect them from harassment or arrest. On balance, then, arguments based on history and contemporary political economy seem more powerful in explaining the relative success of ethnic Chinese business in South-East Asia than culture-based ones.

THE FUTURE The final point to be addressed here is the question of how secure or how stable ethnic Chinese business enterprises in South-East Asia are. Much of the current discussion about ethnic Chinese businesses assumes that they will be allowed free functioning in the future, not constrained by political interference or obstacles. Yet this assumption is rather optimistic, at least in some parts of South-East Asia. And the very economic success of some ethnic


221

Chinese businesspeople is probably making their political positions even less secure than they would otherwise be. Apart from the special case of Singapore, ethnic Chinese business is probably most secure in Thailand. Sino-Thai businesspeople have for long been amongst the most firmly integrated ethnic Chinese businesspeople in the region. Without religious barriers to integration with the larger Thai community, they seem to be likely to ride out any political troubles. In the Philippines, too, the picture is generally fairly secure, though there are periodic episodes during which the Manila government seems to single out businesspeople of ethnic Chinese descent in drives to increase taxation revenue. And the kidnapping of the children of wealthy Sino-Filipinos for ransom has an established history here. In Malaysia, much depends on the internal politics of the majority Malay community. The present government, dominated by the United Malays National Organisation, is politically threatened not by ethnic Chinese political interests, but rather by conservative elements within the Malay community itself. These elements focus on their Malayness, and in particular on their Islamic credentials, to appeal to Malays, and to compete with the Mahathir government. And in this competition, appeals to Malays based on the apparent links between UMNO and the ethnic Chinese community could be useful tools for the opposition to use against Mahathir. Were Mahathir to lose control of the Malaysian government to his Malay competitors, then there could be further limits placed on the freedoms exercised by members of the ethnic Chinese business community. Historically, Indonesia has probably had the worst record in the region of persecution of its ethnic Chinese minority. As recently as May 1994, what started out as a demonstration by workers demanding increased wages in the city of Medan, north Sumatra, turned into an anti-Chinese riot which saw tens of shops looted and burnt, and at least one ethnic Chinese businessman killed. There has also been a fairly pointed debate going on in the Indonesian press and other circles in the country recently about the significance of investment in China by leading ethnic Chinese businesspeople. A number of political leaders have attacked this investment, saying that it shows the ethnic Chinese are not really loyal to Indonesia, that they still feel closer to China. Liem Sioe Liong, in a rather unusual public statement, rather plaintively noted: Ìf I invest abroad, you call it capital flight. If I invest here, you say I want a monopoly' (quoted in Sender 1991, p. 36). You cannot win. None of this, of course, is privileged knowledge. Ethnic Chinese


222

businesspeople know perfectly well how precarious their position has been in the past, and have developed strategies for coping with it. One strategy already noted is to develop close ties with indigenous power holders — which works well, so long as you chose the right power holders. But if you chose the wrong ones, then you are in deep trouble. Other businesspeople seem to be taking the line that if you become sufficiently strong economically, sufficiently crucial to the economic well-being of your country of residence, then whoever is in power will have an incentive to ensure you can get on with your business. This is probably a fairly sensible approach, so long as it is assumed that political leaders always think and act sensibly. Unfortunately, experience suggests that such is not always the case. For all sorts of reasons, governments sometimes seem intent on cutting off their noses to spite their faces. A second strategy is to bring indigenous shareholders into the business by, for instance, launching at least some of the companies owned on the stock market. In recent years this phenomenon has become very evident in Indonesia, where — as noted elsewhere in this book — several major Sino-Indonesian conglomerates have floated some of their companies on the recently revitalised Jakarta Stock Exchange, thereby increasing the number of people who have a vested interest in the longevity of the company. Amongst the new shareholders there are undoubtedly fair numbers of indigenous Indonesians, and foreigners: two groups that any foreseeable president of Indonesia is likely to want to avoid offending. And a third strategy, of course, is to disperse funds and activities offshore, rather than tying them up in one country alone. This may turn out to be the best strategy, and is one which has clearly been followed by Liem Sioe Liong, Li Ka Shing, Robert Kuok and the like. Smaller businesses have followed this strategy as well, with property purchases and the like. But there are still important political question marks over the security of ethnic Chinese business in the region. So long as regional economies are doing well, and so long as national political systems are reasonably stable, they will be all right. And the odds on this being the case for the foreseeable future are clearly quite good. But it would not take much of an economic downturn or political crisis to spark off renewed antiChinese measures, either from governments or from indigenous communities. And therein lies the essential vulnerability, not only of ethnic Chinese entrepreneurs, but also of those linked in business to them. It is all very well for ethnic Chinese entrepreneurs to proclaim that they believe their economic positions are so sound they would not be affected by significant political change in their home countries, that no future


223

government would attack them because of the damage this would do to the national economy. Unfortunately racial discrimination is by its nature irrational. The very obvious and public economic success being enjoyed by a minority of South-East Asians of ethnic Chinese origin is perhaps the one thing which most endangers their continued enjoyment of their prosperity. Political considerations may also affect the future of the ethnic Chinese business communities in the region in another way. Much has been made of the `seamless web' argument: that ethnic Chinese business, through its linkages and relationships, is able to cut across national boundaries, creating a new economy which is a `seamless web' stretched across the region. This argument is sound so far as it goes. Indeed, it is one of the defining features of transnational corporations wherever they are found that they treat national borders with disdain. But ultimately, in South-East Asia as much as anywhere else in the world with the possible exception of western Europe, national borders in fact do count. National governments still do impose tariffs on imports and pay bounties on exports; do restrict the movement of capital and labour; do protect inefficient local producers against cheaper imports; do impose taxes and restrict access to various industries and sectors of the economy. Indeed, if these things did not happen, much of the present value of ethnic Chinese networks would disappear. It is precisely the fact that these barriers to trade and investment exist that gives these networks much of their value. If the economies of the region develop high levels of transparency, and permit the free flow of capital, people and ideas, then the playing field will have been substantially levelled. As a corollary, the advantages bestowed on members of transnational business networks will be reduced. The capacity of Australian business to use relationships with ethnic Chinese outside their places of origin, including Australia, in facilitating trade with those origins are also affected by political considerations. Members of those ethnic Chinese communities who fled their places of origin as refugees are likely to be problematic as potential business partners. In large measure, their possible effectiveness depends on the circumstances under which they left their first homeland, and the extent to which those circumstances still prevail. Thus, for instance, many ethnic Chinese left Vietnam for Australia in 197576 and 1978-79, at times when the Vietnamese government was conducting campaigns aimed at eliminating private business and expelling ethnic Chinese (Viviani 1996, p. 8a). So long as the Vietnamese government was following anti-private business and antiethnic Chinese policies, there was little likelihood of ethnic Chinese from Vietnam in Australia performing an intermediary role between the two countries.


224

Other problems, too, may arise as a result of the conditions under which the first — and perhaps subsequent — homelands were left. One study has suggested, for instance, that the ethnic Chinese of Indonesian origin now living in Hong Kong are à resource that is still to be fully tapped to promote trade and investment between Indonesia and China and Hong Kong' (East Asia Analytical Unit 1995, p. 182). It is quite unclear just who would be likely to utilise this `resource', and more importantly how valuable a `resource' the community is. It is a community many of whose members, as the report itself acknowledges, feel neither Chinese nor Indonesian. Their links with both Indonesia and China are tenuous. They chose — albeit in some cases under pressure — to leave first Indonesia then China. Their children appear to have largely assimilated into Cantonese-speaking Hong Kong society and rarely speak any more than broken Indonesian. Quite what sorts of commercially useful links and relationships these people can be expected to have with either China or Indonesia is unclear. The blanket suggestion that Australian businesspeople should seek out members of the ethnic Chinese communities resident in Australia as business partners, and as facilitators of trade and investment with their homelands, stereotypes members of those communities. It assumes once again that because they are of ethnic Chinese origin, they are inherently interested in becoming businesspeople, and have the capacity to be successful at it. Viviani suggests, from her study of ethnic Chinese migrants to Australia from Indochina, that whilst the first generation frequently went into business — continuing the occupation they had followed in Indochina — subsequent generations may well not: Èthnic Chinese in business in Australia strongly expect their children to move out of the problems of small business and up into the professions, while of course remaining Chinese' (Viviani 1996, p. 119). If people of ethnic Chinese origin in Australia wish to pursue careers in business, then it is a statement of the obvious to say that they have the right to do so. But many will want to avoid the ethnic stereotyping that such a career choice would entail, just as increasing numbers of ethnic Chinese are doing in South-East Asia.

CONCLUSION That some people of ethnic Chinese origin have been remarkably successful in business in South-East Asia is beyond dispute. Any outside person wishing to do business with the region needs to be aware of this fact, and would be well advised to shape their


225

commercial strategies so as to derive the maximum possible benefit from it. What this chapter has tried to do, though, is to bring forward a number of qualifications on the explanations for this success, and on the likely or possible future of ethnic Chinese business in South-East Asia. Probably the most important point made is that it is misleading to see ethnic Chinese in South-East Asia as being unequivocally members of a single community, held together by ties of kinship, language and values, in exile — voluntary or otherwise — from their homeland. To the contrary, the evidence suggests that the bulk of ethnic Chinese in the region have at least as much in common with their fellow citizens of Thai, Malay or Indonesian ethnicity as they do with fellow-`Chinese' in other countries. The shift away from Chinese identity to national South-East Asian identities is not inevitable or irreversible, at least temporarily. Indeed, it seems reasonable to expect that there will be periods during which the communities will undergo a degree of re-Sinification. But there is no reason to believe that such re-Sinification will be deep-seated or long-lasting. To the extent that it has in the past been these ties between people of ethnic Chinese origin which has helped to ensure their business success, then the weakening of those ties would be likely to weaken their business strength. Second, the stereotypical equation of ethnicity with occupation and wealth is both inaccurate and — in some respects anyway — verging on racist. Ethnic Chinese communities in the region are complex social entities, their members representing a variety of occupational and income groups. The majority of the richest residents of the region may well be ethnic Chinese businesspeople; but this does not mean that the majority of the ethnic Chinese people in the region are rich businesspeople. This is the kind of stereotype often seen in the majority communities of the region itself, and used to justify all manner of discriminatory measures against the ethnic Chinese communities in general. Third, to the extent that the business context of the region becomes more transparent and rule-based, then so the particular benefits which derive from the ethnic Chinese networks of the region will decline. These networks are valuable precisely because they help their members to secure the ideas, capital, people and so forth which are not otherwise readily available, in a reliable fashion. Fourth, the personal and political security of people of ethnic Chinese origin in many parts of the region is still open to question. In most cases, it is not in their interests to be seen by the majority community to be either excessively concerned about trade with or investment in China, or to be sought out by foreign businesspeople


226

as their preferred local partners. It is much more in their interests — and certainly in the interests of the vast bulk of people of ethnic Chinese descent who are neither wealthy nor powerful — to assimilate to the majority community than to stand apart from it. This is not a judgment about the moral value of such a position; morally, one might indeed want to argue the reverse, that minorities have at least as great a right to define and to maintain their separate identities as majorities have. Rather, it is a statement about the political and social realities of the region. There is simply no long-term future for anyone in South-East Asia as an Òverseas Chinese'.

NOTES An earlier version of this chapter benefited greatly from discussions with Jamie Mackie; however, full responsibility for the facts and opinions stated here rests with me. 1. 2. 3.

4.

`The overseas Chinese' The Economist, 18 July 1992, p. 24. On this point, see Coppel (1983), p. 5. Theoretically, another reason for the absence of such studies could be that the number of failed ethnic Chinese businesses is statistically insignificant; this seems inherently unlikely, but it would be very important if such could in fact be demonstrated to be the case. I am indebted to Jamie Mackie for this point.

BIBLIOGRAPHY Ang, Ien 1993 `To be or not to be Chinese: Diaspora, culture and postmodern ethnicity' Southeast Asian Journal of Social Science vol. 21, no. 1. Coppel, Charles 1983 The Indonesian Chinese in a Time of Crisis Oxford University Press for the ASAA, Kuala Lumpur. East Asia Analytical Unit 1995 Overseas Chinese Business Networks in Asia Department of Foreign Affairs and Trade, Canberra. Far Eastern Economic Review, 17 November 1994, pp. 78-86. Kao, John 1993 `The world wide web of Chinese business' Harvard Business Review, MarchApril. Mackie, J.A.C. 1992 `Changing patterns of Chinese big business in Southeast Asia' in R.T. McVey (ed.) Southeast Asian Capitalists Studies on Southeast Asia, Southeast Asian Program, Cornell University, Ithaca, pp. 161-90. ——— 1992 Òverseas Chinese entrepreneurship' Asia Pacific Economic Literature, May.


227

Minority Rights Group 1992 The Chinese of Southeast Asia London. Pan, Lynn 1990 Sons of the Yellow Emperor Secker & Warburg, London. Seagrave, Stirling 1995 Lords of the Rim. The Invisible Empire of the Overseas Chinese G.P. Putnam's Sons, New York. Sender, Henny 1991 Ìnside the Overseas Chinese network' Institutional Investor August. Viviani, Nancy 1996 The Indochinese in Australia 1975-1995. From Burnt Boats to Barbecues Oxford University Press, Melbourne. Wang Gungwu 1991 China and the Chinese Overseas Times Academic Press, Singapore.


PART III Market socialism in Asia


9 Market socialism in South-East Asia: economics, society and politics in Vietnam, 1975-96 Melanie Beresford and Bruce McFarlane Vietnamese leaders say that they are constructing à market-oriented socialist system under state guidance'. This followed some 25 years of experience with a modified East European model which, in the decade after the unification of the country in 1975, had failed to deliver adequate agricultural surpluses, an adequate structure of industry or sufficient elements of collective consumption in relation to the societal needs. The course of Vietnamese socialism was dominated in the 1970s by the problems of repairing a country destroyed by 30 years of war; the 1980s was a period of economic reform and restructuring of a socialist-oriented system towards the market, domestic and international. In linking these periods to economic development and structural change, two things stand out as requiring substantial analysis: the process of capital accumulation under Vietnamese conditions and the economic role of the state. The latter has increasingly been seen as a key aspect of the development of East and South-East Asian countries (Amsden et al. 1995). It is the aim of this chapter both to record the development and growth achieved to date and to demonstrate the importance of capital accumulation and the role of the state as it shifts from operating a centrally planned economic system to managing the market economy.

STRATEGIC DECISIONS The basic elements of the development strategy pursued by the Vietnamese government during the period since 1954 were determined by the desire of the Communist Party leadership, first, to initiate a process of rapid industrialisation and modernisation of


232

the economy (a desire held in common with all other newly independent states in the region) and, second, to build a socialist society. As a result of both domestic and international factors impinging on the economy during the last four decades, the authorities have on five occasions been forced by circumstances to make major strategic choices (Kolko 1974 & 1988): 1 In the mid-1960s, at the height of US bombing of the country, whether to concentrate resources to maintain economic growth in the North, or to divert resources from this purpose in order to aid the liberation of the South (Catley & McFarlane 1974). 2 After 1975, how rapidly to unify the economic system in the two halves of the country and what kind of land program to put through in the South, given that there had been great inequalities and social tensions over land in the past (Ngo Vinh Long 1983; Quang Minh Dao 1993), the withdrawal of both American and Chinese food aid to the two halves of the country (Beresford 1989) and the need to promote a capacity to export rice on a large scale to earn precious foreign exchange. 3 In 1979-81 how far to tolerate and develop spontaneous reforms in the areas of agriculture, industry and domestic trade that had appeared in a number of provinces in response to acute shortages which had emerged after collectivisation of southern agriculture, a sharp decline in Council for Mutual Economic Assistance (CMEA) imports as prices rose, the diversion of resources to the war effort against Pol Pot (Beresford & Fforde 1996), and whether to attempt to roll back the movement towards marketisation of the economy that this development heralded. 4 In 1985-86 whether to accept and codify the movement to market socialism generally, and to approve specific measures like freeing the foreign exchange rate of the dong and lifting the remaining price controls or to persist with centralised economic planning and emphasise more traditional socialist policies. 5 In 1996, after four years of GDP growth at over 8 per cent per annum and large volumes of rice exports, how to maintain the àccelerated growth' policy in the face of increasing uncertainty by foreign investors and domestic private investors at the apparent inability of institutional reforms to adapt rapidly enough to the requirements of effective planning and management of the market. The decisions taken dictated the course of events for years afterwards, for as Maurice Dobb once put it, `[H]aving started on

MARKET SOCIALISM IN SOUTH-EAST ASIA

233

one path of development you have to stay on it for some considerable time ahead. It is impossible (without considerable dislocation and wastage of resources) to make abrupt turns, although you can of course start easing off in one direction or another, and begin gradually to deflect your course' (Dobb 1951, p. 82). Specifically, the first decision — to direct assistance from the North to the South — although it ultimately led to victory, also greatly complicated postwar problems of development in the unified country. There had developed within the same geographical boundaries, two very different and antagonistic economic systems. On the one hand the South, following withdrawal of direct funding of its budget by the United States and large quantities of subsidised imports annually, actually had a negative economic surplus that had necessarily to be plugged by already scarce resources from North Vietnam (Beresford 1989). On the other hand, in the North itself, the influence of relatively abundant consumer goods available from the South during 1975-76, simultaneously with increased shortages in its own production sectors, had a strong impact on popular attitudes towards the planned economy, putting pressure on the government to shift its economic strategy towards raising consumption levels. The second strategic, and disastrous, choice was to collectivise agriculture in the South, in an area (the Mekong Delta) which had seen the strong market-oriented development of farming by small and medium peasants who had also proved to be receptive to the use of pumps and other modern inputs, following land reforms initiated by the Communists themselves in the 1960s (Beresford 1989). The result of collectivisation was a rapid erosion of incentives and plummeting production results which had to be reversed from 1979 onwards by the introduction of a system of contracts between the farming families and the state, similar to those in China. Under the new system, surpluses over and above compulsory sales were retained by the producers and could be disposed of on the market or to the state at elevated prices. The immediate effects of the change could soon be seen and can be underlined by pointing to the fact that the state actually gained control over more grain reserves than it had achieved under the previous state-run, collectivist farming system (Beresford 1987). However, three valuable years had been lost and near famine conditions had prevailed in many areas in the late 1970s. By the late 1980s, the new system was under further pressure from farmers to abolish compulsory agricultural procurement altogether and to extend household control over production and investment decisions. Once this was achieved, agricultural output growth was


234

rapid and the system yet again came under pressure from both rural and urban people with wealth to allow a market to develop in land itself. (A free-for-all market in housing, urban land and office space had already developed in the cities by 1992.) The 1981 struggle over domestic trade and rural pricing was a crucial one since political factors stifled the further spread of a promising experiment in decentralised rural administration and price flexibility that had emerged in one particular province (Beresford & Fforde 1996) and thereby delayed acceptance of the `market socialism' concept for another four years, as well as leading to stagnation of food surpluses (after the initial output spurt resulting from the new system of contracts) and delaying the ability to undertake large-scale rice exporting. At the same time, however, the limited reform that was achieved in the early 1980s began the process of dismantling price controls and rationing of many consumer goods so that, despite the Party's intention to maintain central planning, the area of economic life dominated by market relations expanded gradually throughout the first half of the decade. This process was also evident in the reforms applied to state-owned enterprises (SOEs) in 1981, under which the latter were permitted to produce part of their output for the market. These early reforms therefore helped to create an atmosphere in which monetisation of economic transactions became increasingly important and the scope for market relations gradually expanded while the area of the economy which remained under the influence of directive planning shrank. The Party Congress of 1986, with its `renovation' or `Doi Moi' policy, essentially prepared the ground for the abolition of Soviet-style planning methods (the move to a òne-price' system — that is, market prices for all goods — in 1989 was the final step here), the granting of genuine independence from arbitrary state interference to industrial enterprises (1987) and expansion of movement towards de-collectivisation in agriculture (1988). However, institutions established during four decades of building the `traditional' socialist system cannot be expected to change overnight as a consequence of a political decision. In reality, many institutional changes have run ahead of policy reforms — the development of spontaneous market relations during the late 1970s and early 1980s is a case in point. Others have been slower to change, at least partly due to the fact that the transition from plan to market disrupts earlier relations of authority and control over resources. Reforms introduced since 1989 have therefore been aimed at accelerating institutional change within the state apparatus so that it becomes better adapted to the requirements of regulating a market economy. By the mid-1990s, at the time of


235

writing, tensions over the direction and pace of these reforms reflects to some extent the last of the strategic decisions mentioned above — how far to promote the development of private foreign and domestic investment in order to sustain high growth rates versus the desire of Party leaders to maintain a socialist direction of development with dominance of public ownership and high levels of social equity.

WAVES OF INDUSTRIALISATION IN VIETNAM Given the objective of modernisation and rapid industrialisation mentioned above, a discussion of the extent to which this goal has been achieved should start by examining the trends shown in Tables 9.1 to 9.4 which cover the structural change in industry, the overall change in value and volume of industrial production and the achievements in reaching per capita output levels for selected major products. These tables give a bird's-eye view of the course that Vietnamese industrialisation has taken,1 dividing the process into a number of different waves: 1 1955-60 was a period of recovery and improvement of the functioning of the existing capital stock of the industry sector. 2 The first five-year plan period, 1961-65, launched a number of new industrial projects, including several in the category `heavy' industry. 3 The whole decade 1965-75 was one of maintaining industry under conditions of total war and extensive bombing, mainly by shifting plant to the countryside (Kolko 1974). 4 The period 1975-88 shows that industrialisation resumed under peacetime conditions, that it achieved respectable results in relation to per capita production of some major products (Table 9.4), but that declines were recorded in relation to coal (due to poor mining methods), bricks, paper and seafoods. 5 The period 1988-95 (earlier in some sectors) shows a substantial recovery of industrial production as well as rapid structural change with remarkable growth in the production of electricity and fuel (including crude oil which grew from 2.7 million tonnes in 1990 to 7.7 million tonnes in 1995), cement and other construction materials, chemical fertilisers, and a number of consumer goods, such as paper, electronic goods, light bulbs, thermos flasks, milled rice, beer, cigarettes, dairy products and shoes — primarily in the state-owned sector (Statistical Yearbook 1995).


236

Table 9.1 The value of total industrial products in the whole country, Vietnam, 1930–88 (1982 prices, 1930 = 1.0) Year Total Group A* Group B* 1930 1.0 1.0 1.0 1939 1.7 1.9 1.6 1955 0.7 0.7 0.7 1960 2.8 3.5 2.6 1965 6.0 9.0 4.9 1975 11.9 17.8 9.9 1976 13.4 20.5 11.0 1985 21.1 35.1 25.5 1988 27.0 41.6 35.0 * Note: The category `Group A' refers to heavy industry, while Group B refers to light industrial goods and agricultural products. Sources: The statistics for 1930-85 are from Vo Nhan Tri (1990) and for 1988 from Statistical Yearbook for that year. Table 9.2 Industrial structure of Vietnam: Percentage of gross value of output by industrial sector In the North In the whole country 1960 1975 1976 1985 1995 Total 100 100 100 100 100 Group A (heavy industry and engineering) 33 42 30 32 na Group B (consumer goods, light industry, agriculture) 67 58 70 68 na Central industry 38 45 44 34 52 Local and regional industry 62 55 56 66 48 Industry in the state and collective sector 57 72 68 57 73 Private industry 43 28 32 43 27 Electricity 1.2 4.3 4.5 7.0 Energy 5.0 5.1 5.6 1.2 16.2 Metallurgy and machinery 11.0 18.0 12.3 14.0 9.4 Chemicals 3.7 14.1 9.4 10.5 8.7 Building materials 8.7 5.6 6.5 8.1 Wood and paper 13.0 5.9 17.6 12.0 5.6 Glass, porcelain, ceramics 1.0 1.6 1.5 0.1 Textiles and garments 26.5 10.9 14.5 17.0 9.1 Foodstuff 25.0 30.6 33.6 27.4 31.0 Source: Statistical Yearbook, various years.


Table 9.3 Some main industrial products of Vietnam, measured in volume In the North 1975 1965 1960 1955 1 340 633.6 255 53 Electricity (m kwh) 5.2 4.2 2.6 0.6 Washed coal (m tonnes) 10.4 28.2 19.4 1.2 Chrome ore (000 tonnes) 1 609 1 695 1 866 799 Machine tools (pieces) 3 225 2 705 1 115 Diesel-motor (pieces (p) 10 952 10 069 5 712 488 Electric rotary engine (p) 263 510 470 70 Tin (tonnes) 423.0 144.4 51.5 6.4 Chemical fertiliser 4.683 2.676 0.045 Insecticide (000 tonnes) 3.5 4.68 H2SO4 (000 tonnes) 1.73 1.84 NaOH 100% (000 tonnes) 2 872 780 88 Bicycle-tyre (000 pieces) 370.6 573.8 407.9 8.4 Cement (000 tonnes) 1 915 1 560 799 51 Brick (m pieces) 36.0 21.3 3.2 0.4 Glass (000 tonnes) 836.8 1 090 753.2 362 Wood (000 m3) 21.3 23.9 5.6 0.8 Paper (000 tonnes) 222.4 157.0 117.6 58.1 Salt (000 tonnes) 19.6 41.3 32.2 5.6 Sugar (000 tonnes) 105.2 100.3 89.7 11.1 Cloth (m metres) Source: Statistical Yearbook 1955-95.

1976 3 089 5.7 14.4 964 5 315 15 395 288 434.8 14.8 5.44 3.96 5 223 743.6 3 704 40.1 1 673 75.0 584.1 72.8 218.0

In the whole country 1988 1985 6 948 5 230.2 6.9 5.7 2.6 4.1 1 785 1 115 5 200 7 158 28 705 19 833 573 501 502.8 531.5 13.0 17.8 17.31 15.94 4.9 3.0 11 265 11 559 1 958 1 503 3 806 2 932.2 53.0 57.5 1 529 1 437 88.0 78.5 850.5 676.7 366.0 401.7 383.5 374.3

237

1995 14 691 7.7 na

1 200 895 na na na 10 377 5 854 6 576 42.8 na 203.9 na 393 221


238

Table 9.4 Some main industrial products of Vietnam, measured in levels of output per head In the North In the whole country Years 1955 1960 1965 1975 1976 1985 1988 1995 Electricity (kwh) 3.9 15.5 34.7 55 62.8 87.2 109.1 199 Washed coal (kg) 47.0 161.2 229.7 220 115.9 93.9 108.3 104 Cement (kg) 25.3 31.4 15 15.1 25.1 30.7 80 Brick (piece) 49.6 85.4 78 75 49.0 59.7 88.9 Wood (m3) 0.03 0.05 0.06 0.03 0.03 0.02 na na Paper (kg) 0.06 0.35 1.31 1.0 1.53 1.31 1.38 2.8 Salt (kg) 7.0 7.3 9.1 9.5 11.9 11.2 13.3 na Seafoods (kg) 6.9 5.6 5.1 4.0 12.3 10.5 9.9 na Sugar (kg) 0.1 2.0 2.3 0.8 1.5 6.7 5.7 5.3 Cloth (m) 0.72 6.0 5.9 4.5 4.5 6.2 6.0 3.0 Source: Statistical Yearbook, various years.

In explaining the failures of the earlier period, we might say that the initial postunification decade was one in which industrial development was hampered by the need to repair war damage and by the ruthless US-led embargo on trade and investment between Vietnam and the non-communist world. However, the disincentives faced by workers and managers in state-owned factories also played a crucial role: workers' wages were low compared to incomes outside the sector, leading to high absenteeism and pilfering of state property while managers found that all profits were transferred to the state as a part of the government budget revenues, leaving managers with little flexibility and no resources with which to conduct market research or to modernise plant and equipment. Only after 1981 did state enterprise managers begin, gradually, to gain more scope for profit retention and greater flexibility in their production plan. In general, there were two weak points of the industrial sector in this period after 1955: a lack of depth in the industrial structure and weak management. Yet 1955-60 was a period of recovery, improvement and economic development. While light industry was given attention, in time it was thought necessary and possible for bases of heavy industry to be constructed, and economic aid from other countries was available to assist in power development (USSR) and machinery (East Germany). Unfortunately, poor planning and shortages of raw materials meant that many industrial factories and plants operated well below capacity. Problems also arose because the country had been divided into two parts: South and North (Beresford 1989), including the fact that there was a lack


239

of skilled cadres for servicing both South and North and competition for limited investment resources and differences over the worth of collectivisation of agriculture. Some achievements in this period were seen in the fact of the rise in the volume of industrial products after 1955 as shown in Table 9.3 and in the per capita level of output of a few of the major products shown in Table 9.4. It should be noted that industry was scheduled for priority in the first five-year plan (1961-65) which incorporated a plan to change the structure, with heavy industry to be developed and industrial development to be coordinated closely with agricultural development. This change is clearly depicted in Table 9.1 which shows that Group À' products, accounted for largely by heavy industry or producer-goods production, increased more quickly than the light industry category. According to the theory (seen also in Mao's China at this time), light industry was to be developed simultaneously with heavy industry, while central and regional (local) enterprises were also to be developed at the same time. However, in practice, light industry and provincial industry tended to lag behind the modern and urban-based activities. The results for the whole 35 years after the first serious attempts were taken in 1955 to accelerate industrialisation are shown in Tables 9.2 and 9.3. The main result was that, by 1965, industrial products had increased by 9.1 times (taking 1955 as the base year), and the technical and material bases and the skill of industrial management were improved. Industry also developed during the period 1965-75 despite bombing and war (Paine & Fforde 1987), although the Vietnamese had to move the factories and plants to different places to continue working. After unification in 1975 it was discovered that an inappropriate industrial structure was emerging, with too many large projects with long gestation periods and ineffective rates of return on state investment. In the 1980s, therefore, there were deliberate attempts to develop more profitable industries, especially those using local materials or bringing in foreign exchange (Beresford 1989; McFarlane 1993). At the same time, enterprises were given increased scope for autonomous decision making through the introduction of a `Three Plan' system under which only one part of the enterprise's output was subject to directive plans, while others were subjected to more limited interference from the centre. This change of direction was reinforced with the official endorsement of the `Renovation' (Doi Moi) policy in 1986. Directive output plans and centrally fixed prices were finally abolished in 1989. Since that time, a major share of the capital stock of the


240

country has passed into the hands of the household and private sectors, while the remaining state enterprises, following a substantial shakeout of the sector in 1990-92, have lifted their game and achieved labour shedding, higher output and higher levels of productivity (Limqueco 1996a).

ECONOMIC AND SOCIAL ATTAINMENTS: GROWTH VERSUS DEVELOPMENT Industrialisation is an essential ingredient of economic development, not only because it raises the rate of growth of GDP faster than the agricultural and tertiary sectors, but because of the diversification of the economic structure and transformation of human capacities which it engenders. However, there is also a wider notion of development. This distinction has been noted by other contributors to this book, and given Vietnam's well-recorded achievements in education (Marr & White 1989), `grass-roots health programs' (Beresford 1995), and its extensive experience in environmental management (Beresford & Fraser, 1992; Beresford 1995b), it behoves us in studying this country to distinguish economic growth trends as portrayed in GDP movement, per capita GDP (as in World Bank 1995) from `development' which includes the egalitarian achievements resulting from income redistribution and social and collective consumption (Marr & White 1989; Cohen & Purcal 1995). Moreover, the `growth indicators' themselves need to be de-composed or disaggregated, in order to show the nature of the industrialisation process that first got under way in the North in 1955, and to introduce the dimension of poverty relief and income redistribution.

CAPITAL ACCUMULATION PROCESSES Under the condition of the social relations which exist in South-East Asia, three ways of accumulating capital have been dominant: 1 Members of the local Chinese community pool their incomes, inter-marry with members of other rich Chinese families and use their contacts with origins in Amoy and Swatow to arrange credit and funding for larger projects. 2 The state imposes forced savings via its taxation powers or its ownership of successful state-owned enterprises. 3 Under condition of low per capita incomes and low salaries for civil servants and managers of state-owned enterprises,


241

corruption, rent seeking and the prevalence of rent-capital (Bobek's term) constitute a semi-legal or illegal source and process of relatively autonomous accumulation — àutonomous' in the sense of being outside the normal channels or processes of state-controlled accumulation. In Vietnam, while all the aspects of the accumulation process have occurred, there is a difference compared to the other South-East Asian countries: the second was dominant for the first decade, but the third has become significant since the 1986 decisions of the Party Congress to expand the area for economic reform and for market forces generally in the economy. Suddenly, people with land near to urban centres were able to make windfall fortunes and then to invest (admittedly, the short-term avenues were largely in residential activity and tourism) thereby increasing the national rate of investment from a low 6 per cent of national income to about 12 per cent in 1990 and around 25 per cent by 1995. A further source of relatively autonomous accumulation was the semi-legal fees and royalties charged by officials, especially in their dealings with foreigners, bringing about a new faction of capital closely linked to overseas-based capital and of course having a vested interest in the maximum deregulation of the economy and the deepening of the area of domination of market forces.

SOCIO-POLITICAL GOALS: BACKGROUND TO THE NEW ECONOMIC POLICY Beginning in 1981, some leading figures in Vietnam began to think about a new political project — a new sort of political economy for the country. This new set of ideas was further developed and accepted as Doi Moi in 1986, and contact with the World Bank and the IMF has also contributed to the current shape and contours of the project. The most recent policies have been to disinflate the economy, restore public finances, corporatise and deregulate industrial sectors, broaden the tax base and plan for the equitisation of public industries.2 Unemployment has been viewed by some as the necessary cost of accomplishing these reforms (especially by IMF advisers), but the majority of government and Party have been reluctant to allow state enterprises to face the full force of market competition which might cause too rapid an increase in labour shedding from the sector. Instead there has been a rather gradual tightening of budget constraints on enterprises, while increases in household sector employment have


242

been relied upon to provide employment for those displaced, as well as for the million or so new additions to the workforce every year. The core of the transition really consists of six issues related to economic reform and two related to the political theory of the leading political force — the Vietnamese Communist Party (CPV). The six aspects of the reform, to be discussed in more detail below, are: the need to improve the structure, management and flexibility of industry; the need to reorganise the structure, management and role of agriculture; the maintenance of a healthy balance between agriculture and industry in respect to the terms of trade between them and in relation to their shares in the annual investment fund; the need to reorganise the structure and direction of Vietnamese trade with other nations; the need to reorganise state finances, banking and the monetary systems (Spoor 1989), in the wake of the changing fiscal and monetary policies being urged by the IMF (Dollar 1996); and the need to avoid excessive or unfair differentials in the distribution of resources between regions and between social classes. The two major points of issue in the political ideology of the party-state have become clearer since about 1986 and they are: 1 Whether socialism allows for a plurality of ownership forms. For example, should there be some sustained attempt as in the past (and as in countries like socialist China or Soviet Russia) to transform cooperative and collective economic units into state-owned ones, or can the socialist economy in its longish transition to communism thrive economically and develop politically by allowing not only state economic units (state-owned factories and state farms) but collective, cooperative, private, family, state-private joint ventures etc. to play a significant role in the economy (McFarlane 1990; Nolan & Fureng 1990). 2 How the socialist aspects of economic development and social change can be maintained in the face of the dynamism of regional (ASEAN, APEC) capitalism and the trend to globalism led by transnational corporations and policed by the IMF/World Bank incubus. At this point it is necessary to note that the course of the reform during the transition period 1986-96 has been erratic


243

because of shifting political power alignments. For example, some economists have been strong advocates of eliminating all forms of collectivism as inherently inefficient, while others stood for a continuing role for state ownership and state intervention in order to provide basic social investments and to prevent a blow-out in regional and personal income inequality. Given that recorded output in the state sector had generally grown faster than that in the non-state sector over the 1990s, and given the strength of SOE representation within the Party policy organisations, the majority view tended to be to continue with the line of shoring up public ownership and `state guidance' in economic life. It should also be remembered that during the 1970s, in the aftermath of the VietnamUnited States war, Vietnam missed out on the opportunities that had opened up for other South-East Asian countries. These states were able to maintain their investment booms throughout the 1970s by borrowing recycled petro-dollars at negative real interest rates, and foreign investment was readily available to assist both internal infrastructure needs and the expansion of productive manufacturing. As had happened earlier during the 1950-53 Korean war, the Vietnam conflict provided enormous spin-offs for Asian countries in terms of contracts for war-related supplies, American R&R which boosted the `hospitality' sectors, as well as promoting the demand for food and beverages, textiles, apparel, etc. Vietnam, of course, was isolated first by war itself and then by a very tight USorganised and policed trade and investment embargo which was obeyed by Japan and nearly all the others, effectively blocking the development of the economy for a decade. Soviet and East European civilian aid was often not suited to Vietnamese conditions, or was used inefficiently by the Vietnamese themselves. Only barter trade supplied some relief but this was on a small scale, Vietnamese products having no mass market in Europe at that time. The decision taken in the late 1980s to open the economy to foreign investment and trade had as its chief purpose to increase the effectiveness (and profitability) of state enterprises through obtaining technology transfers and exposing them to international competition, and to restructure production in a way that would make Vietnamese products competitive in global export markets. The authorities remain wary, however, of allowing international market forces to structure the economy in the way that happened during the colonial period. Hence local joint venture partners are protected under the Foreign Investment Law, by giving them an effective veto over strategic business decisions of the company. In 1996 licensing of foreign investment was also tightened in an


244

attempt to ensure that foreign investment projects more nearly reflect Vietnamese plan priorities and to retain at least partial Vietnamese ownership in key sectors such as telecommunications, insurance and power generation. A major requirement, if this objective is to be achieved, is to increase the mobilisation of domestic savings for the government's development goals. This has been partially achieved through the increase in government savings in the mid-1990s but, as discussed further below, the reform of the banking and non-bank financial sectors is also important.

KEY ASPECTS OF THE ECONOMIC REFORM PROCESS Since 1986 reform processes have covered industry, agriculture, finance and trade.

Industry policy At the end of 45 years' experience with the construction of industry and its management, the CPV Congress in 1986 was able to sum up all the negative and positive lessons and to hammer out a new package of policies towards industry that they believed would fit more closely the new economic system that, they thought, would take the country into the next century (CPV 1986). Perusal of the decisions and deliberations of the 1986 Congress appears to confirm that the following new approach was foreshadowed. The approach starts from the viewpoint that profitability and effectiveness of investment should be taken into account in projects and in selecting which industries to expand; rural industry, small cooperatives and family-based businesses should become dominant in light consumer goods industries, although efficient parts of the older `social industry' should be retained; private domestic and foreign investment should be welcomed, especially in tourism, export industries, technology transfer, and generally for products that are bought and sold on the market; and state enterprises should be made more productive, should shed excess labour but ought not to be sold off purely for ideological considerations based on the theme of the `magic of market forces' (Limqueco 1996a & 1996b). After a period of focusing on the need to reduce the level of subsidy to state-owned industrial enterprises and force them to restructure their activities to become more efficient and profitable, the theme emerging most strongly at the 7th and 8th Party Congresses was a return to the concentration on industrialisation and modernisation as the means to avoid falling further behind


245

Vietnam's neighbours in economic development (CPV 1996). In this process it is envisaged that the state-owned sector will play the `leading role', although other components, particularly new types of cooperatives and the `state capitalist' economy (comprising joint ventures between SOEs and foreign and domestic capital), individual and small owners, as well as private capitalists, are also to be encouraged. Within the industrialisation policy, priorities are given to human resource development, labourintensive mediumsize and small industries using advanced technology, processing of agricultural commodities, consumer goods, exports and information technology. Key heavy industries in areas such as energy, construction materials, some engineering, ship building and repair, metallurgy and chemicals are also planned to expand (CPV 1996). Direct government investment will be focused heavily on improvement of the country's dilapidated transport and communications infrastructure, while industries will be promoted through the availability of state credits (MPI 1996). Three major industrial areas are envisaged — around Hanoi-Haiphong-Quang Ninh in the north, Ho Chi Minh City-Bien Hoa-Vung Tau in the south and Quang Nam-Da Nang in the centre — and these are the focus of infrastructure development in the form of industrial zones and export processing zones. However, the ability of the Party to impose its priorities depends to a large extent on the availability of foreign direct investment (which currently supplies about one third of the total investment effort) and overseas development assistance, while foreign investors and donors are likely to be wary of large-scale investments in a climate of uncertainty caused by lack of an effective legal framework and sluggish reform of the bureaucratic apparatus. The poor state of the education system, following severe budget cuts in the early 1990s, may also affect the skills base of industry and dilute one of the key advantages that Vietnam has held over other low-wage industrialising countries in the region.

Agricultural policy The main concern has been to upgrade the role of the household sector and to expand free market conditions for the disposal of agricultural surpluses (Beresford 1990). A contract system, under which households agreed to supply a quantum of agricultural produce to state purchasing agents, was established. Above-quota output could then be sold to the state at higher prices or sold on a free market (e.g. at rural fairs). The immediate results were good from the viewpoint of yields and


246

output levels, but incentives declined when peasants found that they could not buy radios, bicycles and light industrial goods which were in short supply. As a result, agricultural output stagnated during 1983-86, forcing a change in policy. That change was based on the idea of upgrading the role of the household sector and abolishing procurement at fixed prices of the `minimum' quota. In 1988, the Politburo of the ruling CPV passed its Resolution 10 which allowed investment and production decisions to be made by households. This led to the break-up of most of the remaining cooperatives, although there was no systematic government-backed assault on collectives, nor any official de-collectivisation of agricultural units of the type organised in China by Deng Xiaoping after 1978. Those that remained became suppliers of extension services: they leased-out equipment or assisted with marketing. Two further developments in agricultural change may now be mentioned: banking arrangements and reorganisation of rice exports. Up to 1994, a State Bank for Agriculture lent to collectives but because of uncertainty and risk in agriculture in practice turned its attention to the state enterprise financing. After 1994 the agricultural bank branches gradually increased their loan portfolios in agriculture. Concern has been expressed, however, that the bulk of credits and loans have gone to wealthier peasant households, so a new bank modelled on Grameen Bank in Bangladesh has been set up to gather resources for poorer families. As part of the government's new desire to expand exports, a major restructuring has been undertaken in the organisation of the rice trade. To counter tendencies towards economic trading organisations cutting rice prices and annoying other ASEAN states and rice exporters, licensing was introduced and an oligopolistic structure for rice export was established. Export quotas were given to a few selected companies. A gap was allowed between the lower domestic-priced rice (to keep the urban real wage down) and the much higher export price. However, successful recipients of the quotas were given windfall profit arising from the price gap, giving cause for concern about the fluctuations of super-rents for income distribution.

Financial policy For the Vietnamese state to fulfil its reform aims it has had to position itself in a way that allowed it to control the banking sector (as the foundation of the financial system) while encouraging the non-state sector to expand trading in liquid securities. This


247

has meant that direct control of finance (money supply, finance earmarked for development projects, forcing commercial banks to lodge reserves with the State Bank, etc.) has been supplemented by indirect influence (via interest rates and foreign exchange rates) stemming from the gradual establishment of (a) short-term money markets; (b) fluctuating exchange rates with the appearance of a legal foreign exchange market; (c) a bond market; and (d) embryonic development of stock markets. In largely withdrawing from control of finance of the sort operated by the state in the period of planned economy, the Vietnamese authorities have shown an awareness of the role played by the financial sector in establishing a stable macroeconomic environment in which other reforms can flourish. The large volume of regulations and legislation since 1989 relating to the banking and financial systems; the emphasis on sequencing the monetary reforms; the awareness that the public must see banks as `honest brokers' if domestic resources are to be mobilised — all these factors show an awareness of the need for new economic functions of the state in the financial sphere. While the rate of accumulation has climbed steadily to some 25 per cent of GDP, and while much of this has been in the form of private housing construction, the pressure on the state to promote an acceleration of the national rate of investment is enormous. Not only are there infrastructure and developmental projects eating up the savings pool, but to get a higher savings pool, the state must (as Kalecki (1976) demonstrates so clearly) expand output by investing, so more savings emerge at a higher level of output. Getting there is the problem because acceleration of investment by government is only partly compatible with price stability. There is in fact a sort of `trade-off' between the two. The inflationary pressures inherent in such an acceleration of the national rate of investment are considerable. The new emphasis on monetary and fiscal reform evident since 1989 is partly a response to the need to keep inflation under control with an ìndependent' central bank declining to print money to finance government capital budget deficits, while pointing the state officials to the need to approach bond, share and foreign exchange markets for their needs instead. In 1990 a two-tier banking system was introduced comprising (a) a central bank (with functions similar to European central banks), and (b) a commercial banking network. This was done in recognition of the reality of the growth of petty commodity production and exchange and the wider scope given to market forces in shaping the structure of output. Two years later, foreign banks were licensed.


248

There is, however, a clear link between problems being experienced by both state and non-state enterprises stemming from inadequate quantitative and qualitative control over the credit system (State Bank of Vietnam 1994; Kijima 1994; Communist Party of Vietnam 1986; Central Institute for Economic Management 1994). The private sector found itself discriminated against in credit availability, partly because the banking system has a lack of capacity to calculate commercial risk. Given the likelihood that SOEs will not be allowed to be bankrupted, they are seen as a safer lending prospect. This has led, however, to a build-up of debt arrears and liquidity problems for many banks. In addition, lack of confidence in official financial institutions meant that there was always below the surface an untapped, immobile pool of domestic savings, transformed into gold hoards or real property (as hedges against inflation) and not available as loanable funds, for a capital-hungry industrial sector. However, the growth of non-bank markets, aimed at stepping up mobilisation of idle funds in the hands of the public, the enterprises and the local authorities was, in 1996, still in its infancy. Fiscal policy aimed to reduce budget deficits of government. This new discipline arose partly from IMF pressure, but also because the èasy' solution of seeking aid from CMEA allies was closed off. The task of limiting the ratio of the overall budget deficit to GDP to about 4 or 5 per cent was essentially achieved by 1993. The reform led, inevitably, to the sort of banking and financial changes now being tried out, simply because enterprises were now dealing horizontally with other economic units, instead of vertically (with the next level of administration) as in the old system. As well, it should be noted, the deepening of the monetary and banking changes will cause the reform itself to accelerate, since the criss-cross of credit flows, the inter-sectoral movements of loanable funds, will render state control increasingly irrelevant.

International trade Accompanying these changes in the domestic sphere has been a rethinking about how to conduct international trade which led directly to a change in the direction and structure of international trade (McFarlane 1993). There has been a particularly rapid growth in exports during the decade since 1986 with a shift away from `soft' manufactured goods (especially handicrafts), for which genuine demand was lacking, to primary commodities such as crude oil, rice, coffee, marine products and rubber, and light manufactures such as garments and shoes. The structure of


249

imports, however, remains, as before, concentrated on fuel, industrial raw materials, and machinery and equipment. The direction of trade has shifted markedly: whereas previously trade was dominated by CMEA countries, especially the Soviet Union, in 1994 75 per cent of trade was with East and South-East Asia, notably Japan and Singapore for exports and Singapore, South Korea and Japan for imports (Statistical Yearbook 1995). Trade with the former CMEA countries has begun to revive after a severe slump in the wake of the collapse of socialism in Eastern Europe: in 1994 the region provided just under 10 per cent of imports and took 7 per cent of Vietnam's exports.3 Officially recorded trade with China has also grown rapidly: exports increased 38-fold between 1990 and 1994, while imports increased 31-fold in the same period. All of these data are, however, blurred by the large amount of smuggling, estimated as high as 25 per cent of total trade and affecting mainly the trade in consumer goods and agricultural products between Vietnam and its northern and southwestern neighbours. The earliest reform in the foreign trade sector came in 1980 when the central trade monopoly was broken and province-level, state-owned trading companies were established. This change brought about a rapid increase in trade with non-CMEA countries during the 1980s and a concomitant shift towards production of export goods outside the plan. But the biggest change came in 1989 with the floating of the exchange rate and the decision that, in principle, anyone can engage in international trade. In practice, however, trade remains largely in the hands of state-owned companies because of their experience and connections outside the country, their larger capital resources and privileged position with regard to obtaining import licences. Small cooperative, private and state enterprises have found it necessary to use the state trading companies because of their lack of marketing skills and information and relative inability to travel abroad to establish contacts. International trade reform has also been linked to policies of price stabilisation. The government issued, for example, export quotas for rice in an effort to maintain a low domestic price and high export prices. In previous years, since the domestic cost of production had been well below the world market price, Vietnamese exporters in competition with each other, drove down the price and caused complaints from Thailand.4 The existence of a quota, however, means that Vietnamese rice producers have not been able to take full advantage of the large price difference between rice in Guangxi province of southern China and the domestic market.5 Despite reports of largescale smuggling of rice to China, domestic prices had not risen substantially, suggesting that the controls may


250

have had some impact. The main beneficiaries of this policy are undoubtedly the mainly state-owned rice-exporting companies who profit from the difference between low farm-gate prices and high world market prices, although it also enables the standard of living of poor urban Vietnamese to be maintained. Since much of the profit is unlikely to be ploughed back into agriculture,6 the policy may have an adverse impact on longrun productivity increases in rice production, not to mention the farmers' standards of living. Cement is another commodity which the government attempts to stabilise through the use of import quotas. Since most construction occurs during the dry season, seasonal fluctuations in the price of domestic cement can be very large. Local cement producers who have an effective monopoly of the domestic market have reportedly engaged in speculative hoarding and cutting production in the dry season, when demand is high, in order to force up prices. During one such `cement fever', in 1995, the State Planning Commission agreed with the factories on a cement import quota which was expected to guarantee the profitability of domestic producers while discouraging speculation.7 Cement imported under the quota system is distributed by the Ministry of Trade. Here again, the stabilisation policy seems most likely to benefit SOEs without allowing international competition to force improvements in efficiency.

ROLE OF THE MARKET IN THE TRANSITION PERIOD This issue has come to dominate the literature on events in the post-communist economies. Not all commentators have retained enthusiasm for predominantly market solutions (Amsden et al. 1995; Haddad 1992, 1995 & 1996 review). The major point in relation to new market mechanisms in socialist economies has been the issue of the speed of introduction of new reform policies. As Haddad put it, unless we absorb Karl Polanyi's point that capitalism required prior institutional development to become viable, we will have a simplistic view of what can be achieved by sudden economic reform in Vietnam and elsewhere. Further closely related issues are those of the proper sequencing of the decentralisation processes and the need for prior establishment of well-functioning institutions (banking, investment market; accounting procedures in public-sector activities, foreign exchange markets, etc.) before major economic reform proceeds. It has been suggested that a country like Vietnam needs to be


251

most careful about these two aspects. In relation to sequencing and institutions there should be a definite plan (Haddad 1992), in which `sequencing' via intelligent state intervention would be undertaken, and in which institutional change would accompany and sometimes precede èconomic reform'. There is a growing awareness that in formerly planned economies, the order in which new institutions and policies are introduced matters a great deal — for example, a clear demarcation has to be drawn between illegal and legal activities.

ECONOMIC ROLE OF THE STATE: PRACTICAL AND THEORETICAL ISSUES FOR THE VIETNAMESE TRANSITION PERIOD Doi Moi has been a process not only of economic renovation, but also one of redefining the social and political goals of socialism. The traditional socialist model in which state intervention in economic and social life was pervasive has been replaced by one in which the state has withdrawn from most areas of concrete production and investment decisions, and many social services (health, insurance, parts of education) have also been subject to market forces. While no clear definition of socialism in the new environment has yet emerged, a number of themes have consistently appeared in Communist Party documents which give some clue as to the new thinking. These include the notions that public enterprise will continue to be the dominant force in the economy, that planning (though not of the administrative variety) will guide the overall development strategy, that poverty alleviation and social equity between classes, genders, ethnic groups and regions will be a major priority, and that workers' rights will be defended (including the right to live and work in a safe and healthy environment). Given that Vietnam remains one of the world's poorest countries and needs to rely heavily on foreign investment and development aid from capitalist countries, these goals are likely to be difficult to achieve while sustaining high rates of growth. Nevertheless, they are an indication that the Vietnamese leadership wishes to avoid the situation where the economic transition becomes simply a transition to capitalism and intends to use state power to preserve many of the social gains of the past as well as ensure that growth does not occur at the expense of development. The practical problems associated with achieving these goals are:

EMERGING ECONOMIC SYSTEMS IN ASIA 1

2

3

4

252

Public enterprise remains relatively inefficient with a lot of very old capital stock. It requires high levels of protection against foreign competition (taking the form of state credit subsidies, import quotas and tariffs) which give it a disincentive to restructure and become efficient. There is so far little evidence of the sort of carrot and stick policies used by the South Korean regime in the 1960s and 1970s to force large enterprises to conform to government policies. In principle, there is no discrimination against private enterprise, but in practice it is more difficult for larger private enterprises to get an operating licence and import and export licences, and to receive credit from the predominantly staterun banking system. Most find it useful to come to an arrangement, either a joint venture or some other form of cooperation, with an SOE in order to avoid these pitfalls. In general, the lack of transparency in the legal and bureaucratic environment of enterprises makes corruption a problem. Adjustment to new methods of planning within a market environment has been slow. There is a lack of coordination between economic ministries, so that indicative plans do not have any real force. Many projects included in the plan are unfunded, and current expenditure implications of capital expenditure are not often taken into account, meaning that adjustment of priorities often has to be undertaken at the last minute to meet resource constraints. Severe budget constraints during the early 1990s meant that expenditure on poverty alleviation, education, health and welfare programs was drastically reduced. The quality of education and health care in the public sector fell, with the result that the rate of school drop-out increased and the availability of both education and health care increasingly depended on income. Despite efforts to increase public spending, especially on education, as public finances were restored, many years of neglect of infrastructure and low teacher and health worker salaries mean that this has had little impact. Moreover, areas funded from the central budget, like universities and hospitals, tend to receive proportionately more funds than basic services funded by provinces, districts and communes whose revenues are, for the most part, less buoyant. Industrial disputation over wages and conditions has tended to rise mostly, but not entirely, in foreign-invested firms. Whereas workers in SOEs have often benefited from profit-sharing arrangements, share ownership, social facilities and a generally looser disciplinary environment made possible by the protectionist regime, those in the new private enterprises have


253

tended to suffer long working hours and low wages. Labour regimes common in other Asian countries have generally not been accepted by Vietnamese workers and the state has so far refused to intervene on behalf of the employers and indeed encourages the formation of unions within enterprises. It is too early to say whether this attitude is likely to discourage foreign investors — for the moment, wages are evidently low enough to offset any perceived disadvantages.

NOTES 1.

2.

3. 4. 5. 6. 7.

The French colonialists ruled Vietnam for nearly 100 years in order to squeeze out raw materials to supply their industries and they were prepared to exploit cheap labour to get more profits. They installed mainly old and redundant equipment. The Vietnamese after 1946 carried out a war of resistance against the French colonialists for nine years, in which the objective was `to resist the French colonialists and to construct industries at the same time'. The tasks announced by North Vietnamese leaders in achieving this program were: to construct the industrial branches on a small scale everywhere, particularly the industry of national defence; to use available domestic materials; and to build public enterprises in coal, minerals and engineering. Light industries (like textile industries) were also given attention. Equitisation is distinguished from privatisation by the fact that the Vietnamese government generally does not envisage the state abandoning its shareholding in the equitised industries. While shares will be sold to managers, workers and the general public, the state will normally retain a dominant shareholding. Includes Germany. Interview at State Planning Commission, 29 September 1995. In 1995 the rice price in Guangxi was said to be 7000 dong per kilogram, while in the Hanoi markets it was only around 3000 dong (Thoi Bao Kinh Te (Economic Times) various issues). In one case reported to the authors, a state-owned oil company was given a rice export quota. Interview at State Planning Commission, 29 September 1995.

BIBLIOGRAPHY Amsden, A., Rochmanowisc, J. and Taylor, L. 1995 The Market Meets Its Match Harvard University Press, Cambridge, MA. Beresford, M. 1987 `Vietnam: Northernising the South or Southernising the North?' Contemporary Southeast Asia vol. 8, no. 4.


254

——— 1989 National Unification and Economic Development in Vietnam Macmillan, London. ——— 1990 `Vietnam: socialist agriculture in transition' Journal of Contemporary Asia vol. 20, no. 4. ——— 1995a `Health and development in Vietnam' in P. Cohen and J. Purcal (eds) Health and Development in Southeast Asia Australian Management Studies Network, Canberra. ——— 1995b Èconomy and environment' in Benedict J. Tria Kerkvliet (ed.) Dilemmas of Development: Vietnam Update 1994 Political and Social Change Project No. 22, Australian National University, Canberra. Beresford, M. and Fraser, L. 1992 `Political economy of the environment in Vietnam' Journal of Contemporary Asia vol. 22, no. 1. Beresford, M. and Fforde, A. 1996 À methodological for understanding the process of economic reform in Vietnam: the case study of domestic trade' Australian Vietnam Research Project Working Papers no. 2, Sydney and Canberra. Braddock, R. (ed.) 1993 Vietnam: Which Way Now? Asia-Pacific Research Centre, Macquarie University, Sydney. Catley, R. and McFarlane, B. 1974 `The Vietnamese social model' Australian Quarterly vol. 40, no. 4. Central Institute for Economic Management of Vietnam 1994 Renewal of Financial and Monetary Policies: The Circulation of Material and Goods at Home and in Foreign Trade Hanoi, February. Cohen, P. and Purcal, J. (eds) 1995 Health and Development in Southeast Asia Australian Management Studies Network, Canberra. CPV 1986 Community Party of Vietnam Sixth National Congress Documents Gioi Publishers, Hanoi. ——— 1996 Communist Party of Vietnam VIIIth National Congress Documents Gioi Publishers, Hanoi. Dobb, M.H. 1951 Some Aspects of Economic Development Ranjit, Delhi. Dollar, D. 1996 `Rapid stabilisation, strong growth mark Indochina's economic transition' IMF Survey 1 July. Haddad, L.M. 1992 `What are the questions?' in H. Hendrischke (ed.) Market Reform in the Socialist World Centre for Chinese Political Economy, Macquarie University, Sydney. ——— 1996 Review of `Socialist economies and transition to the market' Journal of Contemporary Asia vol. 20, no. 3. Hendrischke, H. (ed.) 1992 Market Reform in the Socialist World Centre for Chinese Political Economy, Macquarie University, Sydney. Kalecki, M. 1976 Essays on Developing Economies Harvester Press, Hassocks. Kijima, S. 1994 Banking System and Financial Sector State Planning Commission, Hanoi. Kolko, G. 1971 `Vietnam: the illusion of withdrawal' Journal of Contemporary Asia vol. 4, no. 1. ——— 1974 `The dynamics of reconstruction and victory: the PRG of South Vietnam' Journal of Contemporary Asia vol. 4, no. 1.


255

——— 1988 `The structural consequences of the Vietnam War and socialist economic transformation' Journal of Contemporary Asia vol. 18, no. 4. Limqueco, P. 1996a `Vietnam ain't broke so why is the World Bank trying to fix it?' Asia Times 13 March. ——— 1996b `Vietnam: economic report on industrialisation and industrial policy' Journal of Contemporary Asia vol. 26, no. 4. McFarlane, B. 1990 `Market socialism and democracy' in P. Nolan and D. Fureng The Chinese Economy and its Future Polity Press, London. ——— 1993 `Structural change and trade patters in Vietnam since 1983' in R. Braddock (ed.) Vietnam: Which Way Now? Asia-Pacific Research Centre, Macquarie University, Sydney. Marr, D. and White, C. (eds) 1969 Post-War Vietnam: Dilemmas of Socialist Development, Cornell University Press, Ithaca. Ministry of Planning and Investment 1996 Vietnam: Public Investment Program 1996-2000 Hanoi. Ngo Vinh Long 1983 Àgrarian differentiation in the southern region of Vietnam' Journal of Contemporary Asia vol. 14, no. 3. Nolan, P. and Fureng, D. 1990 The Chinese Economy and its Future Polity Press, London. Paine, S. and Fforde, A. 1987 The Limits of National Liberation: Problems of Economic Management in the Democratic Republic of Vietnam Croom Helm, London. Quang Minh Dao 1993 `History of land tenure in pre-1945 Vietnam' Journal of Contemporary Asia vol. 23, no. 1 Spoor, M. 1988 `State finance in the Socialist Republic of Vietnam' in D. Marr and C. White (eds) Post-War Vietnam: Dilemmas of Socialist Development Cornell University Press, Ithaca. State Bank of Vietnam 1994 `Vietnamese banks and renovation in coming years' in Finance Planning Department Financial Markets in Vietnam Hanoi. Statistical Yearbook (Nien Giam Thong Ke) General Statistical Office, Hanoi. Thaleman, A. 1996 `Vietnam: marketing the economy' Journal of Contemporary Asia vol. 26, no. 3. Thoi Bao Kinh Te (Economic Times) Hanoi. Vo Nhan Tri 1990 Vietnam's Economic Policy Since 1975 Institute of Southeast Asian Studies, Singapore. World Bank 1995 Report on Industrialisation and Industry Policy (Vietnam) World Bank, Washington.

10 The Russian economy in transition: an overview Louis Haddad Despite, or perhaps because of, the numerous systemic, structural and stabilisation measures that have been introduced since the collapse of the system of planning and administrative control and the break-up of the Soviet Union in 1991, the Russian economy remains in a more or less dysfunctional state. The federal government is weak and divided, and appears to be overwhelmed by the bewildering complexity of transition to a functioning market economy. Countless laws and presidential decrees have been passed and numerous policies formulated, but the government lacks the capacity and perhaps the willingness to implement them effectively. Indeed, Russia has been experiencing a crisis of governance. The dismal state of the Russian economy is manifested by the dramatic fall in output (43 per cent between 1992 and 1994), investment, trade and employment, the very high inflation rate, massive outflows of capital and the exodus of professional people, the rapid deterioration of social and physical infrastructures, significant declines in the birth rate and life expectancy, a rapid rise in the number of people below the poverty line, increases in diseases and crimes, and an ecological disaster of contaminated soil, polluted drinking water and unsound nuclear power plants. Given this dismal state of affairs, several questions suggest themselves. First, how much of it is due to èxternal' factors such as the collapse of the Council for Mutual Economic Assistance (CMEA) and the Soviet Union, and how much to mismanagement of the transitional process and to policy mistakes? Second, are the negative economic and social indicators part and parcel of the transformational process, or do they reflect something worse? Third, do the negative indicators obscure the gains made so far, and what precisely are these gains? Finally, assuming that the Russian economy is about to be, if it is not already, transformed

THE RUSSIAN ECONOMY IN TRANSITION

257

into a market-based economy, will it be a well-functioning, efficient and dynamic economy, and well-integrated into the world economy, or will it be some Third Worldtype market economy relying heavily on the export of its rich natural resources? It is, of course, beyond the scope of this chapter to offer complete or even satisfactory answers to all these questions, but in order to give some answers to some of them it is proposed to review the major changes that have taken place since 1991, when the Russian economy separated from the rest of the former Soviet republics. It is further proposed to analyse the changes under three broad headings: systemic, structural and policy. Systemic changes refer to changes in institutions and in `the rules of the game'. Structural changes include sectoral adjustments, restructuring of state-owned enterprises (SOEs), changes in technology and production processes. Policy changes refer to changes in the level of prices and wages, interest rates, the money supply, taxation, exchange rates and other economic variables. Of course, these types of changes are closely interrelated and overlap a great deal. That is why they are often conflated, particularly in the literature on economies in transition. For the purpose of this chapter and for clarity of thought in general, it is best to analyse them separately. The structure of the remainder of this chapter is as follows: the following three sections record and discuss respectively the systemic, structural and policy changes since 1991. The penultimate section analyses and interprets the main economic indicators, focusing on the decline in GDP during 1991-94. The final section offers some concluding remarks about the transitional strategy adopted by the Russian government, and suggests an alternative strategy for both the restructuring and recovery of the Russian economy.

SYSTEMIC CHANGES When the Soviet Union was dissolved at the end of 1991 the Russian economy was already in crisis, mainly because of the collapse of the central planning system and the CMEA trade.1 To solve the economic crisis and transform the new Russian economy into a functioning market system, the federal government in January 1992 introduced a radical program of systemic and structural changes and macroeconomic stabilisation policies. The systemic reforms focused on price, trade and foreign exchange liberalisation, privatisation and banking reforms. In particular, the freeing of prices was considered the centrepiece of the whole program. Within three months nearly all prices of consumer goods


258

and of most producer goods were freed. At the same time, the administered prices of some critical inputs, such as petroleum products, were raised several times. Following the liberalisation of prices, wholesale prices increased four-fold within two months and retail prices of goods rose by 1500 per cent within a year (World Bank 1992; Sachs 1994). Given the chronic shortages of goods and the `monetary overhang' at the end of 1991, as well as the monopolistic structure of Russian industries, some price increases were expected, but the extent of the price rise came as a shock to both the Russian reformers and their Western advisers. What apparently aggravated the price increases was the flight of wealth from the currency. The liberalisation of prices was not accompanied by an increase in the nominal rate of interest, which remained extremely low at 10 per cent. This caused a dramatic drop in savings by the population and an accumulation of large inventories by enterprises.2 The idea of freeing prices is to get the relative prices right, to provide meaningful signals for economic agents. However, in a situation of near hyperinflation which followed the freeing of prices, significant changes in relative prices were swarmed by the rapid increases in their level. Under this situation the freeing of prices did not produce the desired effect. Thus, even without the benefits of hindsight, it is arguable that the liberalisation of prices should have been postponed until the economy had been somewhat stabilised, or at least until the monetary overhang had evaporated. Another reform package considered essential by the reformers for the transition to a market economy is the liberalisation of foreign trade and the foreign exchange regime. This would not only subject the large monopolistic SOEs to international competition, but also inject an element of rationality into the domestic price structure. Since January 1992, imports became relatively free of restrictions, though most items continued to be purchased through centralised agencies, and until July 1992 sold at subsidised exchange rates. Exports of raw materials and energy, which made up some 70 per cent of total exports, continued to be subject to quotas and licences, but because of administrative inefficiency, near collapse of central control and widespread corruption, these restrictions were easily evaded (Gaider et al. 1994). The liberalisation of imports resulted in stiff competition between domestic enterprises with their low quality and homogeneous products and foreign firms with their differentiated, more sophisticated and fashionable goods. While the latter goods are far more expensive, they are very much in demand by the few rich. The majority of the population, whose income has fallen sharply, are in no position to purchase even the cheap domestic


259

goods. Domestic enterprises need time, advanced technology and much capital to restructure their production in order to provide high-quality differentiated goods and thus compete with imports. Even then it would not be easy for them to compete with foreign firms, because of the perceived superiority of imported goods. Following the liberalisation of trade in January 1992, there was a flood of imports of alcohol, tobacco and luxury cars which became leading items of imports in 1992-93 (Gaidar et al. 1994). To contain the trade deficit and give some protection to domestic industry as well as raise revenue, the federal government at the end of 1993 reintroduced tariffs on those items. On the export side, some export-oriented enterprises, particularly those in the energy and raw materials sector, did well from liberalisation. Unlike the domestic and foreign demands for manufactured goods, those for energy and raw materials are close substitutes. However, because of the breakdown of central control, the proceeds of export earnings are not channelled to the Central Bank of Russia (CBR) or even to SOEs but rather to personal foreign bank accounts of corrupt managers and `Mafia' groups who have now greater power over resources and their allocation. According to a report prepared for President Yeltsin in 1994, the Russian Mafia controlled 70 to 80 per cent of all private business and banking activity (Goldman 1995). Given the undesirable outcome on both the exports and imports sides, it seems the complete and sudden liberalisation of trade was rather premature and inappropriate. In the early stages of transition, when enterprises have not had sufficient time to restructure their production they are unable to withstand the rigours of foreign competition. There is, therefore, a need for transitional arrangements under which `viable' enterprises are given temporary protection until they reorganise themselves and restructure their production. Before the liberalisation of prices and trade, the authorities announced their intention to make the rouble convertible. In January 1991 the existing structure of `differentiated exchange coefficients' (quasi-multiple exchange rates), consisting of numerous coefficients that were applied to international transactions, was replaced by a more unified but still a complex controlled exchange rate regime. As Goldberg (1993) shows, this system led to distortions and encouraged both exporters and importers to underreport the value of international trade and avoid participation in legal interbank foreign exchange markets. Thus, efforts on the part of authorities to manage the exchange rate were frustrated. Accordingly, in July 1992 the exchange rate unification plan was introduced as a first step towards convertibility. The plan was


260

designed to unify the various exchange rates applied to foreign exchange surrender by exporting SOEs. The new unified exchange rate was approximately equal to the more depreciated floating value of the rouble on the interbank market. A second step towards convertibility was taken in mid-August and involved the elimination of several excessively appreciated exchange rates that had been applied to centralised imports. As a result of the exchange rate reform, the effective taxation of export activities, which the former system had imposed on exporting enterprises through unfavourable exchange rates for surrendered foreign exchange earnings, was abolished. Further, incentives for exporters to participate in legal foreign exchange markets increased significantly. For importers, the effective rouble costs of foreign exchange rose sharply. For foreign investors, the unification of the exchange rate allowed interbank exchange rates to be applied to capital flows into Russia. (Before July 1992 the CBR did not clarify which exchange rate was to be applied to foreign direct investment (Goldberg 1993)). Nevertheless, the liberalisation of the exchange rate regime, under an environment of an unstable and very high inflation rate, ambiguous property rights and ineffective controls of SOEs, did not stop the dollarisation of the economy and the massive flight of capital.3 The holdings of dollar deposits in the Russian banking system increased from US$1.5 billion in February 1992 to US$12 billion in November 1993 (Sachs 1994, p. 31). The dollarisation ratio in this period fluctuated between 30 and 45 per cent; these figures, however, underestimate the true dollarisation ratio because of dollars ùnder the mattress' and residents' deposits abroad (Sahay & Vegh 1995). While the unification of the exchange rate removed the effective taxation on surrendering foreign exchange earnings, exporting enterprises remained reluctant to surrender their earnings because of the instability of the rouble. It is now widely accepted that the success of liberalisation of prices, trade and foreign exchange depends on macroeconomic stability and on enterprise and structural reforms. Enterprise reform started in 1988 when the Soviet government transferred many micro-decisions to the SOEs and replaced mandatory planning by a system of state orders. Two years later the autonomy of SOEs was further extended. These reforms weakened the ability of the central authority to enforce state orders and to control enterprise finance. As a result, there was a sharp decline in the profits remitted to the government, which contributed to the dramatic growth of the budget deficit in 1991.4 Moreover, the increased autonomy added to the existing confusion over property


261

rights, resulting in multiple claimants with overlapping and conflicting control rights. The regime of multiple claimants and loss of control by the Centre to managers led to the phenomenon of widespread `spontaneous privatisation'. To prevent further the spread of this phenomenon, the Russian government introduced in June 1992 an ambitious privatisation program. The central element of this program is a scheme for mass privatisation of medium and large-scale SOEs through tradeable vouchers or coupons to be completed by the end of the year.5 Accordingly, the government began issuing vouchers to the general public in November with a face value of 10 000 roubles, and the first auction of shares for vouchers took place in Moscow in December. Within a year some 40 per cent of medium-size and large SOEs were privatised. This is considered one of the major achievements in 1993 (Gaidar et al. 1994). Although one third of SOEs were excluded from the privatisation scheme (mainly the defence industry, energy and raw materials, and transport and communication), the program spelled out methods to improve corporate governance in these enterprises.6 Privatising small-scale enterprises (shops, cafes and service outlets) has turned out to be quite successful in terms of raising revenue for the government. Within three years nearly all small-scale activities were privatised. By contrast, the task of privatising medium-size and large-scale enterprises ran into some serious difficulties — notwithstanding the rhetoric of the Russian government and its Western advisers (Rutland 1994). This is mainly because mass privatisation was introduced in the absence of a supporting infrastructure, including a coherent legal framework and mechanism for enforcing contracts, a functional financial market and institutions, scarcity of financial and technical expertise on commercial practice and markets, and a critical financial press. As a result, top managers have been able to secure ownership of a substantial part of the shares of enterprises which permit them to run the enterprises as if they owned them. Also, in many cases large shareholdings have been acquired by private individuals, the nouveau riches, who were able to accumulate substantial amounts of vouchers from the general public at nominal prices. Clearly, the mass privatisation scheme of 1992 has turned out to be, at best, an extension and rationalisation of the preceding `spontaneous privatisation' and, at worse, has led to the criminalisation of the Russian economy. Intriligator (1994) has shown that the rapid increase in economic crime has stemmed from mass privatisation in the absence of appropriate regulatory and legal institutions. As a result, managers with the cooperation of `Mafia' groups were able to take complete control of enterprises, running


262

them for their own personal gains. They have engaged in massive asset-stripping, selling the inventories and assets of enterprises and putting the proceeds in their own offshore banking accounts. It is suggested that `without mass privatisation the nomenklatura would have carved up the assets among its members' (The Economist, 8 April 1995). Nevertheless, instead of creating incentives for economic efficiency and growth, mass privatisation has led to what some Russians have called ànarchy without the market'. This tragic development has far-reaching and sinister implications for the future Russian economy. Yet many economists in the West and in Russia continue to measure progress towards the development of a market economy by the ownership criterion. Using this criterion it is not hard to show that the Russian economy has more or less made the transition. By April 1994 nearly all small SOEs had become privatised and about 80 per cent of the 20 000 large and medium-size ones had been converted into joint-stock companies (Intriligator 1994). According to The Economist (8 April 1995), `proportionally Russia's state sector is now smaller than Italy's'. Privatisation may be a necessary but certainly not sufficient condition for a functioning market economy.7 Inefficient SOEs that are in a monopolistic position are transformed into private monopolies, in which case privatisation does not improve their efficiency.8 The inefficiency of Russian enterprises cannot be eliminated through mass privatisation, especially under conditions of depressed demand, nor by the imposition of hard budget constraints that will force too many of them to close down, including those that are potentially profitable and viable. This raises one of the critical issues for economies in transition: how to develop a financial system that will finance potentially profitable enterprises during the period of transition which may last several years? Thus, reform of the financial system and the development of special institutions to meet the needs of the economy in transition are prerequisites for successful transformation of the economy. The first stage of financial reforms started in 1987 when the `monobank' system was replaced by a two-tiered banking system consisting of a central bank and `commercial' banks. The Central Bank was given the responsibility for the implementation of monetary policy, the maintenance of a stable currency, the supervision of commercial banks and the facilitation of interbank settlements. Most other banking functions were delegated to the `spetsbanki', the second tier of banks, which are `self-supporting joint stock banks' officially separate from the state but relying on borrowing cheaply from the Central Bank to finance their lending.9


263

Similarly, Sberbank, the savings bank for households, became a joint stock while nurturing closer ties with the state.10 In 1988-89 the second stage of the banking reform saw the rapid emergence of a diverse set of sectoral and regional commercial banks that were established as joint-stock companies or cooperatives. By 1992 there were some 1600 (in 1994 the number had increased to about 2000) `wildcat' banks issuing loans to uncreditworthy enterprises that own them (World Bank 1992). In fact, some four-fifths of those banks have been set up by one or more state enterprises with the sole objective of raising funds. They apply for credits at subsidised rates from the CBR and use this money to make loans to their enterprises (Johnson 1994). The activities of commercial banks have led to the serious problem of non-performing loans and are hindering the development of market-based banking principles. They have distorted the allocation of new credits as loans flow to unworthy clients. Given that many banks are lending to their owners, moral hazard has become a serious problem in Russian banking.11 Clearly, there is an urgent need to strengthen the role of the CBR. But as with other reform measures, the banking reforms were introduced in the absence of an adequate banking infrastructure. The current legal code and enforcement mechanisms, accounting, auditing and financial disclosure and bank supervision systems are not sufficiently developed for the CBR to carry out effectively its designated functions. Further, the CBR has neither the staff nor the authority to force the commercial banks to comply with its mandates.12 There are simply not enough skilled accountants, auditors and financial specialists to produce and disseminate information on enterprises and financial institutions, and their fraudulent banking practices.13 However, there has been some improvement in the organisational structure of the Russian banking system which took place in late 1993 and the first half of 1994 when the CBR closed 35 commercial banks in an attempt to improve the safety and soundness of the banking system. Also the structure began to change in favour of larger banks in April 1993, when the requirement to increase the charter capital of commercial banks gave rise to takeovers, a new phenomenon for the Russian banking system (Gaidar et al. 1994, p. 76). Nevertheless, Russian banking remains unusually risky and inefficient, lacking the technology of modern banking systems such as a computerised accounts system and electronic transfer payments. The system of clearing among banks has yet to be effectively computerised. As a result, transactions sometimes take two weeks or more (Johnson 1994). Moreover, there have to be changes in banking practices and attitudes inherited from the past system.14 Russian


264

banks lack sound portfolio management procedures. They allow borrowers to use shortterm loans to finance long-term investment, creating a maturity mismatch. Also they do not make provisions for bad debts, thus contributing to their insolvency.15 As a result, there is a general lack of confidence in the currency and the Russian banking system which is manifested by the dollarisation of the economy and the flight of capital, and this is causing the currency to be extremely undervalued. Perhaps the most serious manifestation of this lack of confidence has been the phenomenal growth of inter-enterprise debts. In addition to the explanation already given, inter-enterprise debts are caused by the fact that the banking system has been made responsible for collecting taxes, thus encouraging enterprises to avoid the banking system and to deal directly with one another (Johnson 1994). The problem of reforming the financial system that will serve well the Russian economy in transition is made more difficult by the need to provide finance to too many loss-making enterprises which cannot, for political and economic reasons, be allowed to go bankrupt all at once. But this need contradicts the very principles needed to establish sound banking practices. To deal with this problem it has been suggested by the World Bank (1992) that special financial institutions might be established during the transitional period to assist the government to finance these enterprises on conditions less stringent than commercial criteria. The advantage of this proposal is that it would isolate bad or non-performing loans from the rest of the financial sector, so that healthy financial institutions could emerge to serve the growing private sector on sound financial criteria. In short, the systemic changes that have been introduced since 1991 have focused on introducing `the rules of the market game' without giving sufficient attention to the institutions and infrastructure required for a well-functioning market system. As a result the application of `the rules of the game' have produced very distorted and tragic outcomes. However, the fact that the `new system in its infancy is rife with abuses is', according to The Economist (8 April 1995), `less important than that it exists at all'. This assessment is based on the dubious analogy of `robber capitalism' that had characterised the development of American capitalism at the turn of the century.

STRUCTURAL CHANGES Systemic changes must be accompanied or followed by structural changes and sound policies to ensure that the newly transformed


265

market economy is efficient, dynamic and flexible — properties that characterise a wellfunctioning economy. As already suggested, structural changes include sectoral adjustments and restructuring of enterprises to make them more innovative and competitive. In addition, there is an urgent need for the rehabilitation and expansion of infrastructure. Of course, some structural changes will inevitably follow systemic reforms and deregulation of the economy and the implementation of macrostabilisation policies.16 But such changes are unlikely to be adequate and will certainly take a long time. Hence it is necessary for the government to be actively involved to bring about the desired structural changes. In the case of Russia, sectoral adjustments imply the shifting of resources from the traditionally favoured defence industry and capital goods to consumer goods and services. To some extent, privatisation and liberalisation measures have already led to a relative increase in consumer goods and services.17 Indeed, it is often argued that the output decline observed in all economies in transition, with the exception of China, is the result of structural changes (Kornai 1994). However, the statistical evidence for the shifting of resources from declining to expanding industries is not very strong. With the opening of the Russian economy to foreign competition, one would expect a significant reallocation of resources in line with the orthodox comparative costs principle. However, the study by Borensztein et al. (1993) indicates no strong tendency for resources to be moving towards those sectors with relatively low domestic costs following the liberalisation of trade. Further, if structural change is taking place on the scale claimed by Kornai, then there should have been a significant increase in investment. But investment has been declining sharply. In 1992 it fell by 40 per cent and in 1993 by 19 per cent (Gaidar et al. 1994, p. 127). A further indicator of structural change, or the lack of it, is the changing composition of imports. Given the relatively backward state of manufacturing industry, one would expect an increase in the imports of machinery and equipment embodying advanced technology needed for restructuring. Instead these items have shrunk while imports of luxury goods have grown since the liberalisation. Of course, structural change takes time. It takes time for new products and new enterprises to emerge. Industrial restructuring is likely to be slow and painful, particularly in a climate of falling demand and employment. Some unemployment of the short-term type is necessary to provide flexibility and facilitate restructuring. But the type of unemployment taking place in Russia is long-term. This type of unemployment does not increase the flexibility of the


266

economy but reduces potential output and growth and increases the fiscal burden (Ellman 1994). Restructuring can be promoted by reorganising the large monopolistic enterprises and breaking them up into smaller units, particularly in cases where production is undertaken in multiple plants. The primary object of this kind of restructuring is to improve the degree of competition in Russian industries. Arguably, Russia needs more competition than privatisation. Privatisation without competition will do very little to improve allocative and creative efficiency. Accordingly, the Russian State Committee for Anti-Monopoly Policy and Promotion of New Economic Structure was established in May 1991 to monitor trade practices. This committee, however, lacks the necessary information and trained staff to assess which firms are in a monopoly position and when an enterprise is in violation of the anti-monopoly legislation. In the few instances where the Committee can make judgments, court proceedings are lengthy; and even if judgments are obtained, there are no effective mechanisms to ensure compliance. In any case, changing the structure of the Russian economy requires a great deal of capital and retraining of the labour force. Foreign direct investment can make a modest contribution to economic restructuring over the medium term, especially in areas with foreign partners who can provide advanced technology and management and marketing skills for improving the efficiency and product quality. However, under the current climate of economic and political instability, capital is flowing out of, not into, the country. Even when stability is maintained there has to be a radical improvement in the infrastructure, particularly transportation, telecommunications, power generation and distribution systems. Existing facilities have deteriorated due to lack of finance over the past years. Arguably, the development of Russia's immense energy resources offers the best prospects for generating the financial surplus needed to restructure the economy and rehabilitate the infrastructure. The importance of the energy sector for the Russian economy is reflected by the fact that it generates more than 60 per cent of total export earnings; the oil and gas industry alone contributes 50 per cent (World Bank 1992). Hence the expansion of production of oil and gas and export earnings will help to restore external viability and offer the potential of financing the much-needed imports of advanced machinery and equipment for the restructuring of the private and public sectors. In theory, if the energy sector is modernised and made profitable, it will generate enough wealth to finance the transformation of the entire economy.


267

Since 1990, however, energy has been declining at an annual rate of 10-11 per cent, due to a number of factors: natural depletion; mismanagement of oil fields; lack of finance to repair oil wells and to develop discovered proven fields; and disruption in 1991-92 of the traditional equipment supply networks following the break-up of the Soviet Union. Similar trends can be seen in coal and gas production (World Bank 1992). According to The Economist (8 April 1995), `[O]ne-quarter of Russia's coal mines continue to require 80 per cent of subsidies handed out to support coal production even though their output will never be economic at market prices . . . [O]nly one coal mine has been closed since the launch of radical reform.' Energy production is unlikely to improve in the short run until there is substantial investment for rehabilitation of existing facilities and the development of new fields. The finance can come partly from raising prices which are still well below world prices. Foreign investors are keen to get involved in the development of the oil industry and could play a major role in the recovery of the oil sector during the transitional period. In particular, joint ventures would facilitate the transfer of modern management skills and methods of enhanced recovery in existing fields. However, foreign investors require a clarification of ownership rights and export regulations before committing themselves on a major scale. The agricultural sector in Russia accounts for about 16 per cent of GDP and employs about 13 per cent of the labour force. In the 1980s, output grew by 2 per cent but over the last four years the growth rate has been negative (Gaidar et al. 1994, pp. 122-4). Further, labour and capital productivities are low by international standards. Given its importance for the economy and for the welfare of the population, this sector is in need of major restructuring. Successful restructuring will relieve both the burden of agricultural imports on the balance of payments and the budgetary burden of agricultural subsidies.18 A necessary step towards the restructuring of the agricultural sector was taken in January 1992 when prices were freed, causing some adjustment of domestic prices to world prices. At the same time, the government introduced a new program of price subsidies to producers to help them adjust to market forces during the transitional period. Further, a comprehensive program for the restructuring and reorganisation of state and collective farms was introduced in late 1991 and early 1992. The program proposed the transformation of firms into joint stock companies with tradeable shares and full division of farms into parts, either as small voluntary cooperative enterprises or individual private farms, or a combination of these.19 However, efforts to push land reform


268

through parliament have failed. Consequently, there are still ambiguous rights over land ownership, and this complicates the privatisation issue. Following the agricultural reforms, the private sector, which was previously limited primarily to household plots of collective and state farm employees and smaller garden plots of urban dwellers, has been increasing. Russia has now over 350 000 private farms. But while the number of individual private farms has been rising, the amount of land privately farmed is still small and life for the 30 million people who depend on the land has changed very little. To facilitate the growth of the private sector, the government in July 1992 empowered the newly transformed Agricultural Bank (Rossel' Khozbank) to issue and supervise the trading of land certificates and carry out mortgage operations and provide working capital.20 However, the development of the private sector depends on government support and provision of certain services, such as price and market information, food inspection, and research and development to improve the production, processing and marketing of food. The agricultural reforms of 1991-92 have improved productivity in sowing and harvesting, due to the devolution of management responsibility, but led to a significant decline in the use of agricultural inputs.21 However, higher productivity requires massive investment for restructuring production processes and building the agricultural infrastructure. Traditionally, Russian agriculture suffered badly from inadequate distribution, storage and processing. Improvements in those areas will have a major impact on the quantity, quality and price of food available for consumers. Most of the processing factories suffer from obsolete production processing. In this area the restructuring of Russian agriculture will need foreign investment, technology, and management and marketing expertise, all of which are in very short supply. There are already a number of joint ventures with foreigners under way, but these remain small and inadequate. International assistance has focused mostly on the supply of food imports, estimated to be around $4 billion in 1992 (Gaidar et al. 1994). But such assistance has been a mixed blessing. It has helped to depress the level of domestic prices and thus contribute to disincentives for agricultural producers. In contrast to systemic changes, structural changes have been modest. Large-scale restructuring has hardly started, especially in the large enterprises in the traditionally favoured sectors such as defence and heavy industry. Industry has remained depressed and investment low. Under these circumstances there can be little


269

restructuring. Apart from the lack of financial and human capital, it is difficult to sort out which enterprises are potentially viable and profitable and which should be shut down. Moreover, environmental problems in Russia, which are among the most serious in the world, are deeply rooted in the structure of the economy. Something has to be done soon about the inefficient and heavily polluted industries. However, it has to be admitted some necessary steps have been taken towards future restructuring and there are signs that managers of many enterprises have become familiar with market behaviour rules and have begun to adjust to market forces (Gaidar et al. 1994; Kharkhordin & Geber 1994; Kuznetsov 1994). Russia has now markets for goods and capital, though they are far from well-functioning.

POLICY CHANGES Since 1991, there have been frequent policy changes reflecting the unforeseeable difficulties of transition as well as political considerations. In this section we focus on changes in monetary and fiscal policies. There is near-consensus that systemic and structural changes require macroeconomic stability to allow the transformation process to continue smoothly. However, there is some evidence to the contrary. Some countries in Latin America and Eastern Europe have managed to implement substantial structural changes in high-inflation environments (Portes 1994). Further, economists belonging to the shock therapy school of transition have erred in believing that macroeconomic stability can be achieved by tight monetary and fiscal policies. Such policies do not work successfully because of the inadequate response of the supply side. In fact, successful macrostabilisation policies equally depend on systemic and structural reforms to produce the desired supply response. This interdependence of the reform measures highlights the bewildering complexity of transforming a large centrally planned economy into a functioning market economy. Following the advice of the IMF, the World Bank and the shock therapy school, the Russian government in January 1992 introduced tight monetary and fiscal policies, leading to a severe liquidity squeeze and an explosion of inter-enterprise arrears, from 39 billion roubles in January to 800 billion at the end of March (World Bank 1992, p. 19). Adverse reactions from the general public and enterprises, as well as banks, forced the government to reverse its tight monetary policy after February. Indeed, in the summer of 1992 the government adopted an accommodating monetary policy that made possible the mutual pardoning of


270

inter-enterprise debts.22 Accordingly, the stock of money rose from 700 million roubles in January 1992 to 4 trillion by October, a rise of 5000 per cent.23 However, in the spring of 1993 tough measures were taken to reduce the budget deficit and limit the supply of credit to SOEs. As a result, the monthly rate of inflation fell from 30 per cent to 16-17 per cent in April and May (Gaidar et al. 1994). This was followed by a relaxation of the money supply which increased the monthly rate of inflation to 20 per cent in the summer of 1993. In autumn 1993, in response to a tightening of financial conditions under a program supported by two drawings from the IMF, the inflation rate declined to 7 per cent. However, in September 1994 inflation picked up again to about 15 per cent a month following a relaxation of financial policies, and this contributed to the rapid decline of the rouble (IMF 1995b). Clearly, there was something fundamentally wrong with the way monetary policy was applied in Russia. Despite repeated attempts to control price increases, inflation continued to be unacceptably high, driven partly by mark-up pricing by monopolistic enterprises. It was also induced by expectations of higher inflation and shortages and supported by sources of enterprise liquidity outside the control of the CBR. Enterprises monetised arrears with the support of enterprise-owned banks which avoided regulations and escaped supervision. Enterprises brought back foreign exchange held abroad, engaged in barter trade and had privilege access to the cash supplies of the CBR for meeting wage payments. The reversal of the CBR's credit stance in July 1992 fulfilled their expectations of cheap credit, and inflation continued to be driven by the belief that (with a discount) arrears are money (World Bank 1992). Thus the repeated, though inconsistent, attempts by the government to reduce liquidity did not result in hard budget constraints for the SOEs.24 This suggests that there was something more seriously wrong than just policy failure or the wrong combination of instruments. The fundamental reason is that monetary policy in the early stages of transition is weak and ineffective as a tool for achieving stability, because it is applied in the absence of well-developed monetary institutions and a market infrastructure, which are necessary to produce the expected outcome. It is very difficult indeed to achieve stability before the required institutions and structural reforms are completed. It has been argued that `the concessions the government was constantly forced to make in pursuing its stabilisation policies were not the result of pressure from conservative forces. Rather they reflected the hysteresis of the existing structure of the economy left intact in fields other than money and the budget' (Yavlinsky


271

& Braguinsky 1994, p. 98). The failure to understand this creates a vicious circle. Instability cannot be eliminated or reduced without structural and systemic reforms, but these reforms cannot be effected without a sufficient degree of stability, though it may be possible, as mentioned above, to make some structural changes in an inflationary environment. Moreover, the required stability cannot be achieved through conventional monetary policy or tight credit policy. In addition, tight credit policy retards the development of the private sector and slows down the restructuring process; but easy credits will also discourage restructuring. Thus, if the reforms are to succeed, credit should be linked effectively to the restructuring of enterprises. The inappropriateness and ineffectiveness of monetary policy in the initial stages of transition suggests a greater role for a fiscal-first approach. In the shock therapy of January 1992 fiscal policy targeted a very tight outcome for the first half of the year. The stabilisation program provided sharp cuts in both government and overall expenditures.25 However, there were large unbudgeted and off-budget expenditures. Also, expenditures at the subnational level may not have been reduced substantially. Indeed, local governments which were given responsibility for subsidising retail prices introduced their own systems of subsidies, leading to sharp differences in prices within and between regions (Yavlinsky & Braguinsky 1994).26 Repeated attempts in the second half of 1992 and throughout 1993 to reduce the expenditure of the federal budget, the major source of inflation, were not carried through to the full extent. Instead expenditure over this period increased from 7 per cent of GDP to 8.7 per cent.27 In the last quarter of 1993, a tough budget policy was introduced as the deficit increased to 9-10 per cent of GDP. This included the cancellation of bread subsidies (though replaced with bread grants for those in the low income bracket), the lifting of import subsidies, abolition of soft credits, and an increase in the CBR's refinancing rate. In addition, the amount of government capital investment was cut back and all expenditure items in the federal budget were reduced by 20 per cent. Despite these measures, the momentum of previous expenditure-oriented decisions continued to add to the federal budget deficit, which amounted to 9.3 per cent of GDP for 1993 (Gaidar et al. 1994). In 1994 the situation hardly improved as there was a degree of slackening in budgetary policies. In fact, the budget deficit was 10.5 per cent of GDP, instead of the planned 8.5 per cent (Sachs 1994). In the area of taxation there were some significant changes in 1992 and 1993. First, the value-added tax (VAT) was reduced from 28 per cent in 1992 to 20 per cent in 1993. As a result, the revenue


272

from VAT fell from 9.1 per cent of GDP to 6.9 per cent. However, the revenue from excise tax and income tax on individuals remained more or less constant.28 Second, the profit tax fell from 13 per cent of GDP to 11.6 per cent, reflecting the depressed state of the economy. There were also tax concessions to enterprises for reinvestment in R&D, social and cultural facilities, nature conservation and privileges for small business. Finally, the fall in revenues was also due to widespread tax avoidance and evasion. In particular, use was made of outright illicit methods to avoid paying taxes by underreporting a certain portion of transactions and through barter arrangements and cash entitlements. It is estimated that some 40 per cent of potential tax revenues are withheld from the government (Gaidar et al. 1994, p. 40). Arguably, an effective and easy measure of reducing the deficit is to tax the energy sector at a higher rate. In most countries, this sector generates 5-8 per cent of GDP. Russia's oil and gas sector pays taxes equal to less than 2 per cent of GDP (The Economist, 8 April 1995). In summary, the expectation that liberalisation of prices, trade and foreign exchange, coupled with tight monetary and fiscal policies, would stabilise the economy and allow the systemic and structural changes to run their course has not been fulfilled. Liberalisation of prices and attempts to tighten budget constraints on loss-making enterprises, the main source of budget deficits, did not work. There are limits to the extent of expenditure and subsidy cuts to enterprises. There are simply too many lossmaking enterprises to impose hard budget constraints that will send them bankrupt. There are also limits to cutting basic social programs. Indeed, in a depressed climate of growing unemployment, poverty, crimes and diseases there is a need to increase expenditure on welfare. Finally, there are limits to cutting down capital expenditure on infrastructure. There is a serious backlog in the maintenance of basic infrastructure, which is needed to encourage private investment, especially direct foreign investment. In the short term, the government can raise the price of energy and try to stop the massive outflow of capital. To do this it must reassert its control and pay more attention to the building of regulatory institutions.29 Until the right monetary and fiscal institutions are established, monetary and fiscal policies remain ineffective and even counterproductive.

RUSSIA'S ECONOMIC PERFORMANCE, 1991-94 Since the adoption of the shock therapy strategy in January 1992, Russia's economic performance has been very dismal indeed (see


Table 10.1 Selected indicators of economic activity in the Russian Federation, 1990-94 (real percentage change from one year earlier) Indicator 1990 1991 1992 1993 GDP –3 –13 –19 –12 Industrial production u.a. –8 –18 –16 Extraction industries u.a. –4 –11 –15 Processing industries u.a. –8 –19 –16 Consumer goods –7 –1 –15 –11 Military goods u.a. u.a. –42 –29 Agricultural production –4 –5 –8 –4 Crops –8 u.a. –4 –2 Livestock –1 –7 –10 –5 Freight –4 –8 –24 –25 Source: IMF (1995c). March 1995, Washington D.C.

273

1994 –12 –26 –14 –30 –28 u.a. u.a. u.a. u.a. –27

Table 10.1). The strategy appears to have aggravated rather than eliminated the economic crisis of 1990-91. Between 1991-94 real GDP fell by 56 per cent and the average annual inflation rate was 880 per cent. However, the rate of decline in real GDP slowed down from 19 per cent in 1992 to 12 per cent in 1994; the inflation rate fell from 1353 per cent in 1992 to nearly 300 per cent in 1994 (IMF 1995a). Similar declines in output and increases in inflation have occurred in other economies in transition (excluding China). Janos Kornai (1994) has described the phenomenon of negative growth rates in Russia and Eastern Europe as `transformational recession', implying that it is inevitable and perhaps desirable. Indeed, he sees it as a `cleansing process', or as `the first phase of the Schumpeterian process' of Creative Destruction. Similar attitudes are held by the IMF, the World Bank and the shock therapist school. Other writers, including this author, see the dramatic decline as a disaster, a tragedy that could have been avoided (Taylor 1994; Yavlinsky & Braguinsky 1994; Haddad 1994a). Further, there is a tendency on the part of those who support the current strategy of transition to argue that the declines in output are exaggerated by the official figures. They contend that 10-20 per cent of the decline is not actual but a statistical illusion (Borensztein et al. 1993; Aslund 1994; Koen 1994). These writers argue that before the collapse of central planning there was an over-reporting of output for the sake of fulfilling plan targets, while in the post-planning period there is an under-reporting of output by SOEs and private firms to avoid taxes. Other writers have pointed out that statistical index numbers will generally overstate the output decline once prices are liberalised (Osbond


274

1994; Berg 1994). Further, it is frequently stated that the official figures do not reflect the rise in the increased quality of goods following the liberalisation of imports, nor do they measure the savings in real work time made possible by the ending of queues. However, it has to be remembered first that the official figures in the pre-reform did not include the output generated by the shadow economy, thought to have been 10-20 per cent of GDP, though by its nature it is rather immeasurable (Grossman 1993). Second, there is much anecdotal evidence that suggests that the official figures have under-reported the extent of the decline, in order to boost confidence in the reform process and to impress IMF officials, the World Bank, and other international organisations providing financial and technical assistance. Third, since taxes are now levied on value-added or profits, it is not obvious why enterprises would want to underreport output rather than profits — though as we have seen there is some evidence of enterprises resorting to barter arrangements but this is primarily motivated by the shortage of liquidity. Finally, the gains from the elimination of queues have to be weighed against the fact that the opportunity cost of queueing has declined because of rising unemployment, and also that relatively few people can afford the high-quality imported goods. Thus on balance it is hard to say whether or not the official figures overestimate significantly the extent of the decline in output. It is fairly clear, however, that much of the decline in output since 1991 is due to the collapse of both the CMEA and Soviet markets, which disrupted traditional supplies and outlets. This is easily seen from the fact that the greatest fall in output in Eastern Europe (with the exception of Poland which started the reform process earlier than the rest) occurred in 1991 following the collapse of the CMEA in January of that year (Haddad 1994a). In Kornai's view, the breakdown of the CMEA and the Soviet markets has been the most important cause of the recession (Kornai 1994). This is somewhat inconsistent with his theory of the `transformational recession' unless one views the collapse of the two markets as endogenous. Other writers (e.g. Laski & Levick 1993) suggest that the collapse was responsible for 30 per cent of the decline. Perhaps, the most common explanation for the output decline is in terms of the transitional process itself. We have seen that systemic changes, the collapse of central planning and of administrative control, have led to disruptions of traditional supplies and markets. Also the liberalisation of the economy has led to changes in relative prices and quantities. While the demand for some goods has fallen and that of others has risen, the decline


275

has by far exceeded the rise, suggesting that the domestic fall in output is not simply the result of systemic and structural changes. Indeed, as we pointed out in the previous section, there is little evidence of major structural changes. At best, the fall might be considered as a first stage in the creation of a market-based economy. But until we see a recovery in the rate of investment, the theory of `transformational recession' remains an unsatisfactory explanation of the fall in output in Russia since 1991. A more plausible explanation for the fall in output is to be sought in terms of mismanagement of the transitional process and policy failures. Conventional macrostabilisation policies designed to check the high inflation rate resulting from the collapse of central planning and premature liberalisation led to a steep fall in real wages, investment, output and employment. Binding credit ceilings imposed on SOEs had significant effects on the contraction of output from both the supply and demand sides. Firms were unable to finance their inputs, causing a contraction in supply and accumulation of inter-enterprise debts. Further, falling real wages, mainly through prices rising more rapidly than money wages, led to a fall in demand. However, industry studies and surveys of enterprises reveal that the great majority of enterprises are suffering from a lack of effective demand. According to Gaidar et al. (1994, p. 178), the overwhelming majority of enterprises in Russia are feeling restrictions of `solvent demand' on the part of both the population and other enterprises, and most enterprises are operating well below capacity. Significantly, factory managers have accepted marketing problems as top priority. This is not to say that supply factors are no longer a constraint. There are still shortages caused largely by the collapse of traditional trade flows following the collapse of the CMEA and Soviet markets, but now the supply factors have moved to the background. Enterprise surveys in 1993 indicate that only 10-12 per cent of factory managers complained about shortages of resources, labour and equipment (Gaidar et al. 1994, p. 109). Thus it seems the supply-constrained former planning system has been replaced by a demand-constrained economy. There has been a corresponding shift from a seller's market to a buyer's market. Another important indicator of the role of effective demand in the output decline is the sharp decline in investment, due not only to tight monetary and fiscal policies, when these were effectively applied, but also to uncertainty about the future, which has seriously discouraged investors even when credit was readily available (Calvo & Coricelli 1993; Chadha et al. 1993). Uncertainty


276

about the future has also been a factor in the massive outflow of capital. It has been estimated that insufficiency of effective demand has been responsible for 50-66 per cent of the fall in output (Laski & Levick 1993). The causes of the decline in aggregate demand are very low wages and investment and the collapse of exports to Russia's main trading partners in the former CMEA and Soviet markets. The decline in these components of effective demand was mainly due to the collapse of the planning system, but macrostabilisation policies designed to control inflation caused further deterioration in aggregate demand and subsequently further output decline. Arguably, an alternative strategy that would have anticipated the emergence of the problem of lack of effective demand as a consequence of the abandonment of central planning would have been more successful in preventing an unnecessary fall in output and providing a better climate for structural and systemic changes. Both theoretical reasoning and empirical evidence suggest that conventional macroeconomic stabilisation policies, which focus on the supply side, have undermined stability by causing contraction of both aggregate demand and supply (Taylor 1994; Yavlinsky & Braguinsky 1994; Laski & Levick 1993; Gaidar et al. 1994). It is bad economics, especially at the macro level, to focus on either demand or supply. Aggregate demand and supply curves are interdependent. Just as supply can create demand, so too demand can create supply. What is needed now is a reversal of the downward cumulative effect of aggregate supply and demand. Contrary to received wisdom, there is room for stimulating the demand for domestically produced goods which cannot be readily exported. This can be done by allowing wages to rise gradually without adding to inflation, as there is much excess capacity. Wages in Russia are very low and are having adverse effects on productivity and labour supply. Many skilled workers are not paid and do not bother to turn up for work since it does not make economic sense for them to do so. Moreover, very low wages encourage enterprises to keep their workers on the employment list, despite a drop in productivity.30 Thus the unit labour cost rises even though real wages have fallen. Enterprises will then be tempted to raise prices to cover costs which they do, given their monopolistic position. Thus we have in Russia a cost-push inflation in a depressed aggregate demand situation (Laski & Levick 1993). From the point of view of structural change, a policy that seeks to keep the level of consumption from falling, or even to increase it, will encourage the movement of resources from capital


277

goods to consumption goods, a movement that is long overdue. This is particularly important in the early stages of transition both to mobilise popular support for the reform process and to encourage the development of the private sector, which naturally flourishes first in the production of consumer goods. Such a policy would be quite favourable to a rational sequencing of privatisation and marketisation of industries (Haddad 1995). The second major component of aggregate demand that should have been the focus of attention of macrostabilisation policies is investment, both private and public as well as foreign. The sharp fall in investment should have been anticipated by the Russian policy makers and their Western advisers as the logical consequence of the collapse of central planning with its in-built bias towards a high rate of investment. The problem now is not only to keep the level of investment sufficiently high, but also to ensure that it is channelled into the most productive sectors. This requires the development of capital markets and an effective banking system — reinforcing once more the importance of developing appropriate institutions in the early stages. Moreover, it is necessary to maintain a high rate of investment by the state to rehabilitate and extend the infrastructure on which private domestic and foreign investment depends.31 Such investment is in the long run anti-inflationary, as it contributes to the capacity of the economy to absorb further productive investment. Quite apart from the need to invest in the infrastructure, the state must ensure that its own remaining enterprises are modernised and reorganised. The third component of effective demand (exports) is the most difficult to stimulate and sustain. Given the low quality and productivity of Russian manufactured goods, domestic enterprises cannot hope to compete on the world market. To increase exports there has to be a restructuring of industries and enterprises, as well as an increase in the rate of innovation. Massive devaluation and wage cuts will do very little to sustain the growth of exports other than those of raw materials and energy. There has to be also a temporary protection of industry capable of becoming internationally competitive. This requires time and much investment as well as advanced technology from the West. Currently, there is very little prospect of this kind of restructuring occurring across industries. Foreign exchange has been dissipated on imports of luxury goods instead of being used to purchase equipment and machinery embodying advanced technology. Worse still, foreign exchange earnings are kept abroad by managers of SOEs for their own personal use. The best way perhaps of promoting exports and thus effective demand in the near future is to re-establish some of the traditional


278

trade flows within the former CMEA and the Soviet markets. This could prove to be a valuable source of useful commodities and products. Such trade may not be optimal from the point of view of comparative advantage, and may not bring lasting benefits by way of learning and technological progress, but it will stop output and employment from falling further. With the collapse of central planning, the re-establishment of the former trade flows does not imply a return to a seller's market. As already noted, there has been a change in outlook and behaviour on the part of Russian managers who are now paying more attention to marketing problems. This will force them to improve the quality and efficiency of their production. The above discussion has focused on effective demand as an important element in achieving both stability and structural change. This emphasis is partly a reaction to the popular stabilisation policies now adopted in economies in transition, in the hope of redressing the balance. To repeat, sound macroeconomic stabilisation policies must take account of both aggregate supply and demand conditions. The neglect of effective demand has led not only to a drop in demand below potential supply, which is implied by the transition from a supply-constrained to a demand-constrained system, but also to a contraction of both actual and potential supply. Evidently, conventional stabilisation policies have overshot their targets and generated a deep depression.

CONCLUSION The preceding review of systemic, structural and policy changes and their effects on the performance of the Russian economy during the transition period points to many failures and setbacks and few successes. Moreover, the successes have been more of the `negative' and easy type, such as the dismantling of the former system and structures and deregulation and liberalisation of the economy. Naturally, it is almost always easier and quicker to destroy than to construct. Such destruction may be necessary before the processes of construction start. But our analysis reveals few signs of the construction phase. One of the few positive features observed amidst the ruin and chaos is the changing attitudes of both consumers and producers who are now adjusting to market signals. According to The Economist (8 April 1995), `[T]he current gloom misses a broader more important point: Russia has now markets to send signals.' But the new signals have led to excessive selfish and downright unethical conducts. Much of the Russian economy has become privatised and marketised,


279

but in the process it has also become `criminalised'. Another seemingly positive feature is that both the decline in the growth rate and the rise in prices have slowed down. It is quite possible that Russia in the next few years will follow Poland and begin to register positive growth rates. There are limits to the fall in output. In May 1995, industrial output rose very slightly for the first time since 1989. Moreover, it is optimistically predicted that by the end of 1996 the Russian economy will be growing by up to 10 per cent per annum (The Economist, 7 October 1995). However, recovery from deep depression is quite different from that emerging from structural change. The former may not be sustainable. In an address given at the US-Russia Business Council in Washington on 29 March 1995, IMF director Michel Camdessus acknowledged the lack of sustained progress towards macroeconomic stability and enterprise restructuring, but admitted no mistakes on the part of the IMF and suggested no change of strategy. On the contrary, he is `proud' of the àchievements' and recommended more of the same: For more than three years now, the IMF has been helping Russia stabilise and reform its economy and establish the conditions for sustainable growth in output and living standards. This has not been an easy ride; but in spite of the many negative reports we receive about the disruptive developments, we should not lose sight of the fact that there have been fundamental changes in the right direction and that substantial progress has been made in freeing the economy and in implementing structural reforms . . . The IMF is proud to have been associated with these achievements through financial support, policy advice, and excessive technical assistance. (IMF 1995c).

There is no recognition in the director's address, or in other IMF documents, of the unnecessary mistakes, economic and human costs resulting from the transformation program supported by the IMF. On the contrary, the economic and human costs are interpreted as signals indicating that the policies are working. This is based on the dubious cliché: `No pains, no gains'. In a major transitional process some mistakes are inevitable, particularly in the absence of an existing theory and experience of transforming a planned economy into a market economy. Nevertheless, some mistakes could have been avoided had the Russian policy makers and their Western advisers devoted more time and effort to institution building and the creation of a civil society/economy, before they introduced the shock therapy strategy of January 1992. The shock therapy may be suitable for policy changes, where the appropriate institutions and structures are


280

already in place. It is, however, inappropriate for institution building which is a lengthy process involving much trial and error. Much time is needed to ensure that the various institutions of a market-based economy grow together in an organic manner. Hasty decisions are notoriously flawed. When one is constructing the foundations of a new economy or society, one has to proceed more cautiously. A mistake in the foundations can prove very costly indeed and very hard to undo. The Russian authorities acting on the advice of the IMF, the World Bank and Western orthodox economists have sought to get `the prices and policies right' first instead of getting the institutions right. The result, as we have already noted, has been disastrous. Not only have the stabilisation policies failed in their objective, but more seriously they have contributed to the criminalisation of the economy and frustrated the process of transition to a well-functioning economy. The criminal element is now deeply embedded in the foundations of the new market economy, and it is hard to see how it is going to be eradicated in the future. The tragedy of the present dismal state of the Russian economy is that much of it could have been avoided had the reformers applied a more imaginative approach to the transformation process. Many, though by no means all, of the mistakes were the result of applying orthodox economics to an economy in transition. Orthodox or neoclassical economics is, at best, the economics of a developed market economy. It assumes that the required institutions are already in place and economic agents behave rationally and to some extent ethically. Thus many of the policies were based on the implicit assumption that the Russian economy is already developed and that it was a matter of getting the prices and incentives right. What is needed is a new economics of transition to deal with institution building as a step-by-step process. The numerous systemic, structural and policy changes have to be introduced in a logical and chronological order. This calls for rational sequencing of reform measures or intelligent planning from the centre. However, as we have argued elsewhere (Haddad 1994b), the premature rejection of central planning has deprived the Russian reformers and their advisers from the IMF, the World Bank and other international institutions of an indispensable tool for achieving their ultimate objective of creating a well-functioning market economy. It is now essential that planning be reinvented to bring about smooth and swift transition. However, this is not a recommendation of the old mindless and justly discredited system of central planning, but rather of an intelligent and strategic form of indicative planning.


281

NOTES 1.

2.

3.

4. 5.

6.

7.

8. 9.

Over the year prices increased by more than 200 per cent, output fell by 9 per cent, real investment dropped by 25 per cent and the fiscal deficit grew to 31 per cent of GDP — one of the largest government deficits on record in recent years (World Bank 1992; Sachs 1994). The policy of low nominal rate of interest was maintained by the Central Bank until 1993. Hence, saving deposits with the state bank for household savings, Sberbank, declined from 8.7 per cent of GDP in January 1992 to 1 per cent in October 1993 (Gaidar et al. 1994, p. 94). As Sachs (1994, p. 23) points out, `the flight from the currency started when the government undermined the confidence in the rouble by announcing, out of the blue, the confiscation of 50 and 100 rouble rates'. The flight of capital in 1993 has been estimated to be from US$16-17 billion (Intriligator 1994) to US$23 billion (Gaidar et al. 1994). Some estimate the outflow to be as high as US$50 billion. The Economist (8 April 1995) estimates the illegal assets in foreign banks to be US$24 billion. The increased autonomy given to SOEs did not improve their budget constraint. On the contrary, enterprise budgets were further softened by giving them easier access to bank credit. Under the scheme, all SOEs with more than 1000 workers or 50 million roubles base capital were obliged to convert themselves into joint-stock companies with openly traded shares. However, under pressure from parliament the program was modified to give some privileges to worker ownership (for details, see Rutland 1994). It is important to note that the government has so far been selling only part of the shares of SOEs, retaining in most cases ownership of 30-70 per cent of the total number (Menshikov 1994). However, it is expected that the government will sell its shareholdings in most big companies. Indeed, the treasury is counting on US$2 billion in privatisation revenues in 1995 to help reduce the budget deficit (The Economist, 9 September 1995). There is some evidence from other economies in transition, such as Poland and China, which suggests that improvements in performance of SOEs which are driven by market forces can take place without the introduction of formal private ownership (Woo 1994; Ebrill et al. 1994). Surveys of recently privatised firms including retail outlets indicate that the quality of their service has not improved significantly (Rutland 1994). The three Spetsbanki — Promstroibank, Agroprombank (Rossel' Khozbank since 1992) and Zhilostbank — have specialised in `commercial banking': the first finances investment in construction, transport and communication, the second finances the agricultural sector, and the third finances light industry, social and cultural ventures and


10.

11.

12.

13.

14.

15.

16.

17.

282

entrepreneurship. There is also the foreign exchange bank Vneshekonom bank, that in the past handled all foreign currency transactions but at the end of 1991 it was made accountable to CBR and later in November 1992 its activities were confined to managing Russia's foreign debt (Johnson 1994). Sberbank occupies a special position in the transformation of the banking system because it has a virtual monopoly on household deposits although Rossel bank is trying to compete for deposits in rural areas (World Bank 1992). It seems that the decentralisation of economic power and the proliferation of banks have led to a rise in organised crime involvement in Russian banking. There is ongoing terrorism against bankers by organised criminal groups seeking low-interest loans or protection money. Many Russian banks closed on 7 December 1993 to protest against the lack of police protection for endangered bankers — as many as 45 bankers were killed in 1993 alone (Johnson 1994, p. 986). Nevertheless, commercial banks complain about the pervasiveness of the CBR regulation, the lack of consultation, the frequency with which regulations are introduced, and the failure to allow banks adequate time to adjust to new regulations (World Bank 1992). According to Gaidar et al. (1994, p. 78), `[I]t is not so much the unfavourable economic institution, inflation, technical backwardness or the low qualifications of bank officials and customers, as the absence of a real legal foundation for banking, business and the inadequacy of appropriate regulations that constitute the principal stumbling block in the development of the banking system.' Under the former `monobank' system, money was considered a passive instrument used to meet the needs of the plan. In general, bank officials were not required to judge the commercial creditworthiness of SOEs, and managers of SOEs did not have to worry about finance. Indeed, the organisational structure of SOEs did not include a finance department. According to the deputy chairman of CBR, Alexandr Khandruyev (1994), the CBR during 1992-94 received technical assistance from the IMF and a number of central banks in six areas: banding supervision; management of the state debt; monetary control; further development of the currency market and improvement in balance of payments statistics; improvement in accounting and reporting practices of the central bank; and reform of the domestic payments system. It has been claimed that shock therapy in Poland has not only reduced inflation but also it has succeeded in restructuring the economy (Berg 1994). However, the evidence presented is largely in terms of systemic change, the displacement of parts of the state sector by the private sector. According to Blanchard (1994), `there is little evidence of restructuring beyond the labour shedding needed to avoid losses'. Of course, both consumer and producer goods declined, but the decline in the former was much less than in the latter. In 1993, the


18.

19. 20. 21.

22.

23.

24.

25.

26.

283

production of consumer goods was 68.5 per cent of the 1989 level. The corresponding figure for machinery and equipment was only 54.9 per cent (Gaidar et al. 1994, pp. 111-12). During 1988-91, direct and indirect subsidy to the agricultural sector was over 15 per cent of GDP, but in 1992-93, due to tight fiscal policy, the subsidy declined to only 6 per cent of GDP. However, the decline does not include subsidies of food to consumers estimated to be 4-5 per cent of GDP (Gaidar et al. 1994). According to the World Bank (1992), by mid-September 1992 the division of farm lands and assets into shares was completed by most farm enterprises. There is some evidence that shortage of rural credit has been a serious constraint on the purchase of agricultural inputs (Gaidar et al. 1994). In particular, machinery declined by 15-20 per cent, pesticide application by 50 per cent, and fertiliser application by 25 per cent. The declines are due to domestic price increases, breakdown of traditional production and distribution networks, and inadequate finance (World Bank 1992, p. 213). As Johnson (1994, p. 971) noted, `The Central Bank printed so much money and released so much credit to state enterprises in July 1992 that it stymied the government's macroeconomic reform.' At the same time, the velocity of money increased gradually, leading to higher price increases than (M2) the money supply. According to The Economist (10 April 1993), during 1992 the Central Bank printed money equal to 40 per cent of GDP, over half of the money supply went to SOEs. But as Sachs (1994) points out, the flows to the SOEs were as much a result of inflation as a cause of inflation. Without the inflation, the `need' for subsidised credits would have been absent. Surprisingly, the shock therapy approach of January 1992 led to very few bankruptcies. As Yavlinsky and Braguinsky (1994) note, in the autumn of 1992, the CBR provided loans to salvage indebted enterprises because 95 per cent of Russian enterprises had put themselves in a position where they would be bankrupt without those loans. In late 1993 a Federal Bankruptcy Agency was established by presidential decree; by January 1995 the agency had taken action against 400 SOEs that had defaulted on their debts, and courts had placed 500 privatised firms in receivership (The Economist, 8 April 1995). Overall expenditures were to be reduced from about 48 per cent of GDP in 1991 to 27 per cent in 1992. The outcome was mixed and somewhat confusing. For example, centrally financed investment was cut from 5.5 per cent of GDP to 2.3 per cent in the first quarter of 1992, defence expenditure also fell sharply and subsidies fell from 3.9 per cent to 2.3 per cent (World Bank 1992, p. 21). Reflecting the rise of regionalism, the share of revenues and expenditures passing through local budgets increased from 8.5 per cent of GDP in 1990 to 14.5 per cent in 1993. In that year, four regions


27.

28.

29.

30.

31.

284

openly refused to pay taxes to the centre; two are oil-producing regions and produce metal s and diamonds. In 1994, other regions also announced their intention to withhold some tax payments (Sachs 1994). For an interesting analysis of the rise of regionalism in Russia and the profound conflict between the national policy agenda and specific regional interests, see Hughes (1994) and Kirkow (1994). In May 1993 cuts were made in defence expenditures, the national economy and in social services. As a result, the federal budget deficit declined to 4.5 per cent of GDP and dropped further to 4.3 per cent for the first half of 1993. However, in July and August the deficit increased to 6.7 per cent and 7.4 per cent of GDP, respectively (Gaidar et al. 1994, p. 26). However, at the end of 1993 excises on vodka and other liquors were reduced from a rate of 90 per cent to 85 per cent. At the same time there were increases in excises on imported alcohol (Gaidar et al. 1994). As Tanzi (1993) has emphasised, there is a need to create some sort of `social ecological balance' necessary for the working of a modern market economy, to develop financial institutions that mobilise savings and allocate them efficiently, and to set up modern tax administrations and budgetary institutions. The sharp falls in output are not reflected in the level of unemployment. In 1993, for example, unemployment fell by 7.8 per cent, compared with 12 per cent fall in output (Gaidar et al. 1994, p. 103). The rapid decline in the physical infrastructure has discouraged the inflow of foreign capital and the flow of domestic capital. According to Gaidar et al. (1994, pp. 43-44), Russia could attract US$20-30 billion but has attracted only US$2 billion in five years.

BIBLIOGRAPHY Aslund, A. 1994 `Lessons of the first four years of systemic change in Eastern Europe' Journal of Comparative Economics vol. 19, no. 1. Berg, A. 1994 `Does macroeconomic reform cause structural adjustment? Lesson from Poland' Journal of Comparative Economics vol. 18, no. 3. Blanchard, O.J. 1994 `Transition in Poland' The Economic Journal vol. 104, September. Borensztein, E., Demkas, D.G. and Ostry, J.D. 1993 Àn empirical analysis of the output decline in three Eastern European countries' IMF Staff Papers vol. 40, no. 1. Calvo, G.A. and Coricelli, F. (1993) Òutput collapse in Eastern Europe' IMF Staff Papers vol. 40, no. 1. Chadha, B., Coricelli, F. and Krajnyak, K. 1993 Èconomic restructuring, unemployment and growth in the transition economy' IMF Staff Papers vol. 40, no. 4.


285

Ebrill, L.P. et al. 1994 `Poland: The path to a market economy' IMF Occasional Paper, Washington DC. Ellman, M. 1994 `Transformation, depression and economics: Some lessons' Journal of Comparative Economics vol. 19, no. 1, August. Gaidar, E.T. et al. 1994 Russian Economy in 1993: Trends and Prospects, Institute for the Economy in Transition, Russian Academy of Sciences, Moscow. Goldberg, L.S. 1993 `Foreign exchange markets in Russia: Understanding the reforms' IMF Staff Papers vol. 40, no. 4. Goldman, M. 1995 `Bribonomics corrodes Russia' Guardian Weekly 26 February. Grossman, G. 1993 `The underground economy in Russia' Economic Insights vol. IV, no. 6, November-December. Haddad, L. 1994a `The importance of effective demand in transition from a supply to a demandconstrained economic system', Paper presented at Conference on Demand Rehabilitation, Centre Maison Des Sciences De L'Homme, Paris, 29 September-1 October. ——— 1994b `Some fallacies in economics of transition' Economies et Societes no. 12. ——— 1995 Òn the rational sequencing of enterprise reform', Journal of Communist Studies and Transition Politics, March. Hughes, J. 1994 `Regionalism in Russia: The rise and fall of Siberian agreement' Europe — Asia Studies vol. 46, no. 7. ——— 1995a IMF Survey 9 January. ——— 1995b IMF Survey 23 January. ——— 1995c IMF Survey 17 April. ——— 1995d Economic Reviews 16 `Russian Federation' March. Intriligator, M.D. 1994 `Privatisation in Russia has led to criminalisation' The Australian Economic Review no. 106. Johnson, J.E. 1994 `The Russian banking system: Institutional responses to the market transition', Europe-Asia Studies vol. 46, no. 6. Khandruyev, A. 1994 `Statement of the Central Bank of the Russian Federation' in J.B. Zulv et al. (eds) Central Banking Technical Assistance to Countries in Transition, IMF, Washington DC. Kharkhordin, O. and Geber, T.P. 1994 `Russian directors' business ethic: A study of industrial enterprises in St Petersburgh, 1993' Europe-Asia Studies vol. 46, no. 7. Kirkow, P. 1994 `Regional politics and market reform in Russia: The case of the Altai' EuropeAsia Studies vol. 46, no. 7. Koen, V. 1994 `How large was the output collapse in Russia? Alternative estimates and welfare implications' IMF Staff Papers November. Kornai, J. 1994 `Transformational recession: The main losses' Journal of Comparative Economics vol. 19, no. 1, August. Kuznetsov, A. 1994 Èconomic reforms in Russia: Enterprise behaviour as an impediment to change' Europe-Asia Studies vol. 46, no. 6. Laski, K. and Levick, F. 1993 Àlternative strategies for economies in transition' in E. Hochreiter (ed.) Alternative Strategies for Overcoming


286

the Current Output Decline in Economies in Transition Oesterreichische National Bank, Vienna. Menshikov, S. 1994 `The role of state enterprises in the transition from command to market economies' Evolutionary Economics vol. 4, no. 4. Osbond, K. 1992 Ìndex number biases during price liberalisation' IMF Staff Papers vol. 39, no. 2, June. Portes, R. 1994 `Transformation traps' The Economic Journal no. 104, September. Rutland, P. 1994 `Privatisation in Russia: One step forward: Two steps back?' Europe-Asia Studies vol. 46, no. 7. Sachs, J. 1994 `Russia's struggle with stabilisation: Conceptual issues and evidence' Annual Bank Conference on Development Economics, 28-29 April, The World Bank, Washington DC. Sahay, R. and Vegh, C. 1995 `Dollarisation in transition economics', Finance and Development, vol. 32, no. 1, March. Tanzi, V. 1993 `Transition to market' Studies in Fiscal Reform IMF Washington DC. Taylor, L. 1994 `The Market met its match: Lessons for the future from the transition in initial years' Journal of Comparative Economics, vol. 19, no. 1, August. Woo, W.T. 1994 `The art of reforming centrally planned economies: Comparing China, Poland, and Russia' Journal of Comparative Economics vol. 18, no. 3. World Bank 1992 `Russian economic reform: Crossing the threshold of structural change' World Bank Country Study Washington DC. Yavlinsky, G. and Braguinsky, S. 1994 `The inefficiency of laissez-faire in Russia, hysterisis effects and the need for policy-led transformation' Journal of Comparative Economics vol. 19, no. 1 August.

11 China Richard Pomfret China has undergone dramatic economic reforms in recent decades. This chapter will analyse the nature and consequences of these reforms, with emphasis on the way in which business is conducted in the semi-reformed economy of the late 1990s (officially referred to as a social market economy). The reforms introduced in 1978-79 focused on the agricultural sector and the open door policy. Reform of the industrial sector and areas such as financial and fiscal reform were undertaken later and remain far from complete. The chapter will emphasise the internal logic of the reform process and pressure for further changes. The first section of the chapter deals with the historical development of the Chinese economic system, focusing on the period since 1978. The problems facing the semireformed economy are analysed in the second section. The analysis highlights the need for financial, fiscal and enterprise reform. The need for further reform in these areas is recognised by Chinese policy makers and an integrated reform package was developed in 1993-94. The reform package is examined in the third section, although at the time of writing it is too early to assess the degree of commitment to implementing the package or the consequences of the new policies. The final section draws some conclusions and looks to the future of the Chinese economic system. Political power in Mao Zedong's China was highly concentrated and his successors have striven to retain a strong central authority. The adoption of economic reforms was driven by pragmatism rather than ideological motives. The centrally planned economy was performing poorly in the 1960s and 1970s, and failure to meet aspirations for higher consumption levels could have undermined the political position of the leadership (as it did in the USSR). Although the economic reforms have been substantial, they


288

have proceeded sporadically because there was never, at least not until the 1993-94 package, a blueprint for reform in China. This is in contrast to the post-1989 situation in Central Europe, where a market economy was desired as the counterpart to a pluralistic political system. The extent of confidence in the leadership shared among China's population is impossible to gauge, given the absence of channels through which to express popular opinion. Increased material goods have been welcomed widely, although the trade-off between the security of the old system and material prosperity plus greater pressures of the new system is not always settled in favour of prosperity (e.g. some workers transferring to joint ventures for higher pay soon return to their old, less stressful jobs at state enterprises). Popular attitudes, however, have surely been evolving as people are continuously exposed to new goods. Exposure to new ideas and new work practices also contributes to questioning of the political system. The lid on such discontent was briefly raised in 1989 before being slammed down. The rampant corruption of the 1990s is fuelling popular loathing towards leaders, other officials and their families. Values and ideologies will not be stressed in the remainder of this chapter, but they are close to the surface. The Communist Party undoubtedly enjoyed strong popular support after 1949, but how far that had been eroded during the Maoist era and the extent to which popular attitudes have changed during the reform period are difficult to assess. Yet these attitudinal changes have certainly occurred and will influence the further evolution of the economic system. It is certain that the Chinese economic system will continue to change over the next decade, but it is difficult to predict the nature of this evolution.

THE CHINESE MODEL OF ECONOMIC REFORM Following the establishment of the People's Republic of China in 1949, the government established a centrally planned economy based upon state ownership and collectivised farming. In important respects, however, the Chinese economy differed from the other centrally planned economies because of its starting point and because of its subsequent policy choices. The Chinese economy was substantially poorer, more rural and less industrially developed than that of Russia in 1917 or of Eastern Europe in the 1940s. After the Sino-Soviet split the Chinese economy followed an idiosyncratic path, becoming more autarchic than other centrally planned economies (which traded relatively little in the

CHINA

289

world economy but which were integrated within Comecon) and going through the economic and social disruption of the Cultural Revolution. Following the death of Mao Zedong in 1976 and the defeat of the Gang of Four who were identified with the continuation of Maoist policies, policy change was firmly on the agenda. The victor in the brief post-Mao power struggle, Deng Xiaoping, became the architect of reforms introduced in the late 1970s. China's initial reforms concerned the agricultural sector and the opening-up of a closed economy. The agricultural reforms were intended to be gradual, starting with cautious experiments in limited locations, but had a dramatic effect. The adoption of the open door policy appears more radical, but its impact was more gradual. The introduction of the contract responsibility system in agriculture in 1978-79 changed incentives. Farmers now had claim to any additional output over and above that contracted to be supplied to the state marketing agencies at the official prices. The supply response was immediate and large, as agricultural output grew rapidly between 1980 and 1984. Given that over three quarters of the economically active population was working in agriculture in the late 1970s, the agricultural output growth translated into a large increase in GDP and rising demand for consumer goods. Lack of savings opportunities and strict controls over labour movement encouraged investment in rural enterprises which employed labour released by increased agricultural productivity. These township and village enterprises produced consumer goods, building materials, and other items which the farmers wanted and which the state-owned industrial sector failed to supply. The township and village enterprises (TVEs) have been the dynamic part of China's manufacturing sector during the reform period. Their nominal output increased at an annual rate of 20 per cent from 1978 to 1983 and then by 55 per cent in 1984 and 46 per cent in 1985 before dropping to a mere 32 per cent in the recession year of 1986.1 The most dynamic areas of the country are the regions in which the TVEs have flourished: northern Zhejiang, southern Jiangsu, Shandong, and parts of Fujian and Gurangdong provinces. The adoption of an open door policy, which permitted foreign investment for the first time since 1949 and loosened government control over international trade, had a more gradual impact. Although the 1979 Joint Venture Law allowed direct foreign investment, actual direct foreign investment (DFI) was small before 1984 (Table 11.1) and concentrated in the Shenzhen special


290

Table 11.1 Macroeconomic indicators, China, 1978-95 Actual direct GNP retail prices Exports Imports foreign investment (annual % change) (billions of US dollars) 1978 11.7 0.7 9.8 10.9 1979 7.6 2.0 13.7 15.7 (Total for) 1980 7.9 6.0 18.1 20.0 (1979-82) 1981 4.4 2.4 22.0 22.0 (= 1.2) 1982 8.8 1.9 22.3 19.3 1983 10.4 1.5 22.2 21.4 0.6 1984 14.7 2.8 26.1 27.4 1.3 1985 12.8 8.8 27.4 42.2 1.7 1986 8.1 6.0 30.9 42.9 1.9 1987 10.9 7.3 39.4 43.2 2.3 1988 11.3 18.5 47.5 55.3 3.2 1989 4.1 17.8 52.5 59.1 3.4 1990 3.9 2.1 62.1 53.4 3.5 1991 9.5 2.9 71.8 63.8 4.4 1992 14.0 5.4 84.9 80.6 11.0 1993 13.3 13.2 91.7 104.0 27.5 1994 11.6 21.7 121.0 115.7 33.8 1995 10.2 14.8 148.8 132.1 37.7 Source: China Statistical Yearbook 1995 (pp. 32, 233, 537 and 554) plus various earlier editions where necessary; 1995 data from DRC Institute (Beijing) Quarterly Report vol. 1, no. 1 China: Economic Scene, March 1996, pp. 25, 33 and 41-42.

economic zone adjacent to Hong Kong. In 1984-85, as wages and land prices rose in the Crown colony and the Hong Kong dollar appreciated against every currency except the US dollar, entrepreneurs from Hong Kong led a foreign investment boom in China. They shifted their labour-intensive manufacturing operations across the border into southern China, and were soon employing more workers in Guangdong province than in Hong Kong itself. Restrictions on foreign firms' activities and ability to repatriate profits were relaxed as the 1980s progressed (Pomfret 1991). By the end of the decade, foreign investors were being welcomed and, although glitches were by no means eliminated, foreign investment is booming in the 1990s (Table 11.1). Restrictions on imports and exports have also been substantially liberalised since 1979 (Lardy 1992), although they remain severe enough to have delayed China's application to join the GATT/WTO. For development economists, China's rapid growth during the 1980s and early 1990s is not difficult to explain, and it is a typical East Asian success story (Riedel 1993). Labour is being released

CHINA

291

from low-productivity agriculture to a `modern' sector with higher returns. Increased demand, generation of savings, and release of labour from a more efficient agricultural sector, all stimulated the growth of light industry and service activities. The open door policy kicked in because the small-scale enterprises set up to meet domestic demand could expand by exporting labour-intensive manufactured goods. This process was substantially helped by the proximity of Hong Kong, but it was essentially a story of exploiting the huge potential gains from specialisation and trade when the first generation newly industrialising economies' entrepreneurs combined their expertise (and used machinery) with China's large low-wage labour force. The details have varied from place to place. Economic growth has been faster in coastal areas than inland, but it is difficult to find any city in China untouched by the accelerated economic development of the 1980s. Direct foreign investment was a far more important catalyst in Guangdong province than anywhere else; Guangdong received over half of the DFI entering China during the 1980s, and most of that was concentrated in the Pearl River Delta adjacent to Hong Kong and Macau (Pomfret 1991). The non-state sector (mainly TVEs) was an especially important source of capital accumulation in Jiangsu and Zhejiang.2 By the 1990s DFI remained heavily concentrated in the coastal region, but less concentrated in Guangdong.3 While per capita incomes increased by three and a half times nationwide in the decade after 1978, annual growth exceeded 15 per cent only in Zhejiang, Guangdong, Fujian, Jiangsu and Shandong provinces (Kato 1992, p. 120). In sum, the Chinese model produced rapid growth because it followed economic logic and benefited from favourable initial conditions. The large rural labour force and unsuitability of Chinese agriculture to collectivisation ensured large immediate gains from agriculture reform.4 Similarly, the open door policy offered large potential gains from trade because the economy had been so closed in the 1970s and because the specialisation benefits from combining China's almost unlimited supply of unskilled labour with Overseas Chinese expertise in producing and exporting labour-intensive manufactured goods were huge.

PROBLEMS By all the usual measures of economic development, China's economic performance during the reform period has been outstanding. Real output growth has been sustained at close to


292

double-digit annual rates over a fifteen-year period; the precise figures are debatable due to pricing and data issues, but the extent and speed of the rise in material living standards are palpable to any visitor to China. Nevertheless, certain shortcomings are apparent, some of which are feared because of historical precedents. Thus, mindful of the warlord period after 1911, Chinese policy makers fear decentralisation and disintegration of the centralised state. Remembering the hyperinflation which contributed to the final downfall of their Kuomintang predecessors, the communist leadership becomes nervous when price rises fuel discontent. The sources of the problems are interconnected, and reflect the partial nature of China's economic reforms, which have failed to transform the large state enterprises and have created neither an efficient financial sector nor macroeconomic policy instruments appropriate to a more market-oriented economic system. China was fortunate in that the state industrial enterprises (SEs) accounted for a smaller share of total output than in eastern Europe or the USSR, but the SEs still accounted for a large share of the economy and employed a large proportion of the urban and industrial workforce. Tentative attempts to introduce greater enterprise autonomy during the early and mid-1980s had little impact on the SEs' behaviour. A more serious attempt at reform was the adoption of a contract responsibility system after 1988, by which taxes were separated from profits. Despite its ostensible similarity to the successful agricultural reforms of a decade earlier, the contract responsibility system did not induce more entrepreneurial behaviour by the SEs (Byrd 1992). In part, the lack of response was because the government recontracted its tax demands if the enterprise became more profitable, thus blunting the incentive. More importantly, the ownership structure provided no strong incentive to earn profits. Price liberalisation has been substantial since the late 1970s, but it has been constrained by a desire to protect the SEs. Agricultural prices to producers were first raised in order to encourage greater output, and then prices to consumers were gradually increased to reduce subsidies. The prices of most manufactured consumer goods were freed during the second half of the 1980s. For producer goods, however, a dual pricing system still exists as a means of preserving a role for planned allocations and softening the disruption of immediate price liberalisation (Chen et al. 1992, p. 208). The use of a dual pricing system to ease the reform of SEs requires incomplete liberalisation of international trade (described by Lardy (1992) as maintaining an

CHINA

293

àirlock' between domestic and world prices), forgoing some of the potential gains from trade liberalisation. Already during the 1980s some SEs had begun to issue shares, mainly to their employees, and the authorities began to encourage the creation of conglomerates. During the early 1990s the dominant approach to SE reform was the creation of joint-stock companies whose shares would be traded on the two stock exchanges in Shanghai and Shenzhen. Despite the publicity associated with embracement of a fundamental capitalist institution, the share flotations have not made the SEs more entrepreneurial. The main attraction of issuing shares has been to attract domestic and foreign capital for restructuring technologically outdated enterprises. It has not been embraced as a means of transferring control to shareholders who would hold management accountable for unprofitable performance; indeed, the state has retained majority ownership of all of the listed companies on the Shanghai stock exchange. Despite frequent `reforms' of the SEs, they continue to face a soft budget constraint. Although China has introduced bankruptcy laws, the number of SEs which have been forced to close is tiny. The result has been a lack of incentive and of entrepreneurial behaviour. As SE managers gain greater independence, this may be changing in the 1990s, but not necessarily in a socially optimal way. Managers in cahoots with the workers will seek to maximise the return to themselves or to employees as a group. Such behaviour encourages a short-term view of net revenue maximisation, with socially undesirable attitudes towards capital; SEs are hungry for capital (since more capital permits greater output), but husband their capital poorly (as they have no ownership rights in it). This is the model of workers' self-management which produced rapid medium-term growth in Yugoslavia in the 1960s and 1970s, but abysmal long-term performance leading to economic collapse in the 1980s. Thus, Chinese enterprise reform may be in an even worse situation than Russian privatisation, which involved unfair transfer of public policy to insiders but at least gave the new owners secure property rights. Although there is dispute over the impact of reforms on SE productivity (Wu 1993; Jefferson & Rawski 1994), there is no doubt that the state sector has been the poorest performing part of the economy. The response has been to rely on the rapid growth of the non-state sector to produce good aggregate results and gradually transform the industrial sector.5 The TVEs' share of industrial output rose from 9 per cent to 27 per cent between 1979 and 1992, which is a dramatic transformation but also reveals the continuing dominance of the SEs.


294

The poor performance of the SEs is closely related to fiscal issues. Turnover tax on the SEs was the major source of government revenue in the pre-reform economy. As competition from TVEs intensified and administered prices favouring the SEs were liberalised, government revenues failed to keep pace with the growth of the economy, and the budget deficit widened.6 The Chinese reform process decentralised responsibilities while reducing traditional revenue sources. Provincial and local authorities tried to tap new revenue sources or to keep a larger share of the SEs' profits, and introduced restrictions to internal trade. These dysfunctional responses, harmful to the long-term development of a market economy, were `the clear outcome of a botched sequencing of reforms' (Wong, 1991, p. 712) due to not reforming the SE-dependent tax system before decentralisation. Stagnation of the SEs is also related to the regional variations in growth. During the Maoist period, China's policy makers made a concerted effort to shift industrial activity from the more-developed coastal provinces to interior provinces.7 The rapid growth during the reform era has been concentrated in the coastal provinces, and especially in those areas where TVEs flourished and SEs were less prominent. Thus, the heavy industry bases in Shanghai and North-East China were less involved in the economic boom of the 1980s than other coastal regions. The economic decentralisation and loss of fiscal control have contributed to the sharpness of economic cycles during China's reform era. Table 11.1 presents the official data on output and inflation, which capture the booms of 1984-85, 1987-88 and 1992-? when growth accelerated and retail prices followed.8 The 1984-85 boom drew attention to the external constraint, as the trade deficit mushroomed. In 1988 inflation was the biggest worry, but the countermeasures led to widespread popular discontent in spring 1989. The 1992-93 boom featured interconnected DFI and real estate booms, and rising concern about corruption and regional disparities. The authorities have experienced difficulty in controlling the business cycle. Using the old tools of credit allocation is contrary to the principles of market-oriented reforms, but indirect mechanisms of monetary policy are not yet in place. In the absence of welldeveloped financial markets, the austerity program of 1988 consisted of crude restrictions on credit. Since the SEs were able to shield themselves from the full brunt of these restrictions, the impact fell disproportionately on agriculture and on the non-state industrial sector. The resource misallocation costs of bringing down inflation in this way were obvious. The twin concerns of SE reform and macroeconomic stabilisation put financial reform centre stage in the early 1990s. Up until

CHINA

295

then the Chinese government had introduced financial sector reforms, without fundamentally changing the operation of banks or financial markets. The only exception was the foreign exchange market which became substantially more liberalised during the 1980s through a series of piecemeal reforms driven by the needs of the open door policy (Pomfret 1991, pp. 29-33). Reform of the domestic financial system has been more tortuous. Driven by loss of control over the economic surplus, in 1981 the government started to issue bonds in order to cover part of the widening budget deficit. Bond distribution through the 1980s was by compulsion; employees were forced to accept government bonds as part of their income. Secondary markets emerged, but the growth of outstanding bonds was not spectacular, in the order of RMB100 billion over the decade (Pomfret 1992, pp. 356-7). Even though bond issues increased in 1988 in the face of widening budget deficits, when the central bank tried to pursue open market operations as part of its austerity program the secondary market was too small for sophisticated monetary policy to be implemented. Enterprises also issued bonds during the 1980s. A leading motive for this was to redistribute profits, as well as to raise capital. There is some confusion between bonds and shares in reports of these developments, since many `shares' appear to have been variable rate bonds (with the rate depending on profits). Securities markets emerged in many cities, although trades tended to be mainly new issues with little secondary trading. Enterprise bonds were tightly regulated because the authorities feared they might draw funds away from more desirable projects (as well as from government bonds). Enterprise bonds offering attractive rates were unpalatable as long as other interest rates were repressed, so that development of this financial market was contingent upon reform of the banking system. The pre-reform banking system was dominated by the People's Bank of China (PBOC), which acted as the administrative channel for distributing funds as directed by the planners. In the early 1980s the monobank system was reformed by the establishment of four specialised banks and the transformation of the PBOC into a central bank. The banks were allowed to pay interest on savings accounts after 1984 and were encouraged to diversify their activities, but in practice the regulated interest rates remained unattractive to savers and the banks continued to deal with established clients. Thus, despite statements that the banks would henceforth act more entrepreneurially, they continued to face a soft budget constraint and to behave conservatively.9 The path selected to lead out of this impasse in the banking system was to permit the opening of branches by foreign banks.


296

In 1991 seven banks (three Japanese, two European and two from the United States) received approval to open branches in Shanghai. The new branches were not allowed to deal in domestic renminbi, so their immediate activities focused on trade finance and foreign loans. Their presence, however, immediately spilled over into other financial institutions as the new arrivals took seats on the swap centre and at the Shanghai Stock Exchange. The most dramatic indication of financial reform was the opening of stock exchanges in Shanghai and Shenzhen in December 1990. To some extent this was a formalisation of the various stock and bond markets which had emerged during the 1980s and represented increased regulation rather than liberalisation. Nevertheless, official support for such an archetypical capitalist institution was an important signal that the tide of economic reform, which appeared to have ebbed after the spring 1989 events, was turning again. Official suspicion of entrepreneurial bankers (especially foreign banks) and of security markets had prevented significant financial reform during the 1980s. By 199091 this suspicion had been reduced. The government needs an active bond market in order to finance its deficit and for the PBOC to manage monetary policy. Policy makers also recognise the desirability of enterprises being able to issue bonds and shares in order to tap the unutilised private savings, as well as to reduce the burden on the government budget of financing SEs. Gradual reform of interconnected financial markets has, however, proved to be difficult. Partial reform leads to misallocation of capital, which can only be resolved by allowing market-determined interest rates.

THE 1993-94 REFORM PACKAGE The symbolic start to more intensive economic reforms was Deng Xiaoping's highly publicised visit to the south early in 1992. This was followed by an increase in local experiments aimed at reforming the SEs. The 14th National Congress in October 1992 called for the establishment of a `socialist market economy', which was generally interpreted as emphasising the second rather than the first adjective. The search for an integrated reform package intensified during 1993, culminating in the Third Plenum meeting in November which endorsed a program of fiscal and financial reforms.10 Many of the new laws enacted during the later months of 1993 went into effect at the start of 1994. The huge losses of SEs and the inefficiency of propping them up by artificial prices were more openly discussed in 1992. The

CHINA

297

dominant approach to the SEs was to turn them into joint-stock companies, whose shares traded on the two new stock exchanges, but this was a slow process and allowing shareholders true control was still resisted. Several additional solutions were tried in different cities.11 Bankruptcy laws had been in place since the late 1980s, but few firms had been allowed to go bankrupt and they were small. When Chongqing Knitting Factory went bankrupt in August 1992, 2600 people lost their jobs and had to find new employment themselves. The dismissed workers were promised unemployment pay for 18-24 months and were allowed to stay in their houses, which must have significantly eased both the burden of job loss and the pressure to find new work. The compensation also highlights the key issue: any large-scale closure of SEs will have to be preceded by the establishment of a social security system, because the Chinese work unit provides far more than just employment.12 In Wuhan a foreign firm was allowed to take a controlling interest in the No. 2 Dyeing and Printing Factory. The Hong Kong company dismissed 1200 of the 1900 employees, which led to discontent. An alternative tried in Sichuan was to lease the Provincial Autobus Factory to a foreign company for fifteen years. The lessor was granted exclusive management rights and guaranteed to spend US$20 million to renovate the 1950s plant, but was constrained to retain 85 per cent of the factory's labour force over the full term. Another approach to protecting local interests was tried by Quanzhou in Fujian, where the city government formed a 100-year joint venture with a foreign company to run all 41 of the city's SEs (employing over 20 000 people). These are all approaches to privatising the SEs from outside, and seek to resolve the trade-off between economic efficiency and protecting existing stakeholders' interests. A simpler approach to allowing privatisation from outside was to allow foreigners to buy shares in listed companies. The first B shares were issued in February 1992, in the largest listed company on the Shanghai Stock Exchange, Vacuum Electron. More B shares were issued over the year, but initial bullishness soon disappeared as foreign investors became dissatisfied with the lack of shareholder rights and felt that new issues were overpriced. Shares in Chinese companies are now listed in New York and other overseas markets, and in Hong Kong. By 1996, however, the market value of all of these freely traded securities (B shares, ADRs and H shares) was only about US$6 billion. Neither the creation of joint-stock companies nor the local experiments have yet had much impact on the operation of China's state enterprises.13 Together, however, they are evidence that China


298

has decided that privatisation from below, via the creation of new non-state enterprises, is insufficient as a solution to transforming the industrial sector. So far, privatisation from within, whereby managers or workers appropriate the SEs' assets, has not occurred on the scale it has in Albania, Russia and other former Soviet republics, but growing concerns over corruption include worries that this might happen in China. Thus, alternative paths to privatisation have to be explored, but this also requires more fundamental reforms of the tax system, the government's revenue base and the financial system. The 1993-94 package centred on tax reform, and in particular the establishment of a unified enterprise tax and the extension of the value-added tax (VAT) to become the major indirect tax. Other components included revisions of the personal income tax, rationalisation of the budgetary system and the abolition of the dual currency system.14 The enterprise taxation system had become a nightmare. The SEs faced a 55 per cent profit tax, which was adjusted to fit each specific situation. As long as the dual price system remained, it was impossible to assert that profits reflected any economic criteria, and tax payments were in effect negotiated on a case-by-case basis. This encouraged many anomalies, such as increasing wage and salary payments rather than realising (taxable) profits or imposing local fees and taxes to cream off the surplus which would otherwise go to the central government. Collective enterprises faced progressive taxes in eight brackets ranging from 10 per cent to 55 per cent, and private enterprises were taxed at 35 per cent. Foreign-invested enterprises were subject to 33 per cent tax, but this was 15 per cent in special zones and often exempted by tax holidays aimed at encouraging joint ventures to locate there. The differential rates encouraged artificial changes of status and widespread tax evasion.15 The 1994 tax reform fixed the corporate income tax at 33 per cent for all enterprises. Existing tax contracts with SEs were annulled. The preferential tax rate of 15 per cent for foreign-invested ventures in special zones was retained, but the power of local authorities to grant exemptions and privileges was curbed (Tsang & Cheng 1994). Although the normal tax rate for SEs was reduced, the base was increased; SEs could no longer repay loans before tax, which reduced the over-investment ascribed to the taxdeductible status of loans and increased revenue from the enterprise tax. China's indirect taxes had been overhauled in 1983-84, when the turnover tax was replaced by the product tax, VAT and business tax. The product tax was the main source of indirect tax

CHINA

299

revenue, and led to highly differentiated rates as well as the multiple-counting problems associated with output taxes. The 1994 reform displaced the product tax and made a 17 per cent VAT the standard tax on sales of domestic or imported goods. The VAT was supplemented by a consumption tax on some luxury items. The business tax, which was levied at 3-5 per cent on services, was retained. Other reforms aimed at taxing capital gains on land and on stock transactions, which could be precursors of a full capital gains tax. The 1993/94 tax reform was a major attempt to rationalise the fiscal system. The central authorities succumbed to pressures from the regions and from the SEs by introducing transitional measures (such as preferential tax rates for SEs with low profitability), and a key issue was whether these would be truly transitional. If so, then the SEs would be forced to compete on a more level playing field, and that would force the issue of how to deal with those which cannot stand the pace. The multiplying of institutional practices aimed at gaining preferred status should also be stemmed by the creation of a more transparent and rational tax system, as should the growth of rentseeking behaviour and official corruption. Finally, the reform package continued the cautious introduction of financial reforms. Exchange rates were finally unified in January 1994 with the abolition of Foreign Exchange Certificates, although in essentials this legitimised a process which had already occurred via ever-broadening access to swap centres. In some respects unification was a step backwards in so far as the unified exchange rate was more regulated by the authorities than the swap centre rates had been in the early 1990s. In 1996, China announced that its currency would be made convertible for current account transactions. Banking liberalisation continued, with an increasing number of cities being opened to foreign bank branches (24 cities by 1996), and with the creation of three policy banks to handle the directed loans and leave the domestic banks free to act as entrepreneurial institutions.

CONCLUSION China's economic success after the adoption of reforms in the late 1970s contrasts to the output losses and high inflation which followed the shift to more market-oriented economies in Eastern Europe and the former Soviet Union in the early 1990s. The benefits from reforming the agricultural and external sectors were substantial because of the underdeveloped and distorted nature of


300

the Chinese economy at the end of the Maoist era. Nevertheless, the difficulties experienced in Eastern European transition economies have a counterpart in China, in so far as at higher income levels and as the economy became more developed the semireformed economy began to show symptoms of malfunction, most of which can be traced back to the essentially unreformed financial sector. Reluctance to undertake financial sector reforms was related to the deteriorating government fiscal position and to the problem of the inefficient state enterprises. China excluded fundamental fiscal and financial reforms from the original reform agenda, but recent events suggest that these have been delayed rather than avoided. The 1994 tax reforms are an integrated package to address the related problems of fiscal deficits and bring the SEs into the market-driven part of the economy. The authorities could get cold feet as potential losers from the reforms marshall their opposition. Or they could push ahead and continue with financial reforms which will combine to yield a reasonable set of capital markets. These steps will be more difficult than the initial stages of agricultural reform plus opening the economy, and the benefits will be less immediate but in the long term a well-functioning market-based economy is inconsistent with a repressed financial sector. The conclusion to be drawn from all of this is that the Chinese economy remains in a state of flux, because the reform process is essentially incomplete. This could be exacerbated by political uncertainty following the death of Deng Xiaoping. At the same time a decade and a half of high growth and rising material living standards has created a general commitment to reform, so that turning back the clock is not a feasible option.

NOTES 1.

2.

3.

Figures are from the World Bank Report No. 7267-CHA, `China — Rural Industry: Overview, Issues and Prospects', March 1989, pp. 11-13. The official figures are underestimates because a substantial part of TVE output is under-reported. Findlay et al. (1994) is a recent collection of studies on TVEs. During the second half of the 1980s Jiangsu and Zhejiang accounted for over a fifth of all non-state investment in fixed assets, and the per capita amounts (RMB1337 in Jiangsu and RMB1423 in Zhejiang) were more than double the national average of RMB623 (Kato 1992, p. 129). Actual direct foreign investment in 1992 was 33 per cent in Guangdong, 14 per cent in Jiangsu, 13 per cent in Fujian and 9 per

CHINA

301

cent in Shandong; no other province or municipality received more than 5 per cent of the total (Pomfret 1996, Ch. 3). 4. The unsuitability was especially pronounced in rice-growing areas where economies of scale or benefits from equipment sharing are minimal (e.g. the Yangtze Delta) or in areas suited to diversified agriculture (e.g. Shandong). Under the extreme strategy of public ownership embodied in the commune system of the 1970s, total factor productivity in agriculture was lower than it had been in 1949 (Lin 1992, p. 91). There is a debate over whether the output gains of 1979-84 and the subsequent slowing down were primarily in response to institutional change or to price reforms, but there is no doubt about the farmers' response. 5. Alternatively described as surrounding the cities from the countryside (Findlay & Watson, 1992) or growing out of the plan (Naughton 1994). 6. Estimates of the consolidated budget revenue vary, because Chinese accounting practices do not follow international norms, but there is no doubt that it fell dramatically as a share of national income. Wong (1991) estimates a decline from 38-39 per cent in the late 1970s to 24-25 per cent in 1988-89, and comments that this was far more severe than policy makers expected. Tsang and Cheng (1994) estimate that budget revenue dropped from 32 per cent of GDP in 1978 to 14 per cent in 1993, by which time the budget deficit equalled 13 per cent of total revenue. 7. During the 1960s this had strategic as well as egalitarian motives as sensitive industries were moved away from the coast and from the border with the USSR. 8. Output also experienced large fluctuations during the pre-reform period but retail prices were stable from the early 1960s to the early 1980s, while external trade was small and direct foreign investment banned. Repressed inflation still exists so that there is debate over the true inflation rate, but the timing of the cycles is agreed upon. 9. Yi (1994) argues that the fundamental problem is the lack of independence of the PBOC and the specialised banks. This may in turn reflect the reluctance of China's senior policy makers to loosen control over the allocation of capital, which if true will be a fatal obstacle to deep reform. 10. The description of the tax reform draws heavily on Tsang and Cheng (1994). They refer to one key document of the Plenum entitled `Decision of the CCP Central Committee on Issues Concerning the Establishment of a Socialist Market Economic Structure'. Despite the pressure from the centre for adoption of such a blueprint, almost half of the delegates voted against proposals to reform the state enterprises. 11. Similar experiments took place earlier, but the outcomes were more widely publicised in 1992. 12. This is one of the most adverse legacies of Maoism for the reform


302

era. The Chinese work unit was responsible for the workers and all of their dependants, providing housing, education, healthcare, pensions and other social services. In no other centrally planned economy did state enterprises have to carry so heavy a burden. 13. A review of the local experiments by the World Bank concludes `From a national perspective . . . these local government initiatives add up to only a modest beginning' (1996, p. 18). 14. Since most forex transactions were being conducted at swap centre rates by the end of 1993, abolition of foreign exchange certificates (FECs) at the start of 1994 was largely symbolic. The history and eventual abandonment of the FEC does, however, underline the difficulty of separating financial markets. It seems only a matter of time before current limitations on foreign banks' activities which exclude domestic banking will be withdrawn or circumvented. 15. The direct foreign investment data are difficult to assess for this reason. A large number of listed joint ventures involve the Hong Kong offices of Chinese enterprises making pseudojoint ventures with their domestic parent; this inflates the number of joint ventures and the value of direct foreign investment. Many small joint ventures keep reforming in order to continually benefit from tax holidays; this increases the numbers of new joint ventures, but not the value of direct foreign investment. Other reasons for acquiring joint venture status include the opportunity to obtain valuable vehicle import licences.

BIBLIOGRAPHY Byrd, William A. (ed.) 1992 Chinese Industrial Firms under Reform Oxford University Press, for the World Bank, New York. Chen, Kang, Jefferson, Gary and Singh, Inderjit 1992 `Lessons from China's economic reform', Journal of Comparative Economics vol. 16, pp. 201-25. Findlay, Christopher and Watson, Andrew 1992 `Surrounding the cities from the countryside' in Ross Garnaut and Liu Guoguang (eds) Economic Reform and Internationalisation: China and the Pacific Region Allen & Unwin, Sydney, pp. 49-78. Findlay, Christopher, Watson, Andrew and Wu, Harry 1994 Rural Enterprises in China Macmillan, London. Jefferson, Gary and Rawski, Thomas 1994 Ènterprise reform in Chinese industry' Journal of Economic Perspectives vol. 8, Spring, pp. 147-70. Kato, Hiroyuki 1992 `Regional development in the reform period' in Ross Garnaut and Liu Guoguang (eds) Economic Reform and Internationalisation: China and the Pacific Region Allen & Unwin, Sydney, pp. 116-36. Lardy, Nicholas 1992 Foreign Trade and Economic Reform in China, 1978-1990 Cambridge University Press, Cambridge.

CHINA

303

Lin, Justin 1992 `Rural reform and development' in Ross Garnaut and Liu Guoguang (eds) Economic Reform and Internationalisation: China and the Pacific Region Allen & Unwin, Sydney, pp. 79-97. Naughton, Barry 1994 Growing Out of the Plan: Economic Reform, 1978-93 Cambridge University Press, New York. Pomfret, Richard 1991 Investing in China: Ten Years of the Open Door Policy Harvester Wheatsheaf, Hemel Hempstead (UK) and Iowa State University Press, Ames, Iowa (USA). ——— 1992 `Financial reform in China' Seoul Journal of Economics vol. 5, Winter, pp. 351-73. ——— 1996 Asian Economies in Transition Edward Elgar, Cheltenham, UK. Riedel, James 1993 `Vietnam: On the trail of the tigers' The World Economy, July, pp. 401-22. Tsang Shu-ki and Cheng Yuk-shing 1994 `China's tax reform of 1994: Breakthrough or compromise?' Asian Survey vol. 34, September, pp. 769-88. Watson, Andrew 1994 `China's economic reforms 1987-1993' Asian-Pacific Economic Literature vol. 8, May, pp. 48-65. Wong, Christine 1991 `Central-local relations in an era of fiscal decline: The paradox of fiscal decentralization in post-Mao China' The China Quarterly vol. 128, March, pp. 691-715. World Bank 1996 The Chinese Economy: Fighting Inflation, Deepening Reform Washington DC. Wu Yanrui 1993 `Productive efficiency in Chinese industry', Asian-Pacific Economic Literature 7, November, pp. 58-66. Yi Gang 1994 Money, Banking, and Financial Markets in China Westview Press, Boulder, Colorado.

12 Conclusion Kyoko Sheridan

BRINGING THE THREADS TOGETHER Many students of economic development are familiar with Alexander Gershenkron's historical analysis of industrialisation in Europe (Gershenkron 1952), in which he found that in backward (less industrialised) economies, the government plays a large and important role first in initiating industrial activities and subsequently in guiding them to expand the economy. Since the publication of the study, the USSR embarked on a program of economic growth within the framework of a socialist economy. Although Russia's efforts have failed, those of the Asian socialist economies of China and Vietnam have long made efforts to establish revised forms of economic systems for growth by introducing market elements into their planned approach. At the same period, a number of development-minded East and South-East Asian economies have sought workable models of a `mixed economy' drawing lessons from Japan's industrialisation experience. In this concluding chapter we make some general observations on the industrialisation `push' of the Asian economies studied in this book.

Role of government What role have governments in Asia played in promoting economic growth and industrialisation? Gershenkron's understanding of the government's role in backward countries is that it provides the essential infrastructure, resources and services that would otherwise be unavailable in the early stages of development of an economy. Government may act as a developer when the economy requires entrepreneurial initiative and skills — in other words, it

CONCLUSION

305

establishes plants and enterprises which it then operates and manages; alternatively, it may allocate capital funds to fund-starved enterprises and entrepreneurs, locate idle capital, encourage people to save or invest instead of spend, and import modern technology and know-how from advanced overseas countries, and educate and train local workers and managers in its use. Gershenkron's emphasis on the government as a provider of scarce resources for industrial activities may now be seen as limited in scope. The country studies in this book demonstrate a range of functions of government that goes far beyond merely providing scarce resources. They indicate that the most important role of government is integration and coordination. Its primary contribution lies in guiding workers to contribute to the achievement of the social objectives of the country as a whole, not just their own personal objectives. People in modern societies work to contribute to the welfare of their fellow citizens. The aim of communist governments in the Soviet Union, China and Cuba was to create a new type of human being, one who as a `social individual' would subjugate their personal interests to those of the nation as a whole. Our study of selected Asian countries shows an emphasis by government on promoting this concept of integration and coordination, though by less ambitious means. The task has been a difficult one, because individuals make economic efforts for diversified reasons and with different expectations. The economic diversity among individuals becomes wider as development takes place, opening up more opportunities for those willing to take risks. It is our observation of Asian economies that the government role expands more in the direction of coordination than Gershenkron's model of industrial development allows. Government becomes more focused in its policy, and its efforts are planned to obtain and maintain economic stability, rather than growth of the economy for its own sake. This is not to say that the Asian way of government is inexorably `developmental' and that all governments in Asian economies are eager to implement growth strategies and growth plans. It is true that all the Asian economies we have studied here are high economic performers, but this observation should not blind us to the true working logic of governments in Asia. The working logic of government is for individual economic efforts to be integrated so that they serve a unified social purpose. The observed high economic record is the outcome of such public efforts, demonstrating that the public sector has pursued this role effectively. It is important to note that these public efforts differ according to each country's approach to economic development, its historical


306

background (such as colonial experiences), the needs of its people, the expectations and aspirations of individuals who engage in economic activities, and the future prospects of the economy. There is a wide diversity of approach in Asia, from the `market socialism' of China and Vietnam to the economies of Indonesia, Malaysia, South Korea and Taiwan which have evolved a workable government — market mix, and to Japan where a form of regulated capitalism which appeared to be well-established is now being reevaluated. Despite such diversity, we believe that a common approach guides the conduct of public intervention among the economies in Asia. It is an approach that may be classified as àrbitration' under the public tasks of integration and coordination. It aims to coordinate the diverse economic efforts and purposes of individuals and groups of people. With ìntegration' goes the decision of government for consensus-based legitimacy. We shall now consider whether consensus building by governments in the region under study has developed in a specially Asian way.

Economic policy and social policy In many parts of Asia the task of developing the economy must begin at an initial backward stage. Advancement of the economy requires a concurrent modernisation of various sectors in society, such as the socio-political and cultural dimensions. However, the experiences of the Asian economies do not fit this ideal case, so that economic development has taken place in a highly unbalanced way between different sectors, industries and regions. When left unchecked, this skewed development in an economy builds up social conflict between people who have benefited from economic growth and development and those who have been left lagging behind. A consciousness gap which threatens consensus will eventually develop, shifting people away from working towards a social purpose to seeking private gains, misusing the resources of the economy, and ultimately depriving the economic society of the capacity to provide a sustained level of well-being for the people. The problems are exacerbated when the economy in question tries to accelerate its growth. By contrast, when economic growth takes place gradually (as has been the case in the past with the advanced economies in the West), problems are countered through the market's allocative devices and a gradual learning process. However, in the case of extremely rapid growth, as experienced in many Asian economies, there is no time for the market or the people to make the necessary adjustments to normalise the impact

CONCLUSION

307

of unbalanced growth and differentials. This is where the judgment and leadership of government is required. Take the case of Japan, for one, the problem of differentials in productivity, wages and working conditions between the agricultural and industrial sectors, traditional and modern industrial sectors, small and larger enterprises, villages and cities, which began to develop in the 1920s as a result of the national effort to industrialise the country, introduced social inequities.1 It took until the early 1960s — four decades — to correct these differentials and distribute the results of economic growth and development relatively equally among the working population. This was made possible only when surplus conditions of labour supply eventually disappeared (as analysed in Chapter 2). How long will Asian economies spend on the necessary adjustment? The ecological and general environmental degeneration in the region (see Chapter 5), political turmoil among South Korean and Chinese citizens demanding `democracy' (see Chapters 4 and 11), and the rise of labour movements demanding more `humane' conditions in the workplace in Malaysia, the Philippines and Indonesia (see Chapters 5, 6 and 7) indicate there is an urgent need for governments in those Asian economies to act swiftly and responsibly to deal with the problems that arise from skewed economic and social development. Will governments in the Asian economies have enough time to implement the policies needed to mitigate and prevent these problems? If not, the Àsian growth miracle' will surely end.

Step-by-step, incremental approach Despite the urgency of the problem, governments in most of the Asian economies have adopted a step-by-step, incremental approach in planning and formulating policies. A brief explanation of this `gradual' method follows, before we examine an Asian approach to reforming the economy. It was Charles Lindblom who drew researchers' attention to what he calls the `gradual approach' in policy writing (Lindblom 1959 & 1979). According to this method, public policy practitioners implement plans and policies by way of trial and error, aiming to introduce reforms and strategy revisions into the economy gradually via the accumulation of partial improvements. This is the opposite of a `big bang' attempt to reform the whole system, from the foundation up, overnight. Lindblom claims that the gradual approach is the most commonly adopted policy-writing approach, at least in the United States. He believes the `shock' approach is rarely used for overcoming economic and social


308

problems, because of the difficulty of prioritising the problems to be resolved. A gradual approach is also frequently advocated by MITI in Japan. For instance, policy measures aimed at improving economic management and widening industrial activities are introduced on a trial-and-error basis, and the results monitored for any unexpected side-effects before moving to the next stage. Careful reading of our country studies indicates that MITI's approach is not an isolated one in Asia. Richard Pomfret's analysis of post-1976 China (Chapter 11) and Bruce McFarlane and Melanie Beresford's examination of recent trends in Vietnam (Chapter 9) demonstrate that these economies have followed a gradualist strategy in their efforts to transform themselves into socialist market economies. Both China and Vietnam appear to have adopted a pragmatic approach where planned reforms are introduced gradually in order to study their impact on segments of the economy before being applied to the whole system. We suggest that this may be one reason for the successful development of these economies, while the USSR has failed in its attempt to introduce a market economy. The Russian approach, according to Louis Haddad in Chapter 10, appears to have been to quickly dismantle the command economy and move in the free market direction. There are a number of explanations for the failure of the Russian economy. One reason that we suggest is that they attempted to build an ideal economic system — a communist command economy — without having had experience of how such a system functions in terms of the total structure of society. The economic planners failed to assess how the new reforms would be digested by a society comprised of people with differing motivations and expectations. If this argument is accepted, then we conclude that the Russian economy appears not to have learnt any object lesson from its previous experience and, consequently, it is attempting to rebuild the nation in one fell swoop by replacing the existing elements of the economy with new models of private ownership and market principles. This `grand' approach looks set to lead to failure. The step-by-step, trial-and-error approach to industrialisation, on the other hand, has been favoured by the East Asian `tigers', such as Taiwan whose government exerts indirect control over the implementation of industrial development policies — policies which might be described as ìndicative' rather than `directive'. Public intervention in South Korea follows a more direct approach than that of Taiwan, but the labour disputes and social disturbances which have accompanied Korea's economic development indicate the government is taking an incremental approach

CONCLUSION

309

of assessing the effectiveness of one reform before moving on to the next. Indonesia's experience, at least up to 1989, revealed frequent and wide swings between political and economic priorities. This may indicate the difficulties the government has experienced in finding a plausible public approach that will bring about economic stability and growth. The Malaysian government has created a `big push' aimed at accelerating the investment rate (now as high as 40 per cent, taking the risk of introducing high inflation and large trade deficit into the economy); otherwise, it has largely adopted a gradual approach to national economic development. The gradual approach is not without its own problems. Conflicting principles and goals are likely to develop in an economic system where the old system continues to operate at the same time as new alternatives are being introduced. Confusion and inefficient behaviour can be expected to occur. This is further indication of the need for government's role in Asia to be one of integration and coordination in order to channel people's economic and other efforts in a unified direction. Despite this problem of having dual principles in the economy, we believe the gradual approach is the only workable approach, at least in the case of the developing economies in Asia where, as we argued earlier, in order to promote industrial development it is necessary concurrently to develop the country's social and political structure, as well as some aspects of its cultural structure. Economic development must be accompanied by social restructuring, and such a large task, even if it gains the support of the majority of citizens, can be carried out only by taking a step-by-step, incremental approach. The question is how compatible the current high speed of industrialisation in the economies of Asia will prove with this incremental approach.

Future prospects In order to assess the future prospects of the Asian economies studied here, we must place their development in a postwar historical perspective comprising three stages: 1 The post-colonial period between 1945 and the mid-1960s. 2 The period of industrialisation between the mid-1960s and the mid-1980s. 3 The period since the mid-1980s, which has seen a move towards free trade and internationalisation of the economy. The first stage was one of nation-building, when formerly


310

colonised territories in Asia were freed from colonial control and influence. The second stage saw a diverse array of economic plans and policies implemented throughout the region. Socio-political problems were to be solved by way of economic devices, and the incompatible interests and activities of people with different ethnic backgrounds, religions, cultures and wealth accumulations were to be countered through industrial plans and trade regulations. As the country studies in this book reflect, the fear of resurgence of colonial control and influence led to the adoption of a `protectionist' planning approach which aimed to shield the infant industries which formed the basis of the economy from any possible threat from the advanced West and Japan. The third stage of development has grown out of the confidence built through nationbuilding and achieving a measure of economic progress and industrial development. The national concern in countries at this development stage has shifted from a socio-political basis of policy making to a greater emphasis on economic calculations and the challenges of international competition, leading the management of a national economy to follow market principles as opposed to government guided plan approaches.

WHAT LIES AHEAD? Over five decades have passed since the Asian economies which have provided the focus of our study began their move towards economic independence. There is every indication that the region's decision makers and entrepreneurs will continue to promote further industrial development. The result will depend very much on how each nation counters the many and diverse problems which may be expected to emerge in the areas of ecology, technology, economics, management, public administration, education and culture, as well as in the spheres of politics and foreign diplomacy. However, in attempting to predict whether certain Asian economies will continue to prosper in the future, it is not enough to speculate (as many economists have) upon the availability of world importing markets for Asian goods, nor on technology transfer and capital investment from the United States, Japan and other developed economies into Asia. Possibly the most important issue to note is the aims of the people living in the region, in terms of the well-being they hope to achieve through economic development. The high economic achievement in Japan during the `miracle' years of the 1950s and 1960s, and the current growth

CONCLUSION

311

performance of many of the Asian economies, should not lead us mechanically to view Asia as a `growth machine'. I have argued elsewhere that Japan's industrialisation efforts since the Meiji period have gone through many policy cycles of several years' duration in which the aims of public economic plans and policies were altered from ìndustrial growth and expansion' to `production efficiency and social purposes' (Sheridan 1993, pp. 189-98). A careful reading of the minds of leaders and decision makers, as well as of the aspirations of the general working population in the economies of Asia, is essential in order to see the direction in which top-level thinking is moving and whether it will assist the course of economic development.

NOTE 1.

See, for example, Minami (1986) Ch. 9 for further discussion.

BIBLIOGRAPHY Gerschenkron, A. 1962 Economic Backwardness in Historical Perspective Mass Belknap Press, Cambridge, originally published in 1952. Lindblom, Charles E. 1959 `The Science of Muddling Through' Public Administration Review, vol. 19, Spring, pp. 79-88. ——— 1979 `Still muddling, not yet through' Public Administration Review vol. 37, no. 6, November/December, pp. 517-26. Minami, R. 1986 Ninon no Keizai Hatten Toyo Keizai Shinpo Sha, Tokyo. Sheridan, K. 1993 Governing the Japanese Economy, Polity Press, Cambridge.

Index

Accord, 126 Affif, Saleh, 189 AFTA, 199 aggregate demand, Russia, 275-7, 278 Agricultural Bank, Russia, 268 agriculture: ASEAN countries, 124; China, 288, 289, 299, 301n; Indonesia, 195; Philippines, 145-6, 147-8, 156, 159-61; Russia, 267, 283n; South Korea, 78; Taiwan, 47, 48-9; Vietnam, 232, 2334, 239, 242, 245-6, 249-50 Albania, 298 America see United States Aminuddin, Husein, 189-90 Amnesty International, 126 Anderson, Ben, 176 Aneka Tambung, 192 Ang, Ien, 212 APEC, 122, 199 Aquino, Corazon, 128, 134, 141, 152-3, 160, 165, 169-70 Armacost, Michael, 161 ASEAN, 119-41; authoritarianism in, 1256; compared with East Asian states, 136; difficulty for researchers of, 125; diversity of socio-economic systems, 141; economic growth of member countries, 123-9; economic integration of member countries, 120-2; environmental barriers to economic

growth, 130-1, 141; founding of, 120, 124; free trade area concept, 122; historical evolution, 120-3; import of Japanese goods, 121; Japanese direct investment in, 137-9; modification of foreign policy, 120; objectives, 120-1; primary accumulation processes, 1356; regional integration in Asia, 2; relations with East Asian economies, 137; role of the state, 135-6; technology transfer from Japan, 13940; trade with Europe and the US, 121; see also member countries Asia: future prospects of Asian economies, 310-11; regional integration, 2; see also specific countries Asia-Pacific Economic Co-operation, 122, 199 Asian Development Bank, 133-4 Astra, 194 Atlantic Gulf and Pacific, 148 Australia, Chinese in, 213 autarky: China, 288; Indonesia, 183 bad debts, Russia, 264 Bakrie, Achmad, 194 Bali, 182-3 Bank BNI, 192 bankruptcies: China, 293, 297; Russia, 283n

INDEX banks: China, 295-6; Philippines, 145, 151, 154, 155, 156, 157, 169; Russia, 259, 262-4, 268, 281-2n, 283n; South Korea, 81, 84, 97, 100; Vietnam, 242, 246-8, 252 Bell Trade Act, 168 Bimantara, 195, 203, 204n bond issue: China, 295, 296; Vietnam, 247 Britain see United Kingdom budget deficits: China, 294, 295; Russia, 260, 270, 271, 281n, 284n; Vietnam, 247, 248 BULOG, 193 bumei kaika, 15 Burma, 141 business sector: Japan, 17, 18, 21-2; South Korea, 79, 87-90, 93-4, 96-101, 108-9, 112n business tax, China, 299 cacique oligarchy, 176 California Packing Company, 148 Camdessus, Michel, 279 Canada, Chinese in, 213 capital accumulation: China, 291; Indonesia, 186; Malaysia, 135-6; Philippines, 135, 147-8, 156, 158-9; Thailand, 136; Vietnam, 240-1 capitalism: Indonesia, 181-2; Philippines, 145-55 car industry: Indonesia, 199, 205n; Korea, 70; Taiwan, 60, 69-70 cement production, Vietnam, 250 Central Bank of Russia, 259, 262-3, 270, 271, 282n, 283n chaebol, 87-90, 96-101, 104-5, 108-9, 112n Chaing Kai-shek, 48 Chattichai government, Thailand, 136 Chien, Dr Fredrick, 63 child labour, Philippines, 171 China, 287-302; attitudes to leadership, 288; consolidated budget revenue, 301n; contract responsibility system, 289, 292; contrasted with Eastern Europe

313

and Russia, 299-300; controlling interests by foreign companies, 297; Cultural Revolution, 289; decentralisation, 292, 294; democracy movement, 307; dual price system, 298; foreign banks in, 295-6; 14th National Congress, 296; Fujian province, 289, 291, 300n; Guangdong province, 289, 290, 291, 300n; Japanese investment in, 139; Jiangsu province, 289, 291, 300n; joint-stock companies, 293, 297; labour supply, 187; model of economic reform, 28891; need for financial sector reform, 300; open door policy, 289-90, 291, 295; performance of the state sector, 293-4; poor performance of planned economy, 287; pragmatic approach to reform, 287-8, 308; reform package (1993-94), 296-9; relations with ASEAN, 120; Shandong province, 289, 291, 301n; share issue by state enterprises, 293; social aims, 305; socialist market economy, 287, 296, 306; tax reform, 298-9; township and village enterprises, 289, 293; work units, 297, 301n; Zhejiang province, 289, 291, 300n China Petroleum, 59 China Shipbuilding, 59 China Steel, 59 Chinese, in South-East Asia, 208-26; absence of political threat, 220; decline of the family firm, 217-18; employment barriers, 218; ethnicity and cultural identity, 208-9, 210-16, 225; float of companies on stock exchange, 222; future prospects, 220-2; historical context, 218; international networks, 209-10, 216-18, 223, 225; offshore investments, 222; persecution of, 221, 222-3, 225; political connections, 219-20, 222;

EMERGING ECONOMIC SYSTEMS IN ASIA reasons for Chinese business success, 214-20; security of, 221-3, 225-6; stereotypes of, 211-12, 224, 225; see also specific countries Chongqing Knitting Factory, 297 Chun, President, 79, 94, 95-101, 105-6 Chung Hi see Park, President Ciputra, 194 Citra Lamtoro Gung, 195, 204n Clark Air Force Base, Philippines, 176 class structure, Japan, 19 Clinton, Bill, 204n collectivisation of agriculture: China, 291, 301n; Vietnam, 232, 233-4, 239, 246 colonialism, 46-7, 145-8, 161, 181, 219, 253n, 310 Comecon, 289 command capitalism, 83 Communist Party of China, 288 Communist Party of Indonesia, 181 companies see business sector comparative economics, 2-3 competition, Russia, 266 competitive advantage, 187, 200 computer industry, Taiwan, 62-4, 68, 69 Confucianism, 3, 14, 80, 89, 125, 209, 21415 consensus management, 13-14 consumption: China, 287, 288, 289; Indonesia, 196-7; Russia, 265, 283n contracts: Indonesia, 197-8; Russia, 261 corporate welfare, 18-19, 21, 22, 25 corruption: China, 288, 294, 298, 299; Indonesia, 197-8; Philippines, 126, 128, 150-1, 153-5, 156, 164, 175; Russia, 258, 259, 263; South Korea, 84, 108; Taiwan, 54; Thailand, 126, 136; Vietnam, 241, 252 cost-push inflation, Russia, 276 Council for Mutual Economic Assistance, 232, 248, 249, 256, 274, 275, 276, 278 credit: China, 294; Russia, 270, 275; South Korea, 84-7, 89-90, 97-9; Vietnam,

314

248, 252 cronyism: Indonesia, 135, 198-9, 205n; Philippines, 144, 150-1, 153-5, 156, 164, 176, 177 Cuba, 305 Cultural Revolution, 289 culture, and economic development, 3 current account deficit, Taiwan, 50 Daewoo, 88 de-afforestation, 130 debt see foreign debt decision-making, in South Korea, 88, 90, 100 deindustrialisation, 10 demand: China, 289, 291; Russia, 275-7, 278 Deng Xiaoping, 246, 289, 296, 300 depression, Japan (1974), 27 deregulation: Indonesia, 185-7, 191-3; Japan, 28; Russia, 278; Taiwan, 65 devaluation, Philippines, 151 disguised unemployment, 148 Djiwandono, Soedradjad, 189 Djojonegoro, Wardiman, 188 Dobb, Maurice, 232-3 Doi Moi policy, 234, 239, 241, 251 domestic investment: ASEAN countries, 124; China, 293; Indonesia, 191-2, 203, 222; Russia, 277; Vietnam, 241, 247 Du Hwan see Chun, President dual labour market, South Korea, 91 Dutch, in Indonesia, 181 East Germany, aid to Vietnam, 238, 243 economic equity, Indonesia, 188 economic goals, Japan, 16 economic growth: ASEAN countries, 141; China, 289, 290-1, 292; contrasted with development, in Vietnam, 240; creation of differentials through, 3067; Indonesia, 180,

INDEX 185, 199-200; Japan, 9, 14-15, 23, 245; Malaysia, 123; Philippines, 128, 161, 173, 174, 175; political problems associated with, 125-9; Russia, 273-4, 279; Singapore, 123, 125-6; social and physical barriers to, 130-5, 141; South Korea, 78, 96, 106; Taiwan, 55, 58-9, 66; Thailand, 123; Vietnam, 129, 232, 240 economic nationalism, Indonesia, 183, 185, 187, 190 economic planning: Russia, 280; Taiwan, 51-3; Vietnam, 252 economic policy, 306-7 economic rationalism, Indonesia, 183, 185, 187, 190 Economic Stabilization Board, Taiwan, 51 economic system: defined, 4; purpose of, 45 education: Indonesia, 188; Philippines, 1712; South Korea, 91, 92; Vietnam, 240, 245, 252 efficiency: ASEAN countries, 131; Indonesia, 185; Russia, 262, 266; South Korea, 84 Eighteenth Brumaire of Louis Napoleon (Marx), 155 Electronics Research and Service Organization, Taiwan, 62, 68, 69 employers, South Korea, 104-5, 112-13n employment security: Japan, 18, 22; South Korea, 91-2, 111n energy supply, ASEAN countries, 133-5, 141 enterprise bonds, China, 295, 296 enterprise reform, Russia, 260 enterprise tax, China, 298 environmental management, Vietnam, 240 environmental problems: ASEAN countries, 130-1, 141; Indonesia, 190; Russia, 256, 269; South-East Asia generally, 307; Vietnam, 129 Estanislao, Jesus, 150 European Community, relations with

315

ASEAN, 121 exchange rate reform: China, 299, 301n; Russia, 260 excise tax, Russia, 272 export processing zones, Taiwan, 53, 55, 66, 70, 73-4 exports: China, 290; Indonesia, 195; Japan, 121, 137; Philippines, 146, 149-50, 154, 169, 173, 175; Russia, 258, 259, 260, 266, 276, 277-8; South Korea, 823, 85, 87, 111n; Taiwan, 55-8, 61; Vietnam, 232, 246, 248, 249; see also export processing zones Filipinos, working abroad, 163, 173 fiscal policy: Russia, 269, 271, 272; Vietnam, 248 Ford, Maggie, 191 foreign aid, to Taiwan, 49-51 foreign debt, Philippines, 151, 164-8, 173 foreign exchange: China, 295; export of Filipino labour to create, 163; Indonesia, 185; Philippines, 168, 173; Russia, 258, 259, 260, 270, 277; Taiwan, 54, 57, 65; Vietnam, 232, 247 foreign investment: by Japan, 109, 137-9, 161, 162, 184-5; by South Korea, 110; by Taiwan, 65, 67; by the United States, 161-2, 184; in China, 289-91, 293, 300-1n; in Indonesia, 184-5, 192, 196-7, 203; in Russia, 260, 265, 266, 267, 272, 275, 276, 277, 281n, 284n; in South Korea, 109; in Taiwan, 55, 56, 59, 60, 65; in the Philippines, 148, 161-3, 174-6; in Vietnam, 243-4, 245 Formosa Plastics, 59 fraud, Russia, 263 free market, in South Korea, 81 fukoku-kyohei policy, 14, 16, 19 Fukuzawa Yukichi, 15 Galael, 197 Gang of Four, 289

EMERGING ECONOMIC SYSTEMS IN ASIA GATT, 28, 65 General Agreement on Tariffs and Trade, 28, 65 Gershenkron, Alexander, 304-5 Ginanjar, Mr (Indonesian economist), 188 Gini coefficient, 205n globalisation, 10, 107-8, 191 Golden Truly, 197 Golkar, 202 government: attitude to labour in South Korea, 105-7; federal expenditure in Russia, 271; investment by in Russia, 277; relationship with business sector in Korea, 89-90; role in promoting economic growth, 304-6; role in the economy, 4; see also government intervention government intervention: ASEAN compared with East Asia, 135, 136; Indonesia, 181-2, 183, 187-90, 309; Japan, 10, 12-13, 15, 21-2, 28-9, 38-9; Malaysia, 309; Philippines, 150-5, 163-8, 169-70, 176; South Korea, 70, 79, 81-7, 93-4, 97-100, 108, 308-9; Taiwan, 45-6, 48, 52-3, 55-60, 62-4, 66, 67-73, 308; Vietnam, 231, 234-5, 241, 247, 250-1; see also market socialism gradual approach, in policy writing, 307-9 Grameen Bank, 246 gross domestic product: Russia, 273; Taiwan, 66-7 Habibie, B.J., 127, 187-90, 191, 200, 201, 204n Harmoko, Mr (Indonesian Minister), 192 Haryanto, Mr (Indonesian Minister), 192 Hasan, Mohammad, 194 health programs, Vietnam, 240, 252 Hero, 197 Hewlett-Packard, 63 Hong Kong: investment in China, 290; investment in the Philippines, 161;

316

Sino-Indonesians in, 224; trade with China, 291 Honolulu Iron and Steel Works, 148 housing: ASEAN countries, 131; Australia, 26; Japan, 25, 26 Hsinchu science park, Taiwan, 63, 70, 72 Humpuss, 195, 204n Hyundai, 88, 112n IBM, 69 IBRD, 184 import substitution: ASEAN countries, 136; Indonesia, 183, 185, 193; Philippines, 148, 149, 168; Taiwan, 53-5, 57, 59, 66 imports: China, 290; Japan, 137; Philippines, 154, 175; Russia, 258-9, 260, 265, 268, 277; South Korea, 83; Vietnam, 249, 250; see also import substitution incentives: China, 292; South Korea, 83-5, 89 income distribution: comparison of Asian countries, 205n; Vietnam, 240, 242 income tax: China, 298; Russia, 272 Indonesia, 180-205; Agency for the Development of Strategic Industries, 188; business links with the presidency, 186, 189-90, 194-5; capital inflow, 183-4; Chinese in, 181, 182-6, 194-5, 203, 211, 212, 214, 219, 221, 222; choice of Suharto's successor, 201-3; colonial period, 181, 219; commercial interests of the Suharto family, 194-5, 198-9; conglomerates, 194, 203; contemporary business characteristics, 190-7; cronyism, 135, 198-9, 205n; economic nationalism versus economic rationalism, 183, 185, 187, 190; environmental damage, 190; future prospects, 197-204; Gini coefficient, 205n; government intervention,

INDEX 181-2, 183, 187-90, 309; governmentmarket mix, 306; implications of economic growth, 127; Japanese investment in, 122, 137, 184-5; Malari riots (1974), 184-5; the military, 189, 201; military dictatorship, 127; ministerial independence, 192-3; New Order, 127; oil revenues, 185; Outer Islands, 182-3; policy making since 1966, 181-7; relations with Vietnam, 120; riots (1996), 200-1; significance of ASEAN to, 120; urban unrest, 2001; water supply, 133; youth, 196-7 Indonesia: The Rise of Capital, 186 Indosat, 191 industrial relations: South Korea, 93-5, 1057; Vietnam, 252-3 Industrial Technology Research Institution, Taiwan, 62 industrialisation: China, 291; Europe, 304; Indonesia, 121, 126, 127; Japan, 13-16, 19, 38-9, 307, 310-11; labour upheavals accompanying, 125; Malaysia, 121, 123, 136; Philippines, 121, 126, 136, 146, 147, 149-50, 1513, 168-70, 175; role of capital and labour, 126; Singapore, 121; South Korea, 78, 79-95, 86-7, 95; Taiwan, 55-8; Thailand, 121, 123, 126, 127-8; Vietnam, 231-2, 235-40, 242, 244-5, 253n inflation: China, 294, 301n; Indonesia, 180; Philippines, 175; Russia, 256, 258, 270, 273, 275, 276, 281n, 283n; Taiwan, 48, 49; Vietnam, 247 infrastructure: Japan, 25, 38; Philippines, 164, 174; Russia, 256, 261, 263, 266, 270, 272, 279-80, 284n; Vietnam, 245 Inter Governmental Group on Indonesia, 184 interest rates: Philippines, 175; South Korea, 84, 97, 100; Vietnam, 247

317

International Economic Cooperation Development Fund, 65 International Monetary Fund policy: Indonesia, 184; Philippines, 158, 166, 167, 174; Russia, 269, 270, 273, 279, 280; South Korea, 82; Vietnam, 241, 242, 248 inventories, Russia, 258 investment see domestic investment; foreign investment IPTN aircraft works, Bandung, 187, 189, 204n Islam, in Indonesia, 201, 203 Japan, 9-42; àdvance' Japan, 31, 36-7, 40; becomes richest nation, 11; curbing of reforms, 27; differentials existing in, 307; distribution of wealth, 17, 19, 22, 25; dual labour market, 91; embargo on Vietnam, 243; exports to ASEAN countries, 121; future possible economic scenarios, 29-38, 40; general fear about future prospects, 10-11, 267; government intervention, 10, 12-13, 15, 21-2, 28-9, 38-9; investment in ASEAN, 137-9; investment in China, 139; investment in Indonesia, 184-5; investment in South Korea, 109; investment in the Philippines, 161, 162; labour management before World War II, 16-20; loss of public trust in government, 41n; major concerns in the 1990s, 9-12; Meiji government, 1316; `mend' Japan, 30, 34-6, 40; MITI's approach to policy writing, 308; mixed economy, 28-9, 39; narrow focus of economic development, 26-7; `naturaltrend' Japan, 30, 33-4, 40; occupation of Taiwan, 46-7; origins of economic ideology, 13-16; postwar development (1946-73), 21-8;


318

recovery after oil crises, 27; `reform' Japan, 31, 37-8, 40; rejection of Western approaches, 21; shift of production bases offshore, 10; speculative boom and bust, 9, 28; technology transfer to ASEAN, 13940; war effort (1931-45), 20-1 `Japan Inc', 12 Jasa Marga, 192 Java, 182-3 J.C. Penny (company), 197 joint ventures: China, 288, 289, 297, 298, 301n; Russia, 268; Vietnam, 245, 252 judiciary, Philippines, 155, 158

Lee Kuan Yew, 125 legal system: Indonesia, 197-8; Russia, 261, 282n legislature, Philippines, 155, 158 leisure, 32 Lewis, Arthur, 2, 14 Li Ka Shing, 217, 222 Li Kuo-ting, 46, 52, 72 Liem Sioe Liong, 217, 219-20, 221, 222 lifetime employment, 91-2, 111n Lim, Joseph, 149 Lindblom, Charles, 307-8 Lippo, 194 Little, Ian, 55, 56

Kao, John, 209 kasmahan, 145 Kawakami, Hajime, 17, 19-20, 41n Kia, 199 Kim, President, 104, 107 KMT, 48-9, 52, 54, 59, 61, 292 Korea see South Korea Korean Central Intelligence Agency, 81 Korean Trade Promotion Corporation, 83 Korean Traders Association, 83 Korean War, 48, 80 Kornai, James, 273, 274 Krakatau Steel, 192 Kuok, Robert, 217, 222 Kuomintang, 48-9, 52, 54, 59, 61, 292

Mackie, J.A.C., 212-13, 215 Madrigal, Vincente, 148 Maekawa report, 36 Mafia, in Russia, 259, 261-2 Mahathir, Mohammad, 122, 215, 221 Makro, 197 Malari riots (1974), 184-5 Malaysia: Chinese in, 211, 214, 221; deafforestation, 130; energy supply, 134; favours free trade area, 122; government intervention, 309; government-market mix, 306; implications of economic growth, 1267; investment rate, 309; Japanese direct investment in, 137; New Economic Policy, 127; primary accumulation in, 135-6; public agencies, 126; significance of ASEAN to, 120 management style, South Korea, 88-9, 90, 94, 103 Manapat, Ricardo, 151, 154 manufacturing: China, 289; Indonesia, 187, 195; Philippines, 146, 148, 168-70; South Korea, 109-10; Taiwan, 47, 54, 59, 61; Vietnam, 146 Mao Zedong, 287, 289 Marcos, Ferdinand: crony capitalism, 125, 135, 150-1, 153-4, 174; land reform under, 159-60; legislates to raise wages, 170; overthrow of, 141,

labour: China, 290-1; Indonesia, 188, 200; Japan, 5, 16-20, 23, 24-5, 39, 307; Philippines, 148, 149-50, 152, 158, 163, 170-1, 173; South Korea, 90-5, 101-7, 110, 112n; see also unions; wages; working conditions; working hours land ownership, Philippines, 146, 155-6, 159-61 land reform: Philippines, 159-61, 174; Russia, 267-8; Taiwan, 48-9; Vietnam, 232, 233 Latief, Abdul, 188, 200 Lee, C.H., 86

INDEX 144; patronage politics, 158; policy of export-led industrialisation, 149; role of the banks under, 157 the market: Japan, 11-12; Russia, 278-9; South Korea, 84; Vietnam, 250-1 market socialism, Vietnam, 231, 234-5, 241, 247, 250-1, 306 Marks and Spencer, 197 Maruzen, 197 Marx, Karl, 155 Matahari, 197 Meaney, Constance, 62, 63 middle class: ASEAN countries, 129; Indonesia, 186, 190, 196 migration, to urban areas, 132 Minority Rights Group, 212 MITI, Japan, 29, 308 Mitsubishi, 15, 18 Mitsui, 15 mixed economy, Japan, 28-9, 39 monetary policy: Philippines, 153-4; Russia, 269-71, 272 money market, Vietnam, 247 money supply, Russia, 270, 283n monopolies: Indonesia, 193; Philippines, 154, 163; Russia, 258, 262, 266, 270; Vietnam, 249 Muhammad, Mar'ie, 189 Muto, Sanji, 17-18, 21, 36 Myrdal, G., 144, 151 Nakasone, Yasuhiro, 36 Nakayama, Ichiro, 19 Nasution, Anwar, 193 National Council on Science Development, Taiwan, 52 National Income-Doubling Plan (Japan), 22 nationalism, 3, 83 natural resources, Philippines, 154 neo-Confucianism, 215 neoclassical economics, 81, 280 New Order, 181, 202 Nikkei Financial Review, 9, 10 1955 taisei, 21, 23 nominal rate of interest, Russia, 258, 281n

319

non-bank financial institutions, South Korea, 100 OECD, 28 oil crises, 27, 38, 58, 60, 64, 87, 96 Okochi, Kazuo, 19 Okubo, Toshimichi, 14-15, 16 oligarchy, Philippines, 158, 176 open door policy, China, 289-90, 291, 295 Organisation for Economic Cooperation and Development, 28 output: China, 289, 293, 301n; Russia, 256, 273-6, 284n Overseas Chinese see Chinese ownership, under socialism, 242 Palapa satellite system, 189 Pan, Lynn, 219 Park, President, 79, 81-5, 87, 95, 96 patriarchy, 88-9 People's Bank of China, 295 People's Republic of China see China per capita GNP: Japan, 11; South Korea, 78 per capita income, Taiwan, 45, 47 Perusahaan Listrik, 192 Philippines, 144-77; Board of Investments, 162, 169; cautious about free trade area, 122; Chinese in, 211, 221; colonial period, 145-8, 161; Comprehensive Agrarian Reform Program, 160; crony capitalism, 125, 135, 150-1, 153-4, 174; deafforestation, 130; development of capitalism in, 145-55; dominance of landed and business elites, 155-8, 164, 176, 177; energy supply, 134; Filipinos working abroad, 163, 173; fiscal crisis, 163-4; free trade zone, 176; government intervention, 150-5, 163-8, 169-70, 176; implications of economic growth, 128; income inequality, 159; investment ratio, 124; Japanese direct investment in, 137; law and order problem, 173; Lee's predictions for,

EMERGING ECONOMIC SYSTEMS IN ASIA 125-6; martial law declared (1972), 153; National Development Company, 147; National Economic Council, 147; National Power Corporation, 147; `Philippines 2000' program, 174-5, 176; political stability, 175; political upheaval, 141; primary accumulation in, 135; role of the state, 155-61, 1638, 169-70, 176; significance of ASEAN to, 120; state capitalism, 1501; trade reforms, 169-70; water supply, 132-3, 134 PKI, 181 Pol Pot, 232 Poland, 274, 279, 282n Polanyi, Karl, 250 Policy Guidelines for the Fiscal Year 1996 (Japan), 29 population: Indonesia, 182, 199; South Korea, 78 post-industrial society, Japan, 32 Poulantzas, Nicos, 155 poverty: Indonesia, 195-6; Japan, 17, 19-20, 40, 41n; Philippines, 169; Russia, 256; Vietnam, 240, 252 PRD, 200-1 price controls, Vietnam, 232, 234, 239, 246, 249 price liberalisation: China, 292; Russia, 257-8, 272, 275 private sector: Indonesia, 186, 194; Philippines, 152, 156; Russia, 268; Taiwan, 56; Vietnam, 248, 252-3 privatisation: China, 297-8; Indonesia, 1912, 194; Russia, 261-2, 265, 266, 277, 281n product tax, China, 298-9 productivity, Indonesia, 188, 200 profit tax: China, 298; Russia, 272 property rights, Russia, 260-1, 267, 268 protection of industry: in newly established nations, 310; Malaysia, 170; Philippines, 149, 168-70; Thailand, 170; Vietnam, 252; see also subsidies;

320

tariffs public policy, 307-8 public sector: integration of individual effort in, 305-6; Japan, 13; Philippines, 153; Russia, 262 quality circles, 28 quality of life, 23, 25-7, 37, 310 Ramos, Fidel, 128, 141, 151-2, 156, 166, 167, 172-7 real estate speculation: Japan, 28; South Korea, 86 regulated capitalism, 15 rent-seeking activities: China, 299; in industrialisation, 136; Indonesia, 184; South Korea, 81, 84, 86; Vietnam, 241 research and development, Taiwan, 62, 72 restructuring: Russia, 265-9, 277; South Korea, 97-9 returns to scale, 68 Rhee, President, 84, 85 Rho, President, 79, 100-1, 105-7 Riady, Mochtar, 194, 204n Riedel, James, 73 Robison, Richard, 186 Rukmana, Siti, 194, 201-2, 205n Russia, 256-84; capital flow into, 260; controlled exchange rate regime, 259; convertibility of the rouble, 259-60; criminalisation of the economy, 261-2, 272, 279, 280, 282n; dollarisation of the economy, 260, 264, 281n; economic performance (1991-94), 2728; energy sector, 266-7, 272; extent of Mafia control, 259, 261-2; financial reforms, 262-4; flight of capital from, 260, 264, 266, 276, 281n; institutional changes, 257-64; inter-enterprise debts, 264, 269-70; liberalisation of trade and foreign exchange, 258, 259; monitoring of trade practices, 266; overview of the economy, 256; policy changes,

INDEX 269-72; reasons for failure of the economy, 308; regionalism, 283-4n; shadow economy, 274; structural changes, 264-9; workers' appropriation of state enterprise assets, 298 Russo-Japanese War, 16 Salim, Sudono, 194 Sampo, 62, 68 Samsung, 88 savings: Japan, 10; Philippines, 166-7; Russia, 258; Vietnam, 240, 244, 247 Sberbank, 263, 281n, 282n science, Taiwan, 52, 53, 62-4, 72 Seagrave, Stirling, 209 sectoral adjustments, Russia, 265 securities markets, China, 295 Seibu, 197 semiconductor industry, Taiwan, 62-4, 68, 69 Sender, Henny, 208-9 share issue, China, 295, 297 Shell Corporation, 162 Shibusawa, Eiichi, 15-16 Shivers, Mitchell, 192 shock therapy school of transition, 269, 272-3, 279-80, 282n, 307-8 Simon, Denis, 61-2 Sinar Mas, 194 Singapore: Chinese in, 211, 214, 221; favours free trade area, 122; investment in the Philippines, 161; investment ratio, 124; Japanese direct investment in, 137; public agencies, 126; significance of ASEAN to, 120; water supply, 133 Sino-American Joint Commission on Rural Reconstruction, 48 Sino-Japanese War, 16 social development, 3 social policy, 306-7 `soft state', 144, 151 Sogo, 197 Sophonpanich, Chin, 217, 219 South Korea, 78-113; bureaucratic

321

regulation, 108; centralisation of power in the executive, 81-2; contrasted with Japan, 5-6; debt to equity ratio, 84; democracy movement, 307; dual labour market, 91; during the `three lows', 100; economic liberalisation, 79, 82-3, 95-101; Economic Planning Board, 81-2; export promotion, 82-3, 85, 111n; financial liberalisation (1980s), 97, 99-100; First Five Year Plan, 82; globalisation, 107-8, 110; government control of credit, 84-7; government intervention, 70, 79, 81-7, 93-4, 97-100, 108, 308-9; governmentmarket mix, 306; industry rationalisation program, 97-9; investment in the Philippines, 162; Japanese occupation of, 80, 81; martial law, 96; monopoly regulation, 100; nationalisation of banks, 81, 84; overcapacity in key industries, 87; political liberalisation, 79, 100-7; recession (1980), 87; relations with the US, 80; seeds of development, 80-1; social restructuring of, 95; stabilisation program, 96; state attitude to labour unions, 105-7; state-controlled incentive system, 83-5, 89; status system, 92; strikes and protests, 112n; structural economic change, 78; trade deficit with Japan, 109 Soviet Union see USSR Spain, in the Philippines, 161, 171 the state see government; government intervention; state-owned enterprises state capitalism, Philippines, 150-1 state-owned enterprises: China, 288, 292-4, 296-9; Indonesia, 186, 193-4; Russia, 258, 260-2, 270, 275, 277, 281n, 282n, 283n; Taiwan, 52, 59-60; Vietnam, 234, 238, 240, 241, 243-5, 248-50, 251-2 statist economics, view of development in South Korea, 81

EMERGING ECONOMIC SYSTEMS IN ASIA stock exchanges, China, 293, 296, 297 subcontracting, Philippines, 149-50 subsidies, Russia, 267, 283n sugar industry, Philippines, 146, 147-8, 156 Suharto, Bambang, 194-5, 205n Suharto, President, 135, 181, 189, 198-9, 201-3, 219-20 Suharto, Probosutejo, 205n Suharto, Sigit, 194-5, 205n Suharto, Tommy, 194-5, 199, 205n Suharto, Tutut, 194, 201-2, 205n Sukarno, President, 182 Sun, Y.S., 62, 63 Taiwan, 45-74; abortive car plant project, 60, 69-70; as a model for Vietnam, 73; colonial development, 46-7; competition with Beijing, 72; contrasted with Japan, 5-6; deepening of the industrial base (1973-80), 58-61; economic planning, 51-3; export-led industrialisation (1960-73), 55-8; foreign investment by, 176; future prospects, 66-73; government intervention, 45-6, 48, 52-3, 55-60, 624, 66, 67-73, 308; government-market mix, 306; impact of oil crisis, 58-9; International Economic Cooperation Development Fund, 65; internationalisation of the economy, 64-6, 67, 71; investment in the Philippines, 161, 162; Japanese occupation, 46-7; lessons for other countries, 73-4; liberalisation of domestic economy, 54-5; liberalisation of trade barriers, 57-8, 64, 65; martial law, 58; Nineteen Project Program, 54; per capita income, 45, 47; political isolation, 59-60; political motivation for economic success, 55-6; post World War II, 47-9; pragmatism in policy implementation, 72, 73-4; production structure, 61; promotes

322

high-skill, high value-added economy, 61; science development plans, 62, 63, 72; Seventh Plan, 59; trade surplus, 645; Twelve Major Development Projects, 60; upgrades public research organisations, 60; US aid, 49-51; use of technology, 60-4 Taiwan Semiconductor, 62 takeovers, Russia, 263 Tale of Poverty (Kawakami), 17, 19-20 Tambang Timah, 191, 192 Tanaka, Kakuei, 184 tariffs: ASEAN countries, 121; Indonesia, 183, 193; Philippines, 151, 157, 16870; Russia, 259; South Korea, 83; Taiwan, 53-4, 57, 65 Tatung, 62, 68 Taw Woo see Rho, President taxation: China, 298-9, 301n; Russia, 271-2, 283-4n technocrats, 183, 189 technology: Russia, 266; South Korea, 10910; Taiwan, 60-4; see also technology transfer technology transfer: from Japan to ASEAN, 139-40; from the US to Taiwan, 49-50; to Vietnam, 243 Teh, Mr (Singaporean Minister), 126 Telkom, 191-2 Thailand: Chinese in, 211, 214, 218, 219, 221; de-afforestation, 130; implications of economic growth, 127-8; political upheaval, 122, 141; relations with Vietnam, 120; significance of ASEAN to, 120; water supply, 133 Tohata, Seiichi, 19 Tokyo, 26, 28 trade: China, 289; Japan, 28; Philippines, 169-70; Russia, 258, 259; Vietnam, 242, 248-50; see also exports; imports trade unions see unions training, Japan, 17-18

INDEX `transformational recession', 273, 274, 275 Treaty of Shimonoseki, 46 Twinhead Corporation, 63 Tydings-McDuffie Act (1934), 147 unemployment: China, 297; Indonesia, 199; Philippines, 148; Russia, 256, 265-6, 284n; Vietnam, 241 unions: ASEAN countries, 126; Indonesia, 200; Japan, 21-2; Philippines, 170, 171; South Korea, 79, 93-4, 101, 1034, 105-7; Vietnam, 253 unit labour costs, Russia, 276 United Kingdom, investment in the Philippines, 161, 162 United Malays National Organisation, 221 United Microelectronics, 62, 66, 68 United States: Agency for International Development, 173, 174; aid to Taiwan, 49-51; annexation of the Philippines, 145-7, 148, 161, 171; Chinese in, 213; embargo on Vietnam, 238, 243; investment in Indonesia, 184; investment in the Philippines, 161-2; pressure on Indonesia to improve working conditions, 187; relations with South Korea, 80; restrictions on ASEAN exports, 121 urbanisation, 132 USSR, 238, 243, 305; see also Russia Vacuum Electron, 297 value-added tax: China, 298, 299; Philippines, 167, 175; Russia, 271 value-adding, Indonesia, 187 Vietnam, 231-53; agricultural policy, 245-6; Chinese in, 240; colonial period, 253n; development aid to, 245; diversion of resources to the south, 232, 233; Doi Moi policy, 234, 239, 241, 251; economic results of war, 243; economic role of the state, 251-3;

323

egalitarian achievements, 240; emigration of Chinese from, 213, 2234; entry to ASEAN, 120; equitisation of public industries, 241, 253n; financial policy, 246-8; First Five Year Plan, 239; floats exchange rate, 249; free market in real estate, 234; government intervention, 231, 234-5, 241, 247, 250-1; implications of economic growth, 128-9; industry policy since 1986, 244-5; institutional prerequisites for development, 250-1; invasion of Cambodia, 232; labour supply, 187; maintaining socialism in a global economy, 242; ownership under socialism, 242; Party Congress (1986), 234, 244; planned economy, 232, 233; pragmatic approach to reform, 308; relations with ASEAN, 120; rice trade, 246, 249-50, 253n; role of the market, 250-1; smuggling, 249; socio-political goals, 241-4, 251; sources of capital accumulation, 240-1; State Bank for Agriculture, 246; summary of industrialisation (1955-1995), 235-40; Taiwan as a model for, 73; Three Plan system, 239; trading partners, 249; transition to new political economy, 241-4, 251-3; US embargo on, 238, 243; war conditions, 239 Vietnamese Communist Party, 242, 244, 246 Viviani, Nancy, 224 voluntary export restraints, 58 Wade, Robert, 56 wages: China, 298; Indonesia, 187, 200, 204n; Japan, 24-5; Philippines, 169, 170-1; Russia, 275, 276; South Korea, 102; Vietnam, 204n, 238, 252-3 Walmart, 197

EMERGING ECONOMIC SYSTEMS IN ASIA Wang Gungwu, 215 water supply, ASEAN countries, 132-3, 134, 141 Weber, Max, 14, 153, 155 welfare: corporate welfare, 18, 21, 22, 25; future scenarios, 33 well-being, 6, 11, 40n, 310 women: Japan, 38; South Korea, 103-4 workers' self-management, China, 293 working conditions: Indonesia, 307; Malaysia, 307; Philippines, 307; South Korea, 91 working hours: Japan, 36; South Korea, 102; Vietnam, 253 World Bank policy: Indonesia, 189, 196; Philippines, 133, 136, 156, 158, 165,

324

173-4, 175; Russia, 269, 273, 280; Vietnam, 241, 264 World Trade Center, Taipei, 53 World Trade Organisation, 65, 67, 71, 199, 290 World War II, Japanese war effort, 20-1 Wu, Se-hwa, 62 Yavlinksy, G., 270 Yin, K.Y., 56 Yong Sam see Kim, President Yue Loong, 69 Yugoslavia, 293 zaibatsu, 15, 88, 89, 111n

Emerging Economic Systems in Asia: A Political and Economic Survey

Vietnam: A Guide to Economic and Political Developments (Guides to Economic and Political Developments in Asia)

China: A Guide to Economic and Political Develolpments (Guides to Economic and Political Developments in Asia)

Economic and Social Survey of Asia and the Pacific 2006

Economic Development in Pacific Asia

Central Asia in Transition: Dilemmas of Political and Economic Development

Economic and Social Development in Pacific Asia

Budget Deficits and Economic Activity in Asia

Regional Economic Outlook Asia and Pacific October 2007 (World Economic and Financial Survey)

Africa and Asia in Comparative Economic Perspective

World Economic and Social Survey 2008: Overcoming Economic Insecurity

Economic Integration in Asia and India

Economic Integration in Asia and India

Political Events and Economic Ideas

Political and Economic Dictionary of Africa, A

Political Competition and Economic Regulation

Adaptive processes in economic systems

A Political and Economic Dictionary of Western Europe (Political and Economic Dictionaries)

Modeling Complexity in Economic and Social Systems

The Politics of Economic Regionalism: Explaining Regional Economic Integration in East Asia (International Political Economy)

Modeling Complexity in Economic and Social Systems

Economic Growth in the Asia Pacific Region

Emerging Infections in Asia

Accounting Theory: Conceptual Issues in a Political and Economic Environment

Economic Development, Integration, and Morality in Asia and the Americas (Research in Economic Anthropology)

Ukraine and Russia. A Survey of Their Economic Relations

India and Emerging Asia

Economic and Social Survey of Asia and the Pacific 2007: Surging Ahead in Uncertain Times

Iran's Political, Demographic, and Economic Vulnerabilities

India: Economic, Political and Social Issues

Iran's Political, Demographic, and Economic Vulnerabilities

Emerging Economic Systems in Asia: A Political and Economic Survey

Vietnam: A Guide to Economic and Political Developments (Guides to Economic and Political Developments in Asia)

China: A Guide to Economic and Political Develolpments (Guides to Economic and Political Developments in Asia)

Economic and Social Survey of Asia and the Pacific 2006

Economic Development in Pacific Asia

Central Asia in Transition: Dilemmas of Political and Economic Development

Economic and Social Development in Pacific Asia

Budget Deficits and Economic Activity in Asia

Regional Economic Outlook Asia and Pacific October 2007 (World Economic and Financial Survey)

Africa and Asia in Comparative Economic Perspective

World Economic and Social Survey 2008: Overcoming Economic Insecurity

Economic Integration in Asia and India

Economic Integration in Asia and India

Political Events and Economic Ideas

Political and Economic Dictionary of Africa, A

Political Competition and Economic Regulation

Adaptive processes in economic systems

A Political and Economic Dictionary of Western Europe (Political and Economic Dictionaries)

Modeling Complexity in Economic and Social Systems

The Politics of Economic Regionalism: Explaining Regional Economic Integration in East Asia (International Political Economy)

Modeling Complexity in Economic and Social Systems

Economic Growth in the Asia Pacific Region

Emerging Infections in Asia

Accounting Theory: Conceptual Issues in a Political and Economic Environment

Economic Development, Integration, and Morality in Asia and the Americas (Research in Economic Anthropology)

Ukraine and Russia. A Survey of Their Economic Relations

India and Emerging Asia

Economic and Social Survey of Asia and the Pacific 2007: Surging Ahead in Uncertain Times

Iran's Political, Demographic, and Economic Vulnerabilities

India: Economic, Political and Social Issues

Iran's Political, Demographic, and Economic Vulnerabilities

Recommend Documents