Asian States: Beyond the Developmental Perspective (Politics in Asia Series)

Asian States

Asian States provides a much-needed re-examination of the theoretical claims and the empirical foundation of developmental state theory. This theory emerged in response to the failure of both neoclassical economics and dependency theory in accounting for the spectacular economic growth of Japan and other latecomer nations. Asian States argues that regardless of the merits of the developmental state as an explanation of economic growth, it falls far short of being an adequate theory of the state of Asia. In this book the contributors critically review claims about agency, state– society and state–market relations that shape developmental projects. It broadens the analysis of state involvement in developmental projects and considers the variety of political and social bases for state projects across East and Southeast Asia in a theoretically sensitive, thematic and empirically rich way. Richard Boyd is Reader in the Law and Society of Japan at Leiden University, the Netherlands. Tak-Wing Ngo is Lecturer in Chinese Politics at Leiden University, the Netherlands.

Politics in Asia series Formerly edited by Michael Leifer London School of Economics

ASEAN and the security of South-East Asia Michael Leifer China’s policy towards territorial disputes The case of the South China Sea Islands Chi-kin Lo India and Southeast Asia Indian perceptions and policies Mohammed Ayoob Gorbachev and Southeast Asia Leszek Buszynski Indonesian politics under Suharto Order, development and pressure for change Michael R. J. Vatikiotis The state and ethnic politics in Southeast Asia David Brown The politics of national building and citizenship in Singapore Michael Hill and Lian Kwen Fee Politics in Indonesia Democracy, Islam and the ideology of tolerance Douglas E. Ramage Communitarian ideology and democracy in Singapore Beng-Huat Chua The challenge of democracy in Nepal Louise Brown Japan’s Asia policy Wolf Mendl The international politics of the Asia–Pacific, 1945–1995 Michael Yahuda

Political change in Southeast Asia Trimming the banyan tree Michael R. J. Vatikiotis Hong Kong China’s challenge Michael Yahuda Korea versus Korea A case of contested legitimacy B. K. Gills Taiwan and Chinese nationalism National identity and status in international society Christopher Hughes Managing political change in Singapore The elected presidency Kevin Y. L. Tan and Lam Peng Er Islam in Malaysian foreign policy Shanti Nair Political change in Thailand Democracy and participation Kevin Hewison The politics of NGOs in South-East Asia Participation and protest in the Philippines Gerard Clarke Malaysian politics under Mahathir R. S. Milne and Diane K. Mauzy Indonesia and China The politics of a troubled relationship Rizal Sukma Arming the two Koreas State, capital and military power Taik-young Hamm Engaging China The management of an emerging power Edited by Alastair Iain Johnston and Robert S. Ross Singapore’s foreign policy Coping with vulnerability Michael Leifer

Philippine politics and society in the twentieth century Colonial legacies, post-colonial trajectories Eva-Lotta E. Hedman and John T. Sidel Constructing a security community in Southeast Asia ASEAN and the problem of regional order Amitav Acharya Monarchy in South-East Asia The faces of tradition in transition Roger Kershaw Korea after the crash The politics of economic recovery Brian Bridges The future of North Korea Edited by Tsuneo Akaha The international relations of Japan and South-East Asia Forging a new regionalism Sueo Sudo Power and change in Central Asia Edited by Sally N. Cummings The politics of human rights in Southeast Asia Philip Eldridge Political business in East Asia Edited by Edmund Terence Gomez Singapore politics under the People’s Action Party Diane K. Mauzy and R. S. Milne Media and politics in Pacific Asia Duncan McCargo Japanese governance Beyond Japan Inc. Edited by Jennifer Amyx and Peter Drysdale China and the Internet Politics of the digital leap forward Edited by Christopher R. Hughes and Gudrun Wacker Challenging authoritarianism in Southeast Asia Comparing Indonesia and Malaysia Edited by Ariel Heryanto and Sumit K. Mandal

Cooperative security and the balance of power in ASEAN and the ARF Ralf Emmers Islam in Indonesian foreign policy Rizal Sukma Media, war and terrorism Responses from the Middle East and Asia Edited by Peter Van der Veer and Shoma Munshi China, arms control and nonproliferation Wendy Frieman Communitarian politics in Asia Edited by Chua Beng Huat East Timor, Australia and regional order Intervention and its aftermath in Southeast Asia James Cotton Domestic politics, international bargaining and China’s territorial disputes Chien-peng Chung Democratic development in East Asia Becky Shelley International politics of the Asia–Pacific since 1945 Michael Yahuda Asian states Beyond the developmental perspective Edited by Richard Boyd and Tak-Wing Ngo

Asian States Beyond the developmental perspective

Edited by Richard Boyd and Tak-Wing Ngo

First published 2005 by RoutledgeCurzon 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by RoutledgeCurzon 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” RoutledgeCurzon is an imprint of the Taylor & Francis Group © 2005 editorial matter and selection, Richard Boyd and Tak-Wing Ngo; individual chapters, the contributors. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Date A catalog record for this book has been requested ISBN 0-203-30823-9 Master e-book ISBN

ISBN 0–415–34612–6 (Print Edition)

Contents

List of contributors Preface 1

Emancipating the political economy of Asia from the growth paradigm

xi xiii

1

RICHARD BOYD AND TAK-WING NGO

2

A regulationist and state-theoretical analysis

19

BOB JESSOP

3

The state–market condominium approach

43

GEOFFREY R. D. UNDERHILL AND XIAOKE ZHANG

4

The paradox of weak power and strong authority in the Japanese state

67

JOHN O. HALEY

5

The political bases of episodic agency in the Taiwan state

83

TAK-WING NGO

6

Local state structure and developmental incentives in China 110 MARIA EDIN

7

Social contradictions of the Korean state

129

HAGEN KOO

8

The political economy of the Asian welfare state

145

STEPHAN HAGGARD

9

Transplanting the neoliberal state in Southeast Asia

172

RICHARD ROBISON, GARRY RODAN, AND KEVIN HEWISON

References Index

199 219

Contributors

Richard Boyd is Reader in the Law and Society of Japan at the University of Leiden, the Netherlands. Maria Edin is a Research Fellow in Political Science at Uppsala University, Sweden. Stephan Haggard is Lawrence and Sallye Krause Professor at the Graduate School of International Relations and Pacific Studies, University of California, San Diego, United States. John O. Haley is Wiley B. Routledge Professor of Law at Washington University in St Louis, United States. Kevin Hewison is Director of the Carolina Asia Center at the University of North Carolina in Chapel Hill, United States. Bob Jessop is Professor of Sociology and Director of the Institute for Advanced Studies at Lancaster University, United Kingdom. Hagen Koo is Professor of Sociology at the University of Hawaii, United States. Tak-Wing Ngo is Lecturer in Chinese Politics at the University of Leiden, the Netherlands. Richard Robison is Professor of Political Economy at the Institute of Social Studies, the Netherlands. Garry Rodan is Director of the Asia Research Center and Professor of Politics and International Studies at Murdoch University, Australia. Geoffrey R. D. Underhill is Professor of International Governance at the University of Amsterdam, the Netherlands. Xiaoke Zhang is Lecturer in International Relations at the University of Nottingham, United Kingdom.

Preface

This is the first volume in a series of publications that aims to return power and history to a central position in the study of Asian political economies. Our motivation is a sense of dissatisfaction with the overwhelming preoccupation with growth and development in the study of Asia. The growth paradigm has grabbed and held the political science of Asia by the throat for more than twenty-five years, leaving it little enough breath to do much more than say which nations have succeeded or which nations have failed to develop and what has been the “contribution” of politics to these. Of course, the importance of growth and development is not to be denied. But there are problems and issues that are not reducible to economic success and failure. In particular, questions of the state, politics, and power cannot be captured in measures of efficiency and effectiveness. Impatience with this state of affairs prompted us to engage in a long-term project on the political economy of Asia in comparative and historical perspective (PEACH). The hope is that the project will marry a rigorous social science approach to a concern with long-run history as well as language and culture. The aim is to produce a richer and reinvigorated study of Asia. The first concrete result of the PEACH initiative was a conference held in Leiden in June 2002 on the theme “Revisiting the Asian State.” More than sixty scholars, among them anthropologists, historians, sociologists, political scientists, and political economists, gathered to debate a wide range of topics covering many of the countries of Asia. One of the most rewarding features of the event was the strong sense we gained that our reservations—about the narrowness of debates and the urgent need to broaden the research focus—were shared by colleagues working on the region. Shortly thereafter, for all the richness and variety of contributions, it became apparent that there are two broad areas of concern. One of these is precisely the need to emancipate the study of Asian political economies from the growth paradigm. The present volume represents the crystallization of those ideas that attempt to understand Asian states from beyond a developmental perspective. A second theme that emerged takes issue with the projection onto Asia of a simplified Weberian conception of the modern state. That conception owes much to an idealized understanding of the European state which is robustly indifferent to the particularity of states in Asia. Ironically, Weber himself warned

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against reading off the states of Asia from a Western text. He was sensitive to the difference of Asia and of the need to locate the state in its historical and cultural specificity—a need all the greater where the states in question knew their own autochthonous political development long before the colonial experience. The critical need is therefore to reconnect the state to the history of its own making as the indispensable means to reveal its contemporary form and meaning. This we seek to do in a second volume, State Making in Asia (edited by Richard Boyd and Tak-Wing Ngo, London: RoutledgeCurzon, 2005). The conference was followed up by a roundtable on “Competing perspective on the state in developing countries” which took place in March 2004. The roundtable served to sharpen our awareness of the different approaches and paradigms deployed in the study of the state country by country. The contributions of participants at the roundtable, we gratefully note, have had a significant impact in shaping the themes of the two volumes. A further opportunity to pursue some of these ideas was made available by the Netherlands Institute of Advanced Studies which hosted a group of scholars working on East Asia and Latin America engaged in a country-by-country comparative study of power, conflict, and development. The collaboration was gratifyingly intensive. Of the observations that emerged critical was our sense that long-run processes of socioeconomic change generate prodigious problems of social conflict and social control. Governments assuming responsibility for the task of industrialization must manage (or fail to manage) the resultant conflict. Where power and authority have yet to be securely institutionalized, social conflict and social cleavages will be closely associated with bids for power and leadership. The particular modalities by virtue of which governments seek to manage this conflict together with their consequences are a crucial determinant of development outcomes. The argument is articulated in the forthcoming volume Political Conflicts and Development in East Asia and Latin America (edited by Richard Boyd and Benno Galjart, London: Routledge, 2005). The volume additionally questions the emphasis on the institutional and cultural bases (such as insulated technocracy, policy deliberation councils, pilot agencies, policy instruments, etc.) for stable growth. It reminds us that the nature and potential of any instrumentality are refracted through political struggle. We see these studies as the first contribution to the repoliticization of the comparative political economy of Asia which seeks moreover to ground the Asian political economies on a basis that acknowledges their autochthonous politics and power relations, their unique histories, and the particularity of how these mesh and clash with Western political modernity. The payoff, as the research progresses and deepens, is a comparative exercise that will contribute to a theorization of the state and the politics of economic exchange (market) in Asia and feed back into theorizing about these in the West. Plainly this kind of sustained endeavor demands tireless institutional and intellectual support. We have had both as well as many reminders that good ideas are the product of many heads. In the process we have accumulated many debts to institutions and individuals who have extended their help in one way or

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another. Financial support has come from the International Institute for Asian Studies (IIAS), the Netherlands Organization for Scientific Research (NWO), the Royal Netherlands Academy (KNAW), the Leiden University Fund (LUF), and the Research School of Asian, African and Amerindian Studies (CNWS) at Leiden University. We owe a special thanks to Wim Stokhof, Director of IIAS, for his unflagging support of the project and to colleagues of IIAS for their invaluable logistical help. We are grateful to numerous friends and colleagues for their insight, patience, questions, and criticism. They include most notably: Tony Allan, Chang Mau-kuei, Martin Doornbos, Mustafa Erdogdu, Ann Frechette, Benno Galjart, Sheldon Garon, William Guéraiche, Jan Newberry, Amit Prakash, Mark Ravina, Shamsul A. B., Alvin So, Olle Törnquist, Charles Tripp, Wang Jenn-hwan, Bridget Welsh, Laurence Whitehead, Willem Wolters, R. Bin Wong, and Wu Yongping. During the preparation of this publication, we gratefully received the assistance of Gina Rozario and Tobias Keller in editing the manuscript. Richard Boyd Tak-Wing Ngo Leiden, 2004

1

Emancipating the political economy of Asia from the growth paradigm Richard Boyd and Tak-Wing Ngo

Political science is primarily a reflection upon Western, or even more restrictively, Anglo-Saxon political experience. It is substantially indifferent to the huge body of politics, statecraft, and state-making outside of Europe. It is almost totally ignorant of thinking and writing about politics apart from the Western tradition. Indeed, the conceptual and theoretical flow has been exclusively one way: from the West to the non-West. In consequence, the discipline risks marginalization and sheer nonutility as its theorizing retreats more and more to generalizations about and abstractions from a narrow segment of the world’s political experience. The theory of the developmental state is an exception to the rule in our universe of understanding. It has come to have its own place in the conceptual lexicon of political analysis. This is a most welcome development. The acknowledgement of the developmental state—derived as it is from contemplation of the political experience of East Asia and cognizant as it is of the possibility of difference worldwide in politico-economic development—as an addition to the theoretical arsenal of political science is to be celebrated. The developmental state thesis hinges upon the claim that the “plan-rational” state (that is to say, a state led by technocrats who enjoy a high degree of political autonomy, insulation from societal demands, and yet who are simultaneously embedded in that society) can engineer economic growth. Advocates believe that this is precisely what happened in East Asia and that the developmental state can be a model for other developing regions of the world. For more than twenty years the theory has captured and held the imagination of researchers working across East Asia. It has extended its scholarly empire far and wide to embrace the political economies of Asia, Latin America, and Africa. The theory has been taken up as much by planners, policy-makers, and international organizations such as the World Bank as by academics. The appeal of the developmental state thesis is not surprising. The theory opens up possibilities to overcome the dictates of the world system and to escape the confines of dependency and the vagaries of the marketplace. So powerful is its hold that what began life as both a robust heuristic interposed between the command economy and the market economy and a theory of growth to challenge neoclassical economics and dependency theory has passed over from political theory to the

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realm of political facts. The developmental state is no longer just a theory. It has become a stylized fact: the thing itself, a fixity in real-world politics in a trope that makes it possible to assert that “State X is a developmental state.” The thesis is not without its critics. Long before the East Asian miracle lost something of its gloss in consequence of the Asian financial crisis of the late 1990s, there were grounds for skepticism concerning some of the claims made for the developmental state. There is a sense that its empirical foundations are less than secure and that it entails a certain romanticization of the Asian experience.1 We share many of these reservations, some of which will be explored, exemplified, and amplified in subsequent chapters. These are, however, not our only concerns. We noted above the importance of the developmental state thesis as an exception to the one-way flow of intellectual traffic from the West to the South and to the East. Ironically, the thesis replicates precisely this shortcoming of mainstream political science: the vision of Asia and Asian development it carries back from the periphery to the mainstream is stamped with smuggled understandings derived from the West which are projected uncritically upon Asia. The developmental state thesis notes how the growth of Asian economies eludes understanding in terms of neoclassical economics. It counters with an explanation, focused upon the leading role of the state, which seeks to capture the particularity of the Asian experience. In doing so, the state-centric analysis is construed in Western terms. In brief, the thesis projects upon the states of Asia a conception of the modern state which privileges Western experience and Western understandings. As such, the developmental state thesis distorts and misrepresents the political economy of Asia. To exacerbate matters, of the many and varied accounts and experiences of the state contained within the Western tradition, the developmental state is treated with only one: the Weberian. More exactly, the thesis takes on board only one narrow facet of the Weberian account that emphasizes legitimacy, rationality, and instrumentality at the expense of monopoly, violence, and domination. There is yet another restriction upon the scope of application of the Weberian account. Advocates of the developmental state thesis have shifted the focus from the state to the bureaucracy. They do so presumably since the bureaucracy is thought to express the agency principle of the developmental state better. The shift has been attended by an implicit and widespread endorsement of notions of the liberal state. “Liberal” here refers not so much to “limited and noninterventionist” but rather by virtue of a too sanguine assumption that contemporary states have resolved fundamental problems of power and are best characterized in terms of authority and legitimacy. The popularity and utility of the liberal state perspective in the explanation of development are the greater since the perspective enshrines a notion of the expert, instrumental bureaucrat untroubled by interests of his own, a notion which lends itself readily to functionalist and instrumentalist conceptions of the state which ease and enable the calculus of efficacy, efficiency, and functionality for growth. At a minimum it must be appropriate to subject this kind of conceptual projection to scrutiny so as to establish what is gained and lost in the exercise.2

Emancipating Asia from the growth paradigm

3

It is one thing to point out the shortcomings of a particular theoretical approach, it is of course quite another to suggest how we might move forward to build upon the insights afforded us by two decades of work on the developmental state. Here we are more tentative. However, we would argue that if our concern is with the political economy of Asia—and this is the case with many scholars who interrogate the developmental state—then we must recognize that this is not reducible to the question of economic growth. Assuredly, economic growth is important, but the Asian political economy encompasses a broader spectrum of issues. The political economy of Asia predicates upon the organization and logic of power, the relationship between the state (and other sites of power) and the market (and other sites of exchange), and power dynamics between social classes and other groups. These are all related to development but cannot be adequately understood exclusively in terms of development. The danger is that the very success of the developmental state thesis has reduced the study of the Asian political economy to the study of economic development.

The developmental state as a theory of economic growth Let us carefully reconsider the status of the developmental state thesis. Is it really a theory of political economy? If so, it must adequately theorize not only growth but also the state. Or is it better understood more restrictively as a theory of economic growth? Moon and Prasad are good guides and very much to the point when they note that the developmental state paradigm is a collection of theoretical propositions and empirical descriptions which relate economic performance to institutional arrangements of the state.3 In short, the developmental state theory is essentially a theory of economic growth. Put differently, it is a “state-led growth” theorem. Most of the advocates of the developmental state theory acknowledge their intellectual debt to Gerschenkron’s idea of late development.4 Gerschenkron has often been quoted as arguing that latecomers to the world economy need a centralized approach to industrialization and economic growth. “Catching up” demands a more centralized mechanism for capital mobilization, industrial adjustment, and technology upgrading. Johnson has famously argued that the role of centralized mechanism is performed by a “plan-rational” state in the case of Japan.5 Subsequently, the rapid economic growth of East Asian economies after the Second World War has been explained in terms of the existence of a developmental state. The argument centers on a number of interrelated observations. First, East Asian countries are said to be characterized by the presence of an authoritarian state that has a high degree of autonomy from political and social pressures. The state is believed to be a unitary decision-making machinery staffed by meritocratic technocrats. Second, these technocrats have made economic development their top priority and the long-term goal of the state. It

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is they who promote industrialization and economic development, raise competitiveness, develop an export strategy, and engineer rapid economic growth. Third, the state assumes a dirigiste role in targeting for economic growth. It intervenes extensively but selectively in the economy to promote its economic plans. It does so by granting subsidies to targeted industries, extending preferential loans to individual businesses, creating monopolistic enterprises to pick and protect market winners, and even engaging in direct protection to develop new industries. However, the theory has been caught for some years now in a withering critical crossfire from, on the one side, specialists in the region shooting holes in the empirical foundations of the thesis and, on the other, the no less deadly attention of theorists skeptical of some of the methodological procedures favored by proponents of the theory. Some of those problems were revealed by the Asian economic crisis when the developmental states stopped being developmental, that is to say when institutions and relationships said earlier to be the very hallmark of the state proved compatible at least, causal at most, with stagnation and decline. Recipes for success were now said to be the ingredients of failure and, for example, what once was hailed as “close harmonious government–industry relations” was decried as “crony capitalism.”6 Whatever its merits or deficiencies, its claim upon our attention derives from its status as an explanation of economic growth. The status and import of the thesis are clearly recognized in the response to the critical crossfire; this takes the form of attempts either to rescue the developmental state theory as an explanation of growth or to go beyond the state-centered approach in explaining economic growth.7

Images of the state under the growth paradigm It remains to be seen how far and how accurately the developmental state thesis explains the state in Asia since we have argued that this is an indispensable precondition for a theory of the political economy of Asia. Cumings is unequivocal in his view that the developmental state theory is “the most formidable theory of the East Asian state.”8 For him it is self-evident and in little need of clarification. We are less confident and suspect that Cumings and many others have turned the developmental state thesis on its head: what began as the claim that “the state plays a central role in promoting economic growth in some countries” has been turned round to become the claim that “a particular state form (called the developmental state) can be found in countries which experienced rapid economic growth.” The second claim embodies a characterization and a theorization of the state that go well beyond the terrain of a theory of growth. It is precisely this growth-paradigm-turned-state-theory slippage that concerns us since it smuggles into our account of the political economy of Asia a state defined and understood at the outset in terms of its functionality for growth. In this sense, the theory has invented its own ontology. From here it is a short step to the now familiar claim that the developmental state is a fact (hence the assertions noted above that State X is or is not a developmental state) and an intra

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type variation of the capitalist state—a claim we believe that owes more to theoretical slippage than to empirically informed theory. Woo-Cumings also subscribes to the “fact” of the developmental state, which she defines as “a shorthand for the seamless web of political, bureaucratic and moneyed influences that structures economic life in capitalist Northeast Asia.”9 This is so far the most explicit (and the most ambitious) definition ever given by advocates of the developmental state. Unfortunately, in her subsequent analyses, there is no discussion of such a web of political, bureaucratic, and moneyed influences: nothing of the nature, boundary, limits and logic of the web said to constitute this developmental state. Without this kind of specification we are left with a conception too sweeping and all-encompassing to tell us much about the state in Asia. When Woo-Cumings moves from definition to analysis she retreats to a much narrower conception in which the bureaucracy comes to stand for the state in the developmental state. Such a shift of focus is conventional in the developmental state literature. Typically, the state-led growth theorem features the (developmental) state as a decision-making apparatus that generates policy in conformity to a technocratic rationality. Since the main concern of the theorem is economic policy that affects growth, the decision-making apparatus is very often further reduced to mean only the economic bureaucracy. The economic bureaucracy qua state has specific features and scales of measurement. In particular, the developmental state theory makes claims about the nature of state strength, about the terms and conditions of effective state agency, about its goals and its direction, about the balance in the agency of the state of political and technocratic rationales (specifically the exclusion of the former and the priority of the latter), and of the relation of these to the logic of economics and so to the possibility of favorable economic outcomes. Here the distinction between the political and technocratic deserves attention. The economic bureaucracy qua state is said to be able to substitute politics for administration. In a wellknown passage from Wade we read: While state bureaucrats “rule,” politicians “reign.” Their function is not to make policy but to create space for the bureaucracy to maneuver in while also acting as a “safety valve” by forcing the bureaucrats to respond to the needs of the groups upon which the stability of the system rests: that is to maintain the relative autonomy of the state while preserving political stability. This separation of “ruling” and “reigning” goes with a “soft authoritarianism” when it comes to maintaining the needs of economic development vis-à-vis other claims, and with a virtual monopoly of political power in a single political party or institution over a long period of time.10 It is clear from this statement that viewing the state through the lens of a growth paradigm privileges a certain image of the state, highlights a single facet of the state, and encourages the reduction of the states of Asia to a single template. It requires a fantastical distinction between politics and administration, the

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marginalization of politics, and the mistaken attribution to the bureaucracy of an innocence and indifference to self-interest. These postulates completed by the equation of the state and bureaucracy make it possible to understand the state as the instrument of pure reason. Efficacious instrumentality is a core element in the developmental theory of the state.11 Typically, proponents of the developmental account of the state eschew reference to theory that associates the state and political conflict. Reference is made overwhelmingly to a Weberian paradigm that makes the legitimacy of the state part of the definition of the state. Additional hypotheses, which address the insulation of the state from society, complete the removal of conflict from the field of analysis. Moon and Prasad have rightly criticized this image of the state for failing to uncover the complex and dynamic internal workings of the state structure by depicting the state as an internally cohesive unitary actor.12 State structure is not an internally coherent, unitary entity. According to Moon and Prasad, four elements are missing from the picture. First, executive leadership. It is unrealistic to assume that political leaders simply reign by creating space for bureaucratic maneuvers and playing the role of safety valve. Political leaders not only reign but also rule. A second absence is that of the executive-bureaucratic nexus. This is not a given; it is highly variable over time and influenced by leadership style, political calculation, and institutional constraints. A third missing element is the intrabureaucratic dynamic. For all the technical competence of East Asian bureaucrats, they are not exceptions to the generalized “bureaucratic politics” phenomenon. Bureaucratic agencies in the developmental states are not unitary, but reflect organizational complexities with diverse and often conflicting ideologies, preferences, and interests. Interagency rivalries, compartmentalization, and sectionalism are the rule rather than the exception. The fourth element deals with the clients and constituents of the bureaucracy. Bureaucratic agencies are not organizational islands but are beholden to corresponding social groups and obliged to protect their interest and to solicit their support. These are valid criticisms. We can underpin them by reference to the searching examination of state strength, state agency, and bureaucratic orientation in the case of Japan, Taiwan, and China undertaken respectively by Haley, Ngo, and Edin in this volume. The three case studies mine a rich seam of empirical and fieldwork materials that contrast with the poverty of the growth paradigm to gloss the state, to imply a state, and to assign to it characteristics not revealed through empirical research. At a minimum, these studies underscore the fuzziness and incoherence of policy-making, the incremental or even haphazard relationship between goals ostensible and real, the contradiction between goals desired and goals achieved, and the multiplicity of logics and precedence that link problems and solutions in the policy-making process—concerns which are not given much attention in the developmental state academy. No review of the status of the state-led growth theorem qua theory of the state itself would be complete without reference to Johnson. Johnson is confident that the theorem can stand as a theory of the state since “a state’s first priority will define its essence.”13 This is bold but also somewhat impenetrable,

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circular, and probably tautological. How we characterize a state will be highly dependent upon the nature of the problem we hope to explain. Be this as it may, whether or not states have essences, they undoubtedly have ministries, agencies, and sections. These loom large in our characterization of the state when it is growth that is to be explained. But even here, on the home turf of the developmentalist account of the state, there is good reason to doubt Johnson’s claim. At the individual ministry level the interests of the ministry (turf, budgets, personnel, recruitment, jurisdiction, etc.) are not usually subordinated to developmental priorities.14 In the case of Japan, in respect of which Johnson makes the claim, it applies no less within the economic bureaucracy than elsewhere in the state. Ministries with sectoral responsibilities value the orderly conduct of sectoral affairs—good housekeeping we have termed it—above growth. At the section level, the local interest of the section and of its clients is yet even more jealously guarded, even if it means compromising financial reform, endorsing profoundly anticompetitive behavior, and sabotaging the plans of other sections.15 If we cast our net even a little wider and consider the activities of other agencies in the state apparatus, then the politics of compensation, inefficiency, rent seeking, and corruption on the grand scale might also be said to characterize the Japanese state.16 These have certainly been used to label it. But which should be considered the “essence” of the state? It is doubtful if we can assign an essence to the state. But do states have singular and exclusive priorities? That is to say, if we move up the analytic scale and consider the state apparatus as a whole (rather than individual agencies), is it possible to detect an overarching priority? The list of likely candidates might include economic development, national security, domestic legitimacy, international relations, and so on. The question then becomes: Does the economic development priority (paramount in Johnson’s view) eclipse concern with national security, with domestic legitimacy, and with the manifold problems of international relations? How does economic development mesh with the pursuit of advantage in the international political environment?17 Johnson argues that these concerns are identical or at least fundamentally complementary so that in the case of Japan at least, they might all be collapsed into the one concern with economic development. In his words, “[o]vercoming the depression required economic development, war preparation and war fighting required economic development, postwar reconstruction required economic development, and independence from US aid required economic development.”18 The vigor of the prose must not fool us. Nor should the survival metaphor. The survival of one of the authors of this piece “requires” him to lose weight—he hasn’t yet. Then there is in these assertions a hefty dose of post hoc rationalization. The responses of capitalist nations to depression have been variable in kind and variable in their success. There was a multiplicity of responses to war preparation and war fighting, only one of which was economic development. In a later period, the drive for nuclear weapons has been a standard response and an economically crippling one at that. Confronting the costs of war can even weaken state power.19 As a matter of fact, the immediate challenge of the postwar period was

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construed in different ways in Japan: on the right, the priority was immediately the suppression of a mass communist revolt and simultaneously constitutional revision; on the left, a socialist alternative and dissociation from the Americanled capitalist West was the burning issue for a decade and a half, accompanied persistently by an abiding concern with the peace constitution. An understanding of postwar reconstruction in narrowly economic terms is anachronistic before 1961. In short, we must look elsewhere to explain the “striking continuities among the state’s various policy tools over the pre-war and postwar years,”20 particularly if our concern is to understand the political economy of Asia, rather than explain growth in Asia. In the particular case of Japan, we must note that the prosecution of war is conducive to the development of very different institutions and power relations than is the pursuit of postwar reconstruction in circumstances which preclude the recourse to war. The leading role of generals and the centrality of military institutions fashion a state different at least to one in which elected politicians are at the helm with business leaders as their principal interlocutor. This being the case, then the element of continuity noted by Johnson and others must not be allowed to obscure the profound transformation of the Japanese state that occurred over the same period.21 The evolution of the prewar and the postwar state is marked by a sharp discontinuity captured by the eclipse and removal of the military and the thought police, the secularization and subordination of the emperor, and the transition from a military empire to democratic constitutionalism. This rupture might be of marginal interest in the growth paradigm, but it is of first-order significance in the analysis of the state. After all, Johnson is well aware that for all his pioneering efforts we still do not have an adequate account of the Japanese state. He excoriates American political science for having “squandered at least a decade in trying to force Japan into various versions of American pluralist, constitutional, and rational choice theory, while avoiding empirical research on the Japanese state itself.”22 He decries the absence of even an elementary mapping of the Japanese government and cites sympathetically Hiwatari Nobuhiro’s lament that “[w]e still need an understanding of the Japanese state.”23 Johnson is not alone among the advocates of the developmental state theory in realizing the dearth of the paradigm on the state itself. Wade, who has a major role in cementing the hold of the growth paradigm on the study of the state, is dismissive of the pretension of the developmental state to be a theory of the state. It is, he writes, “not much of a theory”; its limited “specification of institutional arrangements is descriptive rather than comparative analytic.”24 He is sensitive to the limits within which the different priorities of the state, namely development, legitimation, and security, coincide. He is equally sensitive to the propensity of each of the state priorities in reinforcing different sets of power-creating institutions in the state. And yet, finally, these all seem somewhat contextual, because the ultimate concern for Wade is still growth. State priorities constitute the environment within which the economic bureaucracy

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functions. The economic bureaucracy is technocratic, competent, cohesive, and rational, and described in terms such as “the economic general staff” that are highly evocative of Johnson and the developmentalist account of the state. In short, we are led to conclude that the developmental state theory is misleadingly labeled. The theorem assigns the state a central role, a role celebrated in the phrase—the developmental state. And yet it is not a theory of the state, since the explanation of the state is not the object of the exercise. The state has the analytic status of independent variable. Our dependent variable, that which is to be explained, is economic growth. The state makes for a tricky and elusive independent variable. It is vast and complex, abstract and concrete, a thing, an idea and a place, an institution and an arena. It is above all a power relation(s) with a talent and a need for self-concealment. Faced with such tortuous complexity the analytic response has been pragmatic; the state-led theorem of growth collapses the state into something more manageable. In so doing it imputes to the capitalist state in Asia some general, largely unexamined characteristics which are not revealed through empirical research but which are required by the explanation of growth and justified by a bowdlerized Weberianism. In consequence of its inability to confront the complexity and contrariness of the state, the developmental state thesis is at best a thin and narrowly construed theory of political economy. Something more is required—the likelihood is that its pursuit will require us to go beyond the limits of the growth paradigm.

Beyond the growth paradigm It is our conviction that we need to move beyond the growth perspective if we are to account adequately for the political economy of Asia. We also realize that a proper account of the state is the indispensable prerequisite of a serious political economy of Asia. The contributions to this volume are informed by precisely this conviction. Their authors seek to go beyond the growth perspective in a number of different ways: by introducing hitherto unattended themes, by reflecting upon and reconceptualizing current distinctions and boundaries, and by rigorously exploring the empirical as well as the conceptual deficiencies in the “developmentalist” political economy of Asia. It is to their achievements that we now turn our attention. Jessop develops a vigorous theoretical critique of the developmental state thesis in chapter 2. He takes issue with the conceptualization of the relation between the economic and the political in the developmental state thesis. The developmental state thesis, he writes, naturalizes the (unwarranted) institutional separation between the economy and the state. The theory focuses on growth and neglects the role of economic growth within broader economic, political, military, and societal strategies. It explains state capacities in terms of the properties of the state apparatus but considers these in isolation from a wider society marked off by definitional fiat. Furthermore, the theory seeks to explain the origins of the economic miracle in terms of the particular features of a state apparatus and ignores the extent to which economic growth outside of East Asia

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has been linked to analogous modes of regulation. To overcome these problems, argues Jessop, we need a thoroughgoing rethink of the relation between the economic and the political. To this end Jessop advances a strategic-relational analysis of the state that sets the state in a broader frame: the state is now presented as a key element within the overall accumulation regime and mode of regulation in the domestic economy and the latter is to be viewed from the perspective of its insertion into the wider international regime dominated by Atlantic Fordism. He conceptualizes East Asian states in terms of variants of the “Listian workfare national state” and carefully examines their inherent tensions and contradictions in the context of specific modes of economic accumulation and the challenge of regime maintenance. The limitations of these states in the knowledge-driven global economy are then highlighted to show how new state forms are emerging to adapt to new global circumstances. Echoing the same concerns, Underhill and Zhang argue in chapter 3 that the fundamental weaknesses of the developmental state model stem not only from a failure to include configurations of societal variables embedded in the structures of the market but also from an artificial state–society dichotomy which contrasts with the observable nature of markets as mechanisms of governance. They propose an alternative way of theorizing the Asian political economy which is to treat states and markets as one integrated ensemble of governance—a state– market condominium. Successful development processes in Asia have been based on political strategies which involve the integration of a variety of active market agents into the official realm of state projects. The arguments of Underhill and Zhang are sustained by close reference to two crucial policy areas which both comprise and condition the development process. These are industrial policy management and financial market governance. Their comparative analysis across Korea, Taiwan, Malaysia, and Thailand demonstrates the importance of interactive and recursive state–market relations in shaping core elements of the development process. Jessop, on the one hand, and Underhill and Zhang, on the other, propose important reconceptualizations of the political and the economic and no less of the boundary said to separate both. The approach they take stands at some distance from the position adopted in the state-led growth theorem. Proponents of the developmental state thesis define the political and the economic as discrete and separate realms. The bridge between the two is economic intervention, the potential for which is determined by the nature and limits of state agency. A serious examination of state agency is thus inescapable in our revisit of the Asian political economy. The nature, the extent, and the foundations of state agency in Japan are the object of Haley’s concerns in chapter 4. His findings will be all the more significant precisely because Japan is the spiritual home of our hypostatic developmental state. It is the place where bureaucrats are (said to be) stronger than politicians, where the state has known how to identify and to pursue developmental projects that created world-beating industries. It is the place where the state is strong and its agency is highly developed. So much for the conventional

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wisdom. Haley argues that in critical respects the Japanese state is not strong, does not even occupy the middle rank of state strength but is actually weak. Its ability to implement regulation and to exercise control is severely inhibited by the absence of punitive sanctions and detailed powers of enforcement. The state’s response to these limitations calls into question the very way in which the literature understands “strength” and “capacity” because this weak state gets things done. In the absence of significant coercive and disciplinary powers the state is obliged to cajole and persuade and, above all, to develop skills of consensus building. Indeed, there is an echo here of Mann’s distinction between despotic and infrastructural power25—a distinction which in combination with Haley’s insightful revelation permits a more nuanced account of state strength. The operational style of the Japanese state does not encourage marketconforming practices. Far from it. The state prefers to restrict market entry since it is easier to reach agreement with a small group of actors. This in turn matches the ambition of the big firms to effect market closure, to establish barriers to entry and create cartels. Both parties have a vested interest in a closed and orderly market dominated by cartels and regulated by familiars. It is apparent that maintenance of good order and political acquiescence is no less important a project of state officials as developmentalism itself. The paradox is final when the chapter demonstrates that it is only when good order breaks down that new firms can enter the market and thus trigger competition and create a vital industry. In short, Haley argues, it is the failure of the state that predicates vital industries. The exemplary case of Taiwan’s development planning and implementation is the field for Ngo’s examination of state agency in chapter 5. Taiwan has been the privileged site of a whole series of renowned or stylized facts about the exercise of “governing the market.” Ngo has been able to revisit these on the basis of a wealth of recently declassified materials. His findings are dramatic and challenging. The stylized account of the Taiwanese case speaks of a state that possesses a high degree of unity and that can concentrate agency. Ngo paints a very different picture, one of institutional fragmentation, imperfection, and even amorphous hierarchy. The unity of the state, a given in the governing the market literature, is in fact rent by contradictions between equivocal authorities, factional competition for resources, and conflicts and incompatibilities between the unwitting practices of individual officials and their organizations. So far much has been made in the developmental state literature of the “political economy of war” as an inducement to unity of purpose: that external threat from communist China was a means to discipline dissent, to concentrate minds, and to reduce conflict. And yet in Taiwan it seems that even during the period of martial law the state was an ensemble of ephemeral institutions whose jurisdictions and functions were extremely mutable. The chapter argues that state agency in pursuing developmental projects was episodic rather than constant. Agency does not derive from the characteristics of institutions and organizational resources but is rather dependent upon the concatenation of circumstances that enables specific power holders to register their own parochial

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agenda as the national state project. Agency is thus personal and episodic. It is moreover dependent upon the congruence of the developmental project with the broader political project of regime maintenance. In the same vein, Edin writes about the local state in China in chapter 6. The very expression “the local state” suggests how far removed is the terrain covered in the Asian political economy from the familiar orbit of neostatism. Edin argues, on the basis of extensive fieldwork at the township and village level, that the local Chinese state, renowned for its capacity to promote economic growth, is far from insulated from societal interests but rather has more or less merged with local business. Local state agency derives neither from its autonomy nor its insulation. Rather it is the possibility of agency rooted in specific political practices institutionalized in party-state relations. Edin critically reviews the standard explanations of how and why state officials have promoted local development. The conventional wisdom points to the economic incentives of local cadres to maximize revenues. Not convinced by this, Edin argues that political incentives generated from the cadre responsibility system are no less significant than economic incentives. Political incentives are vested in a partystate structure which hinges upon the nomenklatura—a system of controlling political appointments—and which serves as a key means to the maintenance of party control over the state. It is the cadre responsibility system that works in such a way as to propel local officials to pursue developmental projects. Indeed, it seems at points in her fascinating argument that economic development is an offshoot of the pursuit of political imperatives. The Chinese case neatly illustrates the need to demonstrate the agency of the state—rather than assume the agency of the state as the developmental state thesis tends to do. The black box of state agency has to be opened, and its contents laid bare so as to expose the incentive structures for those in charge of carrying out state projects. The stranglehold of the developmental state thesis and of its economic predicate on the study of state and society in Asia is such that other state-defining projects such as social welfare and national security have been marginalized and in the process other major actors such as labor have become invisible. In reality, states in Asia, much as states elsewhere, have broad concerns. They must respond to an enormous range of imperatives, which is by no means reducible to development. They cannot remain socially aloof (or “insulated” as the developmental state thesis would have it), or indifferent to the pursuit of other projects, if they are to re-create the conditions of their existence. Critically at issue here is how other state projects, such as national security, regime maintenance, and social welfare, mesh and clash with the economic development project. In this regard, Koo shows in chapter 7 that the management of labor relations is a state project of parallel importance to development itself in South Korea. The argument is the more enticing since labor is, when viewed through the economic development window, a factor of production, an integral element in the development process no less than in a politics driven by other imperatives. In one optic, a factor of production; in another, labor represents itself as workers, the working class, and the labor movement. As such, labor has to be

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confronted and accommodated by the state in dramatically different projects. Not only does labor interact with the capital but it also makes demands on policy-makers and may support or challenge the state’s economic and social policies. The chapter shows that state–labor relations in South Korea have been far more conflictual, incoherent, and shifting than state–market relation. Stern control of labor by the state did not stem from a developmental project but originated from national security reasons. The resulting South Korean labor regime was corporatist in official organizational structure but its actual operation was based on a crude, repressive form of control. The state mobilized its security apparatus to keep workers unorganized. This exclusionary approach unintentionally produced a cadre of hardcore unionists who in return presented a radical challenge to state actions. Koo treats in some detail the origins and changes of what we might term the “labor control project” of the Korean state. He concludes that the state’s role in its labor relations project was marked by contradiction, inconsistency, and state myopia and was driven by political considerations rather than by economic logic. The argument is echoed in Haggard’s analysis of welfare projects in Asia. Haggard shows in chapter 8 that welfare improvements in Asian countries are not reducible to the consequences of development. Welfare projects, argues Haggard, have been undertaken in parallel to developmental projects. They emerge as a particular political response to a specific political problem. Indeed, a great strength of Haggard’s chapter is his highlighting of the distinctive approaches of Asian countries in limiting social insurance while investing in human capital. He compares welfare projects across Taiwan, Korea, Thailand, Singapore, Malaysia, and the Philippines to demonstrate that policy differences are governed by political dictates, above all by the type of political regime rather than by the undifferentiated demands of a single developmental imperative. The chain of reasoning is long, historical, and intensely political. From the outset, political independence resulted in the establishment of conservative, anticommunist regimes. The elimination of the left and control of labor reduce political incentives for the creation of social insurance. At the same time, authoritarian rule serves to limit public commitments to social insurance but is compatible with high investment in human capital. Subsequently, democratization opens the possibility of expanding social commitments. The chapter offers a powerful reminder to our concern to move beyond a simple-minded, undifferentiated, and unidirectional developmental perspective upon the political economy of Asia. The widely divergent nature of politico-economic projects in Asia is further evidenced by Robison, Rodan, and Hewison in chapter 9. They compare and analyze the neoliberal reform projects carried out in Singapore, Indonesia, and Thailand as a response to the Asian financial crisis of the late 1990s. They, together with other contributors to this volume, are acutely aware of how unresponsive such projects are to market dictates and growth imperatives. Neoliberal reform targets fundamental transformation in systems of state power and governance. The goal set encompasses the dismantling of the power of the state and

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the eclipse of its capacity for discretionary economic intervention and rent allocation. For all the surface appearance our authors argue, reform efforts are driven not so much by innocent economic and developmental concerns but from the desire and ambition of entrenched political and business interests who have found it increasingly difficult to operate in the old way and to maintain intact existing forms of state power. It is as if neoliberal reform can help old snakes grow better skins. The chapter persuasively illustrates the meshing and clashing of international and domestic political imperative: at one point the congruence of the international and of the domestic sustained old political frameworks blessed by favorable winds from global financial markets. This glued together and papered over fragile economic regimes which had begun to come apart in new configurations of the global and the state local. Fascinatingly, the chapter shows that, in the course of it, state power may be reconfigured and may reconstitute itself without the accompaniment of a successful achievement of the neoliberal reform project. In a careful comparison of the cases of Singapore, Indonesia, and Thailand, the authors show why neoliberal projects have failed politically, that is to say how they have failed to mobilize and organize coherent and effective coalitions around the reform agenda and how the beneficiaries of existing or previous regimes have managed to preserve or reorganize their ascendancy and to accommodate themselves to the political and economic challenges of the postcrisis era. The above studies as a whole underscore the implausibility of the politicoeconomic divide, the no less implausible distinction between politics and administration, and the spuriousness of the claim that development can configure a state. Development is better characterized as a project of the state than the state itself, and even then a development project cannot sustain a claim to exclusivity and priority. These in turn call into question the single-minded characterization of the state. They remind us that the state is a political entity, the raison d’être, whose proximate concerns and goals are politics and power. Its institutions are the same: the product, articulation, reinforcement, and servant of power.

The way forward: problematizing the state in the Asian political economy We have noted above that the study of the Asian political economy entailed a twenty-year-long endeavor to explain economic growth. Throughout the entire period there has been little parallel and sustained effort to make sense of the state in Asia. The state has been treated as explanation rather than as explanandum. For much of that long period of time we have had to make do with unwitting projections onto Asia of partial readings of Western texts about Western states and Western state traditions. No doubt the influence of Western models on Asian political practice is apparent. But it is not the whole story. The imperative now is to move toward a systematic examination of the state in Asia. This can no longer be assumed on the model of the Western state. It must be

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centered as the object of analysis, the dependent variable, the thing to be explained. In this regard, we would like to suggest some of the questions that might be raised en route to an answer. In particular, there are three sets of questions to be addressed as we seek to move the debate forward. These are: (1) state traditions, the idea of the state, and the state apparatus; (2) the international construction of the Asian state; and (3) state-making projects. We can do no more than adumbrate these here. A useful point of departure from which to explore the specificity of individual states is to borrow Nettl’s and Dyson’s distinction between state-societies and stateless-societies.26 The question is whether such a distinction, originally developed for European states, applies with equal force in Asia: that is to say, a distinction between societies in which there is a highly developed sense of public power (power other than and not reducible to the totality of private powers institutionalized in language, debate and practice, and an idea and tradition of the state) and societies that do not have these. The questions arise as to the practical contemporary significance of the presence and absence of such traditions and, where they exist, of differences between them. How far do state traditions shape political debates? Underpin, bind, and potentiate regime goals? Influence institutional reform and state-making? Affect elite training and recruitment? Facilitate or inhibit an activist conception of executive power? This is a singularly, all but unfortunately, neglected line of inquiry of enormous potential in deepening and nuancing our understanding of even those states fired within the European crucible. Richer still is the prospective payoff in a non-European context where the variety and above all the sheer distance of autochthonous political reflection from the Greco-Judean trajectory are so great. The second set of questions deal with what we have called the international construction of the Asian state. Whereas the motive to develop is often attributed to the state’s response to the challenge of competition in the international system, rather less is made of the extent to which and to the ways and means Asian states were constructed, in response to and by external agents. How far and in what ways have the goals and practices of the USA, Japan, the World Bank, and the IMF had an impact upon state institutions, state projects, and regime imperatives of Asia? How far have external pressures had an impact upon the domestic political economy? It is customary to approach the international environment primarily in terms of the Cold War considerations of geo-political security, the provision of foreign capital, the existence of a liberal international trade regime, access to export networks, and so on. The question is not only whether the international environment has been functional or otherwise for growth but about what fundamentally the impact of international politico-economic relations has been upon the ideas and institutions, the goals, purposes, possibilities, and procedures of the states (and markets) of Asia. Eventually, questions about state tradition and the international construction of the state culminate in the exercise of state-making. The political economy of Asia cannot be adequately understood without connecting to the state-making process. Not only is there variety in the discourse of and about the state but

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equally and relatedly in respect of the state itself—the apparatus of the state. We need to identify and explain the institutional range of states in Asia. We need to pose the following questions: How variable are the problems and imperatives that drove the state-making projects of modern Asian states? What kind of state apparatus emerged in the process? How and why do these differ? With what consequences? There has been interest in colonial legacies in the shaping of modern states. We need to know how the different colonial heritages (British, Dutch, French, Japanese) have shaped the emergent state and with what contemporary consequences. How have these legacies been mobilized and manipulated in the state-making process? The rethinking of the state in Asia will eventually oblige us to see the market, or economic exchange, in a different light. Here one has to take issue with the naïve assumption that when we speak of the market in Asia the behaviors evoked must necessarily be the same as those we have in mind when speaking of the market in the West. The market is an institution embedded in particular histories much as the state itself. Neither of these have transcendent qualities which persist regardless of place and time. The form of resource exchange is a matter for investigation rather than for assertion. Indeed, Riggs made the appeal more than thirty years ago.27 Having investigated economic exchange in Southeast Asia, he argued that not only was the market in Thailand and the Philippines different but that this very conception of economic exchange was misleading. Institutionalized economic exchange in these countries was, he argued, better understood as the bazaar or canteen. Very little has been made of this since. By and large the literature speaks simply of the market in Asia as if this were a single, nonproblematic, universal, and transcendent idea. The intervention of the state is routinely said to be market conforming or market correcting without reference to the nature of the market itself. The silence on this issue is deafening. If we set this concern in the context of our initial question, namely that of how an interest in state-led economic growth has impacted upon the political economy of Asia, we might argue and conclude with the following observation. Two decades of research into the roots of high growth in Asia have taught us something about the economy of the region and more recently (as evidenced in this study), how little we know about the state in Asia. Hence this current call for a new research focus which targets the state. The likelihood is that in due course our future work on the state will reveal the shortcomings of what we know about processes of exchange (from bazaars to markets) in Asia and prompt, it is to be hoped, a reinvigorated study of these. As we problematize the state in Asia, we must problematize the market. By doing so, we will realize that there is a rich and persuasive account of the political economy of Asia substantial enough to feed back into mainstream political science and to prompt a certain rethinking of conventional understandings which, in the light of the evidence, are founded upon only one segment of human experience of politics and economics.

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Notes 1 A point made with some vigor in Y. Miwa and J. M. Ramseyer, Capitalist Politicians, Socialist Bureaucrats, Legends of Government Planning from Japan, CIRJE-F Paper Series No. 177, Tokyo: Center for International Research in the Japanese Economy, University of Tokyo, 2002. We should note that their demolition of some of the stylized facts that undergird the state-led growth theorem in its application to Japan is not in any sense evidence in support of a neoclassical account of growth in Japan. Miwa and Ramseyer seem to think it is. 2 This we have done in R. Boyd and T. W. Ngo (eds), State Making in Asia, London: RoutledgeCurzon, 2005. 3 C. Moon and R. Prasad, “Beyond the developmental state: networks, politics and institutions,” Governance, 1994, vol. 7, no. 4, pp. 360–86. 4 A. Gerschenkron, Economic Backwardness in Historical Perspective, Cambridge: Cambridge University Press, 1962. 5 C. Johnson, MITI and the Japanese Miracle, Stanford, CA: Stanford University Press 1982. 6 D. Kang, Crony Capitalism: Corruption and Development in South Korea and the Philippines, Cambridge: Cambridge University Press, 2002. 7 See, for example, S. Chan, C. Clark, and D. Lam (eds), Beyond the Developmental State: East Asia’s Political Economies Reconsidered, New York: St Martin’s Press, 1998; and M. Woo-Cumings (ed.), The Developmental State, Ithaca, NY: Cornell University Press 1999. 8 B. Cumings, “Webs with no spiders, spiders with no webs: the genealogy of the developmental state,” in Woo-Cumings, The Developmental State, p. 63. 9 M. Woo-Cumings, “Introduction: Chalmers Johnson and the politics of nationalism and development,” in Woo-Cumings, The Developmental State, p. 1. 10 R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press, 1990, p. 26. 11 See, for example, A. Kohli, “Where do high growth political economies come from? The Japanese lineage of Korea’s ‘developmental state,’” in Woo-Cumings, The Developmental State, pp. 93–136. 12 Moon and Prasad, “Beyond the developmental state.” 13 Johnson, MITI and the Japanese Miracle, pp. 305–6. 14 See for evidence of this in the Japanese shipbuilding industry, R. Boyd, “The political mechanics of consensus in the industrial policy process: the shipbuilding industry in the face of crisis, 1973–1978,” Japan Forum, 1989, vol. 1, no. 1, pp. 1–17; and R. Boyd and S. Nagamori, “Industrial policy-making in practice: electoral, diplomatic and other adjustments to crisis in the Japanese shipbuilding industry,” in S. Wilks and M. Wright (eds), The Promotion and Regulation of Industry in Japan, New York: St Martin’s Press, 1991, pp. 167–204. 15 R. Boyd, “Rents and economic outcomes in Japan and Taiwan,” in L. Tomba (ed.), East Asian Capitalism: Conflicts, Growth and Crisis, Milan: Feltrinelli Editore, 2002, pp. 151–91. 16 K. E. Calder, Crisis and Compensation: Public Policy and Political Stability in Japan 1949–1986, Princeton, NJ: Princeton University Press, 1988; G. McCormack, Afterbubble: Fuzz and Concrete in Japan’s Political Economy, Cardiff, CA: Japan Policy Research Institute, Working Paper No. 21, 1996; B. Woodall, Japan under Construction: Corruption, Politics and Public Works, Berkeley, CA: University of California Press, 1996. 17 A question raised by T. J. Pempel in his exemplary critique of the developmental state thesis. See T. J. Pempel, “The developmental regime in a changing world economy,” in Woo-Cumings, The Developmental State, pp. 137–81. 18 Johnson, MITI and the Japanese Miracle, p. 308.

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19 See, for example, M. N. Barnett, Confronting the Costs of War: Military Power, State and Society in Egypt and Israel, Princeton, NJ: Princeton University Press, 1992. 20 The phrase and the observation demonstrate Johnson’s analytic acuity; Johnson, MITI and the Japanese Miracle, p. 308. 21 Getting the balance right is tricky. Undoubtedly transwar continuities in the nature and functioning of the state in Japan are of extraordinary importance. Accordingly, those who assume a final break with the past and look to the constitution of 1946 for their chief guide and description of the postwar political system are in error. And yet, as we argue, the eclipse of the military from the postwar political constellation is a decisive movement and a critical rupture in pre-post war continuity. 22 C. Johnson, “The developmental state: odyssey of a concept,” in Woo-Cumings, The Developmental State, p. 51. 23 N. Hiwatari, “After the earthquake election: rethinking the role of the bureaucracy,” Social Science Japan, ( July 1994), p. 14, cited by Johnson, “The developmental state,” p. 51. 24 Wade, Governing the Market, p. 26. 25 M. Mann, The Sources of Social Power: A History of Power from the Beginning to AD 1760, vol. 1, Cambridge, Cambridge University Press, 1986, chapter 1. 26 J. P. Nettl, “The state as a conceptual variable,” World Politics, 1968, vol. 20, no. 4, pp. 559–92; K. E. Dyson, The State Tradition in Western Europe, Oxford: Martin Robertson, 1980. Nettl’s article is very well known if arguably less often used. Dyson’s important work is woefully neglected—a wider acquaintance with it might have spared us all a flood of works, some of which have achieved an undeserved notoriety. 27 F. Riggs, Administration in Developing Countries: The Theory of Prismatic Society, Boston, MA: Houghton Mifflin Company, 1964.

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A regulationist and state-theoretical analysis Bob Jessop

Different (and differently related) economic and political institutions are said to characterize East Asian and Latin American social formations compared with those in “liberal bourgeois democratic” Western Europe and North America.1 In East Asia, this is reflected in work on the developmental state; and, in Latin America, in studies of the dependent capitalist state.2 This is not just a question of incomplete modernization, to be overcome as East Asian and Latin American societies converge on some Western version of modern capitalism. Instead it concerns interrelated institutional and historical specificities in a world society and their transformation in different periods and conjunctures. The idea of the developmental state, beginning with Johnson,3 played a key role in attempts to grasp these specificities and, indeed, after its introduction, also served to guide other East Asian newly industrializing countries (NICs) along their own distinctive economic paths. Paradoxically, the myths of the Japanese state also proved popular in Western Europe and North America during the early years of Fordist crisis as a progressive reformist paradigm to challenge bankrupt economic strategies. From the mid-1980s, however, the theoretical and policy paradigm traffic seemed to have been in the opposite direction, as neoliberalism became dominant, if not hegemonic, on a global scale. Thus it is worth reflecting critically on the “developmental state,” its theoretical context and conceptual coherence, and its historical validity and current relevance. We should also ask in what respects, if any, it is being transformed or superseded in response to the Asian crisis and to the more general restructuring of capitalism on a world scale that is accompanying the transition to the next potential long wave of economic expansion.

Market forces and state power Work on the future of the developmental state addresses the changing articulation of economic and political factors and forces in a period marked by the Asian crisis and the rise of the knowledge-based economy and shifts in the dynamics of globalization. This re-articulation is often reduced to zero-sum changes in market-state relations and, in particular, to the rollback of the developmental state and its functions in guiding market forces. But markets and the

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state are only special forms of the complex “separation-in-unity” of economics and politics that is required to secure the various economic and extra economic conditions for capital accumulation. While many versions of institutionalism support these arguments, here I draw on Marxist state theory and the regulation approach. Marxist state theorists in the 1970s interpreted the capitalist state as the primary institutional means to compensate for the failure of purely marketmediated accumulation. As such, it was said to have enough institutional and operational autonomy to secure key external conditions for accumulation, limit the adverse effects of economic and political competition on capital’s ability to secure its general interests, confine class struggle within limits compatible with continued accumulation, and limit the effects of capital’s recurrent crises and market failures.4 For all its theoretical rigor, however, this approach failed to distinguish between the capitalist type of state and other states in capitalist societies and was also too influenced by European experience—making it difficult to assess its relevance to the developmental state. It also ignored how the formal separation of market and state makes it hard for the state to know and serve capital’s interests from above and outside the market economy. Thus, we should consider how the articulation of the developmental state with economic forces may have resolved or circumvented these problems. Nonetheless this approach did identify the need for some extraeconomic supplementation of market forces and the state’s centrality in this regard. Scholars working with the Parisian régulation approach developed similar ideas on the economic and extraeconomic in the 1980s, albeit in more middlerange than abstract terms.5 They study how the social embedding and social regularization of profit-oriented, market-mediated economic activities enable as well as constrain capitalism. They also define the extraeconomic more broadly than German state theorists. Thus, besides the state and its practices, this includes many other social norms, networks, and institutions (see below). Analogous ideas are presented in 1990s’ work on governance.6 This recognizes not only the many tendencies towards market failure but also the risks of state and planning failures and, in this context, examines the role of self-organization (networking, negotiation, and negative coordination) as another way to underpin and flank inherently fallible market forces and thereby facilitate “governed interdependence.” Such work prompts the question whether the market–state couplet fully grasps the complexity and interdependence of economic and extraeconomic activities, organizations, and institutions.7 Moreover, given the growing interest in economic globalization, state failure, and the rise of the network society, it invites reflection on whether major changes have occurred in the institutional mechanisms and/or social practices that secure these extraeconomic conditions. Prima facie, it appears that the old institutional separation between market and state is being redefined—if not superseded—through a mix of neoliberal reforms (“more market, less state”), new forms of governance (“less market, more networking”), and state rescaling and restructuring (a different kind of state). In

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studying these issues, I will focus on the nature, crisis tendencies, and future of developmental states. To move beyond the market–state couplet in developing a critical account of the developmental state, we must revisit the economic and extraeconomic. The régulation approach rejects the equation of the “economic” with markets and market forces; and of the “extraeconomic” with states and state managers. Thus, it studies five key aspects of accumulation regimes that stretch well beyond the economic, narrowly interpreted: (a) the wage relation, including the reproduction of labor power as well as the capital–labor relation; (b) the enterprise form and competition, including nonmarket relations within and among firms; (c) the money and credit forms; (d) the architecture of the state, forms of state economic intervention, and the state’s wider role in securing institutional integration and social cohesion; and (e) the regimes governing international economic and political relations. Moreover, drawing on Marxist state theory, we can both recognize the state’s distinctive powers and capacities and resist the temptation to treat them in reified isolation from their wider social context. For this theoretical approach starts from the problematic relation between (a) the functional differentiation of the political system, the state’s separation from other institutional orders, and its managers’ operational autonomy and (b) the substantive interdependence of functional systems, the state’s claim to represent the public and national interest (and hence its openness, in principle, to social forces that voice their demands in terms of these interests), and the selective integration (or embedding) of officials and politicians into the wider society. It then explores the resulting problems in terms of their structural and strategic significance for (non)class relations as mediated in and through specific forms of state and the changing balance of political forces. Combining these two approaches serves to highlight the state’s pivotal role in efforts to secure some coherence in the mode of regulation and its connections with the wider social formation. Indeed, one could not even understand its specific economic functions for capitalism, if one held that these were the state’s only tasks. This is very clear in the form and functions of developmental states. To address these issues more concretely, I distinguish four aspects of state involvement in securing capitalist economic growth. The first is the broad field of economic policy in securing conditions for profitable private business. This matters because market forces alone cannot secure these conditions and must be supplemented by nonmarket mechanisms. The second aspect is the broad field of social policy. This refers to the state’s roles in reproducing labor power individually and collectively from everyday routines via individual lifecycles to intergenerational reproduction. It matters because labor power is a fictitious commodity. Although it is bought and sold in labor markets and may add value in production, it is not itself directly (re)produced for private profit by capitalist firms. Labor power enters the market economy from outside and is embodied in individuals who are more than just workers. This poses economic problems over its individual and collective suitability to capital’s needs and its own survival without a secure income or other assets; social problems such as social

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inclusion and cohesion; and political problems regarding the legitimacy of state intervention in this area and its relation to other identities that workers may have. The third aspect refers to the main scale, if any, on which economic and social policies are decided—even if underpinned or implemented on other scales. This matters because economic and social policies are politically mediated and the scales of political organization may not match those of economic and social life. The fourth aspect concerns the relative weight of the mechanisms deployed in the effort to maintain profitability and reproduce labor power by compensating for market failures and inadequacies. Modes of governance are especially relevant here—although they are also involved in the other dimensions too. Top-down state intervention is one of several governance mechanisms; and states as well as markets can fail. This suggests the need for other flanking mechanisms and, in so far as these also fail, for attention to the relative balance among these modes of governance. In short, an adequate description of the state’s role in securing the economic and extraeconomic conditions for capital accumulation should address its institutional architecture, general strategies, and specific policies in all four regards. I have undertaken this elsewhere for Atlantic Fordism in terms of the Keynesian welfare national state and the tendential emergence of a Schumpeterian workfare postnational regime as economic and political forces seek solutions to Fordist crises in North America and Western Europe.8 I will now adopt this approach for the state’s role in East Asian “exportism” and the tendential emergence of a new state form in response to the 1997–8 Asian crisis and the more general restructuring of global capitalism. But I will first critique the “developmental state” and reinterpret its significance in relation to the East Asian “economic miracle.”

Developmental state paradigms Three approaches predominate in general accounts of East Asian economic growth.9 These are the market-centered, developmental state, and culturalist theories. The first is closely related to the neoliberal policy orientation of the IMF and the World Bank. It is based on neoclassical theory. This argues that “the free market mechanism has been and should be the dominant force in bringing about capitalist industrial structure . . . rather than the interventionist role of the state,”10 and that the most efficient allocation of resources will only occur if market forces are allowed free play and if the state has a minimalist, nightwatchman role in economic development. While correctly rejecting the idea that there is a single East Asian export-oriented economic growth model, the World Bank argued that, in all cases, states skillfully tapped the private sector’s strengths. The basic mechanisms were: (a) a virtuous cycle of high investment, high economic growth, and high savings rates; (b) good quality labor and an increasing labor participation rate; and (c) rising production efficiency based on import of foreign capital and technology.11 Criticizing this approach, statecentered studies argue that East Asia’s “economic miracles” depended crucially

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on wide and effective state intervention, targeted industrial policies, and the primacy of substantive criteria of economic performance over the formal rationality of market forces. The third explanation invokes specific cultural factors and is exemplified by—but certainly not limited to—the confused, overextended idea of “Confucian capitalism.” None of these accounts is satisfactory individually and, together, they reproduce the problematic Enlightenment conceptual triplet of market–state–civil society. This suggests in turn that these accounts owe more to European thinking than to East Asian specificities and may therefore prove less than helpful for comparative research in the present context. This said, it is worth pursuing and critiquing the second group of theories. Naïve versions suggest that national sovereign states did not passively support the operation of the invisible hand of market forces but actively guided economic growth, especially through top-down, plan-rational, “industry-specific policies.” More sophisticated versions suggest that operationally autonomous state managers orchestrated a changing balance of markets, networks, and government controls to pursue substantive economic goals within a broader national state project. Moreover, although the notion of developmental state was initially used to identify distinctive features of the national state in Japan and then extended to first-generation late industrializing East Asian economies, it was subsequently used for states at any level (e.g., local, regional, triadic) that actively pursued economic growth. This general usage highlights the state’s operational autonomy in the pursuit of substantive national (local, regional, or, indeed, European Union) economic interests and the conditions that sustain this operational autonomy and can strike the right balance between cooperation and competition in response to domestic and external challenges. It also serves to distinguish such autonomy from predatory states (extractive, underdeveloping), rentier states (extractive, developing), and weak states (lacking capacities to secure all or most of the typical economic, political, and social functions of normal states).12 The developmental state account appears more realistic than neoliberal, market-centered studies. It also “offers an antidote to the laissez-faire mythology triumphed by mainstream economists and the popular business press.”13 This mythology particularly suits the interests of hypermobile and superfast financial capital rather than industrial capital, which more often needs to valorize a given set of specific assets in a particular space and time. But we should not construct an alternative mythology around the developmental state. It is useful here to distinguish theoretical and policy paradigms. Wallis and Dollery argue that policy paradigms derive from theoretical paradigms but possess much less sophisticated and rigorous evaluations of the intellectual underpinnings of their conceptual frameworks. In essence, policy advisers differentiate policy paradigms from theoretical paradigms by screening out the ambiguities and blurring the fine distinctions characteristic of theoretical paradigms.14

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This distinction holds not only for neoclassical economics but also for developmental state theories. For, while the original theoretical paradigm was conceptually rigorous and carefully grounded,15 there is also a developmental state policy paradigm with its own mythologies used to justify and guide specific economic and political strategies. This was adapted to the second-generation “catch-up” industrial development in East Asia and has been advocated for thirdgeneration newly industrializing East Asian economies and other economies too. As such, it can easily lead to the celebration of the developmental state’s capacities and overidentification with its managers.16 The uneasy, ill-defined relationship between theoretical and policy paradigms has led many commentators to exaggerate claims about the autonomy of the developmental state and to sacrifice theoretical and empirical rigor for the sake of critiquing marketfriendly accounts of the East Asian miracle and/or the subsequent Asian crisis. In this respect, the developmental state literature came to share some features of the neoclassical economic approach that it was criticizing. This raises several theoretical and empirical problems. Specifically: 1

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Both the neoclassical and developmental state policy paradigms reify and naturalize the institutional separation between economy and state—seeing this as inherent in modern societies. The former offers a market-based explanation for the economic miracle, argues that state managers are inherently self-interested “rent-seekers” who are best excluded from detailed economic decision-making, and suggests that economic success is everywhere dependent on the emancipation of market forces. The statist version of the developmental state paradigm inverts this model, suggesting that state managers correctly judged how to get prices “wrong” and also pursued a complementary and changing package of policies so that they could guide the market in an export-oriented strategy based on “dynamic growth efficiency” rather than simple allocative efficiency. Yet neither a simple neoclassical position nor the simple developmental state explanation can reveal the complexities of relations between the economic and the extraeconomic and their extensive interpenetration in the East Asian exportist mode of growth in structural and strategic terms alike. They fail to see that the division between market and state is a problematic, socially constructed, and unstable feature of certain capitalist formations and, indeed, one that may be altered, manipulated, and mystified as social forces seek to encourage or prevent the combined deployment of economic and political resources and capacities in pursuit of specific objectives.17 The state is seen as both institutionally distinct and operationally autonomous from the wider society, enabling it to impose its will on society from outside and above. Thus, the developmental state policy paradigm and naïve versions of the developmental state theoretical paradigm both incline towards a state-centrist rather than relational approach to state capacity and power. State capacities are explained in terms of properties of the state apparatus (such as bureaucracy) and/or state managers (such as their

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technocratic expertise) without regard to the specific balance of social forces that enabled an embedded state autonomy.18 These accounts focus on practical aspects of developmental state intervention and ignore the economic, political, and social conditions that enabled such conduct and policies. Crucial here were the fit between developmental state extractive, penetrative, and discursive powers and the susceptibility of the economy and/or civil society to the exercise of these powers; and the state’s ability to project its power through alliances with forces beyond the state. They also neglect the role of contradictions and conflicts in producing losers as well as winners, whether by design or unintentionally, from developmental state strategies and policies. This means that its analysis is too economistic—it focuses on economic growth defined in general quantitative terms rather than the specific qualities of accumulation regimes and it neglects the embedding of the pursuit of growth in broader economic, political, military, and societal strategies. It therefore seeks to explain an apparently anomalous “economic miracle” in terms of the particular features of an equally anomalous state apparatus and thereby ignores how far economic growth outside East Asia displays analogous modes of regulation. For the allegedly exceptional statist features of East Asian NICs can also be found elsewhere in cases of rapid economic growth, if not as such, then at least in substantially equivalent form.

Overall, then, the developmental state paradigm tends to exaggerate the autonomy of East Asian developmental states because its more naïve theorists and policy advocates believe that this is what distinguishes them from more liberal, pluralistic Western political systems. They thereby overlook the actual roles of Western states at all stages in capitalism (including periods of relative laissezfaire, which is itself a distinctive form of state intervention, as well as the more obviously interventionist periods of mercantilism, imperialism, and the Keynesian welfare national state) and the conditions that shape and limit the state’s operational autonomy and state capacities in different contexts. This in turn leads them to treat phenomenal features, which were possible in special contexts and make sense in relation thereto, as the “essence” of the East Asian developmental state. This is correlated with another problem: the implicit claim that market-centered theories hold for Western societies. This suggests that early industrializing Western economies followed a market-centered path of growth, while late industrializing East Asian economies followed a state-centered one. But the state has played key roles in both contexts and it is generally true that, the later a country embarks on the path of capitalist development, the stronger is the need for state intervention to make capitalist accumulation successful.19 To overcome these problems, we must rethink the relation between the economic and the political without engaging in reification and zero-sum thinking; analyze the specificities of accumulation regimes and their modes of regulation rather than study quantitative trends; adopt a relational analysis of the state; and explore the contradictions, dilemmas, and crisis tendencies of the “miracle”

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as well as the continuing strengths of the postcrisis period. Only thus can we avoid the risk of equally one-sided analyses of the pre- and postcrisis periods— either exaggerating the success of the former and failures of the latter or interpreting the past as pathological and the future as a new start provided the “right” policy choices are made. These problems can be overcome if we view the developmental state more broadly as a key element in the overall accumulation regime and mode of regulation in the East Asian NICs and their insertion into the wider international regime dominated by postwar Atlantic Fordism.

The Listian workfare national state My alternative account relies on another ideal-typical construct: the “Listian workfare national state” (or LWNS). Each of its component terms highlights one of its distinctive features and therefore ignores any generic properties the LWNS may share with other types of state in so far as they are also states in capitalist societies. Thus, it ignores the generic concern of such states with general macroeconomic fundamentals and institutional conditions favorable to accumulation as opposed to their adaptation to the distinctive goals and functions of the LWNS. The four terms correspond to the four dimensions of the state’s economic and social functions outlined above. Elsewhere Sum has described Hong Kong in analogous terms as a Ricardian workfare colonial regime and, postcrisis, as an emergent Schumpeterian workfare postcolonial regime.20 I will now present the LWNS without claiming, however, that this analysis exhausts all the East Asian NICs’ distinctive economic, political, and social features. First, then, in promoting the conditions for profitable accumulation, the LWNS is distinctively Listian in so far as it aimed to secure economic growth through export-led industrialization from an otherwise relatively closed national economy and did so mainly by combining catch-up supply-side interventions and neomercantilist demand management. Invoking Friedrich List’s name here is not a Eurocentric conceit but reflects the real influence of his mercantilist approach in Japan and then in other East Asian economies embarking on catchup development.21 This corresponds to the importance of merchandise trade as their key economic driver during the takeoff and consolidation phases of each East Asian NIC’s respective economic miracles. Moreover, even though Hong Kong was more Ricardian and laissez-faire, even here the colonial government used critical economic levers, most notably its control over land supply and the property market, to guide economic growth.22 Second, in reproducing labor power as a fictitious commodity, LWNS social policy displays a distinctive workfare orientation. This can be seen in the following features of state policy: (a) limiting wage costs qua cost of production; (b) investing in human capital; (c) promoting personal savings as a means of securing the reproduction of labor power over the life cycle; (d) encouraging limited forms of occupational welfare for core workers at factory level as a means of reducing overall pressure on wage demands; and (e) promoting forms of collective consumption favorable to the exportist growth dynamic with its

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base in a virtuous circle of export expansion and reinvestment of export earnings in the next generation of capital goods. In certain conditions this orientation also involves repression of organized labor not only to contain labor costs but also to limit political opposition in a national security state.23 Third, the LWNS is national in so far as economic and social policies were pursued within the historically specific (and socially constructed) matrix of a national economy, a national state, and an imagined national community. National security discourse, institutions, and practices affected all three of these elements of the national spatio-temporal fix. Neomercantilism was an important basis of economic security; the national state was a national security state; and a strong nationalist ideology was developed to counteract challenges from divided societies (Korea, Taiwan, Singapore, Hong Kong) or the Cold War ( Japan). This contrasts with earlier colonial periods (e.g., Taiwan and Korea under Japanese rule, Singapore and Malaysia under British rule) and the subsequent postnational period associated with the new dialectic of globalization– regionalization. Thus, within the prevailing scalar matrix, it was the national territorial state that mainly assumed responsibility for developing and guiding Listian workfare policies. Local states in Taiwan and South Korea acted mainly as relays for policies framed at the national level; and the various international regimes established after World War II, the Chinese revolution, and the Korean War were mainly intended to restore stability to national economies and national states within the orbit of the Western bloc under US hegemony. Fourth, the LWNS was statist in so far as a strong national security state and its institutions (on different levels) were the chief means to guide and supplement market forces in securing the conditions for economic growth and social cohesion. The discourse of national security was particularly important in legitimating the state’s role in this regard and, in particular, in justifying the subordination of market forces to state guidance even before there was much evidence of “market failure.” And, where such legitimacy was rejected, the security discourse justified the repression of dissent and organized opposition, including the labor force. Indeed, for this reason, Hee-Yeon Cho prefers the term Listian warfare national state for the early period in South Korea and Taiwan.24 Returning to my main theme, given the residual nature of social policy and the limited institutional separation of the economic and political in still modernizing societies, a major secondary role fell to the extended family, guanxi, and other institutions of “civil society” in the shadow of the state.25 Adopting a regulationist perspective, we can further specify the LWNS. First, regarding the wage relation, export-oriented growth prioritized the wage as an international cost of production rather than as a source of domestic demand. This was reinforced where the wage relation could be subordinated to an exportist and workfarist (rather than welfare) logic through a strong national security state that also restricted opportunities for labor organization to struggle for workers’ economic, political, and social rights. Hee-yeon Cho writes in this context of “an authoritarian developmental mobilization regime.”26 Nonetheless, as incomes rose in line with export earnings (if not always in line with

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productivity, as in the Fordist model), there was increasing pressure as well as scope to expand domestic demand for better housing and more consumer durables. Mass consumption began among the middle classes and later spread to organized labor. This created in turn the basis for the emergence of fractions of capital oriented to mass consumption-led domestic growth. This trend was especially clear in first-generation NICs in East and South East Asia (South Korea, Taiwan, Hong Kong, and Singapore) compared with the second generation (Thailand, the Philippines, Malaysia, Indonesia). Second, enterprise competition was balanced by cooperation. Sometimes the state and/or peak organizations promoted extensive “pre-market” collaboration; sometimes firms divided markets to reduce wasteful competition in favor of “catch-up” development. Small and medium enterprises were also integrated into larger supply chains managed by domestic conglomerates or overseas buyers (and, at least in the Singaporean case, state-sponsored foreign multinationals).27 Such forms of cooperation–competition were crucial to the exportist dynamic based on flexible imitation, technological, process, and product innovation, and, eventually, movement up the world technological and product hierarchy. States can steer the contexts in which enterprise networks and the triple helix of business, universities, and government agencies cooperate but cannot control the process as a whole in a top-down manner. Third, the catch-up strategy privileged credit allocation for long-term growth and subordinated allocation of national money (and international aid or loans) to investment rather than consumption. This required a strong developmental state and/or close coordination between banking and industrial capitals mobilized behind the national economic strategy. Any liberalization of the supply and demand for international credit would have threatened this key pillar of the LWNS—especially in East Asian NICs without strong prudential banking controls—as would the expansion of major conglomerates abroad through the building of a regional division of labor and/or their transfer of R&D and foreign direct investment to Europe and North America. Fourth, the Listian workfare strategy required a strong “developmental state” and/or close and continuing coordination between banking and industrial capitals (keiretsu, chaebol, Kuomintang-capital and state capital, Singaporean stateowned banks) mobilized behind the national accumulation strategy. A key element in the developmental state’s transformative capacities was the economic and political logic of “national security” and its reflection in “exceptional forms” of state (military dictatorship, formalized or de facto one-party rule, etc.) justified by states of emergency. Hong Kong differed because of its continued postwar colonial domination and more Benthamite approach to governance and security. In all cases, however, state insulation from popular control would be undermined by the decline of perceived security threats and continued economic growth, which raised expectations about mass consumption and democratic participation among later generations. Finally, still arguing in regulationist terms and turning to international regimes, we should note the privileged position of the East Asian NICs in the Cold War

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and the massive inflow of military aid and other subsidies from the USA as part of its Cold War economic, political, military, and ideological strategy.

Crisis tendencies of the LWNS There was never a pure LWNS. Japan, Taiwan, South Korea, and Singapore had their own distinctive accumulation regimes and modes of regulation that combined the four features of the LWNS with other functions, scales of action, and modes of governance. Later East Asian NICs also have their own specificities. Nor has there been a pure crisis in and/or of the LWNS—let alone one that issued identically in the Asian crisis. There were only specific, pathdependent, nationally variable crises of variable scope, intensity, and duration. In some cases, one finds greater continuity, linked to the dominance of the view that there was a crisis in the prevailing form of the LWNS, which required only incremental shifts to move towards a new postdevelopmental regime (e.g., Singapore, Taiwan); in others, greater discontinuity prevails—especially in declared policy changes rather than actual outcomes—linked to a discursively constructed domestic crisis of the developmental state, to the constraints linked to accession to the WTO, and, postcrisis, to externally reinforced imposition of domestically promoted radical restructuring (e.g., South Korea). Even in Korea, Thailand, and Indonesia, there are significant continuities. The export-oriented LWNS system had its own vulnerabilities and crisis tendencies on each of its four dimensions. First, as export-led growth continued, it became harder to maintain the relative “structured coherence” of the East Asian NICs’ modes of growth and régulation. The neoliberal promotion of global flows of disembedded capital and domestic deregulation had a particularly adverse impact on the regularities secured by the national institutional and spatio-temporal fix of exportism and the LWNS paradigm. Internal pressures also developed to adopt more Schumpeterian (innovation and competitivenessoriented) forms of economic intervention and workfare—either through gradual adaptation of the developmental state in alliance with producer interests, local authorities, and the wider research community or through its more radical neoliberal rollback. Second, rising personal incomes and popular demands for social welfare weakened the effectiveness and acceptability of the initial workfare regime. This was further weakened by its inability to produce a sufficient quantity and quality of skilled knowledge workers able to contribute to the necessary upgrading of the national economies. Third, the coherence of the economic core and the primarily national matrix of regulation that had permitted concerted state guidance were both challenged by growing interest in promoting inward and outward direct investment as well as a regional division of labor that stretches production networks across national border. Fourth, there were growing external pressures to roll back the developmental state through such measures as privatization, liberalization, deregulation, market proxies, reduced taxes, and an opening to foreign direct investment. This arose in different ways—through preparing to meet the free trade requirements of

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WTO entry, through the impact of the Asian crisis, or simply through massive trade dependence on US markets that made export-oriented economies vulnerable to American pressure to adopt neoliberal measures favorable to US interests. Responding adequately to these four sets of pressures would have required major institutional changes in the economy and state that would inevitably threaten certain sectors of the dominant economic and political elites. Not all states had the institutional capacities and balance of forces to resolve the resulting economic and political institutional crises—Japan is the most notorious example of state failure in this regard, despite its continuing export competitiveness in many industries. Among first-generation East Asian NICs, South Korea was particularly affected in the early to mid-1990s by the rise of strong neoliberal currents among the chaebols and US-trained economic mandarins and attempts to roll back key elements in the inherited LWNS model. Second-tier East Asian NICs were particularly hard-hit by the economic crisis because of their much faster catch-up process, more rapid integration into the emerging regional as well as global division of labor, greater economic, social, and political stresses due to uneven development, and greater vulnerability to large and sudden inflows (and outflows) of short-term, speculative capital. They also had less effective state capacities. “Globalization” did not affect all East Asian economies in the same ways. But we can note two general sets of factors that were mediated through the private more than the public sector. First, there were growing cost pressures as they competed with each other and even newer NICs in the region (such as China and Vietnam) for market share, sought to cover the costs of new rounds of investment and technological innovation, tried to cope with a rising real effective exchange rate both against the dollar, to which national monies were pegged, and, more seriously, against the yen (which was then depreciating against the dollar), and addressed workers’ demands for higher wages and social welfare benefits. And, second, there was the destabilization of national systems of credit allocation through the attempted global imposition of liberalization and deregulation, the use of short-term dollar-denominated foreign credits to finance long-term investment, the additional inflow of short-term speculative “hot money” and resulting excess liquidity, and the search for easier profits in land, property, and stock market speculation (not to mention intensified political corruption) as compared to industrial production. In general, the free movement of global capital made the East Asian economies (especially second-tier NICs) increasingly vulnerable to currency speculation even though many still had what orthodox economists usually call strong underlying “fundamentals,” namely, high domestic savings, budget surpluses, low inflation, and good growth prospects. Unsurprisingly, then, the crisis itself was triggered by the collapse of financial bubbles previously generated by hypermobile speculative capital (aided and abetted, of course, by some local economic and political forces) rather than by long-term balance of trade problems. And it was those East Asian NICs that had embarked on liberalization and hence a weakening of their Listian national

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workfare states that proved most vulnerable to the impact of such hypermobile speculative capital. Hong Kong, Singapore, and Taiwan had the strongest trading accounts and foreign exchange reserves and were less affected than South Korea, which had severe short-term debt problems and a deeper-rooted institutional crisis. Singapore and Taiwan were also protected by strong prudential controls over the allocation of credit; and Hong Kong benefited from background financial and political support from the People’s Republic of China, which had no interest in a spectacular collapse of the Hong Kong economy so soon after its return to the motherland. Second-tier NICs (notably Thailand, Indonesia, Malaysia, and the Philippines) suffered even more from acute pressures of foreign debt and domestic institutional crises. The “IMF-3” (South Korea, Thailand, and Indonesia) were initially drawn furthest into the “illogic” of globalization due to the IMF and the World Bank’s “neoliberal” conditionalities and structural adjustment programs. But, after the initial shock, South Korea adopted a reinvigorated neostatist strategy oriented to a knowledge-based economy. More generally, there has been growing interest in initiatives on a regional scale, beginning with the deepening of the intraregional division of labor and associated intraregional trade and, perhaps, despite initial IMF and US opposition, towards a relatively “dollar-free” regional currency regime.

Towards postdevelopmental states? The problem of reinvigorating and reregulating accumulation after the Asian crisis involves more than finding new ways to manage old contradictions in the same spatio-temporal and institutional matrix. For the relevant spatio-temporal dynamics and contexts have also changed, the inherited forms of the developmental state are in crisis, new accumulation strategies and state projects have become dominant, and, in this context, different contradictions and dilemmas have become primary compared to the LWNS period. Moreover, far from being purely regional, the crisis of exportism and the LWNS is closely linked to the exhaustion of the Atlantic Fordist growth dynamic to which East Asian NIC exportism was closely tied. Overall, I suggest that the latest wave of accumulation can be described in terms of the discourse of the “globalizing knowledge-based economy.” The knowledge-based economy has four key features: (a) importance of new electronic information and communication technologies in the reorganization of production, distribution, and consumption; (b) application of knowledge to the production of knowledge; (c) emphasis on reflexiveness and learning; and (d) the acceleration of innovation and its diffusion. It is being pursued in the context of a complex, multicentric, multiscalar, multiform, and multicausal process of globalization that is re-articulating economic, political, and social relations on many scales. The globalizing knowledge-based economy represents a new economic strategy that is sponsored by local, regional, and national states, international bodies (including the Asia-Pacific Economic Cooperation and ASEAN as well as

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the more global organizations such as the OECD, the World Bank, and the WTO), and leading corporations. It is said to involve wide-ranging economic, political, and social reorganization and is linked to a new vision of social life.28 Thus, while the East Asian NICs have certainly been forced to address the crisis tendencies associated with first- and second-generation exportist strategies, resolving these would be insufficient to generate a new long wave of growth based on integration into the globalizing knowledge-based economy. Indeed, East Asian moves to make the wage relation more flexible and to liberalize the national money form to integrate it more closely into the circuits of international currency have aggravated the crisis tendencies of the earlier exportist model. This is clearest where US-dominated international institutions imposed their preferred neoliberal form of after-crisis restructuring and/or supported domestic forces that had been calling for neoliberalism. For neoliberal restructuring reinforces the abstract-formal logic of flows in the world market at the expense of the substantive-material moment of use value rooted in specific places and times. It is capital in these abstract moments that is most easily disembedded and thereby freed to “flow” freely through space and time. However, in each of its more concrete moments, capital has its own particular productive and reproductive requirements. A largely neoliberal state has most real difficulty in securing the latter. This can be seen in the contribution of the neoliberal turn to the crisis in South Korea and the postcrisis experience in the East Asian NICs suggests that neoliberalism on its own cannot provide a lasting solution to the crisis of exportism and the LWNS. Besides the wage relation and national money–international currency issues, what other issues must be addressed to resolve these crises in an increasingly globalized economy in which knowledge-based competition is increasingly dominant? There are four major problems that affect the East Asian NICs’ distinctive growth dynamic and national mode of regulation: (a) an increasing dissociation between abstract flows in space and concrete valorization in place; (b) the tension between growing short-termism in economic calculation associated with the emphasis on shareholder value rather than long-term patient capital and the increasing dependence of valorization on extraeconomic factors that take a long time to produce; (c) the contradiction between the private appropriation of knowledge (e.g., through the extension of intellectual property rights) and the free circulation of knowledge to maximize its integration into an information economy and information society; and (d) the question of the best spatio-temporal fix, if any, through which to manage the contradictions and dilemmas inherited from exportism as well as those linked to any new mode(s) of growth. The first problem reflects the increasing scope for global operations in real time that are dissociated from particular physical locations. This is most evident in the separation of superfast and hypermobile financial capital from most forms of industrial capital—with the former moving in an abstract space of flows, the latter still dependent on valorization in specific times and places. This problem was crucial in the development of the Asian crisis, which was actually a

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global crisis that first developed in Asia before spreading elsewhere. The same contradiction holds in the individual circuits of financial, industrial, and commercial capital and their interconnections in so far as place still matters for capital accumulation. The grid of global cities provides this territorial “fix” for financial capital and international producer services. Unsurprisingly, then, developmental states are heavily engaged in efforts to upgrade selected cities as their new “national champions” in regional and global city networks. They have also enhanced and upgraded their efforts to promote appropriate forms of infrastructure and extraeconomic supports for knowledge-based industrial capital as well as for e-commerce and e-government. Some of these projects are massive, such as Malaysia’s Multi-Media Super-Corridor and its two cybercities (Putrajaya and Cyberjaya); most are on a modest scale but still have a crucial symbolic significance, even if less important in material terms, such as Hong Kong’s support for a “cyberport” and commercial exploitation of traditional Chinese medicine. Next is the paradox that “[t]he most advanced economies function more and more in terms of the extra-economic.”29 Changes in competition generate major new contradictions that affect the spatio-temporal organization of accumulation. Thus, temporally, there is a tension between short-term economic calculation (especially in financial flows) and the long-term dynamic of “real competition” rooted in resources (skills, trust, heightened reflexivity, collective mastery of techniques, economies of agglomeration and size) that may take years to create, stabilize, and reproduce. This tension is greatly intensified by the neoliberal emphasis on maximizing short-term shareholder value, an emphasis that is particularly inappropriate for the typical East Asian enterprise form with its commitment to patient capital and high levels of debt. Spatially, there is a contradiction between the economy considered as a pure space of flows and the economy as a territorially and/or socially embedded system of resources and competencies. The neomercantilist economic strategies of most East Asian NICs paid particular attention to securing the coherence of the national economy and this commitment is clearly threatened by increased internationalization, especially in its neoliberal form. This poses new dilemmas if capitalist relations are to be stabilized over more scales as well as increasingly compressed and/or extended temporal horizons of action. Relying on market forces alone will solve neither the spatial nor temporal aspects of this paradox. A third problem concerns the increasingly networked socialization of productive forces and continued private appropriation by individual firms. The combination of network enterprises and geometrically increasing “economies of networks”30 poses various collective action problems in a market economy. This suggests the need for new forms of enterprise able to capture network economies without destroying the broader network(s) that generate them. “Virtual” and/or networked firms are said to correspond to this need. However, unless such firms embrace all relevant actors, the contradiction remains. Another solution is the development of “club goods” in which dense regional networks or strategic alliances organized on a “hub-and-spoke” model internalize

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the benefits of cooperation. A third solution is for the state to organize economies of networks and to facilitate collective appropriation and redistribution of their benefits. These last two solutions have already characterized the East Asian NICs in their initial exportist phase and have been reinforced in the wake of the Asian crisis and a more general, global promotion of the knowledgebased economy by leading economic and political bodies. Fourth, the coherence of nationally-based spatio-temporal fixes has been undermined by internationalization and increased time–space compression. As yet, there is no new primary scale around which the old and new contradictions of capital accumulation can be readily managed. Instead we are witnessing a struggle among different social forces to establish their own preferred scales of organization at the primary level on which a new fix will emerge and/or to establish new multilevel governance mechanisms which will challenge the primacy of the national state. This is reflected in the more general problem of securing consensus around a new accumulation strategy and its appropriate mode of regulation and linking this to broader state projects and hegemonic visions within societies still affected by the impact of the Asian crisis. Although the national scale remains significant for the East Asian NICs, there is also increasing interest in postnational economic and political strategies ranging from enhanced cross-border cooperation to the widening and deepening of the regional division of labor and even the development of a corresponding regional financial order to reduce dependence on the US-dominated global financial system.

Developmental states in the globalizing, knowledge-based economy The current long wave of capitalist uneven development is marked by the growing application of knowledge to the production of knowledge in developing technology, process, and products and by the growing importance of knowledge and knowledge work in shaping the relations of production.31 In addition, the knowledge-based economy has become significant in accumulation strategies on almost all scales from the local to the global as well as for firm and sectoral strategies. This reflects both a general response to the maturing of advanced capitalist economies (rooted in the typical shift from investment- to innovationdriven growth) and a specific response to crises in the exportist mode of growth in the East Asian NICs. It goes well beyond the sort of “information society” strategies adopted by Japan in the 1980s to include a wide-ranging set of institutional, policy, and discursive changes in government and governance. Symptomatic of this reorientation are South Korea’s strategy to become a knowledge-based economy, recently endorsed by the OECD and the World Bank; Taiwan’s commitment to become a “green silicon island” based on the knowledge-based economy, sustainable development, and social justice and its promotion of an “e-Taiwan” project to build e-business, e-government, and an e-society; Singapore’s strategy to become an “intelligent island”; Malaysia’s

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“2020 vision” and master planning to move from a production-based economy to a “K-economy”; and, albeit more rhetorically, Hong Kong’s recent plan to become a knowledge-based economy specializing in knowledge-intensive business services for the Pearl River Delta. The globalizing knowledge-based economy involves a restructuring of “developmental states” rather than an active rolling back or a benign neglect that allows them to wither away. For the state is still a key mediating force in an ongoing re-articulation of capital’s economic and extraeconomic moments that goes well beyond a simple recalibration of market and state. Among the functions that the state might perform in the knowledge-based economy are: (a) managing the tensions between intellectual commons and intellectual property and orchestrating the de- and recommodification of knowledge in this context; (b) redesigning the relationship between the economic and extraeconomic in the light of the changing forms of competitiveness associated with the knowledge revolution, reflexivity, and learning; (c) guiding the interlinked processes of de- and reterritorialization and de- and retemporalization associated with new forms of time–space distantiation and timespace compression in order to create a new spatio-temporal fix for capital accumulation; and (d) addressing the political and social repercussions of the new phenomenal forms of capital’s basic structural contradictions and strategic dilemmas. States differ regarding these four functions. Thus, first, they tend to polarize around enclosing the intellectual commons or conserving it (e.g., North–South) and around the intellectual property regimes best suited to balancing these demands. Thus, some states are more active in promoting primitive accumulation of intellectual property, privatizing public knowledge, and commoditizing all forms of knowledge. Others are more concerned to protect the intellectual commons, develop social capital, and promote the information society. Given its competitive advantage in the knowledge revolution and its products, the USA has heavily pushed a neoliberal approach to the knowledge-based economy on a global scale. Conversely, given their very different position, East Asian NICs are torn between continuing neomercantilism—now refashioned and recalibrated to put more emphasis on innovation-driven growth—and embracing the neoliberal Trade-Related Intellectual Property Rights arrangements to benefit from their own competitive advantages in the globalizing knowledge-based economy. Given the general trend to formal acceptance of the US-inspired WTO rules on intellectual property protection, the East Asian NICs have increased their activities in balancing “the need to protect and maintain the intellectual commons against the need to stimulate inventive activity.”32 Their various knowledge-based economy strategies emphasize “technological foresight” and benchmarking their regional and global competitors; the promotion of innovation and diffusion (including social capital); the creation of national information infrastructures and networks of R&D centers, science parks, technology parks, etc.; extension of higher education oriented to the needs of the globalizing knowledge-based economy and regulatory changes in labor markets to recruit skilled knowledge workers from abroad; and so forth.

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Second, competitiveness is now held to depend not only on an extensive range of long-acknowledged economic factors but also on a broad range of formally extraeconomic institutional forms, relations, resources, and values, etc. This entails a basic redefinition of the “economic sphere” and the rediscovery of specifically Asian forms of social capital and even “Asian values.” It is associated with a Schumpeterian orientation that promotes innovation, competitiveness, and entrepreneurship in relatively open economies by intervening on the supply side and tries to strengthen as far as possible the competitiveness of the relevant economic spaces and their extraeconomic supports. This encourages the subordination of all socioeconomic fields to the accumulation process. Indeed, the attempt to valorize the extraeconomic is a key dimension of current Schumpeterian accumulation strategies. Thus, a profit-oriented, market-mediated logic is extended into noneconomic areas to adapt them to the “needs” of an innovation- and knowledge-driven economy (e.g., new roles for education, public R&D, local states, health services, and pension systems). This reinforces the process and pace of the re-articulation of the economic and extraeconomic as firms and states consider how innovation and competitiveness are socially and culturally embedded and become more reflexive about how to promote accumulation in these changed circumstances. Third, in this context, states are also becoming involved in managing the conflicts between time horizons associated with time–space distantiation and compression—especially to protect the social capital embedded in communities, promoting longer-term economic orientations, and designing institutions that sustain innovation. At one pole of state responses in this context, we can find Malaysia’s decision to limit short-term capital flows following the Asian crisis in order to protect its long-term economic, social, and political development strategy; at the other pole, we can find demands for the full opening of formerly neomercantilist economies to liberal, deregulated, and global market forces. A similar reorientation is found in social policy. This can still be described as concerned with workfare in so far as it continues to subordinate social to economic policy. But it is now even more concerned with increasing short-term flexibility as well as with promoting long-term capabilities and skills for the knowledgebased economy and, indeed, with lifelong learning. Fourth, this expanding field of intervention makes it harder for states to reconcile adaptation to evermore insistent economic imperatives with the more general demands of political legitimacy and social cohesion.33 This is addressed in three ways: (a) efforts are made to legitimate these changes in terms of the inevitable march of technological progress, the demands of an irreversible globalization, and the positive benefits to be derived from participation in the knowledge-based economy; (b) states seek to protect communities against adverse effects of the globalizing logic of the knowedge-based economy and ensure that their citizens benefit from the new economy and information society; and (c) as a compensatory and flanking measure where other responses fail, we find a revival, albeit in new form, of the discourse of national security— this time in the guise of a “war on terrorism.”

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These shifts in function are associated with three broad trends in the institutional architecture of the (post)developmental state. First, there is a general trend towards its denationalization, even in the former city-states. This is reflected in the “hollowing out” of the state with old and new state capacities being reorganized territorially and functionally at various local, regional, national, translocal, mesoregional, macroregional, and supranational levels. State power moves upwards, downwards, and sideways as state managers on different territorial scales try to enhance their respective operational autonomies and strategic capacities. This shift is closely related to the state’s new economic roles in the globalizing knowledge-based economy—especially its increasingly Schumpeterian rather than Ricardian emphasis on the supply side, the management of self-reflexivity and “connexity,”34 and interscalar articulation intended to improve overall economic policy “coordination” across different in the face of the increased importance of complex regional divisions of labor that cross-cut postwar national boundaries and, in many ways, revive the East Asian maritime commercial economy.35 Second, there is a tendential destatization of the political system. This is reflected in a shift from government to governance on various territorial scales and across various functional domains. I have already emphasized that the developmental state did not operate in splendid isolation from the market economy or wider society but was embedded within them in ways that enhanced its capacity to govern the complex interdependencies of the political economy of capitalism. This is why they have also been termed networked or embedded states, or, pejoratively, “crony capitalist” regimes. The turn from factor- through investment- to innovation-driven accumulation associated with the globalizing knowledge-based economy reinforces this reliance on governance in the shadow of hierarchy. There is more emphasis on formal partnerships between governmental, paragovernmental, and nongovernmental organizations in which the state apparatus is often only first among equals; and on informal networks and alliances that may often cross-cut national as well as institutional boundaries. The role of the Chinese diaspora in bridging such boundaries is especially interesting in this latter context.36 More generally, this increased resort to governance need not entail a loss in state power, as if power was a zero-sum resource rather than a social relation. On the contrary, it could enhance the state’s capacity to project its influence and secure its objectives by mobilizing knowledge and power resources from influential nongovernmental partners or stakeholders. This was the case in successful developmental states and is now being reordered in their postcrisis incarnations as more weight is put on “knowledge-based economy” policies. Third, there is a complex trend towards the internationalization of policy regimes. The international context of domestic state action has extended to include a widening range of extraterritorial or transnational factors and processes on many scales; and it has also become more significant strategically for domestic policy. The key players in policy regimes have expanded to include foreign agents and institutions as sources of policy ideas, design, and implementation.

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This trend is reflected in economic and social policies as the state becomes more concerned with “international competitiveness” in the widest sense. This trend also affects local and regional states and is also linked to the growth of interregional and cross-border linkages across different national formations. Each trend is linked to a countertrend that both qualifies and transforms its significance for political class domination and accumulation. Countering denationalization is national states’ growing involvement in interscalar articulation as, without a supranational state with equivalent powers to those of national states, the latter seek to reclaim power by managing the relation among different scales of economic and political organization. Not all states are equal in these regards, of course. For, within each regional bloc there is usually one hegemon and, on a global scale, the USA is the key player in the rescaling of politics. Japan is still the regional hegemon in East Asia but China is also becoming increasingly active in interscalar articulation around its own geoeconomic and geopolitical interests. Countering the shift towards governance is government’s increased role in metagovernance. This poses a major difficulty in interpreting the postdevelopmental state.37 Governments on various scales are getting more involved in organizing the self-organization of partnerships, networks, and governance regimes that are appropriate to the globalizing knowledge-based economy. Successful metagovernance requires that states (a) provide the ground rules for governance; (b) ensure the compatibility of different governance mechanisms and regimes; (c) deploy a relative monopoly of organizational intelligence and information with which to shape cognitive expectations; (d) act as a “court of appeal” for disputes arising within and over governance; (e) seek to rebalance power differentials by strengthening weaker forces or systems in the interests of system integration and/or social cohesion; (f) try to modify the self-understanding of identities, strategic capacities, and interests of individual and collective actors in different strategic contexts and hence alter their implications for preferred strategies and tactics; and also (g) assume political responsibility in the event of governance failure. States pursue such tasks not only in terms of their contribution to particular state functions but also in terms of their implications for political class domination. And, of course, not all are equally successful. Somewhat ambiguously countering yet reinforcing the internationalization of policy regimes are national states’ efforts to shape international policy regimes in the interests of the capitals most important for their economic growth. This is clear in struggles over international regimes for the WTO, and intellectual property rights, etc. The United States is currently most influential in promoting international policy regimes for a globalizing, knowledge-based economy but it is facing growing opposition from Brazil, India, China, and other regional powers that have been seeking to organize a counterhegemonic bloc. There are also comparable conflicts on the triadic level—notably in attempts to harmonize regimes across the European Union and across the ASEAN+3. A second, and equally ambiguous, countertrend is the “interiorization” of international constraints as the latter become integrated into the policy paradigms and cognitive

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models of domestic policy-makers. However, “interiorization” is not confined to the level of the national state: it is also evident at the local, regional, crossborder, and interregional levels as well as in the activities of “entrepreneurial cities.” The relativization of scale makes such “interiorization” significant at all levels of economic and political organization. The interiorization of the knowledge-based economy is a particularly interesting and significant phenomenon in this regard in the context of the postdevelopmental states in East Asia.

Neoliberalism and the future of the developmental state The global neoliberal conjuncture in the 1990s prompted questioning of the future of the developmental state in theoretical and policy terms. But this questioning can be taken too far when it conflates different forms and degrees of neoliberalism. For one should distinguish: (a) neoliberal regime shifts in Britain, the USA, and other uncoordinated market economies in response to economic and political crises in Atlantic Fordism; (b) neoliberal policy adjustments in coordinated economies (the “Rhenish” and Scandinavian cases) to improve the performance of the inherited modes of growth and governance; and (c) the neoliberal system transformation proposed for, and imposed on, the postsocialist economies. Given the political, intellectual, and moral climate from the late 1970s to early 1990s and the dominance—if not hegemony—of a transatlantic neoliberal power bloc, these trends were conflated and taken as proof of the general triumph of neoliberalism. There was little interest in the power bloc or its supporters in whether the neoliberal system transformation would be abortive, whether neoliberal policy adjustments would really lead inexorably to neoliberal regime shifts, or neoliberal regime shifts in turn would rediscover that markets fail. The same short-sighted neoliberal triumphalism affected views on the future developmental state. For the dominant neoliberal forces saw the crisis of East Asian economies as an opportunity to impose a radical neoliberal system transformation analogous to that in the postsocialist world or, at least, to encourage a neoliberal regime shift. But domestic forces were often interested only in making appropriate neoliberal policy adjustments to sustain a restructured, recalibrated developmental state that could respond to the perceived imperatives of the globalizing, knowledge-based economy. Moreover, while neoliberalism seemed to have prevailed in the immediate aftermath of the Asian crisis (induced in large measure, paradoxically, by the impact of neoliberalism itself), the medium-term result has been a conservation–dissolution of the LWNS form of the developmental state as it is transformed into a more Schumpeterian workfare postnational state with continuing major roles for the national state.

Conclusion This chapter has critiqued the developmental state as a theoretical and policy paradigm and suggested an alternative theoretical framework for addressing the

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same set of issues that prompted its initial development and subsequent application. This alternative framework may enable a rapprochement between those who claim that neoliberalism has superseded the developmental state and those who argue that the latter remains essentially unaltered. For, by introducing four dimensions of state intervention, linking these to different accumulation regimes and modes of regulation, and noting the transition from the coexistence of Atlantic Fordism and East Asian exportism to a period characterized by the globalizing knowledge-based economy, I hope to have enabled analysis of the (dis)continuities in the developmental state. Thus, just as I rejected the concept of developmental state in favor of that of the Listian workfare national state, it is now time to reject attempts to privilege neoliberalism as an adequate theoretical paradigm for interpreting East Asian economies and recommending that their governments adopt specific neoliberal policies.

Notes 1 This chapter draws on joint work with Ngai-Ling Sum and discussions with HeeYeon Cho, Myung-Rae Cho, and Jenn-hwan Wang. It draws on B. Jessop, “Reflections on the (il)logics of globalization,” in K. Olds, P. Dicken, P. F. Kelly, L. Kong, and H. W. C. Yeung (eds), Globalization and the Asia Pacific: Contested Territories, London: Routledge, 1999, pp. 19–38; B. Jessop and N. L. Sum, “An entrepreneurial city in action: Hong Kong’s emerging strategies in and for (inter-)urban competition,” Urban Studies, 2000, vol. 37, no. 12, pp. 2287–313; and my paper “‘Americanism and Fordism’: Can the regulation approach be exported to East Asia?” for the International Conference on East Asian Modes of Development and Their Crises: Regulationist Perspectives, Tunghai University, Taichung, Taiwan, 13–18 April 2001. 2 J. E. Woo, Race to the Swift: State and Finance in Korean Industrialization, New York: Columbia University Press, 1991. 3 C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford, CA: Stanford University Press, 1982. 4 See B. Jessop, The Capitalist State, Oxford: Martin Robertson, 1982. 5 R. Boyer and Y. Saillard (eds), Regulation Theory: The State of the Art, London: Routledge, 2002. 6 J. L. Campbell, J. R. Hollingsworth, and L. N. Lindberg (eds), Governance of the American Economy, Cambridge: Cambridge University Press, 1991; R. J. Hollingsworth, P. C. Schmitter, and W. Streeck (eds), Governing Capitalist Economies: Performance and Control of Economic Sectors, Oxford: Oxford University Press, 1994; J. Zeitlin and D. M. Trubek (eds), Governing Work and Welfare in a New Economy: European and American Experiments, Oxford: Oxford University Press, 2003; R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press, 1990; L. Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era, Cambridge: Polity Press, 1998. 7 F. Block, “The roles of the state in the economy,” in N. J. Smelser and R. Swedberg (eds), The Handbook of Economic Sociology, Princeton, NJ: Princeton University Press, 1994, pp. 691–710; R. Boyer, “State and market: a new engagement for the 21st century?,” in R. Boyer and D. Drache (eds), The Future of Nations and the Power of Markets, London: Routledge, 1995, pp. 84–114. 8 B. Jessop, The Future of the Capitalist State, Cambridge: Polity Press, 2002. 9 Some scholars deny that an East Asian economic miracle actually occurred, arguing that the high growth rates were simply factor-driven (e.g., P. Krugman, “The myth of Asia’s miracle,” Foreign Affairs, 1994, vol. 73, no. 6, pp. 62–78).

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10 World Bank, The East Asian Miracle: Economic Growth and Public Policy, Oxford: Oxford University Press, 1993. 11 Ibid. 12 P. B. Evans, “Predatory, developmental, and other apparatuses: a comparative political economy perspective on the Third World state,” Sociological Forum, 1989, vol. 4, no. 4, pp. 561–87; Weiss, The Myth of the Powerless State. 13 J. Lie, “Review: rethinking the ‘miracle’—economic growth and political struggle in South Korea,” Bulletin of Concerned Asian Scholars, 1991, vol. 23, no. 4, p. 68. 14 J. Wallis and B. Dollery, Market Failure, Government Failure, Leadership and Public Policy, Basingstoke: Palgrave, 1999, p. 5. 15 See especially C. Johnson, “The developmental state: odyssey of a concept,” in M. Woo-Cumings (ed.), The Developmental State, Ithaca, NY: Cornell University Press, 1999, pp. 32–60. 16 Lie suggests that this explains why, “[i]n spite of Amsden’s success in demolishing the market myth, . . . she ends up buttressing another: the self-congratulatory self-image propagated by the architects of Korean economic strategy” (Lie, “Review: rethinking the ‘miracle,’” pp. 68–9). 17 Cf. T. C. Mitchell, “Society, economy, and the state effect,” in G. Steinmetz (ed.), State/Culture, Ithaca, NY: Cornell University Press, 1999, pp. 76–97; W. Larner and W. Walters, “The political rationality of ‘new regionalism’: toward a genealogy of the region,” Theory and Society, 2002, vol. 31, pp. 391–432. 18 B. Jessop, State Theory: Putting the Capitalist State in Its Place, Philadelphia, PA: Pennsylvania State University Press, 1990; P. B. Evans, Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press, 1995; Weiss, The Myth of the Powerless State. 19 Cf. A. Gerschenkron, Economic Backwardness in Historical Perspective, Cambridge: Cambridge University Press, 1962. 20 N. L. Sum, “Reflections on accumulation, regulation, the state, and societalization: a stylized model of East Asian capitalism and an integral economic analysis of Hong Kong” (PhD dissertation, University of Lancaster, 1994); N. L. Sum, “Theorizing export-oriented economic development of East Asian newly industrializing countries: a regulationist perspective,” in I. Cook, M. A. Doel, R. Y. F. Li, and Y. J. Wang (eds), Dynamic Asia, Aldershot: Ashgate, 1997, pp. 41–77. 21 F. List, National System of Political Economy, Philadelphia, PA: Lippincott, 1856; see also B. Cumings, “Webs with no spiders, spiders with no webs: the genealogy of the developmental state,” in Woo-Cumings, The Developmental State, pp. 61–92; Weiss, The Myth of the Powerless State. 22 Sum, “Reflections.” 23 More detailed historical analyses would also need to consider the role of land reform at the cost of large landowners, especially in South Korea and Taiwan. 24 H. Y. Cho, “The structure of the South Korean developmental regime and its transformation—statist mobilization and authoritarian integration in the anti-communist regimentation,” Inter-Asian Cultural Studies, 2000, vol. 1, no. 3, pp. 408–26. 25 For Hong Kong, see Sum, “Theorizing export-oriented economic development.” 26 Cho, “The structure of the South Korean developmental regime.” 27 On commodity chains, see G. Gereffi and M. Korzeniewicz, Commodity Chains and Global Capitalism, Westport, CT: Praeger, 1994. 28 Jessop, The Future of the Capitalist State. 29 P. Veltz, Mondialisation villes et territoires: l’économie archipel, Paris: Presses Universitaires des France, 1996, p. 12. 30 “Economies of networks” concern both the increasing returns to producers and consumers of the adoption of network infrastructures (e.g., mobile phones, the Internet) and increasing returns to networked forms of enterprise compared to reliance on the invisible hand of the market or single organizational forms

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31 32 33

34 35

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Bob Jessop (see O. Shy, Economics of Network Industries, Cambridge: Cambridge University Press, 2001). Jessop, The Future of the Capitalist State. A. C. Dawson, “The intellectual commons: a rationale for regulation,” Prometheus, 1998, vol. 16, p. 278. N. Poulantzas, State, Power, Socialism, London: Verso, 1978. J. Mulgan, Connexity: How to Live in a Connected World, London: Chatto and Windus, 1996. This is reflected in O’Riain’s description of the “flexible developmental state.” This “consists of a state apparatus which is deeply embedded in a ‘network polity,’ forging socio-political alliances out of constantly shifting local, national and global components. In transforming itself to operate within a locally and globally networked economy and polity, state governance itself is ‘re-scaled’ as the prior privileged role of the national level gives way to a ‘glocal’ form of state.” (S. O’Riain, “The flexible developmental state: globalization, information technology and the ‘Celtic tiger,’” Politics and Society, 2000, vol. 28, no. 3, p. 7.) C. Lever-Tracey, D. Ip, and N. Tracey, The Chinese Diaspora and Mainland China: An Emerging Synergy, Basingstoke: Macmillan, 1996; A. Saxenian and J. Y. Hsu, “The Silicon Valley–Hsinchu connection: technical communities and industrial upgrading,” Industrial and Corporate Change, 2001, vol. 10, no. 4, pp. 893–920. Cf. C. M. Dent, “Taiwan’s foreign economic policy: the ‘liberalization plus’ approach of an evolving developmental state,” Modern Asian Studies, 2003, vol. 37, pp. 461–83.

3

The state–market condominium approach Geoffrey R. D. Underhill and Xiaoke Zhang

Changing state–society relations and their impact on national economic performance are a perennial concern of scholars of development studies. While scholars have approached this subject from diverse theoretical perspectives, they have all sought to explain cross-national variations in industrialization trajectories by focusing on the interplay of states, markets, and societies in the making and implementation of development strategies. Common to extant studies of developing and emerging market countries is the fundamental assumption that development policies and processes are an important function of the complex interactions of economic, political, and social forces operating at domestic and systemic levels of analysis. In this regard, many scholars have attempted to advance explanatory frameworks that address the role of the state in economic development and examine how key societal actors are integrated into state institutions and how the changing configurations of state–society relations are crucial to industrial transformation within the contexts of national and international political economies. Among these theoretical frameworks, the development state model, which emphasizes the institutional insulation of state actors from social groups in pursuit of national interests, has been central to the analysis of development patterns in East Asia and achieved a paradigmatic status in international policy circles since the 1980s.1 In recent years, however, the model has been subject to criticism and reassessment on both theoretical and empirical grounds.2 Critical assessments, while coming from different perspectives and disciplines, have focused on the ahistorical portrayal of the state as a rational and unitary actor and the passive characteristics the model has assigned to the private sector. The criticisms have aimed to revise or even refute the developmental state thesis and to recast the experiences of socioeconomic transformation in East Asia against the backdrop of rapid economic and political changes during the 1980s and 1990s. The neostatist approach, which represents one of the first attempts to revise the model, has focused on mutually reinforcing government–business relations in the development process. Most eloquently elucidated by Peter Evans and Linda Weiss,3 this approach has superimposed state autonomy on close public– private ties as the essential conditions for effective governance. Scholars who

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privilege the role of private-sector organizations have proposed a socialinstitutionalist perspective on development and emphasized the importance of business associations and public–private networks as functional solutions to the various collective action problems that plague economic growth.4 Neopluralist scholars have gone even further by developing a state-in-society approach.5 Drawing on divergent industrialization experiences in Asia, they contend that state structures by themselves correlate poorly with economic performance and suggest that cross-national variations in development patterns reflect different social and cultural settings within which state actors must operate to achieve their policy objectives. These various recent re-examinations of the developmental state thesis have helped to advance theoretical debates about, and to establish a new research agenda for, the changing East Asian political economy.6 Underlying the claims of these revisionist positions is the common belief that growth-promoting economic policies are contingent on the dense and multiple processes of state– society interactions. However, we argue that the revisionist approaches have not taken us far enough in our efforts to understand these processes. The fundamental weaknesses of the developmental state model stem not just from a failure to include configurations of societal variables embedded in the structures of the market but also from an essential state–society dichotomy which contrasts with the observable nature of markets as mechanisms of governance. The revisionist approaches have largely failed to overcome this fundamental dichotomy and to offer a coherent theoretical alternative. While neostatist theorists have modified the crude statist claims by arguing that the public and private sectors are interdependent, they view the interdependence as a subordinate one—the interdependence under “state sponsorship,”7 and continue to characterize the state–market relationship as one between analytically distinct entities. Focusing on the role of intermediate business organizations in the policy-making process, social institutionalists have left unexamined the national-level interplay of state and social interests and institutions embedded in the structure of emerging market societies,8 and which may cut across borders. Whereas developmental statist theorists reify the state, their neopluralist revisionists, who tend to derive state interests and structures from social and cultural configurations, have erred in the opposite direction. There is still one more and crucial conceptual step to take in order to move beyond the developmental state model and its tug-of-war state–society antipathy. As the central argument of this chapter, we propose that the politics of development in East Asia can be more fruitfully theorized if we view states and markets as one integrated ensemble of governance, a state–market condominium.9 In this discussion, we take “the market” as a proxy for “society” —private social constituencies and agents—on the grounds that the overwhelming majority of developing economies are societies based on emerging market principles of various shades and hues. This is akin to Karl Polanyi’s notion of “market-based society.”10 The basic premise underlying our argument is that state and market evolve and exist symbiotically as an array of social-political

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forces. The public and private domains are integrated in a single configuration of power and authority, and the state–market dichotomy is an analytical distinction that obscures as much as it illuminates the dynamics of the development process. Understanding the political economy of development involves accounting for the ways in which market-based governance is exercised through a range of both public and private mechanisms populated by a range of state and nonstate actors, which together constitute an integrated ensemble. This chapter, in line with the overall themes of the volume, seeks to reconceptualize state–market relations as the political and institutional underpinnings of development. The important question that ties the empirical analysis together focuses on how the East Asian developmental states have transformed in their capacities to guide development processes when confronting internal and external pressures for institutional and policy changes and how we can understand this transformation in terms of the changing nature of the state–society condominium. The section that follows outlines the conceptual case for the state–market condominium as an alternative approach to understanding the dynamics of economic growth. The penultimate section illustrates and fleshes out the approach by examining the political processes of industrial policy management and financial market governance in East Asia, particularly during the 1980s and 1990s. The final section concludes by summarizing the main arguments and briefly discussing their implications for effective economic policy-making and governance in emerging market countries in general and in East Asia in particular.

The state–market condominium concept The brief critique of the developmental state model and its revisionist positions offered above suggests that we need to move away from theories portraying an epic struggle between state and market toward an approach that admits their essential unity. While tensions exist between state and market agents in policy processes, the two are interrelated and interact on each other within the same configuration of power and interests.11 Even as an analytical distinction, theories based on a state–market dichotomy blind us to the ways in which states are active in the marketplace, embedded in society, and the ways in which market actors and constituencies are part of the wider process of governance and the formal institutions of government. The case is particularly strong in the development process, where it is empirically difficult to separate out a distinct private domain of market interaction from the realm of official, “public” policy. Successful development processes in Asia, as earlier in Europe, have always been based on political strategies which involve the successful integration of a variety of active market agents, often including working-class movements of one sort or another, into the official realm of legal and regulatory processes. Understanding the comparative dynamics of state–market condominiums, and their relationship to transnational market forces in an integrating global economy, is the essence of the political economy of development.

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The first dimension of the argument as outlined in the introduction concerns the symbiosis of state and market, wherein situating the state remains crucial. The state, which is a key institution-as-agent at the core of the state–market complex, provides the political and institutional focus for contesting the underlying structures of society, particularly in relation to production and distribution. The politics of the state mediates between the public and private domains, among different types of social actors and at the national/international interface. While the state appears as an important decision-making forum, it is far from unified and is hardly the only actor or institution of consequence. Only by locating the state in an integrated ensemble of governance can we understand the broader sociopolitical dynamics of development. This implies focusing on the ways in which formal state institutions are constituted in relation to the social constituencies of the market. The legitimacy and viability of state institutions depend on a network of relationships with dominant and other social constituencies, sometimes mediated by force. State– market interactions imply that state and society are reciprocally molded, penetrated, and empowered.12 As state actors interact with the social groups in the market whom they come to dominate, co-opt, or depend upon, they clash with or accommodate to different social value orientations and demands. Private actors at the same time build networks of relations among themselves which overlap and integrate with formal state institutions and functions. This suggests that state autonomy and capacity are a function of the interests and constituencies which become integrated into state institutions and policies, though even relatively weak societal actors may stand a chance of affecting and shaping state structures. This argument implies that it is difficult on both empirical and conceptual grounds to portray states as unified and single-purpose decision-makers, sitting atop markets and shaping them from above. On the one hand, states comprise complex systems of different agencies and ministries which have diverse institutional histories, dissimilar bureaucratic cultures and values, different constituency bases, and divergent missions and policy objectives.13 Some such as central banks, treasuries, and trade ministries are openly active in markets, giving them divergent views from social ministries or the security apparatus. On the other hand, an array of competing coalitions of social forces is integrated into the policy process of the state itself. This may lead to conflicts of interest within and among state institutions themselves, but also blur the line of demarcation between public and private spheres. To a greater or lesser extent, state agencies are reflective of the social conflicts of the market as much as they seek their own advantage among them. Divisions over policy are drawn not between states versus social groups, but between coalitions of some state agencies and their constituent interests against other coalitions made up in the same way, as well as between members of these networks versus the substantial number in most developing societies who are simply excluded. Viewed in this way, state policies are likely to be ambivalent on most issues and national development strategies result from a mixture of cooperative and conflictual behavior.

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With the disaggregation of the state and an emphasis on social groups and actors in the structures of the market, an understanding of the evolving nature of state–market interactions in relation to policy processes becomes a crucial concern. The institutionalist argument has often led to an overemphasis on static institutional as opposed to process variables as a determinant of policy outcomes.14 The statist concern with autonomy and coherence has tended to reduce the importance of processes through which state elites seek legitimacy and social support by manipulating interest groups and creating coalitions.15 By the same token, overstressing organizational variables results in institutional determinism, neglecting the politics of institution building, and obscuring the interplay of power, politics, and social relations in the development process.16 All this highlights the role of process variables over structural variables in understanding the political economy of development strategies. Our central claim is that political processes mediate between preferences and policy outcomes in a particular structural setting. There are two forms of structural variables to consider here: economic structural variables referring to patterns of production and the market, and structure as institutional patterns. Beginning with institutional structures, political interaction among social and state actors shapes them as much as institutions shape and constrain the options of agents pursuing their preferences. Likewise, social constituencies and state agents alike contest the structures of the market in line with their preferences. They do so through the formal and informal institutions which emerge through political interaction. It is not structures themselves but the politics that takes place within them that sets the contours and direction of economic development. The importance of political processes over structural variables thus requires that the institutional analysis of political economy be supplemented by political analysis.17 To understand the political dynamics of development processes, we need a link between actors, institutions, and the changing market structures and the patterns of costs and benefits they represent for specific agents. That link is the perceived self-interest of agents themselves, whether they be individuals, formal or informal groups, corporate entities, or state agencies. The relationship between individual self-interest and the collective needs of the community is the philosophical problem that so inspired Adam Smith to write his classic text in political economy.18 If the state–society package comprises the essence of the political economy of development, we must begin by analyzing the underlying configurations of interest generated by existing market structures and expressed through institutions. We must understand the ways in which these structures and institutions both constrain and drive distributive and other conflicts. By so doing we can come to grips with the material self-interest of official and private constituencies in the market against the everchanging landscape of the national and global political economies. The patterns of social relations in which the state and the market are embedded constitute the “raw materials” of the development process. The self-interest of agents is thus reflected in their policy preferences as a

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function of their positions in domestic and international economic structures. Indeed, different private sectors with contrasting economic structures will require specific and disaggregated analysis.19 A number of different strategies may be open to any one set of actors in national economies and transnational markets. Schematically, however, national industrial and financial sectors with relatively small and domestically based firms will have different preferences from sectors dominated by internationally oriented firms dependent on transnational transactions. The former might prefer the protection of national authorities and therefore choose nationally based alliances—building coalitions with state officials and like-minded private agents. The latter is likely to prefer more liberal global economic regimes to allow the free movement of goods and capital from one national economy to another. Neither case denies the role of programmatic government interests as an important variable (indeed government interests need be no more or less programmatic than those of market actors). State authorities may constrain sharply the options of some over others, or even foster and then promote one group over another, and in many cases of successful development have done so. Once material economic interests, expressed as policy preferences, are determined, the ways in which these preferences are articulated within domestic institutions (formal and informal) have to be understood. Political articulation, or how interests are organized and aggregated, constitutes the link between institutions, political actors, and policy choices. The key questions here concern how unified these coalitions of interests are and how well they can assert themselves, given the pattern of state and social institutions that act as constraints and opportunities. Unless agents are well placed with institutionalized political resources, they are unlikely to have much impact on state policy. Equally important is the organizational structure of social groups: those groups that are not only economically powerful but also internally cohesive may prove to be a potent force in the policy-making process. This last point leads to the second dimension of our argument: policy processes and the structures of the market. Depending on their individual organizational capacities and political power, the preferences of market agents and other constituencies of market societies are integrated into the institutions of the state through policy and regulatory processes. The incentives and constraints of state policy and regulation become in turn part of the decision-making landscape of market actors as they compete both economically and politically to alter state policies to their own advantage. Policy and regulation confer advantages on some and costs on others just as some are more efficient or more capable of affecting policy outcomes than others. It all has to do with resource, organizational, and political advantages. Thus, the regulatory and policy-making institutions of the state are one element of the market, one set of mechanisms through which the overall process of governance operates. Market structures are constituted as much by policy mechanisms and the political resources of the various private and public actors involved in specific policy processes as by the changing mode of market competition and economic transformation themselves.20

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Socioeconomic interactions in a political economy are managed simultaneously through patterns of competition and cooperation among market agents, on the one hand, and policy-making and regulatory activities mediated by institutional patterns (broadly defined), on the other. Social constituencies in the market enhance or protect their positions and prosperity by making simultaneous calculations through their business strategies, deploying their resources as competitors, and through their political resources in the policy processes of both the state and in less formal institutional settings. This is clearly visible in corporatist systems in Western Europe, where even labor is integrated into both state policy processes and the strategic decision-making of firms,21 or in the close integration of private firms into the system of bureaucratic management that characterizes East Asian political economies.22 Powerful interests in society may even succeed in capturing parts of the policy-making machinery of the state, and so-called public purposes may come to serve blatantly private ends. Thus, one should avoid treating the state as a free-standing entity located apart from the constituencies of the market.23 That the state exists in symbiosis with various societal actors and groups explains how private interests are integral parts of the pattern of market governance even in seemingly strong states. In short, if the evolving structure of the market in the development process is as much a phenomenon of state policy processes, through which the dynamics of social conflict and cooperation work, it is not difficult to understand the role of non-state private interests, integrated into the complex institutional fabric of the state, in shaping the direction of economic transformation. This brings us to the third dimension of the argument, concerning the changing dynamics of the state–market condominium. The politics of the state and the politics of competition and compromise among various actors, which primarily dictate policy choice and performance, vary with the pattern of material interests in national political economies and with the pattern of state–market interactions. The changing configurations of interest, mediated by both formal and informal institutions, set limits on the context in which economic development proceeds. The pattern of political authority is likely to become more amorphous and dispersed in symbiosis with the growing complexity of socioeconomic settings in which such authority is embedded. This will be the case particularly where the state has progressively delegated, voluntarily or otherwise, decision-making power to private bodies against the backdrop of global market integration, though it maintains its functions in terms of domestic political legitimacy and all the tensions that entails. If we properly understand the dynamics of the state–market condominium and all the political implications it carries for economic policy-making, it should be clear that the forms and functions of the state continue to evolve as indeed they have in the past. Institutionalists (state-centered or society-oriented), in focusing on the institutional continuity or stickiness, tend to take institutional structures largely as given without making systematic efforts to explore the underlying forces that mold and change these structures. On the one hand, although effective state intervention in economic processes may grow initially

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out of governmental bureaucracies autonomous from dominant societal interests, these very interventions are likely to lead in time to diminished state autonomy, manifestly because they provide access for social groups to penetrate the state apparatus.24 On the other hand, prior commitments to direct interventions may undermine state autonomy because affected societal interests may mobilize for the maintenance of such commitments; strong states may turn out to be weak if they cannot extricate themselves from previous interventions.25 More significant than the specifically institutional changes resulting from state action are changes in the nature of state–market condominium produced by domestic- and international-level structural market transformations. These forces, such as new systems of production, new state priorities born of balance of payments constraints, or global market integration born of a greater density of cross-border transactions, affect patterns of perceived self-interest. Thus they in turn affect the institutional structures that enable and constrain both official and private actors. In East Asia, as in many other developing and emerging market countries, the move to export orientation, the growing integration of national economies with the international system, and transition to democracy throughout the 1980s and 1990s witnessed an increase in the capacity of private business, labor, and popular sectors to organize for economic and political purposes. As their power grew and coalitions shifted, the institutional bases of previous patterns of state–market relations were eroded and the relationship of state to social constituencies transformed. The implication of this observation is that the interactive relationship between the state and market agents varies continuously as a function of changes in state interests and capacity and the relationship of state bureaucracies to the social forces of the market that result from historical dynamics.26 This debate concerning the state–market relationship in development and policy-making processes of course has its parallels in other theoretical perspectives, more specifically the coalition-centered and policy network approaches. In this chapter, we have made a strong case for reconsidering theory within the broad domain of political economy and attempted to move beyond the conventional analysis of development and policy processes in several important ways. In the first place, the state–market condominium approach is different from the coalition-centered and policy network perspectives in that it views states and markets as part of the same integrated ensemble of governance. Unlike these approaches that, while emphasizing state–market interactions, treat them as analytically distinct entities, our approach contends that states are one element of market societies through which national economic governance operates. The power structure of markets is conditioned as much and simultaneously by the political process of states as by the dynamics of market competition and change. Furthermore, our approach also diverges from the standard view of business– government relations and argues that different government agencies are likely to develop ties with different business sectors. The lines of competition and compromise over economic policy may be drawn not between the integrated state and the unified business sector but between policy alliances of different state

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agencies and their constituent sectors. The preferences of different market agents and societal actors are integrated into different state institutions through such alliances and through politicized policy processes. The parameters and incentives of state policies in turn constitute the landscape of economic decisions by a variety of private interests as they compete in the marketplace.

The state–market condominium: evidence This section will demonstrate empirically the concept of the state–market condominium. Case material on two crucial policy arenas which both comprise and condition development processes, industrial policy management, and financial market governance, will be used. The geographical focus is Korea, Taiwan, Malaysia, and Thailand, the four major newly industrializing economies in East Asia. While illustrative as opposed to exhaustive, the case studies will demonstrate the importance of interactive and recursive state–market agent relations in shaping core elements of the development process in these economies. Industrial policy management In East Asia, industrial policy represents programmatic government efforts to promote selective industrial development by deploying policy instruments and resources. It would be difficult to account for industrialization trajectories in Korea and Taiwan without considering how sector-specific state policies helped engineer comparative advantages for domestic enterprises. Equally, recent studies have disputed the claim of popular accounts that have denied the role of industrial policy in Malaysia and Thailand27 and showed the prevalence of strategic intervention in these countries.28 However, state initiatives alone do not sufficiently explain the industrial policy-making process in East Asia. What appears to have been conscious state leadership in many policy areas is in fact the complex interplay of state and societal actors. Changes in industrialization strategies result from state–market networks reconciling particularistic interests with the broader needs of national economic development.29 In Korea, the transition from import-substitution to export-led growth was shaped as much by state-initiated reforms as by the alliance between state and social elites which resulted in an interpenetration of each other’s interests. In the 1950s, private-sector actors virtually captured the Syngman Rhee regime. Political elites built a patronage constituency and squeezed campaign funds while well-connected business people accumulated capital in protected industries through privileged access to various economic rents.30 Even during the 1960s and 1970s, a period of apparent state dominance which marked the Park Chung-Hee regime, the “sword-won alliance”31 enabled big business to project its demands into public policy arenas. The articulation of private interests was facilitated by the growing weight of chaebol firms and by the close and rentseeking network between Park, his associates, and private business.32 The contour of industrial policy adopted during this period—the intensive use of

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sector-specific measures, the promotion of heavy industries and financial repression—was consistent with the preferences of the chaebols as well as serving the political and economic ends of the military junta. Industrial policy in Southeast Asia emerged and evolved in symbiosis with competition over wealth and power that was intimately bound to the interactive trajectory of state–market agents. During the 1970s and 1980s, what underpinned socioeconomic transformations and corresponding changes in industrial policy in Malaysia was an on-going political process through which interethnic conflicts reconciled. While the state in Malaysia might be autonomous from the politically subservient Chinese and Indian minority communities, it was beholden to the bumiputera or indigenous community and prompted by this structural imperative to pursue Malay communal interests.33 This was clearly manifest in the switch to a state-led strategy in the aftermath of ethnic riots in 1969 and the adoption of industrial policy initiatives contained in the New Economic Policy.34 Throughout the 1970s, the intensification of state intervention and the promotion of statutory bodies as proxies for Malay entrepreneurs were intended to advance the agenda of economic redistribution that linked with the New Economic Policy.35 The election of Prime Minister Mahathir in 1981 ushered in the heavy industrialization drive that championed statesponsored and Malay-managed capital-intensive projects. At its broadest, the new industrial policy represented not only the continuation of the New Economic Policy agenda but also the efforts of state elites to satisfy the economic aspirations and distributive demands of Malay business groups. The distinction between the interests of the state and the Malay social elite became blurred, as the improved position of the latter was contingent on state largesse.36 A similar state–market ensemble shaped the general contour of industrial policy in Thailand. What characterized the Thai industrialization process, especially in the 1960s and 1970s, was that import substitution, which never became the main thrust of development strategy, ran parallel to and was subsidiary to agricultural-export-led growth.37 The government promoted agricultural exports partly because it viewed foreign trade as the main engine of growth and partly because revenues from such trade, particularly agricultural exports, accounted for a significant part of state income during this period. Import substitution, on the other hand, was not so much the legacy of economic nationalism that had prevailed in the 1930s and 1940s as the result of government needs to raise more revenue from import tariffs and of the long-term state policy to avoid heavily taxing the agricultural sector.38 The policy interests of state officials also reflected underlying social arrangements and private-sector preferences. The two apparently conflicting industrialization strategies could be implemented in large part because it had a political constituency that made it feasible and legitimate. The policy had the support of dominant private actors concentrated in the financial and commercial communities that developed cross interests in both agricultural and import-substituting sectors. Support from private bankers derived from their extensive involvement in agricultural exports and from the predominance of trade financing in their

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portfolios.39 In the meantime, banks and financial firms tied up substantial assets in protected industrial sectors and were even directly involved in such sectors. Thai financial and industrial capital, together with their bureaucratic and political patrons who benefited from the grant of licences and the rents such grants could create, had a vested interest in keeping this dual strategy in place. The fragmented structure of state micro-economic institutions and the prevalent practice of clientelism in Thai politics facilitated the projection of powerful private interests into the policy-making process.40 The 1980s and 1990s witnessed dramatic changes in the state–market ensemble of industrial governance in East Asia. The sustained process of economic transformation increased the weight of private business in aggregate economic activity. In parallel with their increased structural power, private-sector actors were able to enhance their organizational resources and effectively employ these resources for economic and political purposes. The increasing integration of the national economy with the international financial and trade systems only served to reinforce the position of private industrialists as crucial economic agents and deepened the dependence of the state upon them for national development in an era of globalization. Equally important, the transition to democracy across East Asia expanded the political space for private-sector actors who, by virtue of their structural and organizational capacities, seized growing controls over parliamentary and electoral processes and became more assertive politically. These changes in the position of private business in the national political economy transformed the state–market condominium with a significant impact upon industrial policy management. In Korea, as the chaebols grew into formidable economic actors and contenders for political power in the 1980s, they began to assert themselves more strongly in public policy.41 Major changes could hardly be developed and implemented without the endorsement and cooperation of the big business sector. In the midst of the economic crisis of the early 1980s, the government attempted to reorganize the heavy and chemical industrial sectors that contributed to a variety of economic ills. The reorganization, however, failed to achieve its intended objectives, mainly because of foot-dragging or refusal to cooperate on the part of the chaebols. By contrast, the disposition of ailing firms as part of government efforts to rationalize the industrial structure during the mid- and late 1980s, which favored many leading chaebols in the form of business expansion and subsidized loans, went ahead without a major hitch. These two contrasting episodes of industrial adjustment attest to increasing chaebol penetration of the state apparatus. While the bankruptcy of the Kukje group in 1985 is often cited as the evidence of continued state control over private-sector behavior,42 it has been shown in recent empirical studies to be more of a case in which political elites dissolved Kukje to reward other chaebol financial contributors.43 With the chaebols integrated to the policy-making institutions of the state, the government–business relationship deteriorated into rent-seeking networks in which powerful private interests appropriated the mantle of public policy for their own purposes. Korean state agencies were not entirely hostage to big

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business, but economic strategies were increasingly aligned with chaebol preferences. The result was inconsistent and ineffective policy reorientation. In the late 1980s and early 1990s, the government moved away from industrial targeting and investment control due to the efforts of the chaebols to seek greater freedom in their operations as well as to external political pressures for neoliberal reforms. Yet it was reluctant to abandon financial and other instruments that allowed it to promote the competitiveness of Korean firms and moved slowly with direct financial decontrols that threatened the interests of the chaebols. The oscillation between laissez-faire and interventionist policies contributed to the worsening of structural problems in the corporate sector that rendered the Korean economy vulnerable to the financial shocks of 1997–8.44 In Taiwan, as in Korea, the 1980s ushered in the gradual replacement of the dirigiste mode of industrial policy management by a more liberal approach. Selective liberalization coincided with the ascending political power of private business and with the enhanced ability of their representative organizations to challenge the dominant position of the bureaucracy in public policy arenas.45 Private influences, particularly strong in sectoral and distributive policies, weighed heavily upon the direction of industrial reforms and adjustments. The basic orientation of major policy shifts, while largely initiated by the government in response to market and political pressures, reflected conflicts and compromises among state officials and business elites. Policy reforms appeared to succeed in areas which benefited large business groups, such as overseas investment decontrols, the removal of entry barriers to protected industries, and the privatization of state enterprises.46 But deregulatory initiatives had to be modified and compensation packages were needed to smooth out the reform process in some sectors, specifically agriculture and agro-processing, where business opposition seemed to be irresistible.47 While the state still maintained a capacity to direct development strategy, the transition to consolidated democratic rule and continued economic deregulation in the 1990s increasingly saw state–business interaction emerge as an integrated mechanism of governance that drove the process of structural change. The changing nature of industrial and economic policies in Malaysia and Thailand during the 1980s and 1990s was also underpinned by the realignment of interactive relationships between state and social elites. Nurtured under the protection of various policy favors, a powerful Malay business community emerged in the national economy during the 1980s and became increasingly influential in the policy-making process.48 The increased economic and political power of Malay business stemmed not so much from their entrepreneurial dynamism as from their symbiotic and reciprocal connections with state elites and from the various rents such connections created. Business elites provided political leaders with financial support in return for policy largesse delivered by their political patrons.49 This practice of clientelism resulted in a rent-seeking “state–capital alliance”50 and the significant interpenetration of public and private interests. The heavy industrialization drive went awry in the mid-1980s when Malaysia

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experienced a severe economic recession. This prompted the government to shift towards industrial deregulation and economic liberalization by, among others, privatizing state enterprises, revamping the industrial investment regime, and adopting a more export-oriented strategy. The liberal and deregulatory line of economic policy management continued throughout the rest of the 1980s and well into the 1990s. The economic crisis and the changing global and regional dynamics certainly provided the impetus for policy reforms. But the direction and nature of these reforms correlated primarily with the configuration of the state–market condominium. Top political leaders saw reforms as an effective way to tide over the recession, get the better of the opposition, and secure their political future. On the other hand, Malay business interests hankered for deregulation in order to gain the broader space for their business operations.51 Economic liberalization was politically feasible, because the selective way it was implemented benefited the Malay business elite.52 The convergence of state and business interests thus underpinned and sustained the process of industry policy reform. In Thailand, the agriculture-based growth was thrown into disarray by the plummeting prices of primary commodities on the world market during the mid- and late 1970s. After a brief infatuation with industrial deepening,53 the government moved to reorient its overall development strategy towards manufacturing-export-led industrialization in the aftermath of the economic crisis of the early 1980s.54 External market pressures aside, one important driving force behind the policy change was a group of externally oriented and labor-intensive industries that outgrew the domestic market and became leading performers in the drive to export in the 1970s and 1980s. Allied with them was the powerful financial community that viewed these industries as enjoying growth potential and began to establish close ties with them. The influence of private industrialists and financiers on policy was ascendant during this period against the backdrop of the political shift away from the bureaucratic polity.55 At the same time, the government–business relationship became more institutionalized in the form of public–private consultative forums which, combined with the increased organizational capacity of business associations, facilitated the projection of private-sector preferences into the policy-making process. Industrial and financial corporate conglomerates with strong interests in export-led growth found a receptive audience in the technocrats who had been arguing for such reorientation for a long time. This alliance emerged as the winner from policy conflicts among state and societal actors who had a vested interest in the protectionist policy regime, and underpinned the high growth period through the early 1990s.56 The export-oriented alliance between business elites and technocrats proved to be short-lived, however. During the early and mid-1990s, Thai firms were facing new and low-cost competitors in export markets and began to lose their comparative advantage in labor-intensive products. Many Thai firms were unable to upgrade their export technologies and began to focus more on domestically based service and heavy industries.57 Private financiers, infatuated with a

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variety of new business opportunities opened up by financial liberalization, began to turn away from their export-oriented clients. Technocrats, whose policy-making authority increasingly came under threat with the transition to democracy, gradually lost control over industrial policy management. Business people, many of whom became leading politicians and even took the helm of important line ministries, employed their political resources, through state policies, to seek their own particularistic interests. The result was the rapid decline in the international competitiveness of Thai firms and the distorted industrial structure that constituted a crucial cause of the financial crisis in the late 1990s.58 Financial market governance As with industrial policy management, the interplay of public and private interests has had a fundamental role in defining the purposes of financial and regulatory policies in East Asia. The objectives of these policies, designed through the politics of the state mediated by the interaction of state and societal interests and institutions, have determined the terms of market entry and competition, the mode and nature of regulation, and the level of openness to capital flows. While state agencies may sometimes have confronted market players with their autonomous policy interests, private-sector preferences are converted, through state–market interactions, into the evolving structure of financial governance. There is ample evidence of the ways in which state policies and market interests are intertwined in the process of financial governance in East Asia. Korea’s financial history, particularly during the 1960s and 1970s, was that of extensive state involvement in delimiting the scope and nature of market operations. Financial repression, in which banks were state-owned, interest rates were kept well below the market rate and credit was allocated at the behest of the government, served as a crucial tool for achieving the key economic and political objectives of the military junta.59 This evolved in line with the interests of state elites, but also incorporated the preferences of dominant private actors. The chaebols, which were integrated into the developmental coalition of the Park regime, were able to influence the direction of financial market development. Their policy influence derived partly from the reliance of the state upon big business to deliver rapid industrial growth. The structural power of the chaebols was further enhanced, as financial repression led to the concentration of credit in the corporate sector and a fragile banking system and as the government was bound by these weaknesses to respond favorably to private demands.60 Heavy reliance upon borrowed funds as the dominant source of industrial finance caused big business to develop a direct stake in low interest rates and preferential credit. As they came to achieve an oligopolistic position across the Korean economy over the 1970s, the chaebols employed their structural and organizational resources to actively champion their interests in financial policy. The legacies of state intervention, which were epitomized in the economic and political power of the chaebols, set the parameters within which the Korean

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government formulated and implemented financial market liberalization in the 1980s and 1990s. The liberalization, which started in the wake of the economic crisis of the early 1980s, ran a gradual and erratic course. While the non-bank financial sector developed rapidly and entry barriers were deregulated at the early stage of the reform process, interest rate liberalization, policy loan reduction, and capital decontrol followed a slow and selective process. This pattern certainly reflected the interests of bureaucrats in using continued financial controls to promote industrial growth and to entrench their regulatory power.61 Yet such an emphasis is seriously incomplete. The powerful chaebols, by dint of their symbiotic ties with the ministries of finance and industry that enjoyed a dominant status in the state policy-making hierarchy, were well positioned to translate demands into policy change. The chaebols opposed the removal of financial controls and the liberalization of foreign direct investment for fear of higher interest rates, increased competition, and diluted ownership. But they supported those reform measures that allowed them to own financial institutions and provided them with access to short-term, cheap foreign funds. The mixed position of big business partly accounts for the selective pattern of financial liberalization in Korea. This pattern led to haphazard and inconsistent reform policies and outcomes that took a heavy toll on financial stability in the late 1990s.62 Like its Korean counterpart, the Taiwan government had also exercised, at least until the late 1980s, tight control over the financial sector and capital flows. Unlike in Korea, however, financial control was designed to maintain macro-economic stability rather than to promote the growth of private entrepreneurship and targeted industrial sectors. Fiscal and technological support was far more crucial than preferential credit in the overall inventive structure for industrialization.63 Two economic and political motives lay behind this policy choice. The Chinese hyperinflation of the late 1940s that contributed to the defeat of the Kuomintang (KMT) on the mainland made political leaders strongly averse to using finance for industrial policy purposes for fear of causing inflation. More important, the restrained use of credit policy represented the official attempt to contain the growth of big business that could challenge the hegemony of the KMT over Taiwanese society and enlarge and sustain a broad distributive coalition in order to limit the social base of the opposition.64 In this sense, the less repressed mode of financial policy stemmed not so much from the preferences of state elites as from the dynamics of coalition politics. With the launch of financial market liberalization and the transition to democratic rule in the 1980s and 1990s, the tightly controlled regime of financial policy governance began to change dramatically. Private influences over both sectoral and financial policies were on the rise, as electoral politics encouraged the ruling KMT party to court business groups for financial support and thus became more responsive to their demands. Cracks also began to appear in the once closely knit macro-economic bureaucracy, as emerging factionalism within the KMT eroded the command of political leaders over state agencies and fostered interagency conflicts, thus creating the opportunity for private interests to infiltrate the state apparatus.65 While financial technocrats did not

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entirely lose their capacity to direct the liberalization process, the implementation of important reform measures was increasingly contingent on the negotiated compromises between state officials and business leaders. Financial authorities set high minimum capital requirements, for instance, when they decided to deregulate entry barriers to the banking sector. Under intense pressure from business groups that were keen to own financial institutions, however, the government issued fifteen licenses for new banks, instead of the planned six. Relatively strict supervision was exercised over commercial banks whereas largely privately owned credit cooperatives, which were periodically used to finance family businesses and local elections, were subject to lax regulation and suffered from growing nonperforming assets.66 Although Taiwan tided over the financial crisis of 1997–8 by dint of its closely regulated foreign capital regime and abundant international reserves,67 the overcrowded banking sector and recurring failures of credit cooperatives posed serious threats to the long-term stability and development of the financial system. During the early years of the postwar period, Malaysia represented a case of relatively low degree of financial repression.68 This policy orientation may be attributable to the free trade regime associated with the British heritage, government interests in promoting commodity exports, the domination of the financial sector by foreigners and Chinese, and the lack of a strong industrial lobby for preferential credit. With the installation of the New Economic Policy in 1970, however, state intervention in financial markets became increasingly pervasive and was motivated by the political objective of developing bumiputra (literally sons of the earth, or local community) interests. In its efforts to promote private Malay entrepreneurs, the government mandated considerable bank lending to the “priority sectors,” which mainly included Malay-controlled industrial and commercial entities.69 In parallel with active state involvement in credit allocation, the government engineered dramatic changes in the ownership structure of the banking sector. By the late 1980s, most of the largest banks had fallen into the hands of bumiputras and government companies whose ownership and managerial control of banking services had increased to as high as 70 percent.70 One principal consequence of state promotion of Malay interests in the financial sector was the emergence of influential and well-connected private bankers and all the policy and regulatory problems that went with it. Strong government interests in advancing the interethnic redistributive agenda and supporting Malay-owned institutions tended to subordinate the broad needs of industrial and financial development to the particularistic interests of the private banking community. Despite the proclaimed New Economic Policy objective of promoting productive investments in manufacturing, banks and finance companies constantly extended the bulk of their credit to the property, commercial, and other sectors in which quick profits could be made.71 The buoyant growth of the stock market in the 1980s also drew significant financial institution funds to share purchases. The large and growing exposure to speculative and high-risk activities, combined with the prevalence of moral hazard that sprang from state intervention and weak and fraudulent management, often landed financial insti-

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tutions in deep crisis.72 The process of financial market liberalization that gained the momentum during the 1980s and 1990s further encouraged shortterm behavior of banks and finance companies and their lending to property development and share trading, compromising prudential regulation and increased the vulnerability of the financial system to external shocks.73 Among the four cases under consideration here, Thailand had perhaps the lowest level of financial repression. During much of the postwar period, the government operated a minimal preferential credit scheme, left commercial banks largely in private hands, and imposed only loose controls over capital movements.74 This hands-off approach to financial sector governance had crucial institutional and ideological correlates within the macroeconomic bureaucracy. Financial policy-making in Thailand had been firmly placed, until the 1980s, under the control of autonomous and prestigious technocrats, particularly in the Bank of Thailand (BOT). These technocrats, who cherished the longestablished tradition of financial conservatism and trade liberalism, shied away from extensive intervention in the financial market for fear of breeding patronage and corruption.75 Support for the more liberal mode of financial policy management also came from Thailand’s most powerful business interests centered in the private banking community. The social bases of the financial orthodoxy manifested themselves in the affinity between central and private bankers, created and sustained by similar economic interests, common development experiences, and close institutional linkages.76 As mentioned earlier, Thai commercial banks were mainly involved in commodity exports and foreign exchange transactions, especially during the early years of their operations. They thus shared the preference of financial technocrats for minimal intervention and loose capital controls. Shared interests were reinforced by the collaboration between public and private sectors in their early efforts to promote the national banking industry in the face of foreign dominance during the Second World War. The 1950s and 1960s represented a period of active and close interactions between central and private bankers and the institutionalization of such interaction in various forms. Good examples in point are the founding of the Thai Bankers’ Association, with the enthusiastic support of technocrats, and the monthly meetings jointly organized by the Association and the central bank. Through these institutionalized connections, financial authorities were able to set forth their policies, influence the behavior of private financiers, and seek their cooperation more effectively. In return, the BOT normally supported the views of private bankers and granted them direct access to the policy-making process.77 The balance of power between financial technocrats and private bankers, however, shifted towards the favor of the latter during the 1980s and 1990s. As an increasing number of eminent private bankers entered the leading echelons of the economic bureaucracy against the backdrop of the on-going transition to democratic rule, the private financial community saw its access to public policy improve. In the meantime, financial market liberalization, launched in the early 1980s, undercut the ability of the BOT to control the behavior of private firms

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and rendered central bankers increasingly dependent upon private financiers for policy support.78 These changes, coupled with the outmoded management structure and factional conflicts within the BOT,79 undermined the influence of central bankers in the policy community. The diminished authority of technocrats meant that they could no longer possess the institutional cohesion to pursue their policy objectives independent of distributive demands. This provided the opportunity for powerful private actors to usurp the mantle of public policy for their particularistic interests. The consequences of growing private capture were manifest in the frustrated official attempts to transform the oligopolistic structure of the banking sector, an approach to financial desegmentation that favored private bankers and their affiliates over others and, most significantly, the mismanagement of capital decontrol.80 The poorly implemented process of financial liberalization also reflected the declining regulatory capacity of the BOT. The Nukul Commission, established to investigate the causes of the financial crisis, found an increasing tendency for central bankers to exercise supervisory forbearance that stemmed from the weakened power of the BOT to enforce regulatory rules in isolation from political pressures.81

Conclusion This chapter has argued the necessity of a conceptual leap to rethink our understanding of states and markets in the process of economic development. The central proposition is that we should abandon models that portray state and market as distinct and opposing dimensions in tension with one another. Empirically they are never found singly and together constitute a broad pattern of governance: the ways in which interests are structured, power is exercised, and economic policy choices are made. While one may make a case for maintaining the analytical distinction for clarity of understanding, we contend that they should be regarded as an integrated ensemble—a state–market condominium. This concept has been empirically demonstrated through case material on four major East Asian industrializing economies. In each of Korea, Taiwan, Malaysia, and Thailand, the interests of market agents were integrated into the state. This occurred asymmetrically in accordance with their structural power and organizational capacity, through their close relationship to state institutions in the policy-making process and in the continuing pattern of public–private sector interactions. This was particularly prevalent in industrial policy management and financial market governance, affecting the terms of market entry, the extent of foreign commercial involvement, the level of competition, and the mode and nature of regulation. At different times in the postwar history of East Asian development, the interactive relationship between state officials and market actors constituted the crucial political and institutional underpinning of economic success. The on-going process of political transition and economic liberalization in the 1980s and 1990s, however, saw dominant private actors gradually establish their collective interests over the state and increasingly capture public policy arenas through close business–government connections.

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This led, in a varying degree, to institutional failures and serious problems of economic policy management in East Asia during the late 1990s. The concept of the state–market condominium permits a more realistic assessment of the possibilities and constraints of the political economy of development. Maintaining a politically sustainable and welfare-enhancing balance between private interests and public purposes is possible through a considerable strengthening of democratic institutions of accountability at all the levels of governance, particularly in the economic domain. This is of course easier said than done, and would certainly run into the fierce opposition of dominant private interests that most enjoy the rent-seeking structures which market and notso-market relations have bestowed on them. The difficulty of restructuring the oligopolistic corporate sector and taming big business in some East Asian crisis countries has attested to such opposition. These difficulties, however, should not diminish the potential advantages of the successful operations of the state–market condominium that can keep the process and mechanism of economic governance inclusive. It is most likely that such operations would significantly reduce the scope for pursuing a narrow private agenda on the part of public and private-sector actors. Democratic processes should be understood as much for keeping private interests accountable for the public interest functions they perform in our market societies, as they are for keeping politicians and governments accountable to the electorate.

Notes 1 The paradigmatic status of the model in the international policy community is reflected in the recognition, if only partial and grudging, of the importance of the state in economic development from such neoliberal bulwarks as the World Bank. See World Bank, The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press, 1993. 2 See, for example, C. Clark and K. C. Roy, Comparing Development Patterns in Asia, Boulder, CO: Lynne Rienner, 1997; R. F. Doner and G. Hawes, “The political economy of growth in Southeast and Northeast Asia,” in M. Dorraj (ed.), The Changing Political Economy of the Third World, Boulder, CO: Lynne Rienner, 1995, pp. 145–85; C. I. Moon and R. Prasad, “Networks, politics, and institutions,” in S. Chan, C. Clark, and D. Lam (eds), Beyond the Developmental State: East Asia’s Political Economies Reconsidered, New York: St Martin’s Press, 1998, pp. 9–24; M. Woo-Cumings (ed.), The Developmental State, Ithaca, NY: Cornell University Press, 1999. 3 P. Evans, Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press, 1995; L. Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era, Cambridge: Polity Press, 1998. 4 See R. F. Doner, “Limits of state strength: toward an institutionalist view of economic development,” World Politics, 1992, vol. 44, no. 3, pp. 398–431; Doner and Hawes, “The political economy”; E. Y. Kim, “The developmental state and the politics of business interest associations: the case of the textile industry in South Korea,” Pacific Focus, 1993, vol. 8, no. 2, pp. 31–60; D. Okimoto, Between MITI and the Market: Japanese Industrial Policy for High Technology, Stanford, CA: Stanford University Press, 1989. 5 See C. Clark and S. Chan, “Market, state, and society in Asian development,” in Chan, Clark, and Lam, Beyond the Developmental State, pp. 25–37; Clark and Roy, Comparing Development Patterns.

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6 The review of the recent revisionist literature has been necessarily brief, leaving out much subtlety and variety among the perspectives discussed here. It has also neglected emerging sociological studies that attribute divergent economic outcomes in East Asia to different organizational structures that shape interfirm interactions and industrial patterns and the sectoral approach that focuses on the organizational features of industrial sectors as a determinant of state autonomy and capacity. See M. Orrù, N. W. Biggart, and G. G. Hamilton, The Economic Organization of East Asian Capitalism, Thousand Oaks, CA: Sage, 1997; D. M. Shafer, Winners and Losers: How Sectors Shape the Development Prospects of States, Ithaca, NY: Cornell University Press, 1994. 7 L. Weiss and J. M. Hobson, States and Economic Development: A Comparative Historical Analysis, Cambridge: Cambridge University Press, 1995, p. 170. 8 G. Rodan, K. Hewison, and R. Robison, “Theorising South-East Asia’s boom, bust, and recovery,” in G. Rodan, K. Hewison, and R. Robison (eds), The Political Economy of South-East Asia: Conflicts, Crises and Change, Melbourne: Oxford University Press, 2001, p. 6. 9 G. R. D. Underhill, “State, market, and global political economy: genealogy of an (inter-?) discipline,” International Affairs, 2000, vol. 76, no. 4, pp. 805–24; G. R. D. Underhill, States, Markets and Governance: Private Interests, the Public Good and the Democratic Process, Amsterdam: Vossiuspers UvA, 2001. 10 K. Polanyi, The Great Transformation, Boston, MA: Beacon Press, 1944. 11 The authors are indebted to Richard Robison for this point. 12 J. S. Migdal, State in Society: Studying How States and Societies Transform and Constitute One Another, Cambridge: Cambridge University Press, 2001. 13 M. Moran, “Financial markets,” in J. Simmie and R. King (eds), The State in Action: Public Policy and Politics, London: Pinter, 1990, pp. 43–58. 14 P. Gourevitch, “The second image reversed: the international sources of domestic politics,” International Organization, 1978, vol. 32, no. 4, p. 904. 15 S. Haggard and C. I. Moon, “Institutions and economic policy: theory and a Korean case study,” World Politics, 1990, vol. 42, no. 2, pp. 214–15; R. Wade, “East Asia’s economic success: conflicting perspectives, partial insights, shaky evidence,” World Politics, 1992, vol. 44, no. 2, pp. 307–9. 16 R. F. Doner, “Approaches to the politics of economic growth in Southeast Asia,” Journal of Asian Studies, 1991, vol. 50, no. 4, pp. 818–49; Rodan et al., “Theorising South-East Asia,” pp. 6–7. 17 Moon and Prasad, “Network, politics, and institutions”; Wade, “East Asia’s economic success.” 18 Underhill, States, Markets and Governance, pp. 7–12. 19 S. Haggard, “Business, politics and policy,” in A. J. MacIntyre (ed.), Business and Government in Industrializing Asia, St Leonards, NSW: Allen and Unwin, 1994, pp. 294–5; H. Milner, Resisting Protectionism: Global Industries and the Politics of International Trade, Princeton, NJ: Princeton University Press, 1988, pp. 14–17. 20 G. R. D. Underhill, Industrial Crisis and the Open Economy: Politics, Global Trade and the Textile Industry in the Advanced Economies, Basingstoke: Macmillan, 1998, pp. 18–25. 21 See P. J. Katzenstein, Corporatism and Change: Austria, Switzerland, and the Politics of Industry, Ithaca, NY: Cornell University Press, 1984; P. J. Katzenstein, Small States in World Markets: Industry Policy in Europe, Ithaca, NY: Cornell University Press, 1985. 22 See Okimoto, Between MITI and the Market; Weiss, The Myth of the Powerless State. 23 T. Mitchell, “The limits of the state: beyond statist approaches and their critics,” The American Political Science Review, 1991, vol. 85, no. 1, pp. 77–96. 24 See D. Rueschemeyer and P. B. Evans, “The state and economic transformation: toward an analysis of the conditions underlying effective intervention,” in P. B. Evans, D. Rueschemeyer, and T. Skocpol (eds), Bringing the State Back In, Cambridge: Cambridge University Press, 1985, pp. 44–77.

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25 See Haggard and Moon, “Institutions and economic policy”; G. J. Ikenberry, “The irony of state strength,” International Organization, 1986, vol. 40, no. 1, pp. 133–6. 26 A. Kohli and V. Shue, “State power and social forces: on political contention and accommodation in the Third World,” in J. S. Migdal, A. Kohli, and V. Shue (eds), State Power and Social Forces, New York: Cambridge University Press, 1994, pp. 293–326. 27 D. M. Leipziger and V. Thomas, Lessons of East Asia: An Overview of Country Experience, Washington, DC: World Bank, 1993; World Bank, The East Asian Miracle. 28 See Jomo K. S. “Introduction: growth and structural change in the second-tier Southeast Asian NICs,” in Jomo K. S. (ed.), Southeast Asia’s Industrialization: Industrial Policy, Capabilities and Sustainability, Basingstoke: Palgrave, 2001. 29 Doner and Hawes, “The political economy.” 30 L. P. Jones and I. Sakong, Government, Business and Entrepreneurship in Economic Development: The Korean Case, Cambridge, MA: Harvard University Press, 1980, pp. 269–78; K. D. Kim, “Political factors in the formation of the entrepreneurial elite in South Korea,” Asian Survey, 1976, vol. 16, no. 5, pp. 465–77. 31 T. J. Cheng, “Political regimes and development strategies: South Korea and Taiwan,” in G. Gereffi and D. L. Wyman (eds), Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia, Princeton, NJ: Princeton University Press, 1990, pp. 139–78. 32 D. Kang, “Bad loans to good friends: money politics and the developmental state in South Korea,” International Organization, 2002, vol. 56, no. 1, pp. 185–93; E. M. Kim, Big Business, Strong State: Collusion and Conflict in South Korean Development, 1966–1990, Albany, NY: University of New York Press, 1997, pp. 135–66. 33 See A. Bowie, Crossing the Industrial Divide: State, Society, and the Politics of Economic Transformation in Malaysia, New York: Columbia University Press, 1991; A. Bowie and D. Unger, The Politics of Open Economies: Indonesia, Malaysia, the Philippines, and Thailand, Cambridge: Cambridge University Press, 1997, pp. 67–97. 34 The primary objective of the New Economic Policy was to empower Malays politically as well as economically, as state elites interpreted the riots as being the result of unequal distribution of wealth and power among different ethnic communities. Its major ingredient was the requirement that corporate equities be redistributed from 1971 levels of 4 percent held by Malays, 34 percent by non-Malays (mainly Chinese and Indians), and 62 percent in the hands of foreigners to a 30:40:30 ratio by 1990. 35 Bowie and Unger, The Politics of Open Economies, pp. 78–82; R. Rasiah and I. Shari, “Market, government and Malaysia’s New Economic Policy,” Cambridge Journal of Economics, 2001, vol. 25, no. 2, pp. 57–78. 36 E. T. Gomez and Jomo K. S., Malaysia’s Political Economy: Politics, Patronage and Profits, Cambridge: Cambridge University Press, 1997; Jomo K. S. and E. T. Gomez, “The Malaysian development dilemma,” in M. H. Khan and Jomo K. S. (eds), Rents, Rentseeking and Economic Development: Theory and Evidence in Asia, Cambridge: Cambridge University Press, 2000, pp. 274–303. 37 Jomo K. S. et al., Southeast Asia’s Misunderstood Miracle: Industrial Policy and Economic Development in Thailand, Malaysia, and Indonesia, Boulder, CO: Westview Press, 1997, pp. 57–66; Pasuk P. and C. Baker, Thailand’s Boom, Chiang Mai: Silkworm Books, 1996, pp. 60–3. 38 Jomo et al., Southeast Asia’s Misunderstood Miracle, p. 60. 39 R. F. Doner and D. Unger, “The politics of finance in Thai economic development,” in S. Haggard, C. H. Lee, and S. Maxfield (eds), The Politics of Finance in Developing Countries, Ithaca, NY: Cornell University Press, 1993, pp. 93–122. 40 S. Christensen, D. Dollar, Ammar S., and P. Vichyanond, Thailand: The Institutional and Political Underpinnings of Growth, Washington, DC: World Bank, 1993; R. F. Doner and A. Ramsay, “Rent-seeking and economic development in Thailand,” in Khan and Jomo, Rents, pp. 145–81.

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41 Kim, Big Business, pp. 167–212; C. I. Moon, “Changing patterns of business–government relations in South Korea,” in Macintyre, Business and Government, pp. 142–66. 42 The Kukje group, the seventh largest chaebol, ran into financial trouble because of its serious cash flow problems and mounting short-term debts. Its financial woes were exacerbated by the economic recession of the early 1980s. The refusal of the Chun regime to approve emergency bank loans to cover Kukje’s debts eventually led to its demise. 43 Kim, Big Business, pp. 200–3; J. Schopf, “An explanation for the end of political bank robbery in the Republic of Korea: The T + T Model,” Asian Survey, 2001, vol. 41, no. 5, pp. 693–715. 44 H. J. Chang, H. J. Park, and C. G. Yoo, “Interpreting the Korean crisis: financial liberalisation, industrial policy and corporate governance,” Cambridge Journal of Economics, 1998, vol. 22, no. 6, pp. 735–46; J. Mo and C. I. Moon, “Democracy and the origins of the 1997 Korean economic crisis,” in J. Mo and C. I. Moon (eds), Democracy and the Korean Economy, Stanford, CA: Hoover Institution Press, 1999, pp. 171–98. 45 Y. H. Chu, “The realignment of business–government relations and regime transition in Taiwan,” in MacIntyre, Business and Government, pp. 113–41; Y. H. Chu, “Surviving the East Asian financial storm: the political foundation of Taiwan’s economic resilience,” in T. J. Pemple (ed.), The Politics of the Asian Economic Crisis, Ithaca, NY: Cornell University Press, 1999, pp. 193–7; Q. Tan, “Democratization and bureaucratic restructuring in Taiwan,” Studies in Comparative International Development, 2000, vol. 35, no. 3, pp. 48–64. 46 T. J. Cheng, “Transforming Taiwan’s economic structure in the 20th century,” The China Quarterly, 2001, no. 165, pp. 34–6; Chu, “The realignment of business– government relations,” pp. 127–8. 47 Cheng, “Transforming Taiwan’s economic structure,” pp. 34–5; L. M. Hsueh, C. K. Hsu, and D. H. Perkins, Industrialization and the State: The Changing Role of the Taiwan Government in the Economy, Cambridge, MA: Harvard Institute for International Development, 2001, p. 72. 48 See A. Bowie, “The dynamics of business–government relations in industrializing Malaysia,” in MacIntyre, Business and Government, pp. 167–94. 49 Gomez and Jomo, Malaysia’s Political Economy, pp. 117–65; Jomo and Gomez, “The Malaysian development dilemma,” in Khan and Jomo, Rents. 50 B. T. Khoo, “The state and the market in Malaysian political economy,” in Rodan et al., The Political Economy of South-East Asia, p. 190. 51 G. Felker, “The politics of industrial investment policy reform in Malaysia and Thailand,” in Jomo, Southeast Asia’s Industrialization, 129–82; Jomo and Gomez, “The Malaysian development dilemma,” pp. 291–2. 52 See Bowie, “The dynamics,” pp. 188–90; Gomez and Jomo, Malaysia’s Political Economy, pp. 75–116. 53 Thailand’s experiment with industrial deepening was epitomized in the ill-fated East Seaboard Project (ESB). Launched in 1981 to utilize the natural gas found in the Gulf of Thailand, the ESB focused on petrochemical and steel industries. This heavy industrialization scheme came apart, however, even before being fully implemented. Steel and petrochemical projects were either scaled back, shelved or simply dropped. This was due to the lack of financial commitment from major commercial banks and opposition of macro-economic technocrats as well as to the recession of the early 1980s. See R. J. Muscat, The Fifth Tiger, Armonk, NY: M. E. Sharpe, 1994; Pasuk and Baker, Thailand’s Boom and Bust. 54 See R. F. Doner and Anek L., “Thailand: economic and political gradualism,” in S. Haggard and S. Webbs (eds), Voting for Reform, New York: Oxford University Press, 1994; Jomo et al., Southeast Asia’s Misunderstood Miracle. 55 Simply put, the bureaucratic polity in Thailand, as defined by Fred Riggs, refers

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60 61

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to the political system in which bureaucratic forces, mainly the military and bureaucratic agencies, were dominant in politics and policy-making whereas extrabureaucratic actors and groups remained weak and subordinate. See F. Riggs, Thailand: The Modernization of a Bureaucratic Polity, Honolulu: East-West Center Press, 1969. Anek L., “The politics of structural adjustment in Thailand: a political explanation of economic success,” in A. J. MacIntyre and K. Jayasuriya (eds), The Dynamics of Economic Policy Reform in South-East Asia and the South-West Pacific, Singapore: Oxford University Press; 1992, pp. 32–49; Pasuk P., “Technocrats, businessmen and generals,” in MacIntyre and Jayasuriya, The Dynamics of Economic Policy Reform, pp. 10–31. Doner and Ramsay, “Rent-seeking,” pp. 168–9; Pasuk P. and C. Baker, “The political economy of the Thai crisis,” Journal of the Asia Pacific Economy, 1999, vol. 4, no. 1, 199–200. R. F. Doner and A. Ramsay, “Thailand: from economic miracle to economic crisis,” in K. D. Jackson (ed.), Asian Contagion: The Causes and Consequence of a Financial Crisis, Boulder, CO: Westview Press, 1999, pp. 145–81; Doner and Ramsay, “Rent-seeking.” Y. C. Park, “The role of finance in economic development in South Korea and Taiwan,” in A. Giovannini (ed.), Finance and Development, Cambridge: Cambridge University Press, 1993, pp. 121–57; J. E. Woo, Race to the Swift, New York: Columbia University Press, 1991. B. S. Choi, “Financial policy and big business in Korea: the perils of financial regulation,” in Haggard et al., The Politics of Finance, pp. 23–54. I. Dalla and D. Khatkhate, Regulated Deregulation of the Financial System in Korea, World Bank Discussion Paper No. 292, Washington, DC: World Bank, 1995; M. WooCumings, “Slouching toward the market: the politics of financial liberalisation in South Korea,” in M. Loriaux (ed.), Capital Ungoverned: Liberalising Finance in Interventionist States, Ithaca, NY: Cornell University Press, 1997, pp. 57–91. See Y. J. Cho, “The role of poorly phased liberalization in Korea’s financial crisis,” in G. Caprio, P. Honohan, and J. E. Stiglitz (eds), Financial Liberalization: How Far? How Fast? Cambridge: Cambridge University Press, 2001, pp. 159–87; X. Zhang, The Changing Politics of Finance in Korea and Thailand, London: Routledge, 2002, chapter 7. T. J. Cheng, “Guarding the commanding heights: the state as banker in Taiwan,” in Haggard et al., The Politics of Finance, pp. 55–92; H. Smith, “Industrial policy in East Asia,” Asian–Pacific Economic Literature, 1995, vol. 9, no. 1, pp. 17–39. T. J. Cheng, “Guarding the commanding heights”; K. J. Fields, “Is small beautiful? The political economy of Taiwan’s small-scale industry,” in E. M. Kim (ed.), The Four Asian Tigers, San Diego, CA: Academic Press, 1998, pp. 150–82. Y. H. Chu, “The realignment of business–government relations”; Tan, “Democratization and bureaucratic restructuring.” G. W. Noble and J. Ravenhill, “The good, the bad, and the ugly? Korea, Taiwan and the Asian financial crisis,” in G. W. Noble and J. Ravenhill (eds), The Asian Financial Crisis and the Architecture of Global Finance, Cambridge: Cambridge University Press, 2000, pp. 80–107; X. Zhang, “Domestic institutions, liberalization patterns and uneven crises in Korea and Taiwan,” Pacific Review, 2002, vol. 15, no. 3, pp. 409–42. See Chu, “Surviving the East Asian financial storm”; L. Weiss, “Developmental states in transition,” Pacific Review, 2002, vol. 13, no. 1, pp. 21–55. D. C. Cole, “Financial sector development in Southeast Asia,” in S. N. Zahid (ed.), Financial Sector Development in Asia, Hong Kong: Oxford University Press, 1995, pp. 223–60; Z. A. Yusof, A. A. Hussin, I. Alowi, C. S. Lim, and S. Singh, “Financial reform in Malaysia,” in G. Caprio, I. Atiyas, and J. A. Hanson (eds), Financial Reform: Theory and Experience, Cambridge: Cambridge University Press, 1994, pp. 270–320. K. F. Chin and Jomo K. S., “Financial sector rents in Malaysia,” in Khan and Jomo, Rents, pp. 304–26; Yusof et al., “Financial reform,” pp. 286–90.

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70 Gomez and Jomo, Malaysia’s Political Economy, pp. 60–6. 71 Chin and Jomo, “Financial sector rents.” 72 See A. Sheng, “Bank restructuring in Malaysia, 1985–88,” in D. Vittas (ed.), Financial Regulation, Washington, DC: World Bank, 1992, pp. 195–236; Yusof et al., “Financial reform.” A major financial crisis took place in the mid-1980s, which involved three banks and several deposit-taking cooperatives. The economic recession aside, imprudent lending to property development and share trading saddled the troubled financial institutions with nonperforming loans and eventually ruined their asset positions. 73 Chin and Jomo, “Financial sector rents”; S. Haggard, The Political Economy of the Asian Financial Crisis, Washington, DC: Institute for International Economics, 2000. 74 Doner and Unger, “The politics of finance”; R. J. Muscat, “Thailand,” in S. Haggard and C. H. Lee (eds), Financial Systems and Economic Policy in Developing Countries, Ithaca, NY: Cornell University Press, 1995, pp. 113–39. 75 See Christensen et al., Thailand, pp. 21–3; Doner and Unger, “The politics of finance.” 76 D. Unger, Building Social Capital in Thailand: Fibers, Finance, and Infrastructure, Cambridge: Cambridge University Press, 1998, chapter 4; Zhang, The Changing Politics of Finance, chapter 3. 77 The 1962 and 1985 revisions of the Commercial Banking Act, for example, were designed through extensive consultation and cooperation between the BOT and the private banking community. The BOT received broad support from private bankers in the process and compromised on the controversial revisions, thereby ensuring the smooth implementation of its duties and responsibilities stipulated in the Act. See Bank of Thailand, 50 Years of the Bank of Thailand, 1942–1992, Bangkok: Bank of Thailand, 1992. 78 See Unger, Building Social Capital, pp. 83–108. 79 A. Siamwalla, “Can a developing democracy manage its macro-economy? The case of Thailand,” TDRI Quarterly Review, 1997, vol. 12, no. 4, pp. 3–10. 80 Zhang, The Changing Politics of Finance, chapters 4 and 7. 81 Nowhere is this problem more clearly demonstrated than in the debacle of the Bangkok Bank of Commerce (BBC). Subject to pressures from influential politicians and senior bureaucrats who were the beneficiaries of large loans from the BBC, the BOT first failed to take effective remedial measures against fraudulent activities at the BBC and then used enormous public funds to keep the bank afloat for quite some time when it tottered on the edge of bankruptcy. For the background, see Pasuk and Baker, Thailand’s Boom and Bust, pp. 105–10.

4

The paradox of weak power and strong authority in the Japanese state John O. Haley

Japan is a paradox. First, the state is weak. At least so it seems if one measures state power by the capacity of public authorities to coerce or compel. Appearances to the contrary notwithstanding—for, after all, Japan is a modern industrial state—the capacity for forceful governmental action has been so hedged in by various institutional and cultural constraints that the effective exercise of public power commonly requires consent by those most directly affected. State actors in Japan thus have generally not had the capacity to develop and direct policy or, more importantly, to compel compliance for its implementation typically enjoyed by either Japan’s East Asian neighbors or its American and European industrial peers. South Korea provides an instructive comparison. Successive governments, democratically elected, in Korea managed in the 1990s to respond quickly, forcefully, and quite dramatically both to political and corporate corruption and to a financial crisis similar to Japan’s.1 Whether consequential or causal, concomitant with this weakness in state power have been corresponding characteristics of governance shared—at least in degree—by neither neighbor nor peer. Not surprisingly, among the most telling has been a dependency on consensus. While perhaps advantageous during periods when a nation shares a strong sense of common purpose and priorities as in the 1950s and early 1960s, consensus, if required, prevents decisive action whenever disagreement over policy persists. State weakness and a concomitant need for consensus help in turn to explain a political system characterized by deal-making and payoffs with bursts of dramatic change along with long periods of apparent stagnation. Also typically prevalent are relatively autonomous organizations and highly cohesive communities.2 These tend to foster private ordering and reinforce the dominant role of social sanctions in societal ordering. In other societies where the state is weak, as in the Middle East,3 kinship and religious belief appear to provide the glue that creates community and holds society together. Not so in Japan where, as explained below, the village and mutual dependency rather than the family and ties of kinship provide the prevailing paradigm. Yet, a reader might retort in protest, at least the postwar Japanese state was surely not passive nor did it lack influence. Paradoxically—at least if one

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accepts the initial proposition—it was both active and influential. I have argued elsewhere that a peculiar combination of strong authority with weak power helps to explain the Japanese paradox.4 State weakness may contribute to an institutional need for consensus, but by virtue of the degree of authority shared by the state and its institutions, those who have governed have had the capacity to create or at least help greatly to achieve consensus. State actors thus have been able to play an effective didactic role, setting goals and establishing parameters for social interaction. They have been able to lead and, like the traffic cop standing alone and unarmed at the thoroughfare, could direct the flow of economic and social traffic. But to accomplish these tasks they have depended on public trust and the recognition that, like the traffic cop, they are useful and often necessary. They have thus maintained or contributed to order by consent and mutual recognition of their utility and their legitimacy in that role.5 Change the equation with respect to state institutions—either to increase governmental powers for effective compulsion or to take away both the trust and legitimacy of public officials or both—or with respect to civil society—to increase labor mobility and thus reduce career dependency for experienced managers—and Japan too would fundamentally change. With more coercive legal powers, those who govern Japan would be able to take more decisive action and implement policy. The ordering function of Japan’s various communities—from yakuza gangsters to the firm—would become less necessary. And as the state reduces need for and reliance on these constituent elements of civil society, and with greater career mobility, individual Japanese become less dependent on these collective communities, their capacity to sanction and coerce and therefore their influence too would begin to atrophy. If so, perhaps, governance in Japan might gradually begin more closely to resemble that in other industrial states. On the other hand, with less public trust and legitimacy, officials would lose the capacity to lead and shape consensus and Japan would perhaps become less stable and less governable. As Japan enters a second decade of apparent economic stagnation despite ostensibly extraordinary political and legal reforms, the question is not whether but how Japan is changing and what the consequences of these changes will be. Will political and legal reform alter the existing balance between power and authority? Will reform lead to more effective legal ordering, will greater disorder emerge, or will things remain roughly as they are? Answers to these questions remain elusive. Nonetheless without radical institutional transformation, the fundamentals are unlikely to change. The making and implementation of public policy in Japan are also apt to continue to depend less on what state actors do than how the myriad “communities” that comprise Japan respond. With continued cohesion, autonomy, and capacity both to create and deny consensus in the society at large, they are likely to continue to determine the directions Japan takes as a nation.

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Measuring power and authority and the village paradigm The extent of either state power or authority is difficult to measure. Both are nevertheless evident in the combination of limited law enforcement capacity, with equally apparent strong institutional authority, commonly explained by Japan’s public law tradition and history of administrative rule.6 Historically, since the sixteenth century most Japanese have suffered stifling regimes of formal administrative proscriptions and procedures. Tokugawa Japan (1600–1867), for example, may have been, as one historian asserts,7 one of the most heavily regulated societies in the world. Yet, seldom if ever was there more than one official per 100,000 persons. Since the vast majority of Japanese were peasant farmers living in often small and remote rural villages and hamlets, few experienced any direct intrusion from their warrior rulers. With their rulers in relatively distant castle towns and village governance left to their most enterprising and prosperous neighbors, this combination enabled them to benefit from both extensive community autonomy and a stable, ordered society.8 Contemporary Japanese also belong to similar semi-autonomous “villages” and enjoy similar benefits. Most work in extraordinarily stable environments characterized by immobility with restricted individual freedom but an equally unusual measure of collective autonomy. Among the most distinctive institutional features of postwar Japan has been the prevalence of organizations—public and private—that hire their core staff at the entry level and have a central personnel office staffed by senior career staff with full responsibility for the recruitment, training, assignment, and promotion of all core employees. One consequence is a high degree of mutual dependency. Those who work in public and private organizations with a hundred or more managerial employees begin their careers as generalists in their early twenties. With little lateral mobility and hardly any market for experienced workers, they know with reasonable certainty as they enter the managerial workforce that they will remain with one firm or agency or its affiliates for the duration of their careers—that is, until retirement thirty or so years hence. Their economic future is thus irreversibly tied to the success of the community and thus with each other. This pattern of employment and organization helps to explain many, if not most, of the more prominent characteristics of postwar patterns of organizational behavior for both private firms and government agencies: institutional loyalty, firm rivalry and corresponding protective we–they and insider–outsider attitudes, and emphasis on collective employee welfare with concomitant controls that may suppress individual employee interests. All in all, the result is a distinctively communitarian orientation with all of its benefits as well as its detriments. These modern “villages” function today as communities that are remarkably ordered and secure. With high levels of internal mutual dependency, they tend

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to be extraordinarily stable but autarkic and resistant to external intervention and control. The prevalence of such communities in turn reduces the overall need and hence demand for more effective government controls and by the same token creates equally strong pressures to prevent effective government intervention except, of course, government largesse. Thus, Japan manages to maintain a well-ordered and remarkably secure society with one of the smallest national government establishments in terms of personnel of any industrial state. The relative paucity of judges, prosecutors, and other law enforcement officials is especially noteworthy. Compared to Japan on a per capita basis, for example, Germany has two and a half times as many civil servants working at the national level, almost twelve times as many judges, over four times as many public prosecutors, and eight times as many private attorneys.9 The contrast with the United States is even starker. Take, for example, the number of personnel in the primary national regulatory agencies responsible for administrative oversight of economic activity. On a per capita basis the United States has over three times as many persons responsible for securities regulation and over eight times as many in environmental protection. The United States Department of the Treasury has five times as many employees as the Japanese Ministry of Finance (MOF), and the United States Department of Commerce, nearly four times as many as the Japanese Ministry of Economy, Trade and Industry.10 Interestingly, on a per capita basis both countries have an equivalent number of employees in their respective national tax agencies.11 The relative dearth of lawyers in Japan is also significant. The vast majority of Japan’s 18,000 practicing attorneys are trial lawyers. Only a handful, nearly all in Tokyo, are professionally engaged as independent legal counsel who rarely if ever appear in court but instead routinely advise small and large business clients alike on legal constraints that channel their behavior. Until very recently Japan had even fewer certified public accountants practicing in independent accounting firms.12 In the United States, and to a lesser extent Europe, lawyers and accountants function as private extensions of the law enforcement community without whom either the numbers of policing officials would have to be significantly increased or the efficacy of regulatory rules significantly diminished. The importance of the lawyer’s role is evidenced by the contribution of the half dozen or so American (and one German) lawyers who were in active commercial practice in Tokyo in the four decades after the Pacific War. All were licensed under provisions of the 1949 Lawyers Law13 that permitted foreign lawyers to practice in Japan after either passing a qualifying examination in Japanese or simply registering. These jun-kaiin (quasi-members) of the Japanese bar established the first international commercial law firms in postwar Japan with American corporations as their principal clients.14 Although inadequately appreciated then or now, the presence of these lawyers was a boon to officials in the MOF and the Ministry of International Trade and Industry (MITI). A word of advice, a suggestion of threat to the long-term interests of their clients, and these lawyers advised compliance with what the officials recommended. Not one

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application for validation of foreign acquisition of an equity investment in a company incorporated in Japan—whether wholly or partially owned by the foreign investor—was ever denied. Official suggestion that the foreign investment was undesirable was apparently sufficient with the advice of American lawyers in support to induce even the largest American corporate client to accept a compromise or to foster withdrawal of the application completely. Belief in the power of Japanese economic bureaucrats was apparently enough. Alas, few among these lawyers separated power from authority. Other measures of the strength or weakness of law enforcement include the effectiveness of state police and investigatory powers as well as the availability and use of coercive sanctions. To retell an old story, many years ago at a conference on Japanese antitrust law in New York, a member of the Japanese Fair Trade Commission ( JFTC) staff bridled at my suggestion that the investigatory and enforcement powers of the agency were weak. He pulled out a copy of an English translation of Antimonopoly Law and read to the audience the provisions detailing the extensive investigatory powers of the agency, which had been copied from US statutes, including the power to subpoena documents. What if, I asked in return, the recipient of the subpoena replied that the document in question did not exist or was missing? In that case, the JFTC official admitted, the agency could not do anything. One could identify the American lawyers in the audience by their laughter. The lesson is that without the backing of judicial contempt powers or some equivalent, administrative orders in Japan are generally enforced through the criminal process—at best a cumbersome process requiring referral to the Ministry of Justice. I am unaware of any case in which any regulatory agency has ever attempted to enforce such a sanction. To obtain evidence of suspected violations the JFTC, like the tax authorities and other regulatory agencies, relies almost exclusively on sudden, surprise raids. Rarely if ever does the JFTC resort to its authority to subpoena documents. Nor to my knowledge is the criminal process ever used to coerce disclosure. As those familiar with Juzo Itami’s 1987 film, A Taxing Woman, may recall, the Japanese taxing authorities were similarly forced to rely on costly and often ineffective spot raids in investigating taxpayers suspected of tax evasion. The lesson learned is that, however extensive or strong Japanese enforcement powers may appear on the books, closer inspection of the realities of their use in practice usually reveals how remarkably weak they actually are. Compounding the institutional weakness of law enforcement is a relative dearth of substantial regulatory law. Notwithstanding a much-touted postwar industrial policy and extensive involvement in the postwar economy, the Japanese state has in fact not had significant legal regulatory authority over economic matters. The sort of regulatory economic controls familiar in the United States from the 1880s with the enactment of the Sherman and Interstate Commerce Commission Acts were unknown in Japan until the mid-1930s. Except in Manchuria—the prewar laboratory for industrial policy—and for agriculture, Japanese wartime controls tended to be less direct and allowed much greater business autonomy than in the United States or Europe.15 Despite the postwar

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legacy of many of these control systems,16 Japan’s postwar economic policies were more often than not based on vaguely worded jurisdictional provisions of ministry establishment laws and promotional legislation and enforced indirectly in reliance on emergency economic controls enacted under the Allied Occupation. Most of the few direct regulatory regimes that did exist were also based on Occupation-era statutes, many of which were amended after the Occupation to weaken or restrict any direct governmental control and oversight. In lieu of direct regulatory controls, Japanese authorities have tended to rely on licensing and approvals powers inherited from Occupation or what Yukio Noguchi refers to as the “1940s system.”17 Rather than legislative grants of administrative powers to intervene directly in the economy to achieve specific aims—either established by the economic ministries themselves through administrative regulations or the Diet via legislation, the common pattern has been to adapt to changing economic conditions and client industry demands though ad hoc policy formation enforced through extralegal guidance. Officials in the economic ministries—especially the MITI18—would simply cajole those who needed a license or an approval to comply with policies that often had no specific legal basis.19 Licensing and approval requirements in effect provided officials with indirect but often very effective means to achieve regulatory goals by supplying needed leverage to negotiate wanted consent. The licenses and approvals of Occupation foreign trade and foreign exchange control legislation, for example, provided the MITI much needed leverage that enabled pursuit of a consensual postwar industrial policy.20 The alternative to licensing as a substitute for direct regulatory controls has been reliance on wartime control systems under which public or semi-public entities act as substitutes for private economic actors. This is the approach used in Japan’s rice support system, which dates from 1942. Prices are maintained by compelling purchases through local agricultural cooperatives and a central semi-public importer under the aegis of the Ministry of Agriculture, Forestry, and Fisheries. The similarly constituted wartime “control associations” for most industries, however, were abolished under the Occupation. But the postwar industry and trade associations in close cooperation with the MITI and other economic officials often functioned as a substitute.21 Neither reliance on licensing as leverage nor even the use of state substitutes for private enterprise necessarily evidences a strong state in the case of Japan. Both instead reflect the limits of state power and a political inability to resort to direct regulation. Unable to develop or win legislative approval for a postwar regulatory regime, Japanese officials were left with Occupation and wartime leftovers as substitutes. These were then adapted and used in a variety of unintended ways under various constraints imposed by politicians, rival administrative agencies, and business and commercial interests. The nature of these constraints and their causes—what they are and why they exist—are important questions. They are equally difficult to answer. For the purposes of this chapter, however, these issues can be put aside. What matters

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here are the coincidental—whether or not causal or consequential—features of Japanese governance that may either generate or result from such constraints. As stated at the outset, these features include emphasis on consensus in the formation and execution of public policy, on social rather than legal sanctions, and on various forms of private ordering. Each has particular consequences that help to explain the continuing vitality of Japan’s major manufacturing industries and the stunning failure of its financial services industry.

Consequences Several consequences flow from the mix of weak state power and strong state authority. Some have produced significant benefits, contributing to Japan’s postwar economic growth and well-being. Others paradoxically underpin many of the most dysfunctional aspects of Japanese social, political, and economic life. The developmental lessons of Japan are thus not revealed in the story of the strong state directing the path of development. Rather they are contained in the narratives of a didactically influential state whose principal failures produced success and many of whose most widely acclaimed successes eventually ended in failure. More specifically, developmental policies designed to produce economies of scale through concentration and stability through cartels failed in critical sectors of the economy to inhibit new entry and firm rivalry or the underlying conditions of competition. Yet, the combination of strong authority and weak power also enabled government-imposed barriers to succeed in other sectors— notably financial services, agriculture, and construction—and thereby set into motion countervailing economic and political trajectories that produced the stagnation and dysfunction of Japan’s contemporary political economy. Conditions of competition Notable among the beneficial consequences of the weak state is the singularly important role of firm—or more broadly group—rivalry as a source of economic efficiency and growth. In environments in which the conditions for competition exist—above all else, opportunities for new entry—the results are vitality and the creation of wealth; where these conditions fail, stagnation. By historical happenstance more than design—or what some might call “path dependency”—the social characteristics of Japan’s weak state have produced these conditions. Indeed, only where the intrinsic weakness of the Japanese state has been successfully overcome to enable effective state action have these conditions failed. Stated starkly, in competitive industries firm rivalry limits the ability of government to pursue policies adverse to most efficient firms. Such firms have the most to lose and thus they are most apt to refuse to agree or, without effective monitoring and sanctions, cheat. On the other hand, in contexts of limited competition, especially where government restrains competition through imposed or enforced barriers to entry such as licensing, industry is more likely to accommodate to government demands. Moreover, restricting entry may also be in the

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government’s interest. The smaller the group, the easier it is to achieve consensus. Thus the more effective the constraints on competition, the easier it is to achieve compliance with government policies. The consequences of consensus and reliance on social sanctions are perhaps best revealed in the context of Japan’s postwar industrial and financial policies. For government officials to achieve consensus within an industry—manufacturing or financial—they needed ideally to restrict the number of actors whose consent was necessary and to have an array of both carrots and sticks to serve as bargaining leverage. With respect to the number of actors, consensus-driven policies ensured that the issue became access. Being at the table gave a party effective voice in the determination and implementation of policy. Hence access became the critical issue. For MITI officials dealing with the manufacturing industries this meant they had to maintain a sustained effort to exclude both labor and consumers from the process and to attempt to restrict new entry. By doing so, MITI officials also stood to gain additional bargaining leverage. Thus, characteristic of postwar industrial policy were efforts designed to limit participation in the decision-making process to business representatives and to attempt to restrict new entrants, especially foreign incumbents. MITI had only limited success. The prevalence of company unions and the effects of “lifetime” or career-long employment and the consequent lack of markets of experienced workers ensured the coincidence of worker and firm interests. Consumer groups were too fragmented to play a significant role, although some groups, especially the Housewives’ Federation (Shufu Rengo-kai), did gain some influence. The most effective of these efforts were those aimed at the exclusion of foreign enterprises from entry into Japanese markets. Until the mid- to late 1970s, by all accounts, Japanese protectionist policies proved to be effective. Unlike other areas of government regulation, with respect to foreign entry the economic ministries had the legal means and will to achieve their goals.22 Their most significant failure was the effort to prevent new entry by domestic firms. As domestic consumer and industrial demand increased with Japanese economic recovery and growth, between 1950 and 1980 nearly every major manufacturing industry experienced significant increases in new entrants. During this period the number of domestic automobile producers as well as integrated steel manufacturers more than doubled. The story was similar for pharmaceuticals, consumer electronics, and refining. Facing sustained rivalry in home markets Japanese manufacturers were forced to engage in continuous efforts to improve efficiency, distribution, and consumer satisfaction. The vitality and international competitiveness of these industries were thus assured despite overt industry cooperation and governmental policies intended to curtail competition. With corollary constraints Not all government agencies suffered from a lack of statutory controls and enforcement powers. Since the late 1920s the Ministry of Finance had exercised entry-limiting licensing controls in banking. Occupation statutes further seg-

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mented the financial services industry and extended these controls to securities firms and insurance providers. The MOF was thereby authorized—indeed, empowered—to prevent any new entry in financial services. In addition to supervisory jurisdiction over the entire financial services sectors—including banking, insurance, and the securities industry—rotating MOF officials also exercised jurisdiction over the tax policy, the national budget, and the Bank of Japan. Retired MOF officials even dominated the nominally independent antitrust enforcement authority, the Fair Trade Commission. The Ministry thus enjoyed unparalleled negotiating leverage both within the government as well as the financial services industry. Administrative guidance from MOF officials meant something. But the MOF officials too found that consensus, if not always necessary, at least made the tasks of forming and implementing policy much easier. There were advantages to all therefore in ensuring that the number of players remained relatively fixed and small. Hence, for over three decades, entry into the financial services industries by both domestic and foreign firms was severely restricted. The costs were dear, however. Without vigorous firm rivalry, Japan’s financial institutions failed to develop the instruments and processes, including the internal mechanisms to assess risk and monitor loans, necessary to channel effectively the wealth being generated by the manufacturing sector. In this cosy world, neither financial regulator nor financier was fully in control. They did cooperate but each side also protected their own distinctive interests. As long as those being regulated ostensibly acquiesced and deferred to regulators, their prestige and influence seemed to be ensured. No bribes are necessary when officials have prestige not power. But those being regulated had their own interests and what they needed to hire they could and did. The Daiwa Bank scandal23 is as good a case in point as any. For over a decade a single career employee, Toshihide Iguchi, in Daiwa’s American subsidiary, Daiwa Trust Bank America, accumulated over $1.1 billion in losses illegally trading in US Treasury bonds. As head of both the control and trading section of the bank, he was able to cover up the trading and the losses for over a decade. The size of the losses in this single case were staggering. We are apt to neglect as a result the banality of Iguchi’s actions. Iguchi was no Millikin or Rich. There is no evidence that he even considered personally enjoying any gains Daiwa might have received, had the illegal trading yielded profits instead of losses, other than ordinary rewards earned by successful employees. What we have here is instead a career employee whose social status and economic future arguably depended almost solely on the financial status of his bank. Like all other career employees of every large public and private Japanese organizations, including those in the MOF, Iguchi’s individual identity was so completely subsumed by the bank—his “village”—that he acted unselfishly in the collective interest. At least, perversely, so it perhaps seemed to Iguchi. This conflation of individual and shared collective or “community” interest also helps to explain why a Japanese bank like Daiwa might fail to create or at least to adhere to procedures designed to monitor and assure the accountability of the activities of individual employees, especially those like Iguchi who enjoy

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positions of significant responsibility and trust. Japanese organizational patterns themselves tend to preclude any significant self-regarding conduct by career employees that is not also in the interest of the organization as a whole over time. Needless to say, this sense of community interest also helps to explain why other employees might not want to disclose—or even discover—any wrongdoing to anyone outside of the bank, especially not to officials in the MOF or the US Treasury. Accustomed to a legal culture of “authority without power,” Iguchi’s superiors at Daiwa did not fully appreciate the legal consequences of any reporting failure in the United States. The perspective of Japan’s system of career employment thus helps us make some sense out of the Daiwa Bank scandal and the thousands of similar albeit smaller incidents where bank managers and others made bad, irresponsible decisions. The dysfunctional features of the Japanese paradox are not restricted, however, to the financial services industry. The relationship between MOF officials and the financial services industry may have retarded firm rivalry and its benefits but no one claims that officials enriched themselves at the expense of banks or the public. In other areas of the economy “cosy” business–government relationships have had equally costly and even more venal consequences. The Japanese electoral system—reflecting once again the village paradigm— has long favored localized, personal relationships over ideology. One result is that in Japan, like the United States but unlike other industrial democracies with parliamentary systems, local politics, especially in rural areas, has a direct and significant influence on national policy. In Japan fewer members of the national legislature have career ties to government bureaucracies at the national level than in most European states.24 Because national politics is personal and local, elections are costly, especially election in the pre-1993 single-nontransferable-vote multimember district system. These costs invite extraordinary pressures for nationally financed, local works projects—“pork” in American political parlance—and corruption.25 Much has been written on the causes and extent of corruption in Japanese politics.26 The consequences are less noted. As in the case of financial services, one is competitive failure and the costs to the public of prolonged economic inefficiencies. In a superb study of cartel behavior in four basic materials industries challenged by the oil shock, yen revaluation, and global competition in the 1970s,27 Mark Tilton shows how three of the four industries involving aluminum, integrated steel, and petrochemicals—managed through relatively short-lived cartels to restructure and make necessary cost-cutting and productline adjustments to regain international competitiveness. Only one—the cement industry—did not. Instead collusive practices in the cement and construction industries maintained domestic prices well above international levels. This failure of firm rivalry was less the result of private collusion than political pressures to ensure that public procurement authorities continued to purchase higher priced locally produced cement and pass the cost on to the taxpayer.

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Institutional reform and the future of the Japanese state The past is not necessarily, however, an adequate guide to the future. In the past decade Japan has undertaken institutional reforms and undergone political changes that few could possibly have predicted to be possible only a few years before. Heading the list were the 1994 election law reforms and, of course, the 1997 and 1998 banking and capital market reforms designed to produce Japan’s “big bang.”28 The legal reforms also include an array of procedural reforms—the 1979 Civil Execution Law,29 the 1993 administrative procedure act,30 the 1996 code of civil procedure,31 and the Freedom of Information Act32—as well as substantive law reforms—the 1994 products liability law,33 and major amendments that included the elimination of nearly all cartel exemptions from Japanese antitrust law.34 Although debate continues with respect to the nature and effect of these reforms, few dispute their basic cause. A decade of apparent economic and political stagnation since the “bubble” economy of the 1980s produced deepening public dissatisfaction with what had earlier appeared to be among the most enduring institutional features of postwar Japan. The most momentous political change occurred in the months just before and after the July 1993 Lower House elections. As a result of defections even before the election was held, the ruling Liberal Democratic Party (LDP) had lost its majority in the Lower House. Although the party actually gained two seats in the election, they did not regain the majority and the ability to form the government. Instead new parties formed by the defectors made spectacular gains, primarily at the expense of the Social Democrats who lost over two-thirds of their seats. For the first time since 1955 the LDP was out of power.35 In early August 1993 a coalition of the new parties formed a cabinet with Morihiro Hosokawa as prime minister. The Hosokawa Cabinet lasted less than a year. At the end of June 1994 the LDP had regained power with the backing of the remnant of the Socialist Party and the Sakigake Party, one of Hosokawa’s initial backers. The deal gave the prime ministership to Tomiichi Murayama, long-time leader of the Socialist Party who promptly renounced nearly every progressive-left position the party had espoused since the end of World War II and presided over the renaming of the Socialist Party as the Social Democratic Party in January 1996. A year and a half later LDP leader Ryutaro Hashimoto had become minister with coalition backing. And since November 1996 the LDP has managed to form every government to date with the support of either the Social Democrats or the Komeito and one or more minor parties. The only lasting legacy of the 1993 election appears to be the demise of Japan’s only progressive-left party. During the short life of the Hosokawa Cabinet, one major political reform was achieved. In January 1994 after two decades of debate, the Diet amended the Public Office Election Law36 in the first of a series of revisions. The amendment

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replaced the existing system of multimember districts with a mixed system in which 300 winner-take-all single-member districts were combined with 200 (later reduced to 180) seats allocated by proportional representation from eleven regional blocks. The reform was challenged in a number of cases under various provisions of the constitution but upheld in a trio of related en banc decisions handed down on November 10, 1999.37 Although some believe elections under the new system have created an embryonic two-party system, the extent of any real change is subject to doubt. Incumbents—at least the conservative ones—win. Nor have the procedural changes apparently had more than marginal influence. The new Code of Civil Procedure is perhaps better described as a revision rather than a reform. The new code was designed as a linguistic updating of the code to make it more accessible to contemporary readers. The new version made hardly any substantive changes. Among the few was to be a broadening of discovery. However, whatever the intended changes may have been, in light of the Supreme Court’s decision in KK Fuji Bank v. Maeda,38 denying discovery of a bank memo evaluating a loan application as an “internal” memo under CCP article 220 (4)(c), the most significant preexisting limits on discovery appear to remain. The 1979 Civil Execution Law gave the courts legal authority to impose sanctions for failure to comply with court orders to enforce execution judgments in civil cases and these new powers have at times been used.39 But, as in other civil law systems, courts in Japan still do not have general contempt powers. Courts still cannot enforce and therefore seldom if ever issue orders to force disclosure of assets or information, even to assist, as noted above, public agency investigations. Whether the threat of a court sanction even to enforce a civil judgment has had any real influence remains unstudied. Also since the mid-1970s disincentives for bringing lawsuits have been reduced.40 Especially notable are the reductions in delay by courts at all levels. Litigation rates are now at the highest levels in over a century. Still, resort to court is less frequent in Japan than in any other industrial state, including South Korea and Taiwan.41 The past two decades appear to have been merely a period of extensive but still superficial reform. If neither the political or legal reforms of the past decade have made much difference, what else must change for the Japanese state to undergo any transformation? The answer, I believe, is the basic lack of individual mobility for the Japanese worker that ensures an extraordinary degree of mutual dependency within almost all organizations in Japan. Without fundamental change in the prevailing pattern of employment and organizational control, the state too is unlikely to change. And despite a decade of economic stagnation and apparent corporate restructuring, there is scant evidence of any basic change. The most recent studies and statistics on Japanese labor and corporate restructuring indicate that indeed no fundamental change is taking place.42 Firms may drastically reduce entry level hiring for several years and pressure senior employees to retire early, they may resort to greater part-time

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hiring, but no evidence has yet appeared of lateral mobility or decentralized personnel management. Quite the contrary. The number of privileged workers protected by job security may be smaller and the number of “temporary” and “part-time” workers may have increased but the basic system has not changed. There seems to be no more lateral mobility. Japanese firms may have actually solidified their central personnel offices by taking measures to reassure the job security of beleaguered mid-career employees. In short, change of the most basic institutional features has yet to occur in Japan. Without such fundamental change, social transformation is unlikely to occur. The communitarian orientation of Japanese society and the prevailing paradox of the Japanese state are thus apt to continue well into the twenty-first century.

Notes 1 For an examination of institutional reform in South Korea during the past two decades, see D. K. Yoon (ed.), Recent Transformations in Korean Law and Society, Seoul: Seoul National University Press, 2000. 2 See J. O. Haley, “Inside Japan’s community controls: lessons for America?,” The Responsive Community, 1999, no. 2, p. 22. Also J. O. Haley, “Relational contracting: does community count?,” in H. Baum (ed.), Japan: Economic Success and Legal System, Berlin and New York: Walter de Gruyter, 1997, pp. 167–83. 3 See, e.g., J. S. Migdal, Strong Societies and Weak States: State–Society Relations and State Capabilities in the Third World, Princeton, NJ: Princeton University Press, 1988, p. 35. 4 See J. O. Haley, Authority without Power: Law and the Japanese Paradox, New York and London: Oxford University Press, 1991. For similar treatment of the influence of courts and the authority of legal rules, see J. O. Haley, The Spirit of Japanese Law, Athens, GA: University of Georgia Press, 1998. 5 For a fuller treatment of this theme, see J. O. Haley, “Governance by negotiation: a reappraisal of bureaucratic power in Japan,” Journal of Japanese Studies, 1987, vol. 13, no. 2, p. 343; also in K. P. Pyle (ed.), The Trade Crisis: How Will Japan Respond?, Seattle, WA: Society for Japanese Studies, 1987, pp. 177–91. 6 Japan’s bureaucratic tradition has become a favored explanation for the authority (and for many the power) of Japan’s modern bureaucracy. See, e.g., C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford, CA: Stanford University Press, 1982, p. 36; K. B. Pyle, The Making of Modern Japan, 2nd edn, Lexington, MA and Toronto: D. C. Heath and Co., 1996, pp. 123–5; B. J. McVeigh, The Nature of the Japanese State, London and New York: Routledge, 1998, pp. 102–4; J. L. McClain, Japan: A Modern History, New York and London: W. W. Norton, 2002, p. 30. 7 J. W. Hall, “Tokugawa Japan: 1600–1853,” in J. P. Crowley (ed.), Modern East Asia: Essays in Interpretation, New York: Harcourt, Brace and World, 1970, p. 71. 8 We are only just beginning to appreciate the full nature, extent and dynamics of village autonomy, see, e.g., H. Ooms, Tokugawa Village Practice: Class, Status, Power, Law, Berkeley, CA: University of California Press, 1996. 9 In 2000 with a population of 85 million, Germany, for example, had approximately 864,000 federal (national) state employees, 21,000 judges, 6,000 public prosecutors, and 101,503 lawyers. See Federal Statistical Office Germany. Available online: (accessed 9 April 2004). In that year, Japan, with 125 million inhabitants, had approximately 500,000 national state employees, and less than 3,000 judges, 2,200 public prosecutors, and 20,000 lawyers. See Statistics

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John O. Haley Bureau, Ministry of Public Management, Home Affairs, Posts and Telecommunications. Available online: (accessed 9 April 2004). With a population roughly double that of Japan, in 2000 the US government employed nearly 3,000 persons in the Securities and Exchange Commission (SEC), 18,000 persons in the Environmental Protection Agency (EPA), 143,500 in the Department of the Treasury, and 47,600 in the Department of Commerce. US Census Bureau, Statistical Abstract of the United States 2001, Washington, DC: US Census Bureau, Department of Commerce, 2002, p. 319. The number of government employees in equivalent agencies in Japan at the end of 1999 was approximately 500 for securities regulation, 1,000 for environmental protection, 14,600 for MOF, and 5,300 for Ministry of Economics, Trade and Industry (METI). In 2000 the Japanese National Tax Agency employed about 47,000 persons. Available online: (accessed 9 April 2004). The number of IRS employees in 2002 was approximately 100,000. Available online: (accessed 9 April 2004). The best general description of the various law-related professions and their respective functions is in D. F. Henderson, Foreign Enterprise in Japan, Chapel Hill, NC: University of North Carolina Press, 1973, pp. 176–8. Bengoshi ho- (Law No. 205, 1949), art. 7, deleted by Law No. 155, 1955. Two of the first international law firms in Japan were established before the First World War by a British barrister ( Joseph de Becker) and two Americans, Nicholas Williams McIvor and James Lee Kauffman. The first foreign firms to establish offices in Japan in the postwar period were apparently admiralty firms. By the mid-1960s, however, any list of the principal international law firms in Japan—all in Tokyo— would have included the Aoki and Christianson (formerly McIvor and Kaufman, now merged with Tokyo Aoyama Law Office as the Tokyo Aoyama Aoki Law Office), Graham and James (later renamed Law offices of Braun and Associates, reorganized in 1997 as Haruki, Sawai and Inoue), Anderson, Mori and Rabinowitz, Blakemore and Mitsuki, Logan, Bernard and Okamoto (today Hayabusa Kokusai Law Office), and Adachi and Hayashida (later to become Adachi, Henderson, Miyatake and Fujita). See R. Rice, “Economic mobilization in wartime Japan; business, bureaucracy, and military in conflict,” Journal of Asian Studies, 1979, vol. 38, no. 4, pp. 689–706. See T. Okazaki, “The Japanese wartime economy and the development of government–business relations; an overview,” in Y. Yamanouchi, J. V. Koschmann, and R. Narita (eds), Total War and “Modernization,” Ithaca, NY: Cornell East Asia Program, 1998, pp. 239–59; L. H. Lynn and T. J. McKeown, Organizing Business: Trade Associations in America and Japan, Washington, DC: American Enterprise Institute for Public Policy Research, 1988; U. Schaede, Cooperative Capitalism: Self-regulation, Trade Associations, and the Antimonopoly Law in Japan, London and New York: Oxford University Press, 2000. Y. Noguchi, 1940 nen taisei (The 1940s system), Tokyo: To-yo- Keizai Shinpo-sha, 1996. Since 2000 by virtue of Law No. 99, 2000, the Ministry of Economics, Trade and Industry. On the prevalence of bargained for consent in Japanese governance, see Haley, “Governance by negotiation.” See Schaede, Cooperative Capitalism. Ibid. See, e.g., R. W. Rabinowitz, The Genesis of the Japanese Foreign Investment Law of 1950, Hamburg: German-Japanese Lawyers’ Association, 1999. For an excellent analysis of the case, see M. Misawa, “Daiwa Bank scandal in New York: causes, significance, and lessons in international society,” Vanderbilt Journal of Transnational Law, 1996, vol. 29, pp. 1–51.

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24 Haley, Authority without Power, p. 141. 25 See, e.g., S. R. Reed, “The incumbency advantage in Japan,” in A. Somit, R. Wildenmann, B. Boll, and A. Römmele (eds), The Victorious Incumbent: A Threat to Democracy? Aldershot: Dartmouth, 1994, pp. 278–81, quoting from G. L. Curtis, The Japanese Way of Politics, New York: Columbia University Press, 1988, p. 177. 26 See, e.g., R. H. Mitchell, Political Bribery in Japan, Honolulu: University of Hawaii Press, 1996; S. R. Reed, “Punishing corruption: the response of the Japanese electorate to scandals,” in O. Feldman (ed.), Political Psychology in Japan: Behind the Nails that Sometimes Stick out (and Get Hammered down), Commack, NY: Nova Science Publishers, 1999, pp. 131–48; S. R. Reed, “Political corruption in Japan,” International Social Science Journal, 1996, vol. 48, no. 149, p. 395; C. Johnson, “Tanaka Kakuei: structural corruption and the advent of machine politics in Japan,” Journal of Japanese Studies, 1986, vol. 12, no. 1, pp. 1–28. 27 M. Tilton, Restrained Trade: Cartels in Japan’s Basic Materials Industries, Ithaca, NY and London: Cornell University Press, 1996. 28 For a sample of comments and more provocative studies on various aspects of the financial reforms over the past decade, see Student Note, J. C. Wiley, “Will the ‘bang’ mean ‘big’ changes to Japanese financial laws?,” Hastings International and Comparative Law Review, winter 1999, vol. 22, no. 2, p. 379; H. Kanda, “Securitization in Japan,” Duke Journal of Comparative and International Law, 1998, vol. 8, p. 359; E. T. Patrikis, “Japan’s big bang financial reforms,” Brooklyn Journal of International Law, 1998, vol. 24, p. 577 ; Student Note, B. A. Pomper, “The Japanese financial reform of 1993: will reform spark innovation?”, Cornell International Law Journal, 1995, vol. 28, p. 525; C. P. A. Jones, “Japanese banking reform: a legal analysis of recent developments,” Duke Journal of Comparative and International Law, 1993, vol. 3, p. 387; C. J. Milhaupt, “Financial reform in Japan: recent legislation leaves some issues unresolved,” East Asia Executive Reports, December 1992, vol. 14, no. 12, p. 9; Y. Miwa, “Kin’yu- seido kaikaku no seijikeizaigaku” (Political economy of financial system reform), in K. Kaizuka and K. Ikeo (eds), Kin’yu- riron to seido kaikaku (Financial theory and institutional reform), Tokyo: Yuhikaku, 1992, pp. 307–41. 29 Minji Shikko- ho- (Law No. 4, 1979). 30 Gyo-sei tetsuzuki ho- (Law No. 88, 1993), translated into English by M. A. Levin in Law in Japan: An Annual, 1995, vol. 25, p. 141. For an English-language analysis, see L. Ködderitzsch, “Japan’s New Administrative Procedure Act: reasons for its enactment and likely implications,” Law in Japan: An Annual, 1994, vol. 24, p. 105. 31 Minji sosho- ho- (Law No. 109, 1996). 32 For a detailed discussion of the statute and local government experience with similar disclosure requirements, see L. Repeta, “Local government disclosure systems in Japan,” NBR Executive Insight, October 1999, no. 16, pp. 1–82. 33 Seizo-butsu sekinin ho- (Law No. 85, 1994). For translation and critical commentary, see T. L. Madden, “An explanation of Japan’s Product Liability Law,” Pacific Rim Law and Policy Journal, 1996, vol. 5, 299; and A. Marcuse, “Why Japan’s new Products Liability Law isn’t,” Pacific Rim Law and Policy Journal, 1994, vol. 3, p. 365. 34 See J. O. Haley, Antitrust in Germany and Japan: The First Fifty Years, 1947–1998, Seattle: University of Washington Press, 2001, pp. 532–63, for a descriptive analysis of all amendments of the Antimonopoly Law (The Law Concerning the Prohibition of Private Monopoly and Maintenance of Fair Trade [Shiteki dokusen no kinshi oyobi kosei kakuho ni kansuru ho-ritsu] (Law No. 54, 1947)) through 1999. The most significant of the recent amendments were the elimination of the international contract reporting and review requirement and the easing of the prohibition against holding companies. For an excellent study of the latter, see A. H. Thorsen and F. Siegfanz, “The 1997 deregulation of Japan’s holding companies,” Pacific Rim Law and Policy Journal, 1999, vol. 8, p. 261. 35 For an excellent study of the election, see S. R. Reed, “The 1993 election and the

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38 39 40 41 42

John O. Haley end of LDP one-party dominance,” in S. Reed (ed.), Japanese Electoral Politics, London and New York: Nissan Institute/RoutledgeCurzon, 2003, pp. 7–23. Ko-shoku senkyo ho- (Law No. 100, 1950), as amended by Law No. 2, 1994. Yamaguchi et al., Tokyo Prefectural Election Commission, 53 Minshu- 1441 (Sup. Ct., G.B., 10 November 1999); Ôkura et al., Central Election Administration, 53 Minshu- 1577 (Sup. Ct., G.B., 10 November 1999); Koyama et al., Tokyo Prefectural Election Commission, 53 Minshu- 1577 (Sup. Ct., G.B., 10 November 1999). 53 Minshu- 1787 (Sup. Ct., 2nd P.B., 12 November 1999). J. M. Ramseyer and M. Nakazato, Japanese Law: An Economic Analysis, Chicago and London: University of Chicago Press, 1999, pp. 147–9. J. O. Haley, “Litigation in Japan: a new look at old problems,” Willamette Journal of International Law and Dispute Resolution, 2002, vol. 10, p. 121, esp. pp. 128 and 134. Ibid., p. 124. See, e.g., A. Holzhausen, “Japanese employment practices in transition: promotion policy and compensation systems in the 1990s,” Social Science Japan Journal, 2000, no. 2, p. 221; David Kruger with Ichiko Fuyumo, “Job flexibility in Japan,” Far Eastern Economic Review, 8 February 2001, p. 66.

5

The political bases of episodic agency in the Taiwan state Tak-Wing Ngo

The state in East Asia has been lauded for its capacity to promote rapid economic development. This capacity, according to the developmental state literature, derives from such institutional qualities as political autonomy, technocratic insulation, social embeddedness, and the presence of a Weberian, meritocratic, and development-oriented bureaucracy. It is argued that such institutional qualities enable the developmental state to plan and coordinate economic activity, to intervene selectively, to get not only its policies but also their timing and meshing right. The assumption is that the state manifests a very high degree of political unity and that it can concentrate agency in planning and coordination. The basis of state agency is seen to be technocratic in nature. This chapter re-examines the assumption about the technocratic basis of state agency, using Taiwan as an exemplary case. Based on newly available empirical evidence, this chapter shows that, instead of manifesting a high degree of unity, the state machinery in Taiwan was plagued by factionalism and intrastate rivalry. State apparatuses were constantly in conflict with one another. They sabotaged one another’s turf and exacted societal resources to expand their own terrains at the expense of their intrastate rivals. Their organizational responsibilities were prone to patrimonial manipulations rather than regulated by rational principles of hierarchical ordering. State planning bodies were ephemeral and worked under overlapping jurisdictions. In brief, the state machinery was a far cry from the image of a unitary, impersonal apparatus of public power acting in accordance with legal rules and procedures. Under such circumstances, it becomes apparent that effective agency did not derive from the institutional qualities of the state apparatuses. In the wake of endless intrastate conflicts, how could major reforms and developmental policies be carried out? What shaped state agency into a collective actor? How can we reconcile the fact that the state was plagued by internal infighting and yet was able to concentrate agency in initiating major economic reforms for developmental policies? How accurate is it to characterize state-led development as a technocratic process? In brief, what have been the bases of state agency? The following discussion attempts to answer these questions by focusing on the first two decades of Kuomintang rule in Taiwan after 1949. This was the

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period when Taiwan experienced the most spectacular growth and industrial transformation. It was also the time when some of the most important developmental policies were implemented. An examination of this period will shed light on the basis of state agency and the nature of state-led development in Taiwan.

Conventional image of the state in Taiwan Let us begin with the conventional image of the state in Taiwan during the Kuomintang rule. Taiwan is commonly seen as a model of economic success. The island emerged from a predominantly agricultural economy after the Second World War to become a fully industrialized metropolis in less than three decades. The impressive performance has been attributed to the effectiveness of the state in steering economic development. In particular, the economic takeoff was orchestrated under the rule of the authoritarian Kuomintang regime which had monopolized state power for over forty years. The “quasi-Leninist” state structure, as some scholars put it, was institutionalized as soon as the Kuomintang regime took over control of the island from the Japanese in 1945.1 A state of national emergency and martial law was declared, justified on the grounds that China was under communist insurrection. Under martial law, major constitutional rights were denied, including the freedoms of the press and association. General elections to the National Assembly and other representative bodies were suspended. Chambers of commerce, industrial associations, labor unions, and professional societies were created and operated under Kuomintang tutelage. Other civic organizations not sanctioned by the regime were banned. This authoritarian structure remained firmly in place for nearly forty years until martial law was lifted in 1987.2 The authoritarian regime is said to require little political support because it faced only weak centrifugal forces.3 Legitimacy is said to be based on international diplomatic recognition, military presence, and the ability to deliver economic prosperity.4 In the words of one observer, Taiwan’s long-existing exclusionary political regime “marks the strongest possible contrast” to Latin America’s sporadically open, competitive political system.5 Under the exclusionary regime, the top leadership and the economic bureaucracy were believed to be relatively unconstrained by societal interests. Economic planning came under a small group of elitist policy organizations. Economic technocrats who served in these units, such as T. H. Shen, K. Y. Yin, S. C. Tsiang, and later K. T. Li, have been seen as acting selflessly in steering Taiwan’s economic development. In particular, K. Y. Yin, the moving force behind many of the programs, was a non-Kuomintang technocrat who successively occupied key economic planning positions in the Taiwan Production Board, the Central Trust of China, the Industrial Development Commission, the Economic Stabilization Board, the Council for US Aid, the Foreign Exchange and Trade Control Commission, and the Bank of Taiwan. These powerful technocrats have been seen as the bearers of economic rationality who championed the agrarian and industrial reforms.6 They successfully

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carried out land reform and channeled agricultural surplus for industrial expansion. They then undertook import substitution initiatives in the 1950s and subsequently shifted to export-led industrialization in the 1960s. Such a strategic shift to export industries has been considered a key step in Taiwan’s economic success.7 In the course of steering Taiwan’s economic development trajectory, the state intervened actively in the market by granting subsidies to targeted industries, extending preferential loans to individual businesses, creating monopolistic enterprises to pick and protect winners, and engaging directly in production to develop new products. The appearance of such a strong, unitary state has led observers to characterize Taiwan as a developmental state. The state is seen as providing active agency in pursuit of developmental goals. It is believed that late development requires a concerted effort. Gerschenkron has often been quoted as arguing that latecomers to the world economy need a centralized approach to industrialization and economic growth.8 “Catching up” demands a more centralized mechanism (often performed by the state) for capital mobilization, industrial adjustment, and technological upgrading. The ability of the state to exercise such strategic agency depends, according to the developmental state theory, upon a high degree of political autonomy of the state from popular pressure, and the existence of a unitary decision-making machinery staffed by meritocratic technocrats. Beneath the appearance of such a strong and unitary state, however, the picture is less assuring. When we probe into the institutional features, power relations, and policy-making process within the state, a different picture emerges: the state machinery in Taiwan revolved around contentious political factions; policy-making was overwhelmed by resource competition and turf fighting between bureaucratic rivalries; planning and coordination were thwarted by ephemeral institutions with mutable functions. In other words, intrastate conflicts were the rule rather than the exception. Let us look at the internal dynamics of the state machinery more closely.

Bureaucratic kingdoms and crony enterprises Jessop reminds us that regardless of whatever constitutions might declare about the unity and sovereignty of the modern state, there are often several rival states competing for temporary and local hegemony within a given national territory.9 These rival “states within the state” can be found in Taiwan, even under the socalled quasi-Leninist structure. From the outset, the Kuomintang regime was never a united political force. Deep-seated divisions within the party existed from its very inauguration. Factional strife eventually caused the regime to crumble during its rule in mainland China. After the communist takeover in 1949, the Kuomintang factions changed their venue of contention from the mainland to the island of Taiwan. Even after the party reform in the early 1950s, factional strife continued.10 When the regime re-erected the state institutions in Taiwan, rival factions

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wasted no time in occupying bureaucratic offices as the organizational basis for their power contention. The fact that under martial law there was no institutionalized mechanism to decide who took what positions and resources meant that not only bureaucratic offices but also their functions and jurisdictions were fought over. Furthermore, since Kuomintang was an émigré regime in Taiwan without an indigenous social basis, whoever could establish political support and mobilize social resources would survive in the internal struggle. Bureaucratic offices thus became the organizational means for exacting resources and establishing political support. A process of bureaucratic empire building began, resulting in the creation of rival states within the state. One of the most noticeable manifestations of bureaucratic empire building was the creation of state monopolies. Over the years various power clusters of the Kuomintang regime competed over revenue exaction via the monopolies they controlled. In addition to taxes and various sorts of levies, rents derived from monopolies became the major form of exaction. As a result, the number of state enterprises grew. Bureaucratic offices which had state enterprises directly under their control included the Ministries of Economic Affairs (10), Finance (9), and Transportation (5), the Veterans Commission (28), the provincial government (33), Taipei and Kaohsiung city governments (7), and country governments (8).11 These enterprises essentially covered strategic industries and monopolies in sugar, salt, fertilizers, steel, shipbuilding, machinery, construction, petrochemicals, electricity, banking, insurance, tobacco and liquor, telecommunication, shipping, mining, forestry, transportation, port facilities, and media. The above-mentioned enterprises all appeared in official accounting. They constituted only a small part of the actual size of the state sector, the main bulk of which was hidden. These hidden ones included enterprises that were either controlled by government-funded legal entities, jointly owned by governmentfunded legal entities and private companies, subsidiaries of state enterprises, or controlled by subsidiaries of state enterprises.12 The Ministry of Economic Affairs alone controlled more than two dozen legal entities. The latter in turn controlled many others. For instance, Taiwan Sugar was a state monopoly under the control of the Ministry of Economic Affairs. Over the years, Taiwan Sugar had diversified its business and invested in various sectors and joint ventures, including pig food and antibiotics, real estate construction, stock exchange dealings, land development, petrochemicals, and financial investment. Those state enterprises such as the subsidiaries of Taiwan Sugar were hidden because, according to the law, they were considered private. In reality, they were firmly controlled by the state, but were free from government auditing and parliamentary monitoring. For instance, China Stock Finance Co. was set up with capital from China Petroleum (5.19 percent), Taiwan Electricity (5.75 percent), Bank of Communications (10.38 percent), and the Executive Yuan Development Fund (36.70 percent).13 Together these state agencies held 58.02 percent of the company. But the company was still considered a private firm. An enterprise was considered “publicly owned” only when over half of its

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shares were controlled by a single government department or by a single public enterprise. As a result, joint enterprises were by definition “private.” On the eve of lifting the martial law, the Veterans Commission had twentyeight directly owned enterprises and thirty-three jointly owned enterprises. With some 500,000 personnel, the military was the largest consumer group in Taiwan. More than 520 private enterprises, including Far East, Tatung, etc. had business relations with the military. Some of them provided military supplies to the armed forces, others subcontracted specific military production. Many factories were subsidized by the Defense Industry Development Fund, others had the military as major shareholders. These factories had retired high-ranking veterans on the board of directors or who served as advisers in order to secure contracts from the armed forces. The military also subsidized universities and research institutes. It directly owned nine publishing houses, some twenty-three press and news agencies, six broadcasting stations with fifty-nine substations, and over seventy periodicals.14 These troupes of open and hidden monopolies and crony enterprises conferred stable income in terms of rents to individual bureaucratic offices. Not surprisingly, intrastate contention over monopolistic rents was intense. For instance, in addition to the monopoly of natural gas and several public bus routes, the Veterans Commission also monopolized all major public works. According to the law enacted in 1964, the construction enterprises under the Veterans Commission were given first priority in all public works projects, including the construction of irrigation works, highways, railroads, bridges, tunnels, harbors, and military works. Its main competitor was China Engineering, a subsidiary of the Ministry of Economic Affairs. Between 1950 and 1970, China Engineering executed sixteen bridge projects, sixteen airport projects, fourteen oil pipeline projects, eleven factory construction projects, eight harbor projects, and a reservoir project. During the Ten Constructions of the 1970s, China Engineering undertook the Chongshan Highway project, the CKS International Airport project, the Kaohsiung Shipbuilding factory project, the China Steel factory construction project, the China Petroleum factory construction project, and the Taichung Port project. In the 1980s, it undertook the Third Napth Cracker project, the Taipei Chienkuo Highway project, and the Hsinchu Industrial Park project.15 There has been no shortage of criticism about these bureaucratic kingdoms. As a gesture to curb bureaucratic expansion and cronyism, the government repeatedly emphasized its intention to privatize as many state enterprises as possible, with the exception of national public utilities and those strategic monopolies that directly affected defense and daily living. Under strong US pressure, a privatization law was enacted as early as 1953. The policy was a complete failure, since no state bureau was willing to privatize enterprises under its control. Although the Ministry of Economic Affairs was responsible for implementing the privatization law, it refused to sell any of its companies. It upheld that its enterprises were all key industries that involved huge investment, low profit, and high risk. It promised to “keep an eye on appropriate opportunities”

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to transfer individual enterprises to the private sector.16 No such opportunity ever arose in the next few decades. Other state agencies put forward the excuse that there should not be any strict distinction between state-owned and privateowned enterprises. All enterprises should be developed by the government and the people together.17 Likewise, suggestions to privatize province-owned banks were strongly opposed by the Finance Office of the provincial government. The Finance Office argued that privatizing the banks would lower the ability of the government to control credit flow, deprive the government of the policy instrument of preferential loans, reduce the revenue of the provincial government, and create the possibility of confrontation among local factions who wanted to gain control of local banks.18 Besides opposing privatizing the banks, the provincial government also opposed selling off the Taiwan Savings Cooperative Co. and the Taiwan Land Development Credit Investment Co. It did agree to privatize the Taiwan Insurance Co. and the Taiwan Life Insurance Co. The rationale is obvious: the two provincial enterprises did not enjoy any monopoly status. There has been fierce competition from other insurance companies since 1960. Furthermore, insurance business for civil servants was already taken care of by Central Trust of China. There was thus little incentive for keeping the two enterprises.19 After forty years of privatization, the number of state enterprises not only did not decrease but actually grew tremendously. By the early 1990s, the total number of state enterprises, open and hidden, was estimated to reach several hundreds. Some observers argue that these public enterprises were used as an instrument for a big push to create new industrial capacity when adequate entrepreneurs could not be found in the private sector.20 But the vast number of state enterprises and the extensive coverage of their businesses have gone far beyond the need for any such big pushes. Far from performing any big push function, state monopolies—often controlling the upstream industries—have hindered industrial upgrading by preventing the development of backward linkages, something which has been deeply resented by the business sector. The real reason behind the development of a huge public sector is the empire-building exercise undertaken by rival factions who occupied various bureaucratic offices. When the Kuomintang regime finally agreed, under mounting social pressure, to privatize a few selected state monopolies in the late 1980s, many of those “privatized” enterprises remained under indirect government or party control.21 Bureaucratic factions were unwilling to relinquish their monopolies because that would mean giving away a secure source of financial resources and political leverage.

Intrastate rivalries In the course of building bureaucratic kingdoms, rival state factions competed fiercely for control over resources and jurisdiction. In general, different power clusters tried to undermine their rivals by impeding others’ organizational resources and jurisdiction. Furthermore, they also imposed taxes and fees or transferred costs onto others.

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The struggle over jurisdiction and resources is best illustrated by the conflict between the National Resources Commission and the Taiwan Production Board. Established in 1932, the commission was a central government bureau. After the war, it was put under the direct supervision of the Executive Yuan and was responsible for taking over confiscated properties from the Japanese authorities. It set up a whole range of management authorities to regulate state monopolies, including coal, electricity, mining of metals, steel, petroleum, chemicals, electric appliances, sugar, cement, paper, supplies, insurance, communications, and foreign trade. On the eve of its retreat to Taiwan, the commission controlled eleven industries involving ninety-six enterprises with 291 factories.22 In an attempt to take over the control of various state monopolies, the provincial government set up the Taiwan Production Board in 1949. Chaired by the Governor of Taiwan, the board was entrusted with exactly the same power and jurisdiction as the National Resources Commission.23 As soon as it was established, the Taiwan Production Board dissolved the board of directors of all state enterprises and took over all production and management decisions. Although the National Resources Commission had the backing of the Executive Yuan to restore the board of directors for public enterprises, the board refused to relinquish its command over the enterprises.24 Eventually, the commission lost the fight but ordered all its subsidiary enterprises to forward their correspondence with the Taiwan Production Board to the commission.25 The fight soon spilled over from a matter of jurisdiction to that of resources. The provincial government claimed that all the land used by state enterprises was public land. Provincial and local governments had the exclusive right to levy land rent, specify land usage, and administer land registration.26 The National Resources Commission insisted on the contrary that enterprises confiscated from the Japanese should own the land. The fight escalated since land was a crucial resource in the small island of Taiwan. In the case of Taiwan Sugar alone, the dispute involved the ownership of over 117,000 acres. Even though the National Resources Commission secured an executive order from the Executive Yuan to assign land ownership to its corresponding enterprises, the decision was rejected by the provincial government. When Taiwan Sugar tendered a land property registration with county and city governments, the registration was turned down flat.27 In return, when local governments demanded state enterprises pay rent for the land they occupied, enterprises refused to pay on the ground that their land rights were guaranteed by the central government.28 The dispute continued for years. At one point the National Resources Commission was planning to pursue the case through legal means.29 An even more extreme case of intrastate clash over resources occurred at Taiwan Sugar Co., then the largest state enterprise in Taiwan. In 1951, the general manager of the company, Shen Chen-nan, was found guilty of treason and sentenced to death by the Garrison Command. Shen was accused of using his position to strengthen railway facilities, evaluate port and shipping services, improve production facilities, and expand sugar production. Instead of being

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taken as evidence of technocratic competence, these acts were viewed as an attempt to increase company assets in order to prepare for communist takeover. His plan to construct an irrigation system from underground water to enhance production, rather than being seen as a developmental plan, was used as proof of a conspiracy to put the government in financial difficulties by depleting foreign exchange holdings. Behind the treason accusations were hidden confrontations between different state factions. Shen was merely a scapegoat in the bitter contest between the armed forces and the state enterprises over resources. The incident began with Taiwan Sugar’s (and other state-owned factories’) strong protest against the occupation of factory premises by the armed forces and their families. The company warned that production would be severely affected by the occupation of warehouses, and demanded the withdrawal of armed forces from factory premises. Taiwan Sugar also defied the military’s order to abandon sugar-cane fields along the coastal area on the ground that they might hinder warfare. Shen insisted that the 11,000-acre sugar-cane fields along the coast constituted one-third of all sugar-cane area, and abandoning them would force twenty factories to go bankrupt and the economic consequences would be dire.30 In the middle of the row, Shen lost the backing of the Taiwan Production Board because he resisted K. Y. Yin’s effort to reorganize Taiwan Sugar.31 Yin wanted to abolish four company branches in order to reduce personnel expenditure. But the ensuing reorganization resulted in five headquarters with a further increase in the payroll. In the end, Shen was removed by treason charges made against him because his fierce fight for the interests of his company ran into direct conflict with other state interests. Ironically, not long after the incident, the Taiwan Production Board was dissolved and Yin himself was removed from office. He faced charges of illegitimately using the Central Trust of China, a state procurement agency, as an industrial bank and for picking losers instead of winners and hence wasting state resources. The case of Taiwan Sugar is rather extreme. But less extreme cases of confrontation abound. High-ranking officials such as Liu Harng-chen, K. T. Li, and Hsu Peh-yuan were removed from office because of charges by their political opponents. They were accused of treason, corruption, or abuse of power. Of these intrastate clashes, conflicts between the armed forces and state-owned enterprises were most frequent. For instance, the Taiwan Electricity Co. protested against the armed forces refusing to pay their electricity bill and using unauthorized electricity connection.32 The Taiwan Shipbuilding Co. refused to hand over their dockyards to the navy but eventually yielded to the pressure.33 The armed forces were very effective in exacting resources from and transferring costs to other state bureaux. From the outset, the military refused to submit to any budgetary constraints. The Ministry of Finance had no control over the expenditure of the military. Because of that, until the 1960s the government totally abandoned any budgetary plan for the entire administration. Deficit was covered mainly by selling gold reserves or printing money.34 To make budgetary planning possible the Ministry of Finance introduced a special

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tax to cover military expenditure: Special Contributions to National Defense. Even after that, military requests for fuel, rice, flour, clothing, cement, steel, and communication, transportation, and hygienic equipment were frequently made to various ministries and departments. Government ministries had to comply, albeit very reluctantly.35 Moreover, the Garrison Command set up an economic police force whose personnel were stationed in every factory and company. The officially stated purpose was to maintain economic order and to conduct inspections to ensure that production was according to government regulations.36 In practice, factories had to pay the salaries of their police. The financial burden was shared by the provincial government that controlled many state enterprises. State departments’ competition for resources and embezzlement of monopolistic rents was accompanied by the battle to confiscate the money embezzled by others. As a result, a lot of effort was spent not in governing the market but in “governing the state”: that is, negotiating compromise between various intrastate kingdoms and in mediating the transactions among them. For instance, all procurement of foreign goods from state enterprises had to be handled by the Central Trust of China which was nominally under the Ministry of Finance. In essence, the Trust became the de facto overseas buyer for all state agencies and enterprises. To take a share of the profit, the Ministry of Communications required that procurements handled by the Central Trust had to be shipped by state-owned shipping companies under the control of the Ministry of Communications, including Yangming Shipping and China Merchants Steam Navigation Co. The policy was frowned upon by other state enterprises which used various ways of evading the requirement. Enterprises deliberately chose ports that were not served by state shipping companies to handle their shipments. They also made use of the loopholes in the regulation which applied to all procurements above $100,000. They therefore deliberately kept each purchase below the value limit.37 Others simply ignored the regulation. Provincial enterprises Teng-Eng Co. and Kaohsiung Actinium Sulphate Co. were once accused by the Supervisory Yuan of boycotting state shipping companies. In defending similar evasion by its enterprises, the Ministry of Economic Affairs accused the state shipping companies of mismanagement for their poor performance and credibility, including delays in shipment, their frequent failure to honor contracts, missing cargo, damages, etc. It also blamed the Ministry of Communications for failing to supervise the shipping companies to improve their services. According to the Ministry of Economic Affairs, such a policy, if followed strictly, would damage Taiwan’s trade development.38

Ephemeral planning institutions In the existence of profuse intrastate kingdoms and bureaucratic rivalries, how was policy coordination achieved? How could policy planning be independent from parochial interests? It was widely acknowledged that the Kuomintang created a number of relatively autonomous economic planning bodies aimed at

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policy coordination. These bodies maintained direct links with the top leadership and were staffed by reform-minded officials. They became the moving force behind developmental planning. Nevertheless, we need to take note of the circumstances under which these planning bodies performed their function. No doubt these bodies were staffed by highly qualified planners. Elegant plans were also produced regularly. But a closer look at the way these planning bodies functioned reveals that their jurisdiction was arbitrary, their status was ambivalent, and their life span was short. Very often, planning and coordination were undertaken by agents not entrusted with the responsibility to plan. It has been customary to consider the Taiwan Production Board to be the first planning organization. Established in 1949, the board was in fact not a planning body per se but a supervisory body set up at the provincial level to monitor state-owned enterprises. Those actually charged with the responsibility of planning were a number of economic and financial committees set up by the central government after 1949. At the request of the US government for a unified plan to utilize US aid, the Taiwan Production Board and the various committees were replaced by an Economic Stabilization Board in 1953, the first standing body responsible for economic planning. The board was put under the Executive Yuan and chaired initially by the Governor of Taiwan and later by the Premier. It was abolished in 1958 with some of the planning functions either taken over by corresponding ministries or merged into the Council for US Aid. The council had already been in place since 1951. It was not meant to be a planning body either but was entrusted with the responsibility of allocating US aid. The council operated until 1963 and was replaced by a new Council for International Economic Cooperation and Development. Three years later this new council was reorganized in 1969. The reorganized council was replaced by yet another Economic Planning Council in 1973. This council did not last long before it was replaced again by a different one in 1977, the Council for Economic Planning and Development. This was again reorganized in 1985. The rapid succession of boards and councils meant that the formal organs of planning were ephemeral. A closer look at these ephemeral organs reveals that their function and organizational setup were less than regularized. For instance, the officially stated function of the Taiwan Production Board was to supervise the management of state-owned enterprises. But soon the board extended its supervisory role to private enterprises, financial matters, and trade transactions. Later on it intervened in major decisions concerning mining, agriculture, industry, transportation, external trade, foreign exchange, finance, and supplies. It virtually displaced the functions of the Ministry of Economic Affairs, the Bank of Taiwan, and the Construction and Finance Offices of the provincial government.39 Despite such concentration of power, the contingent nature of its organizational strength was apparent. All the committees of the Taiwan Production Board, except the secretariat and logistic services, were ad hoc. Such a precarious setup continued with the first standing planning body, the Economic Stabilization Board. The board was formed by secondment from other government departments. When the board was abolished in 1958, its staff and tasks

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were simply returned to the original government departments. Those left behind were merged with the existing Council for US Aid. Existing side by side with the above-mentioned planning bodies was a separate set of ad hoc commissions responsible for the so-called “economic mobilization.” These were set up by President Chiang Kai-shek in the early 1960s to prepare for the recovery of the mainland. Among these, an Economic Mobilization Planning Commission was formed in 1962 under the Executive Yuan.40 The commissions were responsible for formulating plans regarding fiscal, economic, education, land use, and manpower needs in case of war. Membership of the commission was similar to that of the planning bodies: chaired by the Premier, with members including the Ministers of Economic Affairs, Communications, and Finance, the President of the Central Bank, the Chairman of the Foreign Exchange and Trade Control Commission, etc. Under the general committee were subdivisions such as industry, supplies, transport, finance, manpower, etc. In other words, it looked more or less like a replica of the Economic Stabilization Board or the Council for US Aid. The division of labor between the standing planning bodies and the ad hoc commissions was anything but clear. Similar to the planning bodies, these ad hoc commissions were short-lived. The Economic Mobilization Planning Commission was abolished in 1967 and replaced by a National General Mobilization Commission. The new commission, together with the Field Political Affairs Commission and the newly formed National Development Planning Commission and Science Commission were put under a new National Security Council. As expected, the National General Mobilization Commission had a short life and was abolished in 1972. Both the planning bodies and ad hoc commissions were created side by side with the regular government ministries such as the Ministries of Economic Affairs, Finance, and Communications. But this is not yet the end of the story. The web of overlapping planning bodies at the national level was matched by a similar, albeit somewhat smaller, web of planning bodies at the provincial level. The provincial government had twenty-three offices, divisions, bureaux, and committees including major economic planning offices such as finance, construction, and agriculture. Altogether there were some forty administrative heads in the provincial government cabinet. This “small cabinet” was comparable in size and function to the “large cabinet” of the national government. The two governments competed fiercely over jurisdiction and resources. This arose because the boundary between the national and the provincial levels was a political artifice. The state maintained a national government representing the whole of China and a provincial government responsible for the governance of Taiwan province. But since the national government was in exile, the de facto territorial jurisdiction of the national government was the same as that of the provincial government, except over a few barely populated outer islands which did not belong to Taiwan Province. The clumsy overlapping organizational structure was maintained out of symbolic considerations. It was deliberately maintained in order to convey the message that the state in Taiwan should be treated seriously as the sovereign state of China.41 In practical terms, the huge

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size of the state sector also helped provide jobs for the two million Kuomintang followers who retreated to Taiwan. The existence of so many layers of planning bodies with overlapping jurisdictions means that instead of effective coordination, there was more turf fighting.42 Worse still, attempts to moderate intrastate fights led to the creation of even more planning bodies, such as the Financial and Economic Committee under the Executive Yuan, and the Finance Committee and the Culture and Economic Enterprises Management Committee of the Central Committee of Kuomintang. In the end, offices waxed and waned in relation to turf being won or lost.

The centripetal forces binding the state machinery Before moving on, let us recapitulate what we have discussed so far. Our analysis points out that the state machinery under Kuomintang rule was not a unitary, well-coordinated entity. Empirical evidence shows that rival states within the state predominated the polity. Political factions competed to establish their bureaucratic kingdoms and crony enterprises, resulting in the vast expansion of the public sector. These bureaucratic kingdoms competed against one another for power, resources, and jurisdiction. The planning organs had limited effectiveness in arbitrating intrastate conflicts because of their ambivalent status and short life span. In retrospect, the actual working of the state machinery deviated a great deal from the conventional image of a Weberian bureaucracy characterized by clear hierarchical order and legal-rational authority structures. Such legal-rational authority structures are believed to be the basis of professional responsibilities that account for the effective agency of the state in the developmental state theory. This deviation from the Weberian model is indeed hardly surprising. Rudolf and Rudolf have already pointed out that Weber’s conceptualization of bureaucracy in terms of formal rationality fails to take account of the existence and use of power within and outside of organizations.43 In reality, bureaucratic incumbents’ motives and orientations are rarely congruent with formal role expectation. Relationships are often recast in terms of power instead of authority. Office holders compete for positions of power and resources, seek protection from rival elements, and advance their personal careers and fortunes. The common form, as Riggs suggests, is one where intrabureaucratic struggles for parochial power and advancement take precedence over administrative duties and professional responsibilities.44 It is precisely such a struggle that brought down the Kuomintang regime during its mainland rule. This brings us to the questions: Why did the infighting not make the Kuomintang regime in Taiwan crumble as it had done previously on the mainland? What held the state machinery together? We already know that the state machinery not only remained intact but also played an instrumental role in steering Taiwan’s industrialization. Compared to many other developing nations, Taiwan was able to carry out major economic reforms and development projects. Under what

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circumstances was the state capable of concentrating agency for reform irrespective of the intrastate fighting? The single most important factor that bound the different interests of the state together was the national security and survival imperative. The Kuomintang and the state machinery it resurrected in Taiwan were under constant threat from both within and outside. Externally, the threat of a communist takeover of Taiwan was always imminent. Thanks to the outbreak of the Korean War, the United States decided to defend Taiwan against communist invasion. But the US commitment to such a course was questionable. In fact, mutual shelling between the two rival regimes on both sides of the Taiwan Strait continued well into the 1970s. Internally, the Kuomintang regime faced a hostile indigenous population. When the Kuomintang government retreated to Taiwan, it took with it three million military staff and public service personnel. These Mainland Chinese stood in opposition to the six million Taiwan Chinese who, despite being ethnically the same, had been residing on the island for several generations. Open confrontation between the two groups took place on 28 February 1947 when riots broke out and spread over the island. In response to the Taiwanese attack, the mainlander regime launched a massacre. An estimated 18,000 to 28,000 people were killed; more were arrested and executed later. Taiwanese intellectuals, the social elite, government critics, and journalists were the primary subjects of the massacre. Since then the tension between the Taiwanese populace and the mainlander-dominated state machinery has remained high. The threat from within and outside helped to create a binding force for rival elements of the state apparatuses. Collective survival became a political imperative of the regime. Rival factions watched over one another to ensure that no group pursued parochial interests to the extent of threatening their collective survival.45 Closely related to the survival imperative was the mission of recovering mainland China. Such a project was defined as the constitutive function of the state in Taiwan. Put differently, the state defined itself as the main agent to complete the historical mission of creating a unified China. The mission helped justify the form of the state in terms of the interests of the nation it served. But it was more than merely providing symbolic justification. The preparation for the recovery of the mainland created substantive benefits to all power holders inhabiting various parts of the institutional apparatus of the state. It was this shared interest of substantive benefits that glued conflicting power fragments together. The substantive benefits included political exclusion and resource exaction. From the outset, the fall of the mainland to the communists created the circumstances under which political exclusion became a justifiable course. A state of national emergency and martial law was declared since China was under communist insurgency. Taiwan became the temporary capital city of China after the central government as well as the parliamentary bodies retreated to the island. The parliamentary bodies were composed of delegates elected from all parts of

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China and were supposed to represent the interests of the whole of China. But as long as the mainland was under communist control, general re-elections were not possible. The representative institutions therefore enjoyed an indefinite term, which lasted for over forty years. The majority of the population in Taiwan (officially merely a province) was excluded from participating in state affairs which supposedly represented national rather than provincial interests. In other words, the legitimacy of the state was based on its unrepresentativeness.46 The state justified its existence in terms of an imaginary all-China community in which the local community of Taiwan was only a minor part. Regardless of the diversity and conflicts of interests within the state apparatuses, the recovery of the mainland conferred coalitional unity on the state by providing the same discourse as well as practical benefits to all power holders. Power holders within the state enjoyed indefinite political privilege under the shelter of political exclusion. As long as China was divided by civil war and the recovery of the mainland was a national goal, the state was to be constituted by political seclusion from the local population. Unsurprisingly, the mission was upheld as a sacrosanct ideology. This is not the end of the story. Recovery of the mainland, or more realistically defending Taiwan against communist takeover, required the construction and maintenance of a huge war machine and the constant preparation for war, which in turn justified the need for severe resource exaction. War preparation required economic stability and accumulation. Stability in terms of price level and stable supply of basic necessities was needed to maintain internal security. Accumulation for military expenditure was prioritized for the sake of external security. Both internal and external security concerns required the saving of foreign exchange (for the purchase of necessities and weapons) which was in short supply. The limited foreign exchange coming from US aid had to be rationed and used effectively, hence the need for central planning. All economic planning works began with such a concern. In practice, the emphasis on revenue exaction and foreign exchange accumulation allowed power factions within the state machinery to build up their bureaucratic kingdoms. Each bureaucratic office devised its own method of exaction. Altogether, a huge and effective tax machine was in place. Revenue was extracted from exaction in kind, from tax, and via numerous temporary contributions. Operation taxes included commodity tax, mining tax, business tax, special business tax, stamp tax, profit tax, business license tax, operation license tax, capital registration fee, timber product tax, paper product tax, honey product tax, special household tax, car tax, road tax, tariff, and port construction contribution. Asset taxes included farmland tax, land tax, land contract tax, and housing contribution. Defense contributions included defense contribution, fee for fences against communist bandits, various contributions to reward veterans, rescue contribution for the mainland, patriotic bond, and savings bond. Local taxes included local rescue contributions, local education contributions, local public order contributions, and local construction contributions.47 Agricultural surplus was appropriated by the state in the form of land

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tax and the compulsory sale of rice to the government at low price. Furthermore, a rice-fertilizer barter system was set up, under which farmers had to exchange rice for state-monopolized chemical fertilizer at official rates. It is estimated that the “hidden rice tax” involved in the barter system constituted two to three times the average annual rice tax in the 1950s and the early 1960s, and more than the total tax income of the government during the same period.48 Meanwhile, agricultural products appropriated by the state, especially sugar and rice, were exported to earn foreign exchange. They constituted 83 percent of Taiwan’s total export value in 1950, 73 percent in 1955, and 47 percent in 1960. These were official figures based on multiple foreign exchange rates. Under a single exchange rate, the percentage would be even higher.49 The exacted revenue was used to support the war machine and a large state sector. Over 75 percent of the total expenditure was spent on defense during the 1950s. Another 10 percent was spent on government administration. The two expenditures constituted nearly 80 percent of the budget in the 1960s and some 56 percent in the 1970s. In comparison, the percentage spent on economic construction never exceeded 1 percent on average during the 1950s and early 1960s, and no more than 3 percent in the 1960s and mid-1970s. Expenditure on education averaged 1.8 percent in the 1950s, 3.5 percent in the 1960s, and 6.6 percent in the 1970s. Furthermore, part of the export revenues was tucked away by the state as foreign exchange and gold reserves. Over the years, a huge reserve was built up for national security’s sake in case of a military conflict with the communist regime. Foreign exchange reserves increased from $2 million in 1950 to $76 million in 1960, $600 million in 1970, $5,400 million in 1980, and over $80,000 million in 1990. Gold reserves increased from one million liang to over 13 million liang during the same period. In sum, political survival and the enormous resources accrued to the state sector through severe exaction justified in terms of the recovery of the mainland created shared interests among diverse power holders in upholding the constitutive function of the state and in maintaining the coalitional integrity of the state. Together they prevented the state from breaking up into warlordism as had happened previously. At the same time, the requirement of economic planning for war preparation further enabled state actors to expand their own turf in the name of state-led modernization.

Economic development as a state project Recovery of the mainland required extraordinary economic planning for resources mobilization. In particular, war preparation required the introduction of harsh measures of economic control including price control, import restriction on luxury goods, supply and distribution control, rationing of daily necessities, and control of production in accordance with costs and needs. At the same time, rapid and continuous growth was needed to support a huge accumulation scheme. In particular, when US aid was stopped in the 1960s,

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the only way to earn foreign exchange was by promoting industrial export.50 Since then continuous economic growth became the only source of foreign exchange and state revenue. Because of that, economic development was gradually institutionalized as a priority state project. It was accepted by contending interests within the state as a prerequisite to realize the goal of recovery of the mainland. In brief, economic development was not an end itself, rather it was a logical derivative of the recovery of the mainland mission. It should be noted that economic development as a state project was understood in a specific way. It was to be a kind of planned development or state-led industrialization. Again, this consensual understanding derived from both symbolic and practical concerns. The practical benefit was obvious. Economic control and state-led industrialization created state monopolies in a vast number of manufacturing and servicing sectors including defense, energy, steel, shipbuilding, heavy machinery, construction, fertilizer, sugar refining, tobacco and wine, public utilities and transportation, shipping, banking, and financial services. The huge state sector was staffed with followers of competing bureaucracies, factions, and cronies of the Kuomintang. High positions in state enterprises were often reserved for military and party veterans. In short, state monopolies brought good jobs for state officials as well as stable revenue for the state.51 Symbolically, state-controlled development was seen to be congruent with Sun Yat-sen’s principle of state-led modernization. Sun was regarded as the founder of the Republic of China. His first two principles of the people stress nationalism and popular sovereignty. The third embodies the ideas of statesponsored economic development. In this Principle of the People’s Livelihood, the state should not only be the main guardian of national sovereignty and economic independence but also the gatekeeper against the excesses of free market capitalism. In terms of concrete strategy, the principle advocates rapid industrialization through state plans and coordination. At the same time, concentration of wealth resulting from industrialization should be prevented by restraining capital. When left unchecked, Sun’s doctrine asserts, private capital will create a wealthy class and hence social inequality.52 Such defects of Western capitalism can be overcome by careful planning in creating coexistence between state capital and private capital in the course of industrialization. State-led development thus fulfilled a number of symbolic functions. First and foremost, it legitimized the Kuomintang regime in Taiwan. Upholding Sun’s ideas helped give the state in exile its mandate as the true bearer of the Republic. The Three Principles were therefore taken as sacrosanct doctrine by the Kuomintang. Second, state-led development by planning implied the idea of decision-making as a technocratic process outside politics. It gave the state a benevolent image despite political exclusion and authoritarian rule. Third, technocratic planning conveyed the image of a unitary, rational state capable of exercising autonomous agency. It masked the prevalence of sectionalism and contention within the state. It should be noted that although economic development was hailed as a

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priority project of the state, it does not imply that policy choices were taken unanimously without contention. While the goal of economic development was generally accepted, policy debates continued to revolve around who should control what or whether such and such was or was not consistent with the vague principle of state-led development.53 Political factions and their bureaucratic kingdoms relentlessly manipulated state plans to their own interests. Examples of such maneuvers abound. The establishment of the exportprocessing zone is a case in point. The initiative was put forward in 1956 as an antidote to the severely protected domestic market. The goal was to attract domestic and foreign investors to use Taiwan’s cheap labor force to manufacture exports by offering privileges such as freedom of management, tax exemption, low customs duties, and relaxed foreign exchange controls. The project encountered substantial opposition within the government, for fear of the zone becoming a threat to firms operating outside the zone. A compromise was reached requiring firms in the zone to have established their overseas market outlets prior to investing in the zone.54 The first zone in Kaohsiung was established in 1966, after some ten years’ deliberation. During the early years of its operation, state trading agencies prohibited firms in the zone from supplying made-up parts to other firms within the zone. These firms had to ship their products first to Hong Kong, and then back to Taiwan to be used by the firms next door.55 Another eye-catching example can be found in export trade. It is estimated that some 70 percent of Taiwan’s foreign trade was handled in the 1970s by foreign companies such as Japan’s sogo shosha and American buyers. The colonial heritage enabled many producers, large and small, to establish ties with sogo shosha. To capture the huge profit in this trading business, the government promulgated a plan in 1978 to promote local large trading companies. Seven companies, including Pan Overseas, Collins, Nanlien International, Great International, E-Hsin, Taipoly, and Peacock, were picked by the government as the market leaders qualified for privileged measures. However, measures implemented to promote large trading companies turned out to be obstacles rather than aids, because they limited the market share of large trading companies in the export business. The limitations were upheld by state departments who, having hitherto monopolized import and export of various commodities, feared that they would be driven out of the market by the trading companies.56 In the end, the large trading companies failed to thrive; the export sector continued to rely on their own export networks. Other well-known cases include the disastrous automobile and heavy trucks projects,57 and the policy fluctuations experienced in the petrochemical industry.58 Even the oft-quoted success story of the semiconductor project underwent years-long strife and controversy.59 Of these, the most notorious example can be found in the automobile industry. The government decided in the early 1950s that the automobile industry should be one of the first import substitution industries. Under the policy, the first automobile manufacturing company, Yue Loong Motor, was established in 1953 by a former Shanghai textile industrialist

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T. L. Yan who had a close relationship with the Chiang family. With the support of Chiang, the company received over $3 million from the US aid administered by the government. It cooperated with Japan’s Nissan and assembled passenger cars for the local market in 1960. To protect the company, the government prohibited further investment in automobile assembly and imposed high tariffs on imported passenger cars. Profiting from the protection, Yue Loong Motor failed to manufacture cars that could compete in the export market. In fact, the entire automobile industry, due largely to government protection, was inefficient and uneconomical, confined mainly to the simple assembly of imported parts and components with minimal transfer of technology. An attempt to capture the automobile rents was made by Teng-Eng Iron. Teng-Eng proposed a joint venture with Ford who agreed to transfer 100 percent of the technology to Taiwan in five years.60 Teng-Eng was the largest steel and machinery producer at that time, employing more than 4,000 workers. Not only did it have machine-producing experience, but it also promised to export automobiles to the Southeast Asian market. Teng Eng was an indigenous Taiwanese who had managed to build up close networks with various factions within the Kuomintang. Even so, he could not compete with Yan of Yue Loong who had personal connections with Chiang. The case of Yue Loong Motor demonstrates that besides expanding bureaucratic turf, rival power holders within the state also actively cultivated cartels and oligopolies in private businesses. Their control of state power gave them the ability to extend credit, ration foreign exchange, lower interest rates, and control supplies to selective businesses. This winner-picking exercise in turn enabled them to create their own social bases by selecting supporters. At the same time, policy instruments could also be used against the political supporters of their enemies.61 In this regard, the story of Teng-Eng continued. Teng supported Chen Cheng’s bid against Chiang Ching-kuo to succeed Chiang Kai-shek. Scared of the economic power and political stance of the company, Chiang forced TengEng into bankruptcy and then used the Emergency Decree to take over the company, under the excuse that the company was badly run. Teng-Eng was reorganized and turned into a state-owned enterprise under the provincial government. After the takeover, the market share of the company decreased. The company was run badly under the provincial government, building up a huge deficit year after year.62 In brief, although the core concerns over national security, regime survival, and recovery of the mainland provided the basic centripetal force binding the state machinery and subsequently institutionalized state-controlled development as a priority project, this centripetal coalition—buttressed by intrastate power struggles—did not automatically translate into effective agency. As we have seen, examples of policies that were either implemented out of parochial interests of particular power holders or thwarted by bureaucratic rivalries abounded. Our next question is thus what the origin of effective agency is.

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Political bases of episodic agency Rudolf and Rudolf remind us that unlike authority whose jurisdiction and resources are clear and constant, power in organizations is variable and mercurial.63 Its amount and distribution vary over time with the purposes and interests of participants; with the distribution of resources; with the participants’ control of uncertainty and discretion; and with the participants’ willingness to apply or to withdraw efficiency and effect. It follows that effective agency is essentially episodic, depending on the bureaucratic incumbents’ availability of power-related resources as well as their ability to mobilize those resources at a particular historical time to mark their own agenda as the agenda of the entire state machinery. This point is best demonstrated by several key developmental programs and reform initiatives in Taiwan. These programs and reforms were commonly hailed as the cornerstones of Taiwan’s transformation from an agricultural to an industrial economy. They took place under a variety of circumstances, including pressure for change linked to the survival imperative, the presence of determined bureaucratic incumbents with specific policy orientations, the availability of organizational resources and the mobilization of administrative relationships, and the building of alliances among different power clusters in support of a particular policy choice. A central figure in these programs and reforms is K. Y. Yin. As a nonKuomintang public official, Yin has been seen as the exemplar of technocracy in Taiwan’s state-led development. However, a closer look reveals a different story. Yin’s effective agency depended not on his realization of the legal-rational authority embodied by his office, but on his ability to mobilize his political relationships, forge political allies, exploit administrative gray areas, and twist organizational functions even in illegitimate ways to fulfill his policy goals. During the import substitution phase, a central agency role played by the state was the grooming of specific industries and individual enterprises, a process commonly referred to as “picking winners.” Much of this winner-picking exercise was directed by Yin. His use of the Central Trust of China to do so is worth noting. The Trust was originally set up for the procurement of military weapons. It subsequently extended its operation to handle all overseas trade for the government. These included military and civilian procurement, export sales of sugar, rice, and salt, and imports of fertilizer. In connection with its trade operations, the Trust ran warehouses, cargo insurance, and reinsurance. It also operated bank credits and life insurance for all military and civil servants. As soon as K. Y. Yin assumed the presidency of the Trust in 1950, he turned the procurement agency into a policy instrument to extend preferential loans to selected industries and enterprises.64 The Trust was also entrusted with the power to give out textile production contracts to spinners.65 Since domestic demand for textiles was great but the number of spinners and weavers was severely restricted, producers remarked that “spinning yarn was like spinning gold thread, printing cloth was like printing bank notes.”66 The Central Trust

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gradually assumed a special status by virtue of its control over huge bank credits, gold reserves, foreign exchange, civilian and military supplies, and business contracts. In the hands of K. Y. Yin it became a handy policy instrument for picking industrial winners and political supporters. The same applies to the case of the Taiwan Production Board under Yin’s control. The board was set up as a provincial bureau charged with the responsibility of supervising provincial government-owned enterprises. After successfully displacing the National Resources Commission, the board expanded its own power and turned itself into a super-ministry in charge of almost all economic and financial planning works at both central and provincial levels. The so-called planning involved not only the formulation of macroeconomic plans. The board also directly engaged in administering some of those plans as well. For instance, the board calculated the required annual yarn production by estimating the clothing needs of the population and then worked out the quantities of cloth, yarn, and raw cotton needed. It then controlled yarn production by limiting the number of spinners and their production capacities. All production applications were handled directly by the board. In other words, while busily engaged in planning and administration, the board also dealt with individual transactions, applications, complaints, etc.67 As such, the functional capacity of the board stretched very far. So far we have noticed that effective agency in the successful implementation of the import substitution projects depended upon the concentration of power and resources into the hands of specific bureaucratic incumbents. Such concentration of power and resources was possible because organizational responsibilities and jurisdictions were mercurial. As such, bureaucratic incumbents’ capacity to manipulate political control, rather than their technocratic competence, was the key to carrying out policy programs. But this is not the end of the story. Once import substitution had created a powerful status quo backed up by a huge protected public sector and a few privileged private oligopolies, resistance to change became enormous. This resistance came from within the state rather than merely from society at large (because of that, a high degree of state autonomy vis-à-vis societal interests cannot adequately account for policy change affecting the status quo). In addition to power concentration, effective agency in such circumstances rested upon the capacity of specific bureaucratic incumbents to forge political allies and reach political compromise with rival intrastate interests. In the case of Taiwan, although import substitution created huge vested interests in the public sector, the state had also successfully promoted export industrialization since the 1960s. On the face of it, the policy of export promotion proceeded rather smoothly. The government announced in 1960 a Nineteen-Point Fiscal and Economic Reform Proposal. It was followed by the enactment of the Statute for the Encouragement of Investment, which was implemented in three phases: 1960–70, 1971–80, and 1981–90. In the first phase that witnessed the shift from import substitution to export orientation, measures taken included: simplifying the multiple foreign exchange rates into a single

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rate, relaxing import restraint, simplifying export procedures, rebate of customs duties for exports, tax exemptions for exports, and providing export credit. Behind the scenes, intensive political bickering took place. This is best illustrated by the foreign exchange reform which paved the way for export liberalization. The reform hinged upon the interests of all power clusters and affected the subsequent trajectory of economic development in Taiwan. As mentioned earlier in our discussion, foreign exchange was intimately related to the constitutive functions of the state in defending Taiwan and in recovering mainland China. The rationing of foreign exchange formed the basis of state planning. As such, reforming the foreign exchange regime touched a sensitive nerve in the entire state machinery. The pre-reformed foreign exchange regime was an important means of revenue exaction for various power clusters and state agencies. Tight control over foreign exchange quotas, registration, and exchange rates was imposed as soon as the central government retreated to Taiwan. Since then periodic modifications of the foreign exchange regime were taken every two to three years, adding more rules and complexities each time.68 On the eve of the reform in 1948, a multiple exchange rates system was in force. Different exchange rates were applied to different import materials, resulting in several hundred exchange rates. And since there was a grave shortage of foreign exchange, state agencies and office holders profited easily from selling US currency on the black market or by manipulating transactions.69 The rationing of foreign exchange came under the jurisdiction of the Foreign Exchange and Trade Control Commission, chaired by Hsu Peh-yuan. Hsu and the then Premier O. K. Yui were both close to Madam Chiang Soong Mei-ling. Hsu refused to change the foreign exchange system, but the extent of predation and official corruption involved in foreign exchange transactions subsequently reached alarming proportions. This was hardly surprising since even state enterprises had to buy foreign exchange from various state authorities or other state enterprises.70 The foreign exchange regime was severely criticized by industrialists as well as state officials who over the years had established a close relationship with the private sector. K. Y. Yin was among the strongest advocates of reform. The pressure for change coincided with Chiang Kai-shek’s concern over widespread official corruption in foreign exchange transactions. Chiang was convinced that the Kuomintang lost mainland China because of corruption. Tolerating the increasingly ungovernable foreign exchange regime would threaten the survival of the Kuomintang. To avoid repeating the past mistakes, Chiang set up a highlevel committee to review the foreign exchange regime. Incidentally, the review took place in the midst of a power reshuffle. K. Y. Yin had been cleared of corruption charges and resumed his official capacity as the powerful secretary-general of the Economic Stabilization Board. At the same time, O. K. Yui had been criticized by the Supervisory Yuan and was preparing to step down as Premier. Yin’s patron, Chen Cheng, was taking over the premiership and expanding his control over economic and financial

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affairs in the bid against Chiang Ching-kuo. Soon Hsu was forced by Chen Cheng to resign from his position as Finance Minister and chairman of the Foreign Exchange and Trade Control Commission.71 K. Y. Yin began reforming the foreign exchange regime as soon as he took over the chair from Hsu. Eventually, a unified exchange rate with a devaluation of the New Taiwan Dollar took place in 1960. The reform was effectively implemented because Yin served at the same time as the vice-chairman of the Council for US Aid and the President of the Bank of China. The council was the main source of foreign exchange, while the bank was the sole official institution dealing with foreign exchange transactions. Here again we see the concentration of power in a specific bureaucratic incumbent as a precondition for successful policy change. Yin had been active in giving public speeches, writing newspaper articles, and publishing books to sell his policies. These activities were essentially attempts to create social pressure for his policies and to counter political resistance from within the state machinery itself. Besides domestic pressure, the impetus for foreign exchange reform also came from outside. The US government, which had been a main contributor to Taiwan’s foreign exchange reserve through its military and economic aid programs to Taiwan, demanded the institutionalization of a uniform and realistic exchange rate. In addition, the USA, through its representative Wesley C. Haraldson, put forward an Eight-Point Reform Proposal in 1959 to the Taiwan government as a precondition for the continuation of US aid. Besides foreign exchange reform, the proposal demanded a reduction of military expenditure, noninflationary fiscal and monetary policies, tax reforms, liberalization of foreign exchange controls, management freedom for public utilities, simplifying investment rules, and privatization of state enterprises. The general idea behind the proposal was to establish a free market economy. The proposal was supported by Yin and Chen Cheng. However, the idea of reducing military expenditure was turned down flat by Chiang Kai-shek who was the main guardian of military interests.72 After much deliberating, a compromise was reached when Chiang agreed to freeze the percentage of military expenditure in the state budget instead of a reduction in the absolute value of the military budget.73 Subsequently, a Nineteen-Point Proposal was drafted by the Council for US Aid under Yin and his colleagues. However, instead of aiming at the establishment of a free market economy, the Nineteen-Point Proposal emphasized investment promotion, restriction of consumption, and encouraging export. In essence, the Proposal did not end the protection of selective industries and state monopolies. Rather it provided incentives to add new export industries alongside the protected domestic market. In other words, it did not end import substitution but merely allowed the expansion of the export sector. The monopolistic sectors, mostly upstream industries, remained closed to newcomers and private investors, local and foreign alike. The Nineteen-Point Proposal was adopted after much compromise and

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alliance building. From the outset, the mounting US pressure to liberalize the economy provided the external stimulus for reform. At the same time, US aid to Taiwan was going to stop in the mid-1960s, therefore, if foreign exchange earnings were to be maintained, export expansion was needed. Fiscal and economic reform was thus an urgent measure to lessen Taiwan’s reliance on US aid. Unless urgent measures were taken, the sudden cessation of US aid could have dire consequences for the Taiwan economy and therefore would threaten the survival of the regime. Under such pressure, policy reforms were undertaken, but not without a delicate compromise that safeguarded the interests of various power clusters. In particular, the military was given a guarantee that they would be unaffected by budget cuts. Bureaucratic kingdoms and their crony enterprises continued to enjoy privileges under market protection. Even so, the subsequent programs were only half-heartedly implemented by departmental heads for fear of affecting their interests.74 In this example of successful policy change that created a favorable environment for export industries, episodic state agency derived from a concatenation of factors including power alignment, the mobilization of political relationships and organizational resources, and pressure from within and outside. Agency came not from a unified, consensual machinery or technocratic autonomy, rather it came from particular incumbents of functionally mutable institutions overpowering other sectional interests under peculiar circumstances. K. Y. Yin was no doubt a highly capable technocrat who was not only autonomous from societal interests but also well embedded in the private sector. But if Yin represents technocracy, then such technocracy did not operate in a vacuum. He was autonomous from social pressure, but certainly not from intrastate politics. Careful compromise needed to be reached to attain the necessary political support for policy change. And this was anything but a technical process. In other words, the basis of state agency is political, not technocratic.

Conclusion In sum, our discussion shows that the state machinery in Taiwan was fueled by intrastate rivalry. These rival powers built up their own bureaucratic kingdoms and crony enterprises by expanding their own terrains at the expense of their bureaucratic rivals. They manipulated the organizational responsibilities of their bureaucratic offices in accordance with their own vision. They defied efforts aiming at policy coordination. Such a character of the state in Taiwan is thus a far cry from the conventional image. First, it falls short of an authoritarian image of a monotonous party-state authoritarian order exercising singular hegemony over society. Second, it deviates from the developmental state idea of a depoliticized, benevolent, administrative state applying technocratic rationality to promote the collective good. Third, it contradicts the Weberian conception of the modern state as an impersonal apparatus of public power acting in accordance with legal rules and procedures.

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This deviation from the conventional image prompts us to reconsider the basis of state agency. In particular, it brings to light the limitation of the conventional view of state-led development as a technocratic process. Such a technocratic understanding fails to take account of the existence of intrastate power struggles. While state bureaucrats may be autonomous from societal influence, they are in no way insulated from intrabureaucratic contentions. In this regard, effective agency is episodic and political in nature. It is episodic because effective agency depends on a variety of circumstances which create the need for concerted actions. This happens when critical internal and external pressures threaten the survival of the ruling regime and the state machinery under its control. It is political because it involves the concentration of power in the hands of specific bureaucratic incumbents who successfully mobilize their organizational resources, forge political alliance, silence their bureaucratic rivals, or strike political compromises with other intrastate power holders. Of course, it is still too simplistic to assume that once agency is concentrated, the state will be able to implement its developmental projects effectively without constraints. It should be noted that the workings of state institutions are refracted by social conflicts which are political in nature. It is not enough to get the institutions right if the wider politics are “wrong.” Managing intrastate conflicts constitutes only one half of the story; managing social conflicts constitutes the other. The latter is studied elsewhere.75

Acknowledgements This study is funded by the Netherlands Organization for Scientific Research (NWO) and Leiden University Fund (LUF).

Notes 1 T. J. Cheng, “Democratizing the quasi-Leninist regime in Taiwan,” World Politics, 1989, vol. 61, no. 4, pp. 471–99. 2 T. W. Ngo, “Civil society and political liberalization in Taiwan,” Bulletin of Concerned Asian Scholars, 1993, vol. 25, no. 1, pp. 3–15. 3 R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press, 1990, p. 256. 4 Y. H. Chu, “The realignment of business–government relations and regime transition in Taiwan,” in A. J. MacIntyre (ed.), Business and Government in Industrializing Asia, St Leonards, NSW: Allen and Unwin, 1994, p. 121. 5 F. C. Deyo, “Economic policy and the popular sector,” in G. Gereffi and D. L. Wyman (eds), Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia, Princeton, NJ: Princeton University Press, 1990, p. 196. 6 S. Haggard and C. K. Pang, “The transition to export-led growth in Taiwan,” in J. D. Aberbach, D. Dollar, and K. L. Sokoloff (eds), The Role of the State in Taiwan’s Development, New York: M. E. Sharpe, 1994, pp. 47–89. 7 See, for example, S. Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press, 1990; G. Gereffi, “Paths of industrialization: an overview,” in Gereffi and Wyman, Manufacturing Miracles, pp. 3–31.

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8 A. Gerschenkron, Economic Backwardness in Historical Perspective, Cambridge: Cambridge University Press, 1962. 9 B. Jessop, State Theory: Putting the Capitalist State in Its Place, Philadelphia: Pennsylvania State University Press, 1990, p. 9. 10 See the discussions in E. A. Winckler, “Elite political struggle, 1945–1985,” in E. A. Winckler and S. Greenhalgh (eds), Contending Approaches to the Political Economy of Taiwan, New York: M. E. Sharpe, 1988, pp. 151–71; and M. T. Chen, Paixi zhengzhi yu Taiwan zhengzhi bianqian (Factional politics and political change in Taiwan), Taipei: Yuedan, 1995. 11 J. Y. Wu, Zhanhou Taiwan gongying shiye zhi zhengjing fenxi (A political economic analysis of Taiwan’s postwar public enterprises), Taipei: Institute for National Policy Research, 1992, pp. 4–6. 12 S. M. Chen et al., Jiegou dangguo ziben zhuyi (Deconstructing party–state capitalism), Taipei: Zili wanbao, 1991. 13 Ibid., p. 65. 14 Xin xinwen (The journalist), 21–7 May 1990, pp. 23–33. 15 S. M. Chen et al., Jiegou dangguo ziben zhuyi, pp. 48–9. 16 Republic of China, Academia Sinica, Institute of Modern History, Li Kuo-ting Archive, B414, “The issue of privatization of state-owned enterprises”; hereafter cited as Li Kuo-ting Archive. 17 Republic of China, Academia Historica, Chiang Kai-shek Archive, Special Documents, Economy, vols 10–13, “Outline of industrial policies and post-war five year construction plan,” hereafter cited as Chiang Kai-shek Archive. 18 Li Kuo-ting Archive, B412, “Operational guidelines, proposals for improvement, and R&D for state-owned enterprises.” 19 Ibid. 20 Wade, Governing the Market, pp. 110–11. 21 T. W. Ngo, “Business encirclement of politics: government–business relations across the Taiwan Strait,” China Information, autumn 1995, vol. 10, no. 2, pp. 1–18. 22 A list of all the enterprises under the National Resources Commission’s control can be found in Republic of China, Academia Historica, Documentary Collection of the National Resources Commission, vol. 1, Taipei: Academia Historica, 1993, pp. 407–18; hereafter cited as National Resources Commission. 23 Ibid., vol. 1, p. 215; vol. 3, pp. 361–2. 24 Ibid., vol. 1, p. 250. 25 Ibid., vol. 3, p. 363. 26 Ibid., vol. 1, pp. 224–41. 27 Ibid., vol. 1, pp. 290–1. 28 Ibid., vol. 2, p. 490. 29 Ibid., vol. 3, pp. 365–6. 30 Republic of China, Academia Sinica, Institute of Modern History, Taiwan Production Board Archive, 031/1945/1.1. 31 Taiwan Production Board Archive, 038/2184/1.1. 32 National Resources Commission, vol. 1, p. 189. 33 Ibid., vol. 2, p. 493. 34 Li Kuo-ting Archive, B59–22.1. 35 Taiwan Production Board Archives, 033/1961/1.1; 034/1962/1.1. 36 Republic of China, Academia Sinica, Institute of Modern History, Council for US Aid Archive, Textile Sub-committee, Minutes of meetings, 23 July 1952; hereafter cited as Council for US Aid Archive. 37 Li Kuo-ting Archive, C21, “Economic construction.” 38 Ibid. 39 Y. L. Shen, Yin Zhongrong xiansheng nianpu chugao (Draft chronology of Mr K. Y. Yin), Taipei: Chuanji wenxue, 1972, p. 194.

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40 The following is based on Y. F. Chang and S. C. Shen (interviewers), Dong Wenqi xiansheng fangwenlu (The reminiscences of Mr Tung Wen-ch’i), Taipei: Institute of Modern History, Academia Sinica, 1986, pp. 237–43. 41 Suggestions from senior officials to simplify the administrative structure were rejected out of such symbolic consideration. Chiang Kai-shek Archive, Revolution Document, vols 36 and 37, “Period of communist insurgency, politics: major political and economic facilities.” 42 For more examples of bureaucratic infighting, see Y. P. Wu, “In search of an explanation of SME-led growth: state survival, bureaucratic politics and private eenterprise in the making of the Taiwanese economy (1950–1985),” PhD dissertation, Leiden University, 2001. 43 L. I. Rudolf and S. H. Rudolf, “Authority and power in bureaucratic and patrimonial administration: a revisionist interpretation of Weber on bureaucracy,” World Politics, 1979, vol. 31, no. 2, 195–227. 44 F. W. Riggs, Prismatic Society Revisited, Morristown, NJ: General Learning Press, 1973, p. 29. 45 See the discussion in T. W. Ngo, “‘Bad governance’ under democratic rule in Taiwan,” in J. Demmers, A. E. Fernández Jilberto, and B. Hogenboom (eds), Good Governance in the Era of Global Neoliberalism: Conflict and Depolitization in Latin America, Eastern Europe, Asia and Africa, London: Routledge, 2004, pp. 224–45. 46 It is an extreme case of what Anderson describes as the nation-state as an amalgam of legitimate fictions and concrete illegitimacies. B. Anderson, Imagined Communities: Reflections on the Origin and Spread of Nationalism, London: Verso, 1983. 47 National Resources Commission, vol. 1, p. 356. 48 S. W. Y. Kuo, The Taiwan Economy in Transition, Boulder, CO: Westview Press, 1983, p. 36. 49 C. J. Shiau, Taiwan diqu de xinzhongshang zhuyi (The neomercantilism in Taiwan), Taipei: Institute for National Policy Research, 1989, p. 62. 50 Council for US Aid Archive, no. 31–00.49.02 51 T. W. Ngo, “Economic intervention and non-intervention: the ruling strategies of Hong Kong and Taiwan compared,” Hong Kong Journal of Social Sciences, 1998, no. 12, pp. 1–16. 52 W. Sun, Sanmin zhuyi (Three principles of the people), Taipei: Central Cultural Heritage Supplies Unit, 1985, p. 260. 53 As the highly influential official K. T. Li frankly admits, Sun Yat-sen’s doctrine is “general enough to allow a variety of interpretations.” K. T. Li, The Evolution of Policy behind Taiwan’s Development Success, 2nd edn, Singapore: World Scientific, 1995, p. 61. 54 Ibid., pp. 162–3. 55 K. T. Li, “Jingjibu jiagong chukouqu chengli sanshi zhounian yiwang” (Reminiscences on the thirtieth anniversary of the setting up of the export processing zone by the Ministry of Economic Affairs), Ziyou Zhongguo zhi gongye (Industry of Free China), March 1997, vol. 87, no. 3, p. 5. 56 K. J. Fields, Enterprise and the State in Korea and Taiwan, Ithaca, NY: Cornell University Press, 1995. 57 See G. W. Noble, “Contending forces in Taiwan’s economic policymaking: the case of Hua Tung Heavy Trucks,” Asian Survey, June 1987, vol. 27 no. 6, pp. 683–704; and W. Arnold, “Bureaucratic politics, state capacity, and Taiwan’s automobile industrial policy,” Modern China, April 1989, vol. 15, no. 2, pp. 178–214. 58 See J. H. Wang, “Guojia jiqi yu Taiwan shihuaye de fazhan” (The state and the development of Taiwan’s petrochemical industry), Taiwan shehua yanjiu jikan (Taiwan: a radical quarterly in social studies), February 1995, no. 18, pp. 1–37. 59 C. S. Meaney, “State policy and the development of Taiwan’s semiconductor industry,” in Aberbach et al. (eds), The Role of the State, pp. 170–92. 60 H. C. Hsu (interviewer), Minying Tangrong Gongsi xiangguan renwu fangwen jilu,

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62 63 64 65 66 67 68 69 70

71 72 73 74 75

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1940–1962 (Forging the future: an oral history of the Teng-Eng Iron Co., 1940–1962), Taipei: Institute of Modern History, Academia Sinica, 1993, pp. 174–5. See the discussion in T. W. Ngo, “Developmental imperative and spoliatory politics: a comparative study of mainland China, Taiwan and Hong Kong,” in L. Tomba (ed.), East Asian Capitalism: Conflicts, Growth and Crisis, Milan: Feltrinelli Editore, 2002, pp. 193–220. Republic of China, Academia Historica, Chiang Ching-kuo Archive, D2339, Economic Categories 1–3. Rudolf and Rudolf, “Authority and power,” p. 206. Shen, Yin Zhongrong, pp. 115–16. Council for US Aid Archive, Textile Sub-committee, Minutes of Meetings, 1952. K. H. Hsieh (interviewer), Wu Xiuqi xiansheng fangwen jilu (The reminiscences of Mr Wu Hsiu-chi), Taipei: Institute of Modern History, Academia Sinica, 1992, p. 191. Council for US Aid Archive, Minutes of Meetings. Li Kuo-ting Archive, C21–30.1, “Study on the complete modification of ‘Laws regulating foreign exchange’ in our country.” W. A. Yeh, “Taiwan jingji sheji jigou de bianqian” (Changes in Taiwan’s economic planning organizations), memo, Taipei: Institute of Economics, Academia Sinica. A substantial proportion of economic activities involved the buying and selling of foreign exchange among state institutions. For example, the US dollar used by Taiwan Sugar was purchased from the Bank of Taiwan, Taiwan Electricity, Taiwan Fertilizer, Taiwan Railway Bureau, Supplies Regulatory Commission, Taiwan Textile, Taiwan Cement, Command Headquarter of the Army Corp, Gold and Copper Bureau, and Taiwan Food Bureau. See National Resources Commission, vol. 1, p. 351. Yeh, “Taiwan jingji sheji jigou de bianqian.” L. S. Wang, Li Guoding koushu lishi (The oral history of Li Kuo-ting), Taipei: Zhuoyue, 2001, p. 115. Ibid., p. 139. Ibid., p. 143; T. J. Wang, Women ruhe chuangzao le jingji qiji (How we created the economic miracle), Taipei: China Times, 1978. See T. W. Ngo, “Possible and impossible games: institutional order and social conflict in Argentina and Taiwan,” in R. Boyd and B. Galjart (eds), Political Conflicts and Development in East Asia and Latin America, London: Routledge, forthcoming, 2005.

6

Local state structure and developmental incentives in China Maria Edin

States in East Asia have widely been characterized as strong developmental states whose bureaucrats have picked winners among industrial sectors and guided growth in anticipation of comparative advantages.1 In Japan, Taiwan, and South Korea, economic bureaucrats selected industries which they regarded to be of importance for future development and directed capital into these industries. As a result, the East Asian states are today very competitive in, for example, the high-technology industry which was nurtured and protected by the state. The states were led by technocrats who, insulated from societal demands, formulated strategic industrial policies in the national interest. In the common characterization of East Asian developmental states, their bureaucracies are autonomous from society and Weberian in nature. This conception of the East Asian states has been heavily criticized for its lack of empirical underpinnings and undertheorization, calling for a reassessment of the model. Not only have critics of the developmental state concept pointed out that corruption and patronage are widespread in the East Asian countries, they have questioned how economic growth has come about and they have also contested the insulated and Weberian nature of the state. Corruption and other forms of rent-seeking indeed coexisted with the high growth.2 Economic bureaucrats cooperated closely with industry and some authors argue that it was business leading bureaucrats rather than bureaucrats leading business.3 Evans’s concept of embedded autonomy vividly illustrates the theoretical muddle the model is in.4 Most of all, the Weberian conception of East Asian bureaucracies remains a mystery clouded in doubt. At the root of the problem is that the developmental state approach suffers from too much inference from policy outcome. From high economic growth, it has been inferred that the state has been developmental and not engaged in corrupt practices without adequate operationalization about what constitutes developmental and predatory behavior. Furthermore, it has been inferred that the state is autonomous because its economic policies have been carried out without the support of important interest groups. From the postulated autonomy of the bureaucracy, in turn, it has been inferred that it is Weberian. In short, many of the features of the East Asian development state have been inferred from its effects rather than empirically observed, which is highly problematic.

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This project joins the debate on the developmental state by a close study of the local state and its promotion of economic growth in China. It is highly critical of the lack of empirical foundation and inadequate theorization of the developmental state discourse, but it does not reject the developmental state phenomenon as such. It is clearly relevant to focus on states that promote economic growth, but we need to gain a better understanding of how it is being done and why. This author strongly emphasizes an empirical approach to studying how the state assists business and, even more importantly, to studying the internal state structure. The insulated and Weberian nature of the state bureaucracy should not be inferred from policy outcome, economic growth, but empirically examined. One aim here is to examine the claim that bureaucrats are insulated by looking at the different roles played by local governments and local enterprises when winners are picked. Thus, it is the implementation of policies that stands in focus rather than policy intentions as in many previous studies. A tendency in the field has been to equate good outcomes with wellfunctioning institutions, and vice versa. Another aim is to study the political incentives and constraints generated by the internal state structure under which local officials work. In this way, the state as an entity is disaggregated. This project starts at the other end, so to speak, and looks at the political institutions that give rise to the incentives and constraints of local officials, which in turn shape their economic behavior.5 The outline of the chapter is as follows. The first section describes what the local state has done to promote economic growth in China, and compares it with how the state guided development in East Asia. The focus is on how the local projects favored with preferential treatment were selected, thereby addressing the nature of state–business relations. The second section describes the economic and political incentives and constraints of local officials, followed by a characterization of the Chinese party-state organization. In the concluding part, the implications of the findings for the East Asian developmental state model, and for our thinking about state strength and state capacity, are discussed. The study draws on fieldwork that I carried out between 1996 and 1999. I spent more than seven months in counties and townships in rural China where I conducted some 150 interviews with leading officials and local entrepreneurs. The fieldwork was mainly carried out in the developed coastal areas in southern Jiangsu, Shandong, and Zhejiang provinces.6

The local state and business in China It is generally acknowledged that the township and village enterprises (TVEs) in rural China have been the backbone of China’s economic success. It is by now also fairly well established that the local state7 has played an active role in promoting the development of rural industry, and the work by Jean Oi has been particularly important in this respect.8 Oi coined the concept of local state corporatism, where local government is viewed as a business corporation and where officials act in a manner that is equivalent to a board of directors.9 China

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thus differs from the classic developmental state model in that it is the local state that has been crucial in promoting development, and indeed acted as an entrepreneur itself.10 This is not to say that the national state has been passive. It sets the guidelines which provide the framework for local governments, but it is the local state that actively promotes enterprise development and, in the process, makes the economic policies. The traditional central planning system has been replaced by a system of active industrial policies in China. Preferential policies have become an integral part of state intervention and are designed to influence a firm’s decisions as to what to produce.11 Yang describes how Chinese planning agencies, learning from their East Asian neighbors, have become convinced that industrial policy is an appropriate tool for combining a market economy with continued state involvement.12 During the 1990s, the Chinese authorities emphasized the importance of encouraging the development of enterprise groups (qiye jituan), modeled on the Korean chaebols.13 It was their aim to get a few Chinese enterprises onto the Fortune list of the world’s largest enterprises by the year 2000. In particular, the central authorities wanted to develop a number of enterprise groups in strategic sectors. On a national level, two sets of industrial policies were formulated. The 1989 round of industrial policies were too all-inclusive to be effective.14 The 1994 round, in comparison, targeted five pillar industries—machinery, electronics, petrochemicals, automobile, and construction—for national promotion.15 Industrial policies were then sent down through the plans, level by level. At the local level, local governments drew up their own plans on the basis of national plans and with due consideration to local conditions. In comparison with East Asia, where specific products were discouraged or encouraged, national industrial policies in China are formulated in very general terms. In addition to the five pillar industries, it has been stipulated that projects containing high technology and high levels of value added are to be supported.16 Many of the local projects receiving preferential treatment no doubt fall into these broad categories. The question must, however, be about the extent to which national industrial policies determine the process whereby winners are picked at the local level. On closer scrutiny, it turns out that the actual function of national policy at the local level is to restrict choice rather than to operate as the determining factor with regard to which products will be promoted. The planning commissions I have interviewed gave a rather uniform picture in this respect. One director expressed it as follows: “The state industrial policy has very exact rules as to which kinds of products must be restricted but it is not very detailed regarding which kinds of products the central government wants to support.”17 After examining local plans, it is apparent that many of the projects designated to receive preferential treatment belong to the five national pillars but there are also many local pet projects. Almost all areas have targeted specific projects. In one county in Shandong, for example, six sectors or rather products were promoted: textile and garment (blue jeans clothing), special machinery (machines for making paper), petrochemicals, electric components (frequency adapters), building material, and furniture (sofas).18

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As in the case of East Asia, local governments select industrial sectors and enterprises to be nurtured and promoted. Blecher and Shue have highlighted the coordinating role played by the county government.19 The county-level planning commission draws up the plan that lists which local enterprises and projects have been selected for preferential treatment. The county plan lists key projects (zhongdian xiangmu), and, according to one township party secretary, the most important assistance the township government could render was to ensure that their own key enterprises were listed in the plan.20 All relevant government departments are namely urged to pay due attention to the key projects that are listed and they are expected to grant them highest priority.21 Township governments rank their township enterprises on the basis of a number of different criteria, and thereby create internal competition, as the highest ranking enterprises can make it into the county list.22 These enterprise lists are government documents distributed to relevant departments. One such list contained thirtysix enterprises categorizing them as key enterprises.23 Here is a clear parallel with the manner in which the developmental state in East Asia exposed their firms to the international market and hence to international competition. In China, township enterprises are also exposed to competition, but internally within the county or within the municipality. Those listed enterprises, both collective and private, will receive preferential treatment and be promoted by the local state and granted priority with regard to gaining government attention and facilitation of bureaucratic procedures, assistance in being granted bank loans, tax concessions, approval of applications for land, water and electricity, and so on. One of the most important forms of assistance local governments are able to render their enterprises is help in raising capital. As in East Asia, the government was at least up to the end of the 1990s able to exercise considerable influence over banks that were provided with lists of enterprises which had been granted entitlement under the government policy loans. Before the recent reforms of the bank system, township leaders could exercise indirect influence over banks through various channels, such as through the party and through approval of the appointment of the branch director at the township level. The county leaders convene a meeting in which the government departments and the financial institutions participate, where the heads of banks are informed of the key projects for the year ahead and which they are expected to support. Government bureaux, banks, and enterprises all provided a similar picture: bank loans are not guaranteed to listed enterprises but their listing greatly facilitates the process, whereas if enterprises are not listed, it is very difficult. In Zhejiang, the county leaders convene a meeting where the leaders express the hope that banks will support the key projects of the plan and a support scheme is drawn up, to which the banks, in principle, agree to follow.24 As banks today are becoming increasingly commercialized, they look mainly at profits. One county branch of the Agricultural Bank granted one loan of the ten recommended loans to enterprises, leaving other banks in the area to shoulder responsibility for the other nine enterprises.25

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Local governments in China target certain industrial sectors, enterprises, and projects for promotion in a familiar fashion to the developmental state in East Asia. Our concern here is with how the winners are picked. In East Asia, the economic bureaucracy picked the winners in anticipation of market forces, they gave preferential treatment to projects which they believed to have future potential. Here we find that local state-led development in China and the conception of East Asian developmental state differ. While East Asian bureaucrats supposedly picked winners ex ante, Chinese local cadres picked winners ex post. In China, local governments support those who are already successful, those who have already demonstrated good performance rather than those with promising future potential. One township official put it to me very clearly: “It is not that we first have an idea of a suitable product and then set it up . . . No, the most common situation is that the township governments support enterprises which have already developed very well.”26 In this township, the two key sectors, the clothing and textile industries, already occupied the market before becoming targeted industries. Another planning commission director explained that new products originate at the enterprise level and the township- and county-level government support the successful projects, but the selected key projects are to be in accordance with government policy, that is no polluting, no waste, no low technology, and no repetitive projects.27 Economic initiatives in China usually originate from the enterprise level where the township and county level select the successful projects for promotion. As one township mayor expressed it, the enterprises set up projects which the township government attempts to have listed under the state plan.28 The Chinese way of picking winners differs from East Asia, where winners have been nurtured. Lin, Cai, and Li characterize Chinese planning as an expost judgement, therefore implying that it is a meaningless exercise.29 I would like to turn the reasoning around and argue that the system provides room for initiatives from below while at the same time it is sufficiently coherent to be able to adopt successful cases and target them for promotion. The local state in China does not govern the market to the same extent as the East Asian developmental state, but it certainly directs local development by concentrating local resources on strategic key enterprises. As economic initiative and the planning process in China are driven from the bottom up, each level of local government thus functions more as protectors and promoters. In China, then, using Wade’s terminology the local state follows, rather than leads, the market but I prefer the term “reinforcing the market”. When we examine the criteria for enterprises and their products to be targeted for promotion, we find that most of them relate to financial indicators, such as level of profits. In the Shandong county described above which targeted furniture, for example, criteria for promotion were: high-level technology, large markets, foreign-exchange earning capacity, and high efficiency.30 Even though the profit indicator is the most important criterion for targeting enterprises, the local state also actively promotes projects that involve high technology. Of thirteen key projects in 1996 in one Shandong county, nine were projects approved

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by the science and technology commission, which was seen as a guarantee of high technological level.31 In addition, as local governments are very concerned with the size of projects, large-scale projects are assigned high priority. In all areas, local government are actively encouraging mergers of enterprises into enterprise groups. There was a frenzy throughout China in the late 1990s to establish enterprise groups.32 In some areas where private enterprises dominated, the local state draws up special programs to promote the growth in scale of enterprises. In Zhejiang in the late 1990s, the province-level government recommended that preferential treatment should be provided to small giant projects (xiaojuren), basically a project to support small and medium-scale enterprises which had captured a large share of the market. At the local level, it often meant supporting the largest local enterprises. In one Zhejiang county, a list of twenty-one small giant enterprises was publicized and these enterprises were to be given special attention by government departments at different levels.33 In spite of its name, all twenty-one small giants were large enterprise groups, forming the backbone of the county’s economy. In sum, to receive government assistance in China at the local level, enterprises have to be good performers. Support is thus conditional upon performance. The difference between East Asia and China is that while continued support is contingent on performance in East Asia, Chinese local enterprises have first to show successful performance before being granted preferential treatment. Criteria for targeting enterprises in local China are based on more short-term considerations than the criteria described in the case of East Asia. In China, scale and profit indicators seem to outweigh more long-term indicators. The methods for picking winners have a bearing on government and business relations: extensive cooperation between government and business enabled the state to pick winners ex ante and to guide enterprises in the East Asian case. In the case of China, where winners are picked ex post, the division of labor between government and business is more clear. In the East Asian states, there has been far-reaching cooperation between government and business. Disagreements have arisen, not about the cooperation itself, but about who follows and who leads in the partnership.34 Cooperation in Japan was manifested in the deliberation councils, which are official organs under the respective ministries. Representatives from industry were regularly invited to discuss economic policies with the economic bureaucrats in these deliberation councils.35 Elaborate linkages with the private sector were established in Japan, Taiwan, and South Korea. Weiss states that these linkages may be thought of in terms of policy networks as they enable state agencies to gain adequate information from, and to coordinate agreement with industry.36 Economic bureaucrats thereby obtain crucial market information from industry representatives but at the same time the in-house expertise of the economic bureaucracies is considerable. In the case of China, there is a simple division of labor between local governments and local enterprises whereby enterprises initiate industrial projects and local governments target successful projects for promotion. There is thus no problem in establishing that it is the enterprises

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that take the economic initiative, and the government that reinforces market outcome through preferential treatment. The dilemma in the Chinese context, rather, has been whether it is at all possible to distinguish between government and enterprises at the township level. Oi’s concept of local state corporatism supposes that the local state and their collective enterprises together form one entity, a business corporation led by the party secretary.37 There are a number of ways in which enterprises and local governments may be said to have merged in local China. First, government actors often function as the enterprise manager, indirectly if they take important investment decisions or directly if they are also the appointed enterprise manager. Second, enterprise managers are systematically incorporated into the party-state organization, especially the successful enterprise managers, as deputy managers of the economic committee, deputy township party secretary, or member of the People’s Congress, People’s Consultative Conference or the party committee.38 Third, their interests collide, just as was the case with regard to economic bureaucracy and big business in East Asia—contrary to the view of some who have persisted in maintaining that the state was in fact insulated from industrial group interests. The favored managers join the party and can lobby in the interest of their enterprises, and government officials’ work performance in part depends on enterprise performance. The local state in China cannot be conceived as autonomous from local business as it is in fact difficult to distinguish the two from each other. In spite of the fact that the local state is not autonomous from strong local interests—on the contrary, it is dependent on them—the state is still able to promote local development by concentrating scarce resources on developing the largest and key profit-making enterprises. As the economic and political incentives of local government leaders are different from those of enterprise managers, it is fitting to examine empirically the type of state administration that has led economic bureaucrats to promote development at the local level in China. This microlevel study looks into the incentives and constraints, generated by the structure of the party-state organization, that local bureaucrats face.

The Chinese party-state organization The dominant explanation in the China field as to why state agents have promoted development is that local cadres had economic incentives to do so, both on a collective and on an individual level. On a collective level, local governments were granted fiscal incentives by economic reforms since those reforms provided them with residual claimant rights over enterprise profits. After fiscal reform, local governments could keep part of the revenues. Oi writes that the benefits to townships and villages to be gained from developing their own enterprises are fairly obvious: “the reasons center on revenue.”39 Walder conceives of government officials as solely economic actors, whose incentives and constraints must be understood as surely as those of firms. He poses the question as to what incentives drive local officials to play such an active role in the development

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of local public industry and provides the reply, “The answer, in a word, is revenue.”40 The fiscal incentive explanation falls within the political economy approach which views state agents as revenue maximizers.41 Revenue, however, can be used in different ways, productive and unproductive, and the assumption of the political economy approach that political leaders will maximize revenue itself begs the question as to how leaders use the revenue. On an individual level, bonus payment is linked to the development of township enterprises in the coastal areas.42 Bonus payment constitutes a substantial part of the salary which is less than RMB 1,000 per month in rural areas. In southern Jiangsu, where collective industry dominates, township cadres in a middle-ranking township received RMB 4,600 in bonus in 1995. The leading cadres of the highest ranking township in the same county received RMB 8,580 in bonus the same year.43 But also in areas where private industry dominates, local officials receive a bonus. In one Zhejiang county, the average bonus for township cadres amounted to more than RMB 2,500 in 1997.44 Here, it is appropriate to make a distinction between economic incentives derived from sharing part of the enterprise profits and economic incentives presented as a reward for fulfilling work tasks set by a hierarchical party-state bureaucracy. Bonus payment, in principle, is a device to encourage agents to work towards the organizational goals, something we will discuss below. However, in the examples given above, bonus is not financed from the state budget but paid from the township’s own collective funds, that is, funds from local projects such as township enterprises. Paying a bonus therefore appears to be a conscious strategy on the part of local governments, approved by the central authorities, to supplement the basic salary for local cadres. In other words, the bonus is contingent on the condition of local finances and is not provided by the state, which reduces its organizational incentive. Economic incentives are important when trying to understand cadre economic behavior in China, and have been well described in the literature.45 Not equally well described are the political incentives that to a large extent govern local leaders’ behavior.46 Political incentives are generated from the cadre responsibility system (gangwei zerenzhi), a system set up by higher levels to hold local leaders accountable.47 In the 1990s, the Chinese Communist Party (CCP) attempted to strengthen the control over appointment and evaluation of local leadership cadres (lingdao ganbu). Local cadres are agents of higher levels who need to ensure that their agents work towards attainment of the principal’s goals. The CCP is still communist in its organizational structure, and the nomenklatura forms the basis of the system. The nomenklatura is a list of leading positions over which the party controls appointment.48 Party committees exercise authority over the appointment of senior personnel, as well as promotion, dismissal, and transfer one step down the administrative hierarchy, and the lower level is accountable to the next higher level. I will here describe the essential features of the cadre responsibility system that prompts local leaders to engage in economic development. It should be pointed out from the start that some of the political incentives are direct and others are indirect:

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incentives are direct (or intended) when state agents are rewarded for promoting development, and indirect when state agents promote economic growth as a means towards other ends and therefore is largely unintended by the leadership. As part of the cadre responsibility system, the party secretary and the township mayor literally sign performance contracts (gangwei mubiao zerenshu) with the county level.49 In these contracts, township leaders pledge to attain certain targets laid down by higher levels. The content of the contract varies between areas and over time depending on what the central authorities, the provincial level, and the county level wish to emphasize. Performance targets can be adjusted and new ones added in response to changing circumstances. It is on the basis of fulfilling these work targets that local leaders are evaluated, and economic and political rewards are tied to these targets. Work targets are internally ranked in importance: there are soft targets (yiban zhibiao), hard targets (ying zhibiao), and priority targets with veto power (yipiao foujue). Hard targets tend to be economic in nature while priority targets tend to be political in nature. Completion of hard targets is important both for bonus and for political rewards, but the completion of priority targets is basic to personnel decisions due to its veto power. If township leaders fail to attain these priority targets, it would cancel out all other work performance, however successful, in the comprehensive evaluation at the end of the year. Hard targets are typically drawn from the economic and social development plan. Tax revenues paid to higher levels were, not surprisingly, invariably made a hard target in all the areas where I conducted field research. With regard to industrial development, the township mayor of a rapidly developing township in Shandong signed to achieve the targets of RMB 700 million in output value, RMB 830 million sales income, and RMB 54 million in profit in 1997. The two key industrial projects (gongye zhongdian xiangmu) of this township that were listed in the county plan as key projects were also listed in the performance contract.50 Priority targets with veto power are exclusively used for key policies of higher levels or the county itself. There are two priority targets which are enforced nationwide, mirroring the importance which the CCP places on these policies: family planning and to uphold social order (shehui zhi’an). Serious disturbances of social order will cancel out successful work performance in other fields of government work, and what constitutes such disturbances varies between areas. In one Zhejiang county, for example, three situations counted as violation of social order: economic crime (where more than RMB 200,000 were embezzled), violence (resulting in one person’s death), and demonstrations (when more than fifty people gather).51 If areas experience particular problems that are deemed important by local authorities, it may also become a local priority target. As part of the evaluation by higher levels, a democratic appraisal meeting is held where colleagues and “the masses” gather to evaluate the party secretary and township head. The term “masses” (qunzhong) refers to representatives of the level immediately below the unit undergoing evaluation. In the case of the township leading cadres, it is the village leaders and the township-run enterprise

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managers that constitute the masses. The rating is conducted anonymously. Many interviewees do not attach large importance to this rating, but it sends signals and provides information to higher levels. If many people express dissatisfaction with a leader at the meeting, the party organization department begins to investigate.52 Petitioning, or the practice of submitting letters of complaint to higher levels, is also both a criterion in evaluation of local leaders and a channel of information that facilitates monitoring by higher levels. Information from citizens no doubt plays a major role in uncovering cadre misbehavior. Complaint letters have a direct effect on the evaluation results: if too many complaints are filed, or if complaints are not dealt with properly, it reduces the evaluation scores.53 But citizen complaints take on a special importance since it is intimately connected to the priority target of upholding social order, reflecting the center’s concern with maintaining stability. As we have seen, if township leaders fail priority targets, it will cancel out all other work performance in the annual evaluation and cannot be taken lightly by township leaders. At the end of the year, a comprehensive evaluation of the work performance of local leaders is carried out. Just as for enterprises, competition between party-state cadres at the same administrative hierarchical level has been introduced under the cadre responsibility system. Township leading cadres are placed in an internal ranking order within the county on the basis of the evaluation results. Rewards are based on the evaluation results and the subsequent ranking of township leaders. The results are officially announced, and sometimes published in the local press, thereby putting pressure on those involved. The parallel with enterprise ranking lists is obvious. Economic rewards that were discussed earlier only serve as a weak bureaucratic incentive since the bonus is paid from local funds. Top-ranking township leaders will be awarded the political title of advanced leader (xianjin lingdao), or declared to be a model leader. In one Zhejiang county, leading cadres of the first three ranked township were titled advanced leaders in accordance with local regulations.54 To score high in evaluation and to be declared an advanced leader increases one’s chances of promotion but does not guarantee it.55 Perhaps more important than regular promotion is that successful township leaders are commonly promoted to hold concurrent positions at higher levels of the party-state, just as enterprise managers hold positions in the party-state. One township party secretary of the first ranking township in a southern Jiangsu county, for example, concurrently held the position of vice-party secretary of that county.56 As for top-ranking enterprises, it is easier for top-ranking leaders awarded the title of advanced leader to receive preferential treatment.57 In sum, the cadre responsibility system generates political incentives for township leaders to promote growth. Higher levels of the party-state have constructed a system which induces local leaders to promote growth. Economic growth targets, in particular industrial development, are important criteria in the cadre evaluation. Economic development is also a means to attain other work targets, such as supporting agriculture, increasing living standards, providing social welfare, maintaining the standard of education, reducing the burden

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of peasants, and so on, which are also criteria in evaluation. Budgetary funds are insufficient, and without income from the township enterprises and other local projects, it is difficult for township governments to attain the other work targets. These are direct incentives for local leaders to promote economic development, but these direct incentives only give part of the picture. There are also indirect incentives for township leaders to promote growth, which may have been unintended by the central leadership. Economic development has come about not only as a response to a constructed incentive system, but also as a response to the insecurities of the cadre administrative system. To reveal the other part of the picture, the negative incentives, or the constraints, that local leaders work under must be discussed. The Chinese party-state organization has in the era of reform and decentralization increasingly relied on goal management, institutionalized through the cadre responsibility system, to rule lower levels. Local governments have become more free to choose their own methods as long as they fulfill higherlevel targets. Monitoring agencies fall into this pattern in so far as they will not intervene unless grave problems are reported. However, higher levels of the party-state have their own agenda, and to enforce their priority targets they may enlist the help of monitoring agencies. Given that most officials have engaged in some unorthodox methods, and in a system where it is not clear what is illegal and not (and which may change over time), it is not difficult for monitors to find faults if they set their mind to it. In one drive to clamp down on private enterprises in a Shandong county, for example, the best private enterprise in town was accused of tax evasion but the charge was dropped when the manager agreed to merge with one collective enterprise.58 Township officials are especially vulnerable during corruption campaigns when monitors need to complete their quotas of uncovered cases. Monitors may sometimes also act on the information by local community members. One study reports that 80 percent of the clues about cadre misconduct and financial irregularities came from letters of complaint sent by the public.59 Township leaders, as middlemen in between higher levels of the party-state and the local community, work under strong pressure in an uncertain bureaucratic environment.60 They risk both being targeted by the county in one of their campaign drives or by dissatisfied local community members. Community members and officials of higher levels may cooperate if their agendas coincide. How can township leaders cope with this uncertainty? I argue that promoting economic development is a way for township leaders to cope with uncertainty. To avoid being targeted in a campaign by higher levels, local officials of course use their political connections. But there are also indications that it is easier to avoid being targeted if cadres have been successful in furthering economic growth. Being economically successful certainly also helps to make good connections. Up to a certain limit, leaders who have been successful in promoting economic growth may even be allowed to be more corrupt.61 Furthermore, local citizens may be less inclined to submit complaints to higher levels concerning their grievances and local distortions of national policies if township leaders

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have been successful in promoting growth. To date, the majority of peasant protests and demonstrations have occurred in poor areas. In short, economic development is an asset, or insurance, that reduces the risk of being targeted in a politically uncertain environment. According to this interpretation, township leaders not only promote growth because it is rewarded by higher levels but also because it is a means to survive in the system and to gain some control over their work situation. This understanding might help us shed light on recent studies that show no correlation between high development and the promotion of mayors.62 This is because the party organization rules not only through positive incentives but also through uncertainty. It follows that economic development at the local level has in part been an unintended, although by no means undesirable, consequence of the political system. Institutions produce unintended consequences since actors work within multiple sets of rules and also exert both direct and indirect effects upon individual behavior. Political institutions will not only influence official behavior, but also the behavior of local society which will then in turn modify the behavior of state actors.63 Borrowing Tsebelis’s terminology, nested institutional arrangements place conflicting pressures on actors.64 In this way, an actor’s behavior depends upon the way in which he or she balances competing pressures. This finding points to the danger of inferring the nature of political institutions from policy outcome when economic development has partly come about as an unintended consequence of the political system. The portrayal of the Chinese party-state organization that emerges here is not wholly Weberian. In the discourse on the East Asian state bureaucracies, there has been no systematic analysis of which features of the bureaucracies are Weberian but authors usually point to their insulated character, and the special status of officials together with the meritocratic elements that allowed officials to pick the winners. Officials follow long-term career paths within the bureaucracy, and generally operate in accordance with rules and established norms.65 There are certain elements of Weber in the Chinese party-state organization as well: the Chinese party-state is clearly hierarchical and lower level officials are accountable to the higher levels who appointed them. Although the exit rate has increased since the beginning of reform, many officials who have entered the bureaucracy pursue a life-long career within the party-state. But the way the party-state functions in China is, as I hope the above analysis has shown, the antithesis to the principles of Weberian bureaucracy. It is not rule-oriented at all and least of all it values predictability. On the contrary, the Chinese leaders rule the party organization by uncertainty. The Chinese party-state organization is much closer to the new public management type of bureaucracy. The new public management model is based on the view that the experience of the private sector is superior and it should therefore be applied to the state administration, that is to say that government should function in accordance with the same principles as private enterprises.66 The primary objective of this approach is to downsize government administration and to extend and liberate market forces. A second, and subordinate, objective is to import

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market principles into the operation of government administration itself.67 The Chinese Communist Party has introduced market reforms, similar to those reforms that have swept public administrations all over the world, into their cadre management system as described above. Chinese leaders govern their internal party organization by goal management, rather than by rule management. Politicians formulate broad policies and main strategies, and set targets for lower levels of the administration. Higher levels are less concerned about which methods are used to achieve the goals. While the Weberian model emphasizes predictability, derived from the impartial implementation of rules and norms, the new public management model thus stresses efficiency and above all performance. Since government should function according to the same principles as private enterprises in the new public management, the borderline between government and business becomes blurred. At the local level in China, government and business closely cooperate and are difficult to distinguish from each other.

Implications for the developmental state theory What are the implications of the findings presented here for the developmental state theory? The case of the local state and its promotion of economic growth in China well illustrates the problems of the developmental state theory, but could also point the way forward. The lack of empirical foundation in the debate and its undertheorization with regard to the nature of the state have been discussed here. I see as the most serious problem that both the insulated and the Weberian nature of the state bureaucracy have been inferred from its assumed policy outcome. When the empirical underpinnings and theoretical claims are re-examined in the Chinese case, it turns out that the local state was far from insulated from strong local interests and had more or less merged with local business. This study furthermore shows that the Chinese party-state organization hardly bears any resemblance to the Weberian meritocratic bureaucracy, but that it is much closer to the new public management model of bureaucracy. In fact, local state-led development had in part come about as an unintended consequence of the political institutions. While the findings here pose grave problems for the developmental state theory, this is not the same as saying we should abandon the entire theory. It is still highly relevant to increase our understanding of states that promote economic growth, and the analysis of the Chinese case here also shows how a developmental state approach could be improved. This study has pointed to the importance of studying the internal structure of state institutions. In order to uncover the black box of state institutions, the state must be disaggregated. First, the state can be disaggregated into national and local levels. It is at the local level that the implementation of national policies takes place, and where the actual economic behavior can be studied. Second, the state can be disaggregated into different departments that all have different incentives and constraints that they work under. When examining the various incentives and

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constraints of local officials, we may better understand how economic growth came, or did not come, about. While the model of the developmental state has been reassessed in the debate, a reassessment of what constitutes state strength has taken place in tandem. A traditional indicator of state capacity was the ability of state institutions to resist pressure from powerful actors in its environment. Theda Skocpol, who greatly influenced this thinking, discussed the capacities of states to “implement official goals, especially over the actual or potential opposition of powerful social groups.”68 That state autonomy was the source of state effectiveness began to be questioned a decade ago by Migdal, Kohli, and Shue who emphasized a “state in society” approach.69 Today, as the view of what the state can or should do is changing, so too is the concept of what constitutes a strong state. The new thinking is well represented by Pierre and Peters, and they argue that an indicator of state strength is the state’s capacity to establish priorities and coordinate action among key society actors in pursuit of those goals.70 Institutional strength has become more a matter of entrepreneurial and networking skills rather than the implementation of impartial rules derived from constitutional powers. The East Asian developmental states are a classical case of this old notion of strong states as they could supposedly formulate economic policies in the national interest and implement them even if these policies hurt vested interests. The reassessed developmental state model, on the other hand, fits quite neatly into the new thinking of what constitutes state strength. The analysis of the Chinese state here also fits the new thinking. The notion of what constitutes a strong state has been put on its head. Pierre and Peters see the role of the state not as decreasing but as transforming.71 In particular, the state remains crucial as a goal-setting structure. Shifting its control from the micro level to macro issues, the state is able to provide strategic guidance. The Chinese party-state is no longer so concerned with policy implementation and detailed regulation, but prefers to provide strategic guidance. Control has shifted from the micro level to the macro level. Goals are transmitted down the system, and higher levels are able to implement their priority policies through the cadre responsibility system. The local state is able to coordinate various actors with the government and business community. At the same time, I question how useful this discussion on strong and weak states is. State withdrawal from some fields allows the state to concentrate on some of its key policies, but it also means that the state rids itself of various other functions. The Chinese state focuses on its priority policies but has delegated many of its previous responsibilities to groups in society to carry out, and to care about. In China, there are many issues, such as dealing with regional inequalities and reduction of poverty, that are not at the top of the party agenda, and that the party will face difficulties in implementing. It is therefore very important to be precise about what the state has the ability to do, as it may have great ability to do some things and less ability to do others. So rather than attempting to label states strong or weak, it may be more meaningful to distinguish between

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different kinds of state capacity and seek explanations behind variations. Some states may, for example, have great ability to promote economic growth but less ability to implement welfare reforms. East Asia has previously been known for its relatively equal development, whereas in China economic growth has resulted in huge gaps in income and between regions. To account for this and other differences in state capacity, we need to empirically study state–society relations and the internal structure of a disaggregated state.

Notes 1 C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford, CA: Stanford University Press, 1982; A. H. Amsden, Asia’s Next Giant: South Korea and Late Industrialisation, New York: Oxford University Press, 1989; and R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press, 1990. 2 M. H. Khan and Jomo K. S. (eds), Rents, Rent-seeking and Economic Development: Theory and Evidence in Asia, Cambridge: Cambridge University Press, 2000. 3 C. Moon and R. Prasad, “Beyond the developmental state: networks, politics, and institutions,” Governance, 1994, vol. 7, no. 4, pp. 360–86; K. E. Calder, Strategic Capitalism: Private Business and Public Purpose in Japanese Industrial Finance, Princeton, NJ: Princeton University Press, 1993; and S. Chan, C. Clark, and D. Lam (eds), Beyond the Developmental State: East Asia’s Political Economies Reconsidered, New York: St Martin’s Press, 1998. 4 P. Evans, Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press, 1995. 5 This approach follows Geddes who uses a simple model of politicians and bureaucrats as rational individuals who attempt to maximize career success but it stresses the bounded rationality of local officials who must try to survive in an uncertain work environment, see B. Geddes, Building State Capacity in Latin America, Berkeley, CA: University of California Press, 1994. 6 For a more detailed description of the fieldwork and a list of interviews, see M. Edin, “Market forces and communist power: local political institutions and economic development in China,” PhD dissertation, Department of Political Science, Uppsala University, 2000. 7 The local state is simply defined here as the administrative apparatus at the local level (township and above, up to province). It is seen as part of the party-state bureaucracy. The reason here for focusing on the local state is not that it is necessarily conceptually different from the central state, but it is more a research method or strategy. As I discuss later in the chapter, the state must be disaggregated and it is at the local level that state-business relations and the internal structure of the state can be empirically examined. 8 J. C. Oi, “Fiscal reform and the economic foundations of local state corporatism in China,” World Politics, 1992, vol. 45, no. 1, pp. 99–126; J. C. Oi, “The role of the local state in China’s transitional economy,” The China Quarterly, 1995, no. 144, pp. 1132–49; and J. C. Oi, Rural China Takes off: Institutional Foundations of Economic Reform, Berkeley, CA: University of California Press, 1999. 9 Oi, “Fiscal reform,” p. 100. 10 Duckett has described the activities of the entrepreneurial state in urban areas but then it has more directly been doing business itself for the benefit of the department rather than coordinating development for the benefit of the whole community, see J. Duckett, The Entrepreneurial State in China, London: Routledge, 1998; and J. Duckett, “Bureaucrats in business, Chinese-style: the lessons of market reform and

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state entrepreneurialism in the People’s Republic of China,” World Development, 2001, vol. 29, no. 1, pp. 23–37. D. Lu and Z. Tang, State Intervention and Business in China: The Role of Preferential Policies, Cheltenham: Edward Elgar, 1997, p. 102. D. Y. Yang, “From command to guidance: China’s turn to new industrial policies,” Journal of Asian Business, 1995, vol. 11, no. 2, p. 34. D. Y. Yang, “Governing China’s transition to the market: institutional incentives, politicians’ choices, and unintended outcomes,” World Politics, 1996, vol. 48, pp. 424–52; P. Nolan, China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution, Basingstoke: Palgrave, 2001; and R. Smyth, “Should China be promoting large-scale enterprises and enterprise groups?,” World Development, 2000, vol. 28, no. 4, pp. 721–37. Yang, “From command to guidance,” p. 50. Lu and Tang, State Intervention and Business, p. 78. In the “Outline of the Ninth Five-Year Plan for National and Social Development and the Long-Term Target for the Year 2010,” it is stipulated that government should selectively give support to key projects within pillar industries and to hightechnology development projects. Within the five pillar industries, the government should promote economies of scale and work for the establishment of enterprise groups, see Lu and Tang, State Intervention and Business, p. 106. Interview 2SA4 with the director of the planning commission in Shandong county, 1998. Those products to be restricted are related to polluting industries, repetitive projects, and projects with low levels of value added. Those which are to be supported are products involving high technology and large-scale projects. See document entitled Guomin jingji he shehui fazhan dijiuge jihua ji 2010 nian yuanjing mubiao gangyao (The ninth five-year plan and an outline of the long-term targets of 2010 of X county). M. Blecher and V. Shue, Tethered Deer: Government and Economy in a Chinese County, Stanford, CA: Stanford University Press, 1996. Interview SBa1 with the Party secretary of a Shandong township, 1997. Once the plan has been passed by the local People’s Congress, a planning work conference is convened in which representatives from relevant government bureaux and financial institutions participate. At these meetings, decisions are made with regard to the contributions and other assistance which are to be provided at different levels and by different units. Competition concerns a number of different performance criteria of which the most important would be profits and growth figures, and possibly also production output. See document entitled Guanyu gongbu 1998 niandu shi zhongdian gongye qiye de tongzhi (Circular publicly announcing 1998 key industrial enterprises of X municipality). This is a county-level municipality. Interview ZC4 with a section chief of the planning economic committee in a Zhejiang county, 1998. Interview 2SA3 with the division chief in charge of loans at the agricultural bank in a Shandong county, 1998. I do not have any information as to whether the other banks did in fact shoulder their responsibility, i.e., whether key projects were divided among all banks or whether some enterprises never received their promised loans. Interview BAa1 with the vice-manager of the economic corporation in a rural township under Beijing municipality, 1997. Interview SA2 with the director of the planning commission in a Shandong county, 1997. Interview 2SAa18 with the mayor cum vice-Party secretary of a Shandong township, 1998. J. Y. Lin, F. Cai, and Z. Li, The China Miracle: Development Strategy and Economic Reform, Hong Kong: The Chinese University Press, 1996, p. 76.

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30 Interview SA2 with the director of the planning commission in a Shandong county, 1997. 31 Interview 2SA2 with the director of the science and technology committee in a Shandong county, 1998. 32 Not only do local governments encourage mergers (hebing) into large-scale groups but they also try to annex ( jianbing) unsuccessful state-owned or collective enterprises with their top collective enterprises. In areas where private enterprises dominate, local governments also encourage mergers between enterprises and play a facilitating role. For example, one promising private enterprise was to form an enterprise group and needed other enterprises in the same industry with which to merge. The local state assisted this enterprise to find several partners around which it could form a group, see interview ZAb2 with the enterprise manager in a Zhejiang township, 1997. 33 See document entitled Zhonggong X xianwei wenjian: Guanyu gongbu X xian 1998 niandu “xiaoxing juren” qiye de tongzhi (Document by the Communist Party Committee: circular publicly announcing the small giant type of enterprises in 1998 of X county). 34 See, for example, Calder, Strategic Capitalism, who takes issue with the developmental state interpretation of Japan arguing that Japan’s development has been private sector-dominated. 35 Johnson, MITI and the Japanese Miracle, p. 47. 36 L. Weiss, “Governed interdependence: rethinking the government–business relationship in East Asia,” in L. S. Lauridsen (ed.), Institutions and Industrial Development: Asian Experiences, Occasional Paper No. 16, Roskilde: International Development Studies, Roskilde University, 1995, p. 55. 37 Oi, “Fiscal reform,” p. 100. 38 D. L. Wank, Commodifying Communism: Business, Trust and Politics in a Chinese City, Cambridge: Cambridge University Press, 1999, p. 193; and Edin, “Market Forces and Communist Power,” p. 111. 39 J. C. Oi, “The collective foundation for rapid rural industrialization,” in E. B. Vermeer, F. N. Pieke, and W. L. Chong (eds), Cooperative and Collective in China’s Rural Development: Between State and Private Interests, London: M. E. Sharpe, 1998, p. 106. 40 A. G. Walder, “The county government as an industrial corporation,” in A. G. Walder (ed.), Zouping in Transition: The Process of Reform in Rural North China, Cambridge, MA: Harvard University Press, 1998, p. 69. 41 M. Levi, Of Rule and Revenue, Berkeley, CA: University of California Press, 1988, p. 10. 42 W. A. Byrd and A. Gelb, “Why industrialize? The incentives for rural community governments,” in W. A. Byrd and Q. Lin (eds), China’s Rural Industry: Structure, Development, and Reform, Oxford: Oxford University Press, 1990, p. 374; S. H. Whiting, “The micro-foundations of institutional change in reform China: property rights and revenue extraction in the rural industrial sector,” PhD dissertation, University of Michigan, 1995, p. 29; and Oi, Rural China Takes off, 1999, pp. 49–50. 43 Interview JA1 with the vice-director of the Party bureau of rural affairs in a southern Jiangsu county, 1996. 44 Interview ZC5 with the vice-director in charge of evaluation in the Party bureau of rural affairs in a Zhejiang county, 1998. 45 For a different argument, see M. Edin, “Local state corporatism and private business,” The Journal of Peasant Studies, 2003, vol. 30, nos. 3–4, 278–95. 46 An important exception is Whiting, “The micro-foundations of institutional change,” and S. H. Whiting, Power and Wealth in Rural China: The Political Economy of Institutional Change, Cambridge: Cambridge University Press, 2000, who discusses how township cadres respond to two powerful sets of incentives: the incentives contained in the revenue-sharing fiscal system and the cadre evaluation system. Her work from 1995 was one of the first to describe the cadre evaluation system at the local level, see also

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S. P. S. Ho, Rural China in Transition: Non-agricultural Development in Rural Jiangsu, 1978–1990, Oxford: Clarendon Press, 1994. M. Edin, “State capacity and local agent control in China: CCP cadre management from a township perspective,” The China Quarterly, 2003, no. 173, pp. 35–52. J. P. Burns, “China’s nomenklatura system,” Problems of Communism, 1987, vol. 36, no. 5, pp. 36–51; and J. P. Burns, “Strengthening central CCP control of leadership selection: the 1990 nomenklatura,” The China Quarterly, 1994, no. 138, pp. 458–89. The description of the cadre responsibility system is from Edin, “State capacity and local agent control.” From document entitled X zhen 1997 nian gongye waijin mubiao zerenshu (Responsibility contract with regard to industry and foreign export targets in 1997 of X township) which was copied down for me by the township mayor. See also Interview 2SAa18 with the mayor cum vice Party secretary of this Shandong township (1998). The information on key industrial projects are from a document entitled X qu 1997 nian guomin jingji he shehui fazhan jihua (The 1997 plan of national economic and social development of X district), pp. 18–19. Interview ZC5 with the vice-director in charge of evaluation in the Party bureau of rural affairs in a Zhejiang county. Interview SCA1 with the village Party secretary-cum-chairman of the board of the village corporation in Shandong village, 1998, and interview ZCa1 with the vicemayor-cum-director of the industrial office and the vice-director of the industrial office in a Zhejiang township, 1998. K. J. O’Brien and L. Li, “The politics of lodging complaints in rural China,” The China Quarterly, 1995, no. 143, pp. 756–83. Interview ZE3 with one section chief of the Party committee and one section chief of the Party committee organization department in a Zhejiang county, 1999. One recent study has found that there was no statistical relation between the success in promoting GDP and promotion of municipal mayors to the post of party secretaries, see P. Landry, “Controlling decentralization: the party and local elites in post-Mao Jiangsu,” PhD dissertation, Department of Political Science, University of Michigan, 2000. There are, however, other criteria in evaluation and other political rewards than those included in the model. Another study has made similar findings on the provincial level, but that there is a weak correlation between revenue collection and representation at a higher level, see Z. Bo, Chinese Provincial Leaders: Performance and Political Mobility since 1949, Armonk, NY: M. E. Sharpe, 2002. Interview JAb1 with the township party secretary-cum-vice-party secretary of a southern Jiangsu county, 1996. While a Shandong official called the practice “a political bonus,” it is at the same time a means for higher levels to control strategically important townships. Lists with the best-ranking local leaders are, just like enterprise lists, circulated as government documents to all relevant government departments in order to emphasize their priority in higher-level assistance. Interview 2SAa7 with the general manager and the vice-manager of a township-run enterprise in Shandong, 1998. This general manager was the former private entrepreneur accused of tax evasion. Today, this collective enterprise is one of the leading enterprise in the township. His version was supported by township officials. X. Lu and T. P. Bernstein, Taxation without Representation in Rural China: State Capacity, Peasant Resistance, and Democratization, 1985–2000, Cambridge: Cambridge University Press, 2003. Uncertainty here does not only refer to lack of costly information but also to uncertainty with regard to which criteria will be emphasized in cadre evaluation and, more generally, which will be the rules of the game. This chapter does not go into the relationship between economic growth and corruption, for a discussion on this, see M. Edin, “Institutional basis of developmentalism

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and cronyism in China,” paper presented at the Annual Meeting of the Association for Asian Studies, Chicago, 24 March 2001. Developmentalism serves as a check on corruption even though both are partly driven by the same imperative. One could say that developmentalism serves as a check on corruption since the latter can not spread without being interrelated with the former. While the political system does not restrain corruption, institutions at least ensure that it occurs together with economic development. Political and economic performance requirements limit corrupt behavior by local state officials in China. In other words, development and corruption originate from but were also constrained by the same political imperative. Landry, “Controlling decentralization.” K. Firmin-Sellers, “Institutions, context, and outcomes: explaining French and British rule in West Africa,” Comparative Politics, 2000, vol. 32, no. 3, pp. 253–72. G. Tsebelis, Nested Games: Rational Choice in Comparative Politics, Berkeley, CA: University of California Press, 1990. See, for example, P. B. Evans, “Predatory, developmental, and other apparatuses: a comparative political economy perspective on the Third World state,” Sociological Forum, 1989, vol. 4, no. 4, p. 573. For a good introduction to the new public management model which advocates that government should function in accordance with the same principles as private enterprises, see P. Self, Government by the Market? The Politics of Public Choice, Boulder, CO: Westview Press, 1993; and P. Dunleavy and C. Hood, “From old public administration to new public management,” Public Money and Management, July–September 1994, pp. 9–16. Self, Government by the Market?, p. 59. While market reforms were first initiated in Thatcher’s Britain and Reagan’s USA, they have acquired global dimensions with the diffusion of new public management reforms through aid policies, see V. Desai and R. Imrie, “The new managerialism in local governance: North–South dimensions,” Third World Quarterly, 1998, vol. 19, no. 4, pp. 635–50. T. Skocpol, “Bringing the state back in: strategies of analysis in current research,” in P. B. Evans, D. Rueschemeyer, and T. Skocpol (eds), Bringing the State Back in, Cambridge: Cambridge University Press, 1985, p. 9. J. S. Migdal, A. Kohli, and V. Shue (eds), State Power and Social Forces: Domination and Transformation in the Third World, Cambridge: Cambridge University Press, 1994. J. Pierre and G. B. Peters, Governance, Politics and the State, Basingstoke: Macmillan Press, 2000, p. 164. Ibid., p. 25.

7

Social contradictions of the Korean state Hagen Koo

The main preoccupation of the literature on the East Asian states is with developmental states. In this literature, East Asian states are almost uniformly viewed as strong, autonomous, and highly effective in guiding the economic process with consistent developmental objectives. The aim of this chapter is to demonstrate that this generalized view hides important weaknesses and contradictions in state strength by looking closely at the evolution of state–labor relations in South Korea. The South Korean state is well known for its strength and autonomy from societal forces and for the strong interventionist role it has played over the past four decades of rapid economic growth. The South Korean state is particularly noted for its exceptional ability to discipline both capital and labor and to have them carry out state-devised developmental goals efficiently with little resistance.1 State power in South Korea is thus viewed as not only strong and autonomous but also highly rational and proficient in devising developmental policies. This picture may hold true with regard to state–market or state-economy relations. If we shift our focus to state–labor relations, however, this proficient image of the developmental state breaks down. The South Korean state, during its authoritarian era, was certainly powerful and autonomous from class forces and possessed immense organizational and ideological resources to mobilize and demobilize labor in line with developmental goals. Indeed, under the tight state control system, South Korean industries enjoyed a long period of industrial peace from the early 1960s to the mid-1980s. During this period, industrial labor had never disrupted industrial production in any serious manner and the Korean export industry, like those of other Asian tiger economies, drew its chief comparative advantage from its low-wage, hard-working, and disciplined labor force.2 Under the surface of such remarkable industrial peace amidst rapid industrial transformation, however, significant changes were occurring in the industrial arena, that would undermine the repressive labor regime and reveal the profound weaknesses and contradictions of the developmental state in South Korea. The aim of this chapter is to look at South Korea’s developmental state in the context of state–labor relations. Our main concern here is not with the state as a static institutional entity but with the ways the state engages with societal

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forces in the process of industrialization. Labor represents an important part of society. Industrial labor in particular represents a dynamic agency—its size, composition, and political character continuously evolving in the process of economic development. Considering a state from the perspective of state–labor relations affords a unique view of the state in action, not just in the narrow confines of developmental policies, but in the broader contexts of political, ideological, as well as economic relations with society. The time factor is important in this analysis. State–society relations do not remain constant, certainly not fixed at any moment, but continuously evolve, often producing unexpected changes in the balance of power between the two. By closely looking at state– labor relations as they evolved in the process of rapid industrial transformation over the past half century, we can better understand the nature of the South Korean state that is far more complex and contradictory than conventionally portrayed in the developmental state literature. What is demonstrated in this analysis is that state–labor relations in South Korea have been far more conflictual, unstable, and unpredictable than state–market relations have been. The state actions in the labor arena have been far from clear-sighted, consistent, and wise in terms of long-term consequences. Changes in state policies and actions toward labor were more often determined by political motivation than by economic rationality. The institutional resources deployed by the state in controlling labor were narrower than the ones used in managing the market. The state relied too heavily on security agencies and anticommunist ideology and failed to develop an institutional mechanism that would promote more mature industrial relations and ensure a stable labor regime. The South Korean state’s labor control method produced many contradictory and ironic consequences and compromised the state’s developmental role in the long run. While the state played a dominant role in setting the direction of social transformation in Korea, the concrete processes of social and political change have been determined not simply by the state’s directives but by the specific ways in which the individuals, groups, or social classes have reacted to state policies and to the economic conditions produced by these policies. As labor became empowered after political democratization in the late 1980s and as the South Korean economy became increasingly globalized, the legacy of the past authoritarian labor regime turned out to be a major obstacle to the economic reform demanded by the new globalized economy. This chapter examines state–labor relations in South Korea during the decades of rapid economic growth, the 1960s through the 1980s, during which the developmental state took a strong interventionist approach to the economy and labor relations. The focus of the analysis is on the ways the state adopted a particular approach to labor control and the ways labor reacted to the mode of state control. Particular attention is given to the ways these state–labor relations have evolved over time, often as an unexpected and unintended consequence of the mode of state control over labor. The South Korean case of state–labor relations aptly exemplifies the complexity, fluidity, and the recursive nature of state–society relations that are the central theme of this volume.

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Postwar state formation and labor regime The post-World War II political development in Korea was intimately affected by the complex colonial legacy—by the organizations, ideologies, transformed class relations, strong sense of injustice, and the experience of collective struggles —all accumulated during the thirty-five years of harsh colonial rule (1910–45). With the sudden ending of Japanese colonialism in 1945, a dizzying array of political and social organizations appeared in a short time to make their voices heard in determining the destiny of the new nation-state.3 Labor emerged as a significant force during this period of new state formation on the Korean peninsula. The labor movement in Korea first emerged in the 1920s with the rapid growth of industrial workers in the process of colonial industrialization. Frequent labor disputes occurred in the Japanese-owned factories and mines during this period. The labor movement during this colonial period was clearly more than an economic struggle but part of the independence movement against Japanese colonial rule. After active strike activities in the 1930s, the labor movement went underground in the 1940s because of a severe crackdown by the colonial government. After Korea’s liberation from colonial rule in August 1945, the labor movement surfaced with stronger organization and leadership than before. Within three months of liberation, strong leftist unions were created under the umbrella organization of the National Council of Korean Trade Unions (Chonpyong). Chonpyong led many labor disputes, frequently clashing with the police and with the American military occupation forces. Between August 1945 and March 1947, there were 2,388 labor demonstrations involving 600,000 participants. This was the most violent period in the pre-1987 history of the Korean labor movement. However, this strong labor movement did not last long. In March 1946, right-wing groups, backed by the American military force, created a new labor organization, the Federation of Korean Trade Unions (FKTU or Daehan Nochong). The FKTU had no grass-roots base, nor any genuine interest in promoting worker welfare. Rather, its sole objective was to compete with, and eventually destroy, leftist labor unions. Many violent clashes occurred between the leftist and rightist unions, and gradually the Chonpyong was destroyed by the combined forces of the police, rightist unions, and the American military government. Violent clashes occurred frequently between leftist and rightist labor groups, ending with the decimation of the communist labor leaders; hundreds of them were killed or executed, and thousands were imprisoned. In March 1947, the American military government outlawed the Korean Communist Party, which put an end to the already weakened communist labor organizations. Thus ended the first period of active labor mobilization in Korea. In this way, the powerful leftist labor movement was completely demolished in the immediate postwar period and this was part and parcel of state formation in South Korea. This process was aided by the external forces, the United States, and more broadly by the geopolitical context of the Korean peninsula. The way leftist labor was destroyed denied the later labor movement in the

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south any organizational or ideological heritage from the earlier labor movement. On the other hand, this historical circumstance paved the way for the export-oriented industrialization which commenced in the early 1960s by providing a hard-working, docile, and politically quiescent labor force. And it facilitated the formation of a developmental state with the almost complete exclusion of organized labor. Another important process that occurred during the immediate post-World War II period was land reform. Following sweeping land reform in the north, intense peasant protests and labor unrest forced the conservative government of Syngman Rhee to implement land reform in 1948–50. Land reform brought about substantial change: about 70 percent of eligible land was redistributed and over one million out of a total of two million rural households benefited. The reform also imposed a limit on paddy holdings of three chongbo (equivalent to about one hectare). The overall effect was to destroy the old landlord class and to create a basic rural structure of small, owner-operated farms, and to eliminate a significant source of political instability in the countryside. The Korean War, which broke out in 1950, finally ended the old agrarian elite of the Korean class structure. With the war’s end emerged a poor but a highly fluid and egalitarian society in South Korea. In short, the destruction of the powerful landlord class and the strong leftist labor movement in the immediate postwar period provided a structural foundation for the formation of the strong state in South Korea, possessing ample autonomy from class forces and enjoying the historically and culturally endowed power and authority over society. The South Korean state’s capacity was partly drawn from the bureaucracy and the police networks inherited from the colonial government but more importantly from the powerful military developed during and after the Korean War and from the bureaucracy that had continuously developed since independence with US assistance. An important point to be stressed here is that the destruction of the strong leftist labor movement during the immediate postwar period was one of the essential processes in the formation of a strong anticommunist capitalist state in South Korea. It is also important to note that this labor control meant a preemptive control and that it was politically motivated rather than dictated by economic imperatives. Anticommunism provided a legitimating formula for authoritarian rule and has exerted continuous influence on the subsequent development of the labor movement.4

Evolution of the labor regime during the development decades After the end of the Korean War in 1953, the Rhee government laid down new labor laws, which stipulated the basic rights of labor, including the rights of association, collective bargaining, and collective action. In retrospect, these first labor laws were quite liberal, allowing workers to form unions and engage in collective bargaining with minimal state interference. The laws even allowed unions to engage in political activities. Given the extremely weakened state of

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organized labor and the tense Cold War atmosphere, these new labor laws had no impact on the labor movement. Subsequently, Rhee incorporated the FKTU into an auxiliary organ of the ruling Liberal Party to complete his corporatist control of labor organizations. While labor volatility arose in the late 1950s in reaction to worsening employment situations, the FKTU leadership was completely detached from the rank-and-file membership and engaged in bitter factional fights for spoils from Rhee. The Rhee regime was toppled in April 1960 by student uprising against the rigged election. A political transition to the democratic government of Chang Myon (1960–1) was accompanied by the activation of civil society, as students, workers, and professionals made many demands. Labor conflicts increased sharply, many of which involved street demonstrations. Labor unrest continued throughout the Chang period, weakening its ability to manage the ailing economy. The staggering economy and growing disaffection with continuous social unrest opened the way for the military coup in May 1961. One of the first measures which the military junta took after it seized power on May 16, 1961 was to dissolve the FKTU, arrest labor leaders, and ban strikes. Immediately after that, the newly created Korean Central Intelligence Agency selected a group of labor leaders and had them create a new national center of trade unions, the Federation of Korean Trade Unions (FKTU, the same English name, but slightly different in Korean from the previous name). In August 1961, the new FKTU was organized along industry lines, and unions were given exclusive representation rights. In this sense, the new union system was based on a corporatist principle. But, in practice, industry unions did not function as effective units of labor activities; there were few horizontal linkages among local unions within the industry, and virtually all the collective bargaining was conducted at the enterprise union level. After it restructured the union organization, the Park regime introduced substantial revisions in the existing labor laws. Among other things, the revisions included new clauses which disallowed unions’ political activities and which expanded the scope of public-interest enterprises where strikes were prohibited, as well as the scope of state intervention in labor disputes. The main concern among the policy-makers at this time was to keep the organized labor depoliticized and disconnected from political opposition groups. These organizational and legislative changes set a new framework for the labor movement in the industrialization period. The Park government launched into outward-looking, export-oriented industrialization in 1963. Profound change in the structure of industries began to take place, and the number of wage workers began to grow rapidly in the latter part of the 1960s. Union membership increased steadily: from 9.3 percent (of the total number of wage workers) in 1963 to 11.2 percent in 1965, to 12.4 percent in 1970. The number of labor disputes fluctuated from 89 cases in 1963 to 113 in 1965 to 88 in 1970. But the trend was a shift of the center of labor activism, from the public service sectors to export manufacturing sectors. Toward the end of the 1960s, the South Korean economy was running into

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the first crisis of the export-oriented industrialization, caused by serious balanceof-payment problems and widespread business failures in foreign-invested firms. Frequent labor disputes occurred in response to layoffs, delayed payments, and the like, creating a sense of crisis in the policy-makers. At the same time, opposition groups waged a stronger challenge to the legitimacy of the Park regime. Park’s response was a turn to harsh, bureaucratic authoritarianism. Faced with grave economic problems in the export industry sectors and growing political challenges, Park determined to close the little political space that had existed at the end of the 1960s, by establishing an exclusionary bureaucratic authoritarian regime in 1972. Following the Temporary Exceptional Law, which was legislated at the end of 1969 and put into effect in 1970, the government introduced a series of antilabor legislations. In December 1971, Park declared a state of emergency and simultaneously proclaimed the Law Concerning Special Measures for Safeguarding National Security (hereafter, National Security Measures), which indefinitely suspended workers’ right to collective bargaining and collective actions. Workers’ ability to organize unions was greatly restricted and they lost the right to engage in collective actions. In March 1972, the government introduced another restrictive measure, the Measures dealing with Collective Bargaining under National Emergency. This measure expanded the scope of the enterprises which were defined as belonging to public interest and therefore prohibited from union actions. By this time, the main objective of the state strategy of labor containment was to destroy industry unions and confine any collective labor actions within company-controlled enterprise unionism. The culmination of all these authoritarian legislative actions was the installation of the Yushin system in October 1972—a Korean version of bureaucratic authoritarianism, which closed all the political space and bestowed upon Park a lifetime presidency with unchecked executive power. The rise of this bureaucratic-authoritarian system in South Korea, as in Latin America, can be explained in part by economic problems associated with the exhaustion of one phase of economic development. It is true that South Korea faced several serious economic problems at the turn of the decade, caused by the balance of payments, shortage of capital, increasing competition in export markets from other low-wage countries, and business failures in many foreign-invested enterprises. To a large extent, these problems were associated with the structural limitations of the labor-intensive stage of export-oriented industrialization. A change in the development strategy was in order, and Park decided to launch the HCI (heavy and chemical industries) push. Important as they are, these economic reasons provide only a partial explanation for the emergence of the Yushin regime in South Korea. More important were political factors. Park’s personal desire to remain in power, his near defeat by an opposition candidate, Kim Dae Jung, in the 1971 presidential election, the mounting protests to his rule from students and intellectuals, President Carter’s announcement of US troop withdrawal from South Korea, and increasing security threats from North Korea, all contributed to his move to an extraordinarily exclusionary authoritarian system. Labor was also an important concern for

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Park. Labor unrest began to grow steadily, and in 1970 a momentous event occurred in the labor arena. A tailor, named Tai-Il Chon, immolated himself in public protest against the deplorable working conditions in the garment industry. His death sparked off violent protests by workers and students and triggered a new effort among grass-roots workers to organize independent unions in opposition to management-controlled unions. Particularly troubling to Park were growing linkages between labor and the intellectual segments of society. The immediate consequence of the repressive labor control adopted by the Yushin regime was a decline in union membership and labor conflicts. But this was only a temporary phenomenon. After a couple of years of forced dormancy, the Korean labor movement reappeared with greater determination and in a new form. Most significant is that the new labor movement became closely linked to, and assisted by, intellectual communities. Two groups within society have played a particularly important role in supporting grass-roots labor struggles. The first was the church organizations, influenced by progressive theological orientations such as Latin America’s liberation theology. These Christian organizations took advantage of their international networks and their relatively secure political and ideological position in society to provide guidance and shelter for labor activists. They also ran workers’ night schools and organized small-group activities where workers had opportunities to share their experiences and to develop a sense of identity and solidarity among themselves. Union consciousness was first born through these activities, and so was the first group of grass-roots union activists, the majority of whom were women workers employed in the garment, textile, and electronics industries. These women led the grass-roots labor movement from the late 1970s to the early 1980s.5 From the early 1980s, students took over the role played by church groups. Korean students have long played a very active role in Korea’s modern political history, and during the three decades of military rule since 1961, they have been the most active and politicized element in South Korea. Student political activism began to spill over into the industrial arena from the mid-1970s, and in the early 1980s when a large number of students went to work in factories with the aim of raising class consciousness among workers and helping them to organize independent unions. The involvement of these students-turned-workers in many labor disputes thus helped to politicize labor conflicts and sharpen political consciousness among workers.6 The dominant trend of the Korean labor movement in the 1970s was, thus, the polarization of the movement. At the national level, the official unions became the instrument of the state’s corporatist control of organized labor; at the grass-roots level, workers strived to create independent unions outside the official union structure. The emergence of this “democratic union movement” was clearly a reaction to the dominant state strategy of labor containment. The Park regime’s labor strategy turned the majority of existing unions into coopted and powerless organizations, which were not only unable to represent the interests of workers but frequently worked to suppress and distort their demands. Unlike corporatist systems in other countries, Korea’s ostensible corporatist

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system did not employ a combination of inducement and control but relied primarily on control without offering benefits. In other words, it used only the stick and no carrot to keep unions under control. Rank-and-file workers were deprived of any useful and legitimate role to play in official unions. Consequently, worker struggles converged on attempts to create an alternative structure in opposition to the official union structure.7 As the corporatist, cooptation strategy of labor containment was continuously challenged by workers’ grass-roots resistance, the Park regime relied more heavily on a security-oriented control. The state defined labor activists, especially those supported by church groups and students, as being influenced by communist sympathizers, if not communists themselves. Wherever workers attempted to form independent unions, security agencies rarely failed to step in to crush their actions. Inevitably, workers had to fight with the omnipotent state power rather than with the employer or the managers. Consequently, labor conflicts became increasingly politicized.8 The Park government’s security-oriented approach to labor control created serious strains in the latter part of the 1970s. For one thing, this control method became increasingly ineffective in the face of the grass-roots democratic union movement. For another, this crude repressive method did not sit well with the economy at the current stage of industrialization. The South Korean economy at this time was striving to move out of the low-skilled, labor-intensive industries toward the technologically sophisticated industries. In order to make a successful transition to this mature stage of industrialization, it was not enough to repress and demobilize workers; it was also necessary to motivate them to a higher level of commitment and performance. What was in order was some new mechanism of psychological motivation and ideological control. The Korean business and government leadership sought to solve this problem in two interrelated ways. One was the idea of family enterprise system, and the other the Saemaul Factory Movement. Both were ideological campaigns, borrowing similar models from prewar Japan, and both were engineered by the ever penetrating state, probably to a greater degree than in Japan. The family enterprise system denies the reality of conflict relations between labor and management and seeks to promote pseudo-family relations among all members of an enterprise. It borrows a rhetoric from a traditional patriarchal family, so the employer is likened to a father, the worker as a son, and the manager as an elder brother. From the mid-1970s, every Korean factory gate put up the same sign, which read: “Treat employees like family members, do factory work like my own work!” This family enterprise ideology was frequently wrapped up in the national security ideology; labor cooperation and hard work were deemed essential to building a strong nation, and were often elevated to the status of a citizen’s sacred duty.9 Supplementing the Saemaul Factory Movement was a labor-management council, comprising the representatives of management and labor. The manifest function of this bipartite organization was to foster cooperative relations between management and labor and to promote industrial peace. In essence, this is an

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antiunion organization, taking over many functions of labor unions and undermining their organizational strength. As labor unrest increased in the latter part of the 1970s, the labor protest that occurred in 1979 at a wig factory, called YH Company, played a catalytic role in accelerating a political crisis which led eventually to the downfall of the Park regime. About 200 women workers conducted a sit-down strike in August 1979, protesting the shutdown of the plant. When they were forcefully evicted from the factory, they moved to the headquarters of the opposition party, the New Democratic Party, to continue their strike. But the police broke into the building, beating and arresting not only the strikers but also the opposition party assemblymen. In this way, the New Democratic Party, which had been more or less aloof from the labor movement so far, became inadvertently involved in labor struggles. Party politics plunged deep into a crisis, when the ruling party, the Republican Party, ousted the NDP president from Congress. Violent street demonstrations erupted in Pusan, and spread to a neighboring industrial city, Masan. This political crisis coincided with economic downturn caused by the second oil crisis, mounting foreign debts, and decreasing exports due to growing protectionism abroad. These political and economic crises caused a serious disunity among the ruling elites, and eventually led to the assassination of Park Chung-Hee by his own CIA chief on October 26, 1979. Labor struggle, in this way, brought grave consequences, though not directly, for state power.

The labor movement in the 1980s Several months of political uncertainty followed Park’s death, during which labor conflicts increased drastically. Also unionists moved swiftly to organize new unions or replace the existing company unions with independent unions. But the spring of political freedom in 1980 quickly ended with the installation of another military regime, headed by Chun Doo Hwan. Upon assuming power, Chun Doo Hwan took extremely harsh measures to demobilize the civil society and resume control of labor. Thousands of political activists were rounded up and, along with hoodlums and racketeers, were sent to jails or “purification camps.” The regime cracked down especially hard on labor, abolishing most of the newly created independent unions and expelling labor activists from union leadership. Employers took advantage of this antilabor environment and fired hundreds and hundreds of workers who had actively participated in democratic union movement. These fired workers were then blacklisted by the security agencies so that they were barred from gainful employment. In December 1980, Chun abolished the industry-based union system and restructured unions into an enterprise union system. In order to insure that unions become docile and depoliticized, however, it was necessary not only to atomize enterprise unions by severing ties with other unions but also to insulate them from the influence of outside groups. Chun took an extraordinary but rather simplistic measure. He introduced a revision of

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labor laws in December 1980 that prohibited the involvement of the third party in union organization and collective bargaining. The third party here referred primarily to student activists and church groups, those “impure elements,” which had been active in the democratic union movement, but it also included the upper-level union leadership. This was undoubtedly an isolationist policy in the extreme. While defining legitimate peak labor organizations as a third party and barring them from assisting local unions, the revised law expanded the scope of the government’s compulsory arbitration of labor disputes. At the same time, the new law made union organization more difficult by introducing several restrictive conditions as to the procedure of forming a new union (it must be approved by a minimum of thirty workers or one-fifth of the total number of workers employed in a given firm), screening of the qualifications of union officers, and the usage of union dues for non-strike activities (a minimum of half of collected dues must be spent on worker welfare programs). Furthermore, the cooling-off period was extended from twenty to thirty days in the private sector. Collective actions were banned for civil servants and for the employees of staterun enterprises.10 As a consequence of all these antilabor policies, the number of unions dropped drastically, from 6,011 in May 1980 to 2,618 by the end of the year; union membership also decreased from 1,120,000 to 950,000. Again, workers were forced into silence and submission, and the labor movement was virtually suspended, at least on the surface, for the next three years. Ironically, however, the Korean labor movement grew stronger during the first years of the Chun regime. Below the surface of political passivity, students, workers, and other dissident groups reflected on their defeats in 1980, the meaning of the Kwangju massacre, and their future strategy. This was a period of radicalization of dissident movements and deepening class consciousness among many labor leaders. Many students, intellectuals, and political activists were strongly influenced by Marxism, dependency perspective, or people’s liberation theology, and embraced the idea of radical social transformation through collective action. In this period, church influence on the labor movement declined considerably, as labor leaders gradually became disenchanted with the church leaders’ mild approach to labor struggles. By the early 1980s, there emerged a large number of fired and blacklisted workers, and the Chun Doo Hwan regime’s ferocious attack on democratic unions produced still more determined labor activists expelled from the labor arena with years of union experience. As they were blocked from gainful employment by the government, they had no choice but to become professional labor activists. These “outside” (chaeya) labor activists played an instrumental role in mobilizing unionists across firms and linking them to dissident political communities. They organized mass demonstrations demanding the revision of labor laws and the abolition of the blacklist. The consequence of hard-line labor repression during the Chun regime was, therefore, the ever-enlarging circles of dedicated union activists armed with a high level of class consciousness. With the growth of grass-roots labor activists,

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both inside and outside the industrial arena, the labor movement gradually outgrew the need to depend on outside organizations, especially on church organizations. The growth of class-conscious labor activists and grass-roots organizations, however, did not lead the South Korean labor movement to develop on its own. On the contrary, Korean working-class struggles became more intimately enmeshed in the larger political struggles against the authoritarian state. Particularly important in this period was the role of students. Student involvement in the labor movement, which began to appear in small numbers in the 1970s, became a major trend in the 1980s. But then, the students’ strategy had changed. Rather than trying to assist workers from the outside, which was not allowed anyway by the revised law, the activist students—some expelled from schools for political activities, some voluntarily dropped out, and some graduated from colleges— became factory workers themselves and sought to prepare the broad foundational work inside the factories. While working in the factories, they tried to raise workers’ class consciousness through many small discussion circles. In addition to “worker classrooms” where students taught workers broad subjects from a leftist viewpoint, these small circles which students-turned-workers organized around the workplace became an important mechanism linking workers across workplaces in the same geographic areas and linking economic struggles inside the industrial arena with democratic struggles in the larger society.11 After severe repression of civil society in his first years of power, Chun Doo Hwan decided to introduce a partial liberalization of political activities in the hope of broadening the popular base of his regime in the latter part of 1983. In the spring of 1984, the government released a number of political prisoners, allowed dissident professors and students to return to their schools, and partially relaxed its tight control over labor activities. Several factors contributed to this partial political liberalization. Chun was troubled by the continuously lagging legitimacy of his regime and felt it necessary to broaden its social base of support in preparation for the upcoming general election in 1985 and for the two international sporting events to be staged in Seoul, namely the Asian Games in 1986 and the Olympic Games in 1988. Furthermore, the goals of economic liberalization and a “welfare society,” that the Chun government identified as the regime’s principal project, called for a more liberal approach to politics. Also the robust economic growth after a brief period of political instability in 1980 probably made Chun feel more confident about securing popular support, especially from the middle classes. Chun’s gesture of political rapprochement, however, was immediately met by an upsurge of political activism and labor conflicts. When the labor movement resurfaced in 1984, it demonstrated greater organizational strength and a higher level of political consciousness among workers than ever before. Workers swiftly organized numerous independent unions (about 200 independent unions were formed in 1984) and fought to revive those unions previously dissolved by the government. Labor disputes increased in frequency from 98 cases in 1983 to 113 cases in 1984, and to 265 cases in 1985.

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The labor organizations which appeared in the mid-1980s clearly demonstrate that the Chun regime’s effort to disconnect labor from other political groups had failed. In March 1984, a national labor organization, called the Council for Korean Worker Welfare, was created by an alliance of sacked workers (fired for their union activities) and intellectual labor activists as a direct challenge to the coopted official peak union, the FKTU. A dozen other labor organizations had been created since 1984, most of which had illegal or at most quasi-legal statuses, and all of which were politically oriented. These labor organizations became an important component of the larger “outside” opposition forces that played a critical role in the democratic transition that occurred in 1987.

The breakdown of the authoritarian labor control system The failure of the developmental state’s labor policies during the Park and Chun periods was most clearly demonstrated in 1987, when a huge labor uprising erupted in the wake of the political transition from authoritarian rule. In summer 1987, the Chun government was forced by massive nationwide protests to accept the popular demand for a direct presidential election and democratic political reform. A coalition of students, dissident intellectuals, and the opposition party had successfully mobilized large-scale nationwide protests against Chun’s attempt to transfer power to his hand-picked heir through an indirect election by the electoral college. Clearly, this democratic transition was not the making of the labor movement. The main actors, as in most other previous political upheavals in Korea, were students, who had fought for democratization tenaciously throughout the 1970s and 1980s. As soon as the Chun regime announced a plan for political liberalization, however, it was the industrial labor that was mobilized instantly on a large scale. A wave of violent labor conflicts erupted within two weeks of the Chun government’s announcement of political liberalization. Labor unrest swept across the country like a prairie fire at an unprecedented level of intensity and fury. It started in the manufacturing industry but spread to mining, transportation, the dockyards, and some service sectors, too. From July to September in 1987, as many as 3,311 cases of labor conflicts occurred, virtually all of which involved work stoppages, wildcat strikes, or demonstrations. The Great Worker Struggle in 1987, however, was different from the previous outbursts of labor conflicts. In 1987 and in the following year, workers were not just interested in venting their grievances and being paid higher wages. They were equally interested in acquiring the organizational means to protect their long-term interests. Organizing unions was at the top of their priorities. Where company unions had existed, workers wanted to transform them into genuine representative unions. In almost all factories where intense labor conflict occurred, a focal point of contention was with management’s acceptance of a newly formed union or of a “democratic union” instead of a company-

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controlled (o-yong) union. Many new and powerful unions were formed at large conglomerate firms while managerial power to interfere with union affairs at most factories diminished considerably. Although the rate of unionization declined in the labor-intensive sectors, especially in the textile industry, unionization increased significantly in the heavy and chemical industries and among large firms, resulting in the increase in larger and stronger unions in place of weaker and unstable unions in the light manufacturing sectors. Also, the unionization of white-collar workers has increased noticeably since 1987. Many of these newly formed unions were characterized by rank-and-file militancy and a high level of mistrust toward management, both deriving from the legacy of the past repressive mode of labor control.12 The state’s role during this period demonstrates its fundamental weakness and unpreparedness for labor challenge. During the explosive years of labor militancy in 1987 and 1988, the state withdrew from the industrial arena for the first time and proclaimed a hands-off policy toward labor relations, leaving the capitalists suddenly unprotected in the face of furious labor offensives. Totally unprepared for such a situation, the capitalists had to make substantial concessions to big demands from a labor force that had suddenly gained control of the situation. Workers gained over 20 percent wage increases in many large factories in 1987. Fortunately, the South Korean economy during the period of 1986 to 1988 benefited tremendously from the favorable economic conditions of the so-called “Three Lows”—low interest rates, low oil prices, low dollar–yen and won–yen exchange rates—so, Korean firms were able to buy industrial peace by conceding to big wage hikes. But such a favorable external condition ended by the conclusion of the 1980s and the South Korean economy began to slide downwards from then on. Under strong pressure from business groups, the Roh government began to resume its interventionist policy toward labor relations from the end of 1988. In December 1988, Roh Tae Woo made a Special Announcement Concerning Civil Security, signaling the revival of a repressive approach to labor unrest. In spring 1989, the government sent the police to crack down on strikes at the Pungsan metal company, Seoul Subway Station, and Hyundai Heavy Industries. The government’s renewed effort in labor control was particularly focused on the militant labor groups’ attempt to organize a new national center separate from the official national union, FKTU. The security agencies and the police were intent on demobilizing democratic union leaders by interrogating, arresting, and jailing the most active of the radical leaders. During the period of democratization, some important changes began to occur in the state’s labor policy. Rather than maintaining the past form of blatant procapital stance in labor disputes, the state tried to maintain a neutral stance in labor–capital relations and to steer trade unionism in a peaceful and “responsible” fashion. Its approach now was to restore industrial peace and develop a stable cooperative industrial relations system in Korean industries within the framework of an atomized enterprise union system. To this aim, the state changed the labor laws in December 1987, making it easier to form unions

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and to engage in collective bargaining. Allowing greater space for trade unionism, the state, however, refused to abolish the clauses that disallowed multiple unions and the third party involvement in union matters. The aim was always to keep trade unionism within the bounds of enterprise unionism and to obstruct the formation of cross-firm solidarity among unions or of a possible counter national center to the government-controlled KFTU. In short, the major shift in the state policy was a gradual change from the crude repressive approach to a more sophisticated legal and administrative approach, while intensifying ideological campaigns for harmonious industrial order.

Conclusion Clearly, state–labor relations in South Korea did not develop in a linear fashion without upset. The South Korean state no doubt had enormous organizational and political resources to determine the type of labor regime that it wanted with no constraints imposed by organized labor. However, the way state–labor relations developed was not necessarily the way the developmental state had expected, and the long-term consequence of the tightly controlled labor regime was quite contrary to its short-term result of labor suppression. The evolution of the labor relations system in Korea reveals a great deal of social contradiction and the dialectical nature of industrial development. The developmental state in South Korea inherited from the past both strong state apparatus and weak and demobilized labor. Yet, the history of a largescale mobilization of labor by the leftist forces during the immediate post-World War II period and the everpresent security concern in a divided nation made state rulers always wary of labor’s possible political danger and made them approach organized labor with political considerations more than with economic considerations. Korea’s labor history demonstrates that the cycles of labor mobilization and demobilization coincided closely with regime changes. A major outbreak of labor unrest usually occurred whenever there appeared a political opening due to a sudden vacuum in state power. Such was the case in 1960 after the ousting of Syngman Rhee, in 1980 after the assassination of Park Chung Hee, and in 1987 after the Chun Doo Hwan regime’s surrender to the “people’s power.” Other minor cycles of labor mobilization also corresponded to periods of political relaxation. Once the period of political relaxation was over, the regime immediately tried to bring labor back under tight control. Labor policy changes usually occurred because of the necessity to curb the growth of civil society and to prevent linkages between organized labor and civil society groups as much as to facilitate economic growth. As we have seen, South Korea’s labor regime corresponded to the form of state corporatism in its broad characteristics. Its actual operation, however, deviated from the typical state corporatism found in other societies. Unlike the situation in most corporatist labor regimes, in which officially sanctioned unions are allowed to represent labor demands and deliver some benefits to union members, the South Korean government was primarily interested in keeping

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workers unorganized and in controlling them through security apparatuses rather than through labor branches of the government. Compared with Taiwan, for example, where local unions were deeply penetrated by the ruling party and where various preemptive measures were adopted to ensure labor passivity, in South Korea the government relied primarily on threats and punishments, using the police and security agencies to control labor agitation. Heavy reliance on repressive organs led the state to ignore legal institutional development to foster mature industrial relations. There existed a huge disparity between the labor laws, which had been surprisingly liberal on labor rights, and the actual labor regime. Labor policy measures were therefore inconsistent and were often determined by political circumstances, and by security agencies rather than by an appropriate labor bureaucracy. If there was consistency in the South Korean state’s labor policies, it was in its attempt to prevent organized labor from becoming a political force by being connected to the opposition movement. The main aim of the labor law revisions adopted from the 1960s through the early 1980s was to prevent such linkages. Unions were barred from involvement in any kind of political activities and no third party (labor advocates, church groups, students, or even labor federations) was allowed to be involved in local union activities. The police and security agencies maintained close surveillance over labor organizing activities and sought to eradicate “impure elements” from the labor arena. The most ironic consequence of such a repressive and exclusionary approach was to broaden and deepen ties between union activists on the shop floor and dissident communities outside the factory. The Chun Doo Hwan government’s ban on third party involvement in local union activities in fact drove thousands of students into the factory while broadening the clandestine networks of labor activists, dissident intellectuals, and radical student groups. In short, from the perspective of state–labor relations, South Korea’s developmental state was a far cry from the usual image of a proficient, rational, and effective state. What appeared to be wise and effective at the time turned out to be dysfunctional and counterproductive in the long run. Thus, the South Korean state’s harsh repressive labor policy eventually undermined its state corporatist system by unexpectedly spurring the grass-roots independent union movement outside the official union structure. More important, the state’s deep involvement in labor affairs led to a high level of politicization among rank-andfile workers and deep mistrust among workers toward state policies. This strong mistrust among workers toward the state and capital, formed during the authoritarian period, turned out to be a major obstacle to building a productive and cooperative industrial relations system in the age of globalization.

Notes 1 A. Amsden, Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press, 1989; R. Applebaum and J. Henderson (eds), States and Development in the Asian Pacific Region, Newbury Park, CA: Sage Publications, 1992; S. Haggard,

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7 8 9 10 11 12

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Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press, 1990; J. E. Woo, Race to the Swift: State and Finance in Korean Industrialization, New York: Columbia University Press, 1991; L. Weiss and J. Hobson, States and Economic Development: A Comparative Historical Analysis, New York: Polity Press, 1995. F. Deyo, Beneath the Miracle: Labor Subordination in the New Asian Industrialism, Berkeley, CA: University of California Press, 1989. B. Cumings, The Origins of the Korean War: Liberation and the Emergence of Separate Regimes, Princeton, NJ: Princeton University Press, 1981; G. W. Shin, Peasant Protest and Social Change in Colonial Korea, Seattle, WA: University of Washington Press, 1996. F. Deyo, S. Haggard, and H. Koo, “Labor in the political economy of East Asian development,” Bulletin of Concerned Asian Scholars, 1987, vol. 19, pp. 42–53. J. J. Choi, Labor and the Authoritarian State: Labor Unions in South Korean Manufacturing Industries, 1961–1980, Seoul: Korea University Press, 1989. S. K. Kim, Class Struggle or Family Struggle?: The Lives of Women Factory Workers in South Korea, Cambridge and New York: Cambridge University Press, 1997; H. Koo, Korean Workers: The Culture and Politics of Class Formation, Ithaca, NY: Cornell University Press, 2001. Choi, Labor and the Authoritarian State; Koo, Korean Workers. G. Ogle, South Korea: Dissent within the Economic Miracle, London: Zed Books, 1990. Choi, Labor and the Authoritarian State; Kim, Class Struggle or Family Struggle? Y. K. Park, Labor and Industrial Relations in Korea: System and Practice, Institute for Labor and Management Studies 6, Seoul: Sogang University Press, 1979. Koo, Korean Workers. D. C. Kim, Han’guk sahoe nodongja yo-nku (A study of the Korean working class), Seoul: Yo-ksawa pipyo-ng, 1995; Y. I. Lim, Han’guk nodong undongkwa kyeku-p cho-ngchi (1987–1995) (The Korean labor movement and labor politics (1987–1995)), Masan: Kyungnam University Press, 1997.

8

The political economy of the Asian welfare state Stephan Haggard

The middle-income countries of East and Southeast Asia have long been a source of economic models, even when their content is sharply contested. For the mainstream development policy community, including the international financial institutions, Asia continues to demonstrate the benefits of an outwardoriented, “market-friendly” development strategy.1 The financial crisis of 1997–8 briefly dented this faith and produced a more critical look at Asian financial systems, corporate governance, and business–government relations. But the quick rebound from the crisis seemed to underscore the importance of more enduring fundamentals, including conservative fiscal and monetary policy, high levels of savings and investment, openness to trade and foreign capital, and a longstanding policy emphasis on human capital.2 For critics of this orthodoxy, East Asia held quite different lessons that centered on the effects of government intervention, political institutions, and distinctive characteristics of the East Asian firm. It was from this eclectic mix of concerns that the concept of the “developmental state” arose.3 This camp also found vindication in the financial crisis, particularly in the risks associated with financial market liberalization, the decline of the coordinating role of the state, and changes in politics and business–government relations that increased risk. In the past decade, a new strand of analysis has been added to this older debate on East Asian political economy and it centers on the role of the state in social welfare.4 This new body of research parallels the old to some extent. The neoclassical interpretation of Asia’s postwar growth always touted the social benefits of the region’s labor-absorbing growth strategy; the rapid and virtually uninterrupted employment and real wage growth in the middle-income countries of the region are undeniable. The picture with respect to income distribution is somewhat more mixed than the stylized fact of “growth with equity” would suggest. Income distribution has historically been much more equal in Japan, Taiwan, Korea, and Indonesia than in the Philippines, Malaysia, Thailand or the city-states of Hong Kong and Singapore. Moreover, income distribution has worsened in a number of countries in recent years, most markedly in Thailand (and China). Nonetheless, when compared to Africa and Latin America, East Asia is markedly more equal and there can be little

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question that countries in the region have been highly successful in reducing levels of absolute poverty. As with the earlier market–state debate, the analysis of social welfare in East Asia also has its revisionists. Students of industrial relations have long argued that whatever the social outcomes of East Asia’s growth, they rested on authoritarian and labor-repressive foundations;5 I return to this issue in more detail below. But equally important is the contention that the state played a major role in the distribution of income and wealth. Wide-ranging, top-down land reforms equalized the distribution of assets in Japan, Korea, and Taiwan, and investment in education and primary health services was crucial to realizing the full potential of an export-oriented strategy. A number of theoretical and empirical papers have gone further, arguing that equality in the distribution of assets and income is a cause as much as a consequence of long-run growth in the region.6 This line of work suggests the subversive conclusion that redistribution should be counted as one of the “lessons” of the East Asian experience. I begin the analysis by drawing a distinction between two components of social policy. The first is insurance against major life-cycle risks, most notably unemployment, sickness and disability, and old age. Unemployment and health insurance and pensions can be provided through a spectrum of means that range from mandatory government schemes to purely private provision, with a number of hybrid systems in between. These systems may be more or less universal and more or less redistributive in their design. The second dimension of social policy is the provision of social services. In developing countries, the most important of these constitute investments in basic human capital: the provision of primary and secondary education and basic health care. As with social insurance, basic service delivery can also be more or less universal in coverage and involve different mixes of public and private financing and provision. These policies are clearly not the only ones affecting social welfare, particularly in countries that began their postwar history as overwhelmingly agrarian societies. Choice of industrialization strategy, land reforms (or their absence), agricultural pricing policies, and systems of industrial relations all had consequences for growth, equity, and poverty alleviation. However, choices regarding these basic social policy measures had important consequences and these issues play an increasingly important role in the political economy of the region. Table 8.1 suggests that East Asian countries took quite distinctive choices with respect to these policies. Socialist systems, such as those in Eastern Europe, provided relatively comprehensive protections and services, albeit at great cost and often with poor quality of delivery. Many of the larger middle-income Latin American countries developed quite extensive forms of social insurance, particularly pensions and health insurance, but commitment to provision of basic health and education lagged substantially behind other countries at comparable levels of development. In middle-income East Asia—Korea, Taiwan, the Philippines, Malaysia, Thailand, and Singapore—governments initially provided very little social insurance or did so through mechanisms which shifted the financial burden

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Table 8.1 Dimensions of social policy and types of welfare states

High

Low

High

Modern welfare states (Western and Eastern Europe)

Human capital model (Asia)

Low

Public commitment to basic social services

Public commitment to social insurance

Distributive model (large Latin American countries)

Limited welfare commitments

largely onto employers and employees. Outside of Singapore and Malaysia, which inherited public health systems from the British, government commitment to financing and provision of health care was also quite limited. Health systems were de facto market-oriented; in Singapore and Malaysia they became increasingly so over time as well. On the other hand, governments supported a relatively efficient expansion of primary and secondary education. Such broad generalizations naturally hide important interregional variations, to which I will return repeatedly. Nonetheless, to the extent that there is an East Asian model with respect to these two important dimensions of social policy, it appears to rest on a distinctive combination of policy choices. Governments committed to human capital formation while leaving other forms of social insurance to households, individuals, and to a lesser extent, employers. This chapter poses three questions. The first is the historical one of origins: what accounts for the early policy choices with respect to social policy? The answer is to be found in the nature of the immediate postwar governments, a critical historical juncture that can only be understood in light of the extension of the Cold War to Asia. Political independence resulted in the establishment of conservative, anticommunist regimes, many of which were authoritarian in nature. The elimination of the left and effective control of labor reduced any political incentives for the creation of social insurance outside of government workers and small segments of the urban workforce. However, such governments did have an interest in extending primary education, partly for reasons of social control and “nation building.” This explanation should come as no surprise to students of East Asian political history, but it is important to recount because of the significance of path dependence.7 Once put in place, these policy choices tended to be self-reinforcing and have long-run effects. The second section of the chapter looks at the expansion (or nonexpansion) of initial welfare commitments, and emphasizes the effects of regime type. In many countries in the region, the same factors that help account for early policy choices continued to operate through much of the postwar period. Authoritarian rule, and the weak labor movements and the left parties that accompanied it continued to limit public commitments to social insurance, and led to systems of

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social insurance that targeted politically important actors and limited broader public commitment. However, we might expect that the transitions to democracy that began in a number of countries in the mid-1980s would lead to a more expansive approach to social welfare. Evidence from Taiwan, Thailand, Korea, and to a lesser extent the Philippines suggests that this is in fact the case. The third section looks at the debate over social policy in the wake of the Asian financial crisis. My purpose is not to consider the short-run response to the crisis, but rather to consider how deepened economic integration or globalization might influence the debate over social policy going forward. I emphasize two important features of the current landscape. First, policy debates on social welfare are now taking place in the context of increasing fiscal constraints. Second, while a number of countries in the region have experienced political transitions to democratic rule, left parties and labor remain relatively weak and conservative political forces continue to hold substantial sway. These factors do not necessarily imply a retrenchment of existing commitments, but they do suggest distinct limits on the possibility that East Asia would evolve more fullblown welfare states along European lines.

The historical origins of the East Asian welfare model In East Asia, Thailand stands alone in enjoying an uninterrupted history of political independence. For the other countries under review here, colonial rule only came to an end in the postwar period. Japanese rule of Korea and Taiwan ended in 1945. Independence came to Korea in 1948 following a three-year occupation by the United States. Taiwan fell under Kuomintang rule at the end of the war in the Pacific, although the flight of the party to the island did not occur until 1948–9 with the endgame of the revolution on the mainland. The Philippines secured a modicum of self-rule from the United States in 1935, but did not gain full independence until 1946. Malaysia and Singapore achieved independence from Britain in 1957 and 1959 respectively. Colonial and occupying powers had their own reasons to sponsor social policy innovations, and in some countries these had quite enduring effects. Most notable in this regard are the institution of central provident funds in Malaysia and Singapore and colonial commitments to education in Korea, Taiwan, and the Philippines. But newly independent governments defined the overall approach to social policy. Despite many differences, a common feature of these governments was their strongly conservative orientation, buttressed by the coming of the Cold War to Asia. In Korea, Taiwan, the Philippines, and Thailand, the United States supported anticommunist regimes, in Korea and Taiwan with massive foreign assistance. Anticommunist politics was motivated not only by foreign threats, such as the division of the peninsula in Korea or continuing cross-straits rivalry between Taipei and Beijing, but by domestic challenges from the left as well. In a number of countries, these challenges could be traced to the anti-Japanese resistance, for example, in the very strong urban and rural left in Korea and

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rural insurgencies in the Philippines and later in Thailand. Singapore’s independence struggle was also characterized by a sharp polarization between left and right. In Taiwan, the Kuomintang faced few political challenges, but brought with it the disturbing historical memory of defeat at the hands of the communists on the mainland. Only in Malaya was the left–right divide not particularly salient following independence, and only because the British had already ground down a rural, largely Chinese, communist insurgency during the “emergency” of the 1950s. As in Taiwan, the political memory of this insurgency remained fresh in the postindependence period. Within this broad regional pattern there were clearly differences among these governments with respect to regime type, the extent of actual challenges from the left, and whether governments responded to those challenges with coercion, cooptation or strategic concessions. In Taiwan, Thailand, Korea, and Singapore, the conservatism of postindependence governments was buttressed by authoritarian rule that actively sought to weaken and/or control social forces such as labor that might have supported more extensive social protections. The political and organizational power of the right was most overwhelming in Taiwan, where the Kuomintang quickly snuffed out the modest and relatively moderate indigenous opposition in 1947. Chiang Kai-shek used a highly developed party apparatus to penetrate and control the relatively thin social organization which existed on the island and even to organize and co-opt potential political forces. Labor was organized into state-corporatist unions and labor-management councils and the peasantry benefited from a wide-ranging land reform. The other five countries were nominally democratic at the time of independence, but Thailand, Korea, and Singapore moved quickly in an authoritarian direction. The attempt to establish civilian rule in Thailand at the end of the Pacific war fell to a coup in 1948. Following another coup in 1957 the Sarit government abrogated the parliament and used anticommunism as a justification for clamping down on opposition. In Korea, the departure of the Japanese lifted the lid on a highly polarized society but American occupation forces quickly moved to buttress political forces on the right and to marginalize those on the left. Rhee limited the power of the National Assembly and completed the political assault on labor and the left initiated under the American occupation while making strategic concessions on select social issues, most notably with respect to land reform. The peninsular war (1950–4) provided tremendous opportunities for Rhee to expand his political base in the government, military, and quasi-corporatist groups (of youth, labor, women) and following the armistice, the regime became increasingly autocratic until overthrown in the socalled “student revolution” of 1960. Singapore’s politics was also polarized both before and after independence in 1959. Lee Kuan Yew skillfully outmaneuvered the Barisan Socialis party in the immediate postindependence period, not simply through electoral means and the strategic use of social policy but through emergency powers inherited from the British. By 1967, Lee’s People’s Action Party (PAP) dominated the political landscape and had brought the labor movement under tight corporatist control.

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In Malaysia and the Philippines, politics was somewhat more competitive but the fundamental parameters of that competition had been set by the colonial powers. Quezon’s presidency under the commonwealth (1935–44) established features of Philippine politics that were to persist following full independence in 1946: the dominance of the landed oligarchy, patronage politics and corruption, militant anticommunism, and presidential powers that invited abuse. After the war, MacArthur moved quickly to exonerate collaborators and to restore rightwing, pro-American, oligarchic political forces. Philippine politics in the late 1940s and early 1950s was defined by the American-supported efforts to manage a growing leftist opposition and armed insurgency. In Malaysia, the politics of independence revolved around ethnic issues. The dominant and enduring political force was an electoral alliance between conservative Malay nationalists (United Malays National Organization, UMNO) and a business-oriented Chinese party (the Malayan Chinese Association) whose leaders were “either anticommunist because of their pro-Kuomintang leanings or pro-British because of their English-language education.”8 But the context of the new political landscape was the defeat of the communist insurgency, as much through the mistakes of the Malayan Communist Party as the “hearts and minds” strategy of the British. Political opposition was relegated to a shifting coterie of relatively ineffectual multiethnic, religious, and leftist parties. How did this politics affect the initial policy choices of postindependence governments with respect to social welfare? Of course, economic structure mattered as functionalist accounts of the welfare have long argued.9 At the time of independence, the countries under consideration here were, with the exception of Singapore, overwhelmingly rural, and the demand for social insurance correspondingly weak. But politics also mattered. Conservative governments targeted social insurance to very small numbers of core beneficiaries (as in Taiwan and Thailand), limited the extent of coverage offered (as was the case in the Philippines and particularly Korea where virtually no social insurance existed), or adopted funding schemes that shifted the burden of financing away from the government to employers and employees (Taiwan, Malaysia, and Singapore). Outside of Singapore and Malaysia, which inherited public health systems from the British, government commitment to financing and providing even basic health care was also quite limited. Health systems were de facto market-oriented. On the other hand, postindependence governments had a number of reasons to support a relatively efficient expansion of basic education. Not only was mass education broadly popular in newly democratic political settings, but conservative political elites saw primary education as a tool of political socialization and control, motives often captured by euphemistic references to “nation building” (most notably in Singapore). Given the low level of income in the region, pressing problems of postwar reconstruction, and the political conditions we have outlined, it is perhaps surprising that there was any commitment to social insurance, as I have defined it, at all. In Korea, such insurance was lacking even for government employees

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and the military, perhaps because the rapid expansion of the civil service and the army following independence and during the peninsular war played a laborabsorbing role. The Thai, Taiwan, and Philippines cases are more typical of a political pattern of providing protection first to government employees—usually on fairly generous terms—and extending more limited benefits to key formal sector workers, typically in larger enterprises and on the basis of defined contributions.10 In Thailand, the Government Officials Pension Act of 1951 codified a noncontributory scheme funded by government revenues that provided benefits up to a maximum of 100 percent of final salary. But various proposals to insure workers in the private sector were consistently defeated: in 1932 following the coup d’etat that transformed Thailand from an absolute to a constitutional monarchy and again in 1938, 1946, and throughout the 1950s. The more authoritarian Sarit government moved to repress labor organization, but after some delay and revision resubmitted a welfare bill to Parliament. The bill spent another seven years in revision and review by Parliament and other bodies before finally being scrapped in 1965. Social insurance in the Philippines also began with commitments to public sector workers and was only later extended to private-sector workers in large firms in 1954, and with extremely modest benefits. Taiwan differs from Thailand and the Philippines in extending somewhat more protection to private-sector workers very early in the postwar period.11 Military personnel gained insurance quite early (1950) under a program that provided lump-sum cash benefits for death and disability and free medical care for sickness and injury. Somewhat more surprising was the simultaneous introduction in 1950 of a mandatory labor insurance scheme that provided some health insurance and a lump-sum retirement benefit for employees in industrial firms and mines with twenty or more employees, extended to firms with ten or more employees the following year. This bow to social insurance of privatesector workers was one component of a more far-reaching strategy on the part of the Kuomintang to control industrial relations, including efforts to organize industrial workers and to integrate them at the factory level through labormanagement councils. From a comparative perspective, however, the key feature of the system was that financing was split between employers and employees (in a ratio of 80:20). As in the central provident fund model implanted by the British in Singapore and Malaysia, the government itself assumed no obligations for the program beyond its administrative expense. The former British colonies pose some complexities because important and quite enduring social insurance initiatives date to the colonial period; threats from the left played a significant role in them. As Ramesh argues, “the British showed no inclination to expand democracy or social welfare [in Malaysia] until the failure of the first three years of the counterinsurgency campaign” that was launched in 1948.12 The British also had a strong interest in moderating the nature of the nationalist opposition, accommodating ethnic demands with respect to education, and dampening labor militancy in Singapore.13 The creation of the Public Service Pension Scheme and the Employee Provident Fund

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in Malaysia in 1951, the issue of an Employment Ordinance in 1955 mandating employers to pay sick leave and a maternity allowance and the establishment of the Central Provident Fund in Singapore in 1953 were direct responses to these political pressures. Several features of the provident fund model are noteworthy. The government’s direct fiscal role was limited to the administration of the program, directly reflecting Britain’s own financial concerns. Workers and employers contributed to individual accounts and withdrawal was initially allowed only on retirement, disability, or death. All workers except domestic servants, casual and agricultural workers, and certain government employees were included; in Singapore this implied a relatively high share of the total workforce. As we will see, this provided a ready instrument to expand social insurance at no cost to the government. Characterizing health systems is complex given the range of interventions involved and the fact that both financing and provision typically combine mixes of public and private involvement. What is striking about early Asian health policy choices, however, is the relatively limited role of the state both in financing and provision of health care.14 Out-of-pocket expenditures, including at public facilities, accounted for a large share of total health spending and provision was increasingly dominated by private doctors, clinics and hospitals, pharmacists, and dispensers of traditional medicine. We have already seen that health insurance was typically not part of the social insurance systems put in place in the postwar period, with the exception of that extended to government employees or small segments of the privatesector workforce. Korea did not entertain health insurance—or even a serious expansion of primary health care—until the 1970s. In Taiwan, health insurance was a component of the labor insurance program, but coverage under that program was minimal: in 1951 only 2 percent of the population enjoyed such insurance with that total dominated by government employees.15 The integration of fragmented public insurance schemes did not occur until the 1980s. The number of both public and private hospitals increased rapidly throughout the postwar period, but even in public hospitals individuals paid for service out of their pocket or through their own insurance. Thailand and the Philippines show similar patterns.16 Governments established a provincial infrastructure for public health in both countries and devoted primary attention to the physical infrastructure of hospitals and health centers. Detailed household surveys for 1970 document that expenditures in Thailand went largely to private providers (nearly 75 percent), with payments to government hospitals accounting for most of the remainder. Social insurance came much later. The Philippines enacted a form of national health insurance tied to the social security system in 1969, but benefits were extremely modest and Thailand did not pass national health coverage until 1991. Singapore and Malaysia constitute a partial exception to the privatedominated pattern, in part because of the colonial inheritance of British-style national health systems. The PAP government considered national health insur-

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ance but explicitly rejected it on classic conservative grounds: that it would “foster overuse of health services and reduce incentives for people to stay healthy.”17 Most hospitals were initially in public hands, but outpatient services were private and government hospital and outpatient services relied heavily on user fees. Malaysia shows some departure from the overall regional pattern we have noted in its precocious attention to primary health care. The reason can be traced directly to the emergency, during which the colonial government provided quite extensive services to resettled populations, largely Chinese, of the New Villages. The provision of these services raised the question of why they were not available to Malay kampongs or villages as well, and in 1953 the colonial government initiated the Rural Health Services Scheme. The gradual expansion of the Rural Health Services Scheme and low fees for services were popular with postindependence governments seeking to build bases of support with rural Malays. Nonetheless, the overall pattern in the region is fairly consistent: reasonable attention to basic public health issues such as communicable diseases, but very limited social insurance and heavy reliance on private financing even where provision was public. As McGuire has argued, this pattern strongly suggests that positive health outcomes in the region were as much a result of growth, improving nutrition, and education as they were of public effort.18 With respect to education, East Asia has long been held up as an exemplar of getting public commitments right.19 The core feature of Asian educational policy in the immediate postindependence period was a relatively early commitment to primary education. Asian countries obtained high educational outcomes both in quantity (average duration of study of a cohort) and quality (high retention rates within cycles of study and high level of formal student learning) while keeping the burden on public finance low. Explicitly or implicitly, governments drew a distinction between basic education, which was initially treated as a public good, and tertiary and even secondary education which were treated as a private investment decision and thus left to a greater extent to both private provision and financing. Despite the studies documenting this pattern, surprisingly little attention has been given to its political economy. Any explanation must include a reasonably advantageous colonial legacy and the political gains from expanding education in newly independent and initially democratic countries. In several countries, including Korea and the Philippines, aspirations to universal primary education were enshrined in new democratic constitutions. However, nation building—or less euphemistically, political control—also constituted an important motive. Postindependence governments used educational commitments both to garner political support and to propagate particular conceptions of citizenship and political loyalty. Much research in this area remains to be done, but we can hypothesize that ideological motives for education would be most visible in the “frontline” Cold War states of Korea and Taiwan, on the one hand, and in the ethnically plural

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societies of Malaysia and Singapore, on the other. In Korea, the US Military Government attempted a wide-ranging and idealistic overhaul of the Japanese system, including the development of Korean language materials, decentralization of control, and promotion of democratic values. The commitment to universal primary education was enshrined in the independence constitution, but the Rhee administration effectively reversed many of the American initiatives. Mason et al. summarize these changes: Control of schools (but not financing) was taken back by the national and provincial governments. Teachers were carefully screened for loyalty to the government. Traditional authoritarian practices returned to the classroom and schools and students were regularly used to organize demonstrations of support for the government.20 Nonetheless, United Nations and American assistance helped finance an ambitious primary school-building program in the 1950s. In Malaysia and Singapore, postindependence educational policy was strongly shaped by ethnic politics.21 In Malaysia, education policy was formulated in the mid-1950s as part of a grand political bargain that traded citizenship rights for the Chinese population for a recognition of Malay dominance not only in language but in politics as well. The Education Act of 1961 instituted free but not compulsory primary education (Malay and Tamil education had been free already). While it allowed the continuation of primary education in the language of the family, it required that syllabi and timetables be integrated and that secondary education be restricted to Malay and English. The entrance exam into secondary schools was also abolished in 1965, opening the door for wider Malay participation at that level as well. Upon independence, Singapore also established universal but not compulsory primary education and went through a similar process of “de-pluralization,” but through quite different means. In explicit contrast to his Malayan counterparts, Lee Kuan Yew rejected affirmative action and sought to build a multiethnic polity on the principle of meritocracy. Upon independence, the government initiated integrated schools that comprised two or more language streams within a single school and in 1966 bilingualism (with English as the de facto dominant language) became compulsory in both primary and secondary schools. The curriculum was also aggressively Singaporeanized. Taiwan in effect combines these political and ethnic motives for expanding primary and secondary education. As Ku summarizes: Mandarin was regarded as a weapon to foster the national identity of pupils, to shape their minds as Chinese, not Taiwanese, and make them pursue the highest national policy of the KMT: defeating the communist rebellion and reinstate KMT power over all of China.22

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Authoritarianism, democracy, and the politics of expansion The foregoing section focused on the decisions of the early postindependence governments, and offered a political explanation for a policy mix that provided highly targeted and limited social insurance but made relatively expansive commitments to the provision of primary education. In this section I turn to the expansion—or nonexpansion—of these social policy commitments over time. “Expansion” is a multidimensional concept and includes an increase in both the breadth of coverage (in terms of the share of the population covered by insurance and services) and its “depth” (in terms of the generosity of benefits and the quality of services). However, I am also interested in the extent of government commitment. Insurance and services may be financed and provided by the government, or the government may mandate or encourage financing and provision by the private sector, employers, employees, and households. A central theme of the literature on the Asian welfare state is the extent to which it relied on this latter welfare style, or what Kwon has called neatly a “regulatory” approach.23 Before turning to the politics of this process, it is worth outlining several well-known features of East Asia’s growth that might have affected both the demand for and supply of social insurance and services over time. First, the countries under scrutiny remained rural well into the postwar period and, in the case of both Thailand and the Philippines, to this day. To the extent that politicians responded to social pressures from below, they were as likely to come from the rural sector, either in the form of rebellion (as in the Philippines) or as a result of an electoral calculus (in Korea and Malaysia and to some extent Taiwan, which allowed local but not national elections). Conversely, urban-based political forces, particularly labor unions, were too weak to provide the political base for effective demands for social insurance. Labor markets faced the overhang of the countryside and the share of the workforce in industry was initially too small to serve as an effective source of political pressure for expanded social commitments. Second, high growth itself might have had a dampening effect on the demand for social insurance while increasing political and economic demands for an expansion of social services, particularly education. Rapid growth permitted high household savings and thus buttressed traditional mechanisms of insurance within the household and extended family. Households had effective private means of coping with uncertainty. At the same time, the pursuit of labor-absorbing growth strategies increased the returns to education and thus made both public and private investment in it rational. Rapidly rising incomes also permitted higher private health-care spending. These structural factors should not be seen as operating independently of politics, however. For example, the weakness of labor was not simply a structural given but closely tied up with the existence of labor-repressive governments. Nor is the hypothesis that growth limits the demand for social policy self-evident.

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Rapid economic growth in postwar Europe provided the fiscal foundation for expanded social commitments. To understand the politics of expansion, it is worth considering some findings of the literature on the welfare state in Europe.24 Although this literature has gone through great theoretical and methodological innovation in the past decade, the power-resources approach remains a fundamental point of departure. This approach presumes that organized labor and the political parties that appeal to it, typically on the left, are the most important advocates for an expanded state role in the provision of social insurance and services. The stronger labor and the left, the more extensive social welfare commitments are likely to be. We have already seen that there is some prima facie plausibility in this approach. Initial social policy choices in East Asia were bounded by the weakness of labor and the left. This weakness could be traced to political developments prior to independence (for example, in Korea and Malaysia), repressive actions of authoritarian regimes (in Korea and Singapore), or underlying socioeconomic factors such as the small size of the urban industrial sector (particularly in the Philippines and Thailand). But caution must be exercised in extending the power resource model to Asia, because it omits an important prior variable: regime type. The comparative analysis of the expansion of the European welfare state—at least in the postwar period25—begins with a sample of countries that were consistently democratic. In Asia, we see periods of relatively open democratic rule (in the Philippines and Malaysia in the immediate postindependence period; in Korea, Taiwan, the Philippines, and Thailand since the mid-1980s); authoritarian regimes subject to some electoral constraints (as in Korea from 1964 to 1972, Singapore and Malaysia) and authoritarian regimes that face little or no electoral constraints (Taiwan until the mid-1980s). Democracy is clearly not a necessary condition for expansion of social commitments but democratic governments have greater incentives to respond to social pressures than authoritarian ones, ceteris paribus. First, democratic governments face competitive electoral pressures. Given that social benefits are typically expanded incrementally over time, such competition provides incentives for politicians to appeal to voters through an expansion of social insurance and services. Second, democratic governance is a precondition for the operation of interest groups, including labor, that have an interest in welfare policy. A simple orienting hypothesis is that expansion under authoritarian regimes is likely to be more focused and targeted on politically strategic groups and seek to limit public commitment. Democratic politics are more likely to be associated with a broader, or even universal, expansion of welfare commitments and the assumption of a greater public role. The empirical discussion can be organized by beginning with those countries and time periods during which somewhat more open electoral incentives operated, beginning with the Philippines, which was nominally democratic from its independence in 1946 until the Marcos coup in 1972. Competitive political pressures and pressures from the left did affect the expansion of both social

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insurance and services. However, in both instances, the nature of expansion was constrained by the fundamental similarity between the two dominant conservative political parties, the absence of an effective left, and the extensive use of patronage. The extension of pensions from government workers to the private sector occurred in 1954 during a period of reformism under Magsaysay. Many of Magsaysay’s initiatives were a direct response to the Huk rebellion: deploying the military to provide health services in rural areas, providing legal services to tenant farmers; resettling surrendering Huks. However, Magsaysay also took some initiatives with respect to urban labor as well, including the passage of an Industrial Peace Act which overhauled the system of industrial relations, provided for collective bargaining and created incentives for the formation of unions. The 1954 Social Insurance Act was clearly geared toward urban labor, since it was initially limited to firms with more than fifty employees. In 1955, the government passed a Workmen’s Compensation Law as well. The social security system provided the template for the further expansion of benefits, which were extended to employees in firms with at least six employees in 1958 and to all private enterprises with at least one employee in 1960. With respect to the provision of social services, the Marcos government passed a Medical Care Act (1969, operative in 1972) that provided for national health insurance.26 The program was to be implemented in two phases, with the first to cover only the formally employed who were members of the social security system. The expansion of coverage to others was continually postponed and benefits were in any case minimal. The system did not run its own health-care facilities, reimbursement rates to private providers did not keep up with rising costs, and the government exercised no controls on private-sector pricing. In the mid-1980s, not only was total health spending (2.4 percent of GNP) lower than that in Korea (5.1 percent), Thailand (3.8 percent), and Malaysia (3.5 percent) but the public share of total health spending was extremely low (0.6 percent, the same as in Korea but less than Thailand’s 1.1 percent and Malaysia’s 2.7 percent). The Medical Care Act did relatively little either to increase total health spending or to shift the balance toward the public sector. The run-up to the 1969 election was also marked by an expansive schoolbuilding program in an effort by the president to seize control of pork from Congress. But Marcos’s capacity to spend was limited by the reluctance of Congress to vote higher taxes. Overall spending on education remained low by regional standards, as did efficiency. Comparative analysis by Tan and Mingat shows that even when controlling for GNP per capita, survival rates in primary education in the Philippines in the mid-1980s were lower than in Singapore, Malaysia, Korea, and Thailand and only marginally better than Indonesia’s; the expansion of the system was not matched by consistent attention to quality.27 The period of the Marcos dictatorship was marked by a retreat from a social policy agenda, substantial regression on a variety of social indicators, and new controls on the labor movement. As political pressures on the regime

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mounted in the late 1970s, including from a widening rural insurgency, the government did take some social policy initiatives. In 1980 the government extended social security benefits to self-employed workers. The Marcos government also increased nominal (but not real) benefits in the face of accelerating inflation of the early 1980s. But throughout both the early democratic and Marcos periods, compliance (in the payment and collection of payroll taxes) and corruption (in the management of Social Security System funds) were problematic and they remained so into the 1990s. As we have seen, the performance of the public education and health systems remained poor. Not until the return of democratic rule under Aquino, Ramos, Estrada, and Macapagal did the government again begin to seriously address social issues, albeit it under difficult fiscal constraints. Malaysia and Singapore were also born democratic and as in the Philippines social policy responded to electoral incentives and in Singapore, to challenges from the left as well. In both countries, central provident funds provided the basis for an expansion of social insurance. In both countries, albeit for different reasons, ruling parties had a strong interest in the expansion of education and in Malaysia, of primary health care as well. Yet while electoral constraints continued to operate in both countries except for a brief period in 1969–71 in Malaysia, both countries evolved into conservative, dominant party systems with distinctly authoritarian features that increasingly eschewed their earlier redistributive objectives. Electoral pressures and challenges from the left were strongest in Singapore. From the first election in 1955 a labor-based and communist left played a significant role in national politics and within the PAP itself. Despite the large majority that the PAP garnered in the 1959 elections, the coalition represented by the party was extremely diverse. For the next ten years, Lee Kuan Yew navigated a series of political challenges from the left: defections from the PAP that formed the United Peoples Party and the Barisan Socialis; the debate over merger with Malaya, which the left opposed; the Barisan’s walkout from Parliament in 1967 and subsequent demonstrations calculated to bring the PAP government down. Despite its reputation as a market-oriented entrepot, Lee Kuan Yew was open in his use of social policy to blunt the challenge from labor and the left. The extension of the educational franchise and early and aggressive investment in vocational education were a component of this effort. But the key instrument for responding to the left in the early postindependence period was through housing policy, overseen by a Housing Development Board created in 1960.28 The prior creation of the Central Provident Fund proved an extremely useful tool for financing the housing push, which was also closely connected with educational and health objectives. Government apartment complexes included schools and clinics. Initially, the government drew on the Central Provident Fund to finance Housing Development Board construction. After 1968 individuals were able to draw on their Central Provident Fund accounts to purchase Housing Development Board flats.

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The government turned in a more explicitly authoritarian direction in the mid-1960s, building on corporatist control of the labor movement that had gradually been established since independence and particularly after 1963 when the government moved to curb and ultimately deregister unions linked to the Barisan Socialis. Singapore comes the closest of the East Asian countries to showing a clear link between the turn to export-oriented growth, labor controls, and the withdrawal of previous social entitlements.29 The Employment Act and Industrial Relations (Amendment) Act of 1968 established nonwage benefits to workers but also placed strict ceilings on them in an effort to attract foreign investment. At the same time, the Central Provident Fund provided the government with a ready instrument for meeting changing social policy objectives. The government faced few political constraints on raising Central Provident Fund contribution rates, could shift the balance between employer and employee contributions, and could continually revise the uses to which funds could be put: from housing, to education, to private investment, and perhaps most importantly, to health care. In 1984, the government used the Central Provident Fund to establish a compulsory medical savings scheme, Medisave, although the inadequacy of the scheme forced the government to establish a modest public insurance scheme (Medishield) in 1990. Following the inception of Medisave, the public share of total health spending underwent a sharp decline before stabilizing at about 25 percent in the 1990s. When electoral constraints resurfaced in the early 1990s in the form of a decline in PAP vote shares, the government undertook a more targeted approach to certain limited categories of the poor. But the distinctive feature of the Sinagpore model remained basically unchanged since the mid-1960s. An expansive central fund provided social insurance, including medical insurance, with extremely limited public commitment or redistribution, while the government invested heavily in education and training geared closely to private-sector needs. In Malaysia, the nature of the electoral challenges to the early postindependence governments took an entirely different form. In contrast to Singapore, the emergency virtually eliminated the left as an organized political force. Religious parties played an oscillating political role over the next three decades, but opposition tended to mobilize on ethnic grounds. On the one hand, Chinese and multiethnic parties challenged Malay privilege on meritocratic grounds. On the other hand, Malay parties or factions within the UMNO argued for an expansion of pro-bumiputra policies. During the first decade of independence, Alliance governments focused primary attention on shoring up their rural Malay base. The Employees Provident Fund continued to grow as a result of structural change and the inclusion of new workers, but the urban working class was predominantly Chinese and the extension of social insurance and housing did not play the political role they did in Singapore. Rather, the main social policy initiatives focused on expanding the educational franchise, building schools, training teachers—who subsequently became an important base of the UMNO—and expanding the Rural Health Services Scheme established by the British in the mid-1950s. More than in any other Asian country, early Malaysian

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health initiatives mirrored later norms of concentrating health-care spending on primary care aimed at the poor. Electoral setbacks both to the UMNO and to its Chinese partners triggered the violent ethnic conflict of 1969. The effects of those events were far-reaching, beginning with a twenty-one-month declaration of a state of emergency that initiated the incremental transition to a less democratic politics. The New Economic Policy of 1971 was a direct response to the riots and social priorities underwent a shift. Earlier commitments to education and health were expanded in line with the first objective of the New Economic Policy—”to reduce and eventually eradicate poverty . . . irrespective of race.” But new attention was also given to more direct means of attacking ethnic imbalances in the distribution of income and assets through a variety of affirmative action measures. Quotas for access to higher education played an important role in this new approach. The Mahathir governments of the 1980s and 1990s pushed the New Economic Policy in a new direction that placed greater emphasis on economic growth through foreign direct investment and support for Malay capital.30 New controls had been placed on the labor movement in the wake of the events of 1969; these controls fit well with the probusiness orientation of the government. With this new political orientation—a shift to the right in the context of creeping authoritarianism and greater openness to foreign investment—the government emphasis on social policy and equity was increasingly muted. The government continued to extend higher educational opportunities on the basis of ethnic quotas. But it also proved quite tolerant of the privatization of education and the growing practice of sending children abroad for tertiary and even secondary education. As in Singapore, the government also reduced public health-care costs by turning to the Employee Provident Fund and opening an Account III modeled on Singapore’s Medisave program. Also as in Singapore, the government sought to increase private-sector involvement in provision of health care and to selectively privatize public health-care functions. The effect of regime type can also be seen if we turn our attention to the course of social policy in countries that began their postwar history under more overtly authoritarian auspices and subsequently went through periods of political liberalization and transition to democratic rule. The “purest” authoritarian system in the region is Taiwan and, as we have seen, social insurance was initially limited to the military and select segments of the private sector. Prior to the gradual democratization of the 1980s, the system expanded incrementally to small groups of politically significant public sector workers (government employees in 1958; additional government workers and retired government employees in 1965) and a handful of private-sector workers (fishery workers in 1953; sugarcane plantation workers in 1956). Despite these small changes, the welfare system stagnated until the 1980s. What changed, beginning in the late 1970s, was a gradual process of political liberalization and democratization, albeit initially under the tight control of the Kuomintang. During the initial phase (1977–86), the government tolerated

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opposition but did not allow changes in political institutions. Martial law remained in place. During the second transitional phase (1986–91), the Kuomintang lifted martial law and permitted an opposition party to form, but institutional legacies of the old order remained. These included continuing restrictions on the scope of political activity (for example, in the advocacy of independence) and a legislature that was not elected under fully competitive conditions. After a series of crucial constitutional reforms in 1991–2, and particularly with the concession of the direct election of the president in 1995, the political system became more fully democratic. There can be little question that the increasing competitiveness of the political system had a profound effect on the level and composition of government spending, including the provision of welfare.31 The main opposition party, the Democratic People’s Party, began its life focusing primarily on democracy and ethnicity, but these issues gradually lost salience and the opposition shifted its attention to economic questions. As early as 1987, the Kuomintang had coupled its pledge of political reform with the commitment to create a “welfare state” by the end of the century. The government began this foray by appealing to its traditional rural base with a heavily subsidized health insurance program for farmers in 1989, followed by a program for low-income households in 1990 and a separate health program for the handicapped in 1991. In 1992, the Democratic People’s Party campaigned in the legislative elections on its own welfare state platform, promising an extensive array of entitlement programs including universal health insurance, subsidized housing, government-guaranteed retirement income for the elderly, and pensions for farmers. In 1993, the Democratic People’s Party took up the issue of reducing health premiums for workers. The most important result of this political bidding war was the legislation of a national health-care plan in 1994 (operative in 1995) that integrated the previously fragmented medical insurance system. The insured are divided into six categories that pay varied premiums; nominally, the system was designed to be earnings-related, but the categories are in fact occupational. The government makes contributions for people with low incomes—farmers, fishermen, employees without fixed employers, and seamen—and contributes as the employer for civil servants, dependants of servicemen, and veterans. The innovations wrought by democratization are clear: the near-universal nature of coverage (95 percent of the population), the departure from the past welfare model implied by large government contributions; and the relatively generous nature of the benefits which permit individuals to visit the doctors of their choice. By the early 2000s, debate over the system centered not on its deficiencies but on whether the system was financially sustainable. Moreover, the welfare debate had moved on both to unemployment insurance and a national pension scheme. The effects of democracy on social policy are equally stark in Korea and Thailand, although somewhat complicated by the oscillation of regimes and the importance of initiatives taken by authoritarian governments.32 At the time of the military coup in Korea in 1961, the social question was of primary political

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importance. Unemployment was high and the brief democratic political opening of the Second Republic (from the student revolution of April 1960 to May 1961) brought a variety of social grievances, both urban and rural, to the fore. The military government exhibited a strong populist streak, particularly with respect to rural welfare, and undertook a number of radical steps such as the cancellation of farmers’ debts. In 1965, the government initiated a Public Assistance Program that provided small transfers to several vulnerable categories: the elderly poor, the homeless, those with mental disability, and those living in poverty. However, the central thrust of the military government was to reverse the policy drift of the First and Second Republics by emphasizing economic growth. Education fit quite prominently into the military’s plans. The new government put renewed emphasis on expanding primary education to rural areas through a school-building campaign, and cut strongly against social norms by placing greater emphasis on vocational education, with support from the private sector. In 1968, the government took a popular step toward universalizing secondary education by abolishing the entrance exam. Social insurance began tentatively during the early Park period, and as elsewhere in the region, civil servants were an early beneficiary (1963) through a contributory pension plan to which the government made contributions as an employer. The new government also launched industrial accident insurance (under the military prior to the presidential elections of 1963) and a pilot health insurance program (launched in 1965). Both were fundamentally limited in their scope, the industrial accident insurance program by its initially restricted coverage (firms with more than 500 workers), the health insurance scheme by the fact that it was not compulsory. Over time, the employeefunded industrial accident scheme provided a template for the expansion of coverage by gradual reduction in the size of firms covered. But the health insurance scheme did not expand, as potential losers from the scheme stayed out. For the remainder of the 1960s, commitment to social insurance languished as the economy took off. The next round of welfare initiatives followed the installation of the authoritarian Yushin Constitution of 1972, and reflected a selective, Bismarckian approach targeted at strategically important workers. Korea witnessed increasing political polarization in the late 1960s and early 1970s, and social issues played a prominent role; Kim Dae Jung played to these issues during the presidential campaign of 1969 and labor and student militancy increased. The new constitution was a response to these political pressures, and was accompanied by martial law and new controls on labor and political organization. The Yushin Constitution gave the president the power to dissolve the National Assembly and to appoint one-third of its members and through an indirect electoral mechanism essentially assured Park the presidency for life. The Yushin announcement was accompanied by several welfare initiatives. A national pension system was proposed as a way of mobilizing savings for Park’s ambitious heavy industry drive, but was postponed with the first oil shock. National medical insurance was launched in 1977 (along with a modest

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Medicaid program for the poor). As with industrial accident insurance, coverage was initially limited to the largest firms. As with other Asian social insurance schemes, the National Health Insurance scheme was fully financed by employers and employees. In 1981, under the authoritarian government of Park’s successor, Chun Doo Hwan, the government allowed occupational associations to establish their own health insurance funds, providing an avenue for the expansion of coverage to some of those who fell outside the initial limitations of the program. As in Taiwan, there can be little question that the transition to democratic rule had a profound effect on the government’s commitment to social insurance.33 Although constitutional issues dominated the 1987 election campaign, all four candidates promised a national pension program and an expansion of national health insurance. By the time of the democratic transition, most employees in the industrial sector had access to health care but the selfemployed, farmers, and others without employers fell outside of it. Both parties promised to rectify this, and the Roh government initiated coverage which not only extended the system to all but involved the government assuming half of the contributions of those previously outside the system. The implementation of the suspended 1973 National Pension Program was an election promise of Roh Tae Woo during the 1987 campaign. The introduction of the system began with workers in the formal sector—in firms with more than ten employees—and was fully funded by employer and employee contributions with no direct government role. Nonetheless, the system provided the template for gradual expansion to others. In 1992, the Kim Young Sam government passed a modest unemployment insurance program, a particular rarity in East Asia. A similar pattern can be seen in Thailand.34 Following the gradual introduction of more open electoral politics in the 1980s, the Thai parliament unanimously passed a wide-ranging social security bill in July 1990 that included health insurance, and maternity, disability, and death benefits. The bill had been passed over the veto of the more conservative Senate, and when the military took power in February 1991 it would have been plausible to assume some retrenchment. But the military had its own political concerns and decided to retain the new system, which was consolidated and expanded further following the return to democracy in 1992. To summarize, underlying economic and social conditions may have influenced the course of social policy in East Asia but politics played an important role as well. Democratic governments were more inclined to initiate and expand both social insurance and services than authoritarian ones, were more inclined to do so through public spending, and were more inclined toward a universal approach to coverage, even if implementation sometimes fell short. Authoritarian governments were more limited in their social commitments, were more inclined to meet social demands through a regulatory approach that limited public spending, and were more likely to focus on politically important groups, including civil servants, the military, and the “labor aristocracy” of workers in large, formal sector firms.

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Several caveats and directions for future research are indicated by this stylized history. First, the duration and stability of democratic rule appear to play an important role in how commitments expand over time. Short democratic openings, such as those in Korea (1960–1) or Thailand (1973–6) are unlikely to generate programs with lasting impact. Second, more research is needed on the left and labor unions in these initiatives, and in both authoritarian and democratic settings. The initiatives of democratic governments may be limited in scope where labor and the left are weak, as they were in the Philippines and Malaysia and as they remain in some ways to this day in most countries in the region. Conversely, even where the left and labor are not well-institutionalized political actors, various forms of social action “from below” such as strikes, demonstrations, riots, and insurgency may generate targeted, if short-run, social policy responses even from authoritarian governments.

Globalization and the future of the Asian welfare state after the financial crisis The Asian financial crisis of 1997–8 represented a profound shock to the region, with obvious and wide-ranging social consequences in the form of rising unemployment, falling wages, and the destruction of assets and savings. It is beyond the scope of this chapter to discuss the short-run response to the crisis; I have taken the issue up at greater length elsewhere and numerous other accounts exist on the social dimensions of the crisis.35 Rather, I am interested here in the longer-run effects of “globalization” on social policy. Is the economic openness that has long characterized the East Asian economy conducive to the development of more robust social protection, or ultimately corrosive of it? What models are available to the Asian publics debating these issues, and under what conditions might different models emerge? It is worthwhile to consider several limiting cases. One possibility would be a conservative reaction to the political pressures that have emerged for a more expanded government role in social provision. To understand what such a reaction might look like requires a theoretical digression on the relationship between economic openness and social policy. An alternative argument about the causes of social policy to the one advanced here begins with the imperatives of different development strategies.36 This approach mirrors earlier work on Asia that linked authoritarian rule and repressive labor regimes to the demands of an export-oriented growth strategy and resonates closely with current work on Europe on globalization and the retrenchment of the welfare state.37 This line of analysis offers up a relatively tidy explanation for the patterns of social policy that we have described. On the one hand, mobile capital and export-oriented firms, both foreign and domestic, constrain governments’ ability to tax and to support welfare commitments. On the other hand, internationalized segments of the private sector might very well support government investment in both health and education, and particularly education that was tied to shifting labor market needs.

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There is historical evidence that such links existed in the region, most notably in Singapore where the relationship between an export-oriented manufacturing strategy, limitations on social benefits, and government investment in education were tied together in an extraordinarily explicit way. However, even in that case the argument does not fit perfectly by any means. Although the government did periodically respond to crises by lowering employer contributions to the Central Provident Fund, the period of internationalization in Singapore was accompanied by steadily rising contribution rates for both employers and employees. In most of the other cases, timing does not appear to support this functionalist economic argument. The conservative orientation of governments had established policy templates with respect to both social insurance and the provision of services that predated the transition to more export-oriented growth models. And as we have seen, democracy overrode, at least to some extent, the presumed dictates of an open economic strategy; even in the face of increasing economic openness in the 1980s and 1990s, new democracies in Thailand, Taiwan, and Korea expanded social commitments, in some cases quite dramatically. Nonetheless, the argument is an important one. The emergence of internationalized segments of business—both foreign and domestic—enhanced the sensitivity of the private sector to expanded welfare commitments. Moreover, political transitions in East Asia tended to be conservative in nature.38 Right and center-right parties continued to enjoy substantial electoral appeal even following transitions to democratic rule. These parties were motivated not simply by their links—sometimes quite direct—to the authoritarian past but by their receptivity to business interests. Conditions that expand the appeal of such parties could also lead to a conservative reaction with respect to existing or future welfare commitments. Just as the financial crisis naturally gave rise to political pressures to expand social commitments, so it also gave rise to conservative notes of caution. A number of governments—most notably those in Singapore, Thailand, and Malaysia—responded to external pressures to expand social commitments by explicitly criticizing the inappropriateness of the Western European welfare state. This critique was couched in the language of values, such as the traditional reliance on family and community and ethics of work, discipline, and individual responsibility. However, these voices also reflected material motives with respect to the fiscal burden such commitments might imply and their effect on the ability of export-oriented firms to compete internationally. What is the likelihood of such a conservative reaction (outside of Malaysia and Singapore, where it already arguably holds sway)? Perhaps the clearest route is through the emergence of fiscal policy as a salient dimension of political contestation. The expansion of social commitments noted above took place in the context of rapid growth and stable government finances; indeed, the fiscal conservatism of countries such as Korea, Taiwan, and Thailand constituted an important permissive condition for the expansion of welfare. One of the most enduring effects of the Asian financial crisis was a dramatic reversal in the fiscal

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fortunes of Asian governments.39 Corporate and financial sector restructuring proved extremely expensive, and the stock of government debt rose dramatically as a result. Conservative parties and politicians might appeal to publics on the grounds that they do elsewhere in the advanced industrial states, and particularly the United States: that spending is excessive, that welfare commitments squeeze out other priorities and result in higher taxes. This might be coupled with efficiency arguments about “waste, fraud, and abuse” in the implementation of social programs. Although such appeals cannot be ruled out, they may be more effective in limiting future commitments than they are at rolling back those that have already been made. The expansion of social spending that is visible in Korea, Taiwan, the Philippines, and Thailand clearly responded to pent-up political demand for improved insurance and services, and once in place such commitments can be hard to reverse. Moreover, it is not clear that all private-sector interests necessarily gain from a socially minimalist state, as an important new body of literature on the advanced industrial states has begun to find.40 Some public provision of social insurance can serve the interests of employers as well as employees, for example, by relieving them from previous commitments. The significance of high-order skills in attracting foreign investment and retaining competitiveness is increasingly obvious as well. It is also possible that political forces could arise that would push the social policy debate in the very different direction of the classic European-style welfare state. The one country in which this might happen is South Korea, where the labor movement is the strongest. Kim Dae Jung did use his credentials with labor to convene a tripartite committee in early 1998, and in the process undertook a number of reforms that were of longer-term significance, including an expansion of unemployment insurance and pension coverage and a consolidation of national health insurance. But these reforms were two-edged, and were aimed in part at extracting concessions from labor with respect to labor market flexibility. Even where labor has gained in strength with the transition to democratic rule, it is typically lacking in organizational capacity, it is hampered by social-structural constraints such as the continuing weight of agriculture in the economy, and perhaps most importantly it has not found effective representation through political parties that champion labor interests. The explosion of non-governmental organization activity across the region has helped to bring social grievances to the fore, but these political forces remain localized and lacking in the kind of overarching organization that can effect broad changes in policy. In sum, the prospects for a social-democratic turn appear remote. The “middle way” in East Asia is likely to reflect the pull of the contending forces just outlined: the continuing strength of conservative political forces, including internationalized business, as well as an increasingly democratic context where social security and services have become a much more salient political issue not simply for labor but for the middle class as well. What are the issues in contention and how might they unfold politically? The provision of social insurance potentially has broad appeal. Rising

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health-care costs and pensions are particularly important political issues in the context of rapidly aging populations. In one crucial area, however, the debate over social insurance has yet to begin and that area is unemployment. In the advanced industrial states, even in their more liberal Anglo-Saxon variants, unemployment insurance was the centerpiece of the modern welfare state. In East Asia, unemployment insurance has rarely managed to garner political support. Again, the weakness of organized labor seems the most logical explanation for this outcome, and structural changes such as the increasing flexibilization of labor markets are also at work. However, insecurity is now reaching into employment domains that were previously secure, such as the government itself, the state-owned enterprise and large firm sectors. The financial crisis affected white-collar as well as blue-collar workers as firms responded with aggressive restructuring plans. At least in the more industrial and urbanized states, support could grow for income maintenance programs. A second and closely related area of policy debate will be education and training. Governments followed a highly sequenced approach to the expansion of education, focusing their attention initially on primary and secondary education. Tertiary education will now pose political challenges, as the emergent middle class seeks upward mobility for its children through expanded educational opportunity. The optimal policy is to channel resources to research and other public goods, such as merit-based fellowships, to avoid across-the-board support which can lead to overbuilt, inefficient public university systems and to allow private universities to flourish. Misguided spending on tertiary education can drain human and administrative as well as financial resources from other levels of education and make spending highly regressive. But Thailand, the Philippines, and Korea all show that political pressures for the expansion of tertiary education can be intense. Moreover, there are labor market reasons for such expansion, given the changing technological demands on workers even in traditionally labor-intensive fields. A third axis of policy debate has to do with the efficiency of service delivery. Within the public sector, the organization of social services has been relatively centralized at the national level even though governments have relied on private financing (through insurance) and provision (through private schools, tutors, doctors, clinics, pharmacies) to a surprising degree. Governments are now under international and domestic fiscal pressure to decentralize, corporatize (hospitals in particular), and privatize service delivery in the hopes of achieving both greater efficiency and greater accountability as well. Yet experiences with decentralization in other regions have been decidedly mixed as lower levels of government lack the capacity to take on these tasks. Privatization also poses the problem of oversight and holding private providers of services accountable to mandated standards. As the Asian financial crisis showed, the shift to a more liberal model does not mean the state can simply step aside; to the contrary, decentralization and privatization require new oversight capabilities. Finally, there is the problem of the poor. Asia has been more successful than

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any other region in reducing poverty. During the crisis, the international financial institutions were very much focused on the needs of the structurally poor, and with good reason. With the passage of the crisis, attention to the structurally poor may decrease as conservative publics show reduced interest in programs that may leak to the nonpoor and create moral hazard. Yet there is cause for cautious optimism about the prospects of social protection for the poor. When the poor have gained such protection in the advanced industrial states, it is typically because the middle class has endorsed programs that provide help to all who face some risk of falling into poverty under defined circumstances. Increased economic uncertainty may have the positive effect of generating greater support for arguments that have as their premise “there but for fortune go you or I.”

Conclusion This chapter joins a number of other recent efforts to reconsider the East Asian growth experience through the lens of welfare commitments and outcomes. “Growth fundamentalists” argue that the most important determinants of welfare outcomes in the region reside not in social policy as commonly conceived, but in the more basic conditions and choices that were conducive to high growth in the first place. High income growth provided the basis for an efficient solution to many of the problems addressed by the welfare state in the advanced industrial economies. Growth permitted high savings, which allowed for both self-insurance and private insurance; it increased the returns to education; and it improved nutrition and allowed households to purchase the medical care they needed on the private market. High and stable income and employment growth may also have a causal role in explaining why the political demand for formal social insurance was muted. In this view, the analysis of welfare policy is a distinctly secondary consideration to unraveling the economic and political conditions for high growth. As I have attempted to show, there is more to the East Asian approach to social policy than is often thought. The puzzle of explaining its distinctive characteristics—limited public social insurance coupled with effective investment in human capital—is in fact quite central to understanding the broader development trajectory of the countries in the region. In particular, the findings presented here raise important theoretical as well as empirical issues for the concept of the “developmental state,” the subject of this volume. Most of that analysis—including that presented here—has emphasized the authoritarian and labor-repressive nature of the developmental regimes in East Asia. A minority, represented by José Edgardo Campos and Hilton Root’s The Key to the Asian Miracle,41 has placed more emphasis on shared growth and the existence of an implicit social contract in the region. Yet both lines of attack clearly face important questions. The “hard” view of the developmental state does not address the puzzle of why East Asia’s authoritarian governments have been responsive to social welfare while so many other authoritarian regimes have not. The “soft”

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view faces a similar problem; how can political systems lacking in effective means of representation generate credible social contracts? As I have suggested throughout, more attention needs to be paid to the way authoritarian regimes use social policy as an instrument to deter political challenges. Now, the conditions that gave rise to the minimalist East Asian welfare state are rapidly changing. Growth appears more uncertain and erratic. Traditional networks of support are breaking down just as populations are aging in ways that will place pressure both on public pension programs and on national health-care systems. Globalization, in the guise of both long-run competitive pressures and external shocks such as those of the Asian financial crisis, also increase social insecurity. Most importantly, the transition to democratic rule (and at least some degree of pluralism in Malaysia and Singapore) has generated new pressure on governments to provide social protection. Democracy means that these initiatives—and therefore the future shape of the East Asian state—will be molded by political contestation among competing models rather than the political strategies of authoritarian elites.

Acknowledgement This chapter is part of a larger project with Robert Kaufman comparing the political economy of social policy in East Asia, Latin America, and Central Europe.

Notes 1 See most notably, the World Bank, The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press, 1993. 2 The World Bank, East Asia: Road to Recovery, Washington, DC: World Bank, 1999. 3 M. Woo-Cumings, The Developmental State, Ithaca, NY: Cornell University Press, 1999, for an overview. 4 The literature on welfare policy in East Asia has become quite large. Comparative efforts to characterize and explain social policy regimes in the region include J. Dixon and H. S. Kim (eds), Social Welfare in East Asia, London: Croom Helm, 1985; A. Tyabji, “Social security in the Asia-Pacific Region,” Asia-Pacific Economic Literature, 1993, vol. 7, no. 1, pp. 53–72; R. Goodman, G. White, and H. J. Kwon (eds), The East Asian Welfare Model: Welfare Orientalism and the State, New York: Routledge, 1998, and particularly the important essay in that volume by H. J. Kwon “Democracy and the politics of social welfare: a comparative analysis of welfare systems in East Asia,” pp. 27–74; D. Jacobs, Social Welfare Systems in East Asia: A Comparative Analysis Including Private Welfare, CASE Paper No. 10, London: Centre for the Analysis of Social Exclusion, London School of Economics, 1998; M. Ramesh with M. Asher, Welfare Capitalism in Southeast Asia: Social Security, Health and Education Policies, New York: St Martin’s Press, 2000; C. Aspalter, Conservative Welfare Systems in East Asia, Westport, CT: Praeger, 2001; I. Holliday, “Productivist welfare capitalism: social policy in East Asia,” Political Studies, 2000, vol. 48, no. 4, pp. 706–23; K. L. Tang, Social Welfare Development in East Asia, New York: Palgrave, 2000; I. Gough, “Globalization and regional welfare regimes,” Global Social Policy, 2001, vol. 1, no. 2, pp. 163–89; I. Holliday and P. Wilding (eds), Welfare Capitalism in East Asia, New York: Palgrave, 2003.

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5 An exemplary work is by F. Deyo, Beneath the Miracle: Labor Subordination in the New Asian Industrialism, Berkeley, CA: University of California Press, 1989. 6 N. Birdsall, D. Ross, and R. Sabot, “Inequality and growth reconsidered: lessons from East Asia,” World Bank Economic Review, 2000, vol. 9, no. 3, pp. 477–508. 7 On path dependence with respect to social policy, see P. Pierson, Dismantling the Welfare State? Reagan, Thatcher and the Politics of Retrenchment, New York: Cambridge University Press, 1994, and the more general argument in P. Pierson, “Increasing returns, path dependence and the study of politics,” American Political Science Review, 2000, vol. 94, no. 2, pp. 251–68. 8 R. Stubbs, Hearts and Minds in Guerilla Warfare: The Malayan Insurgency 1948–1960, New York: Oxford University Press, 1989, p. 202. 9 H. Wilensky, The Welfare State and Equality, Berkeley, CA: University of California Press, 1975. 10 On this pattern, see Ramesh, Welfare Capitalism. The following on Thailand and the Philippines draws on Pawadee T., “Social security for the Thai people,” ASEAN Economic Bulletin, 1986, vol. 3, no. 1, pp. 145–56; and M. Lamberte, “Social adequacy and economic effects of social security: the Philippine case,” ASEAN Economic Bulletin, 1986, vol. 3, no. 1, pp. 92–123. 11 See Y. W. Ku, Welfare Capitalism in Taiwan, New York: St Martin’s Press, 1997; and C. Aspalter, Democratization and Welfare State Development in Taiwan, Aldershot: Ashgate, 2002. 12 Ramesh, Welfare Capitalism, p. 154, 13 An excellent account of the early period can be found in L. Low and T. C. Aw, Housing a Healthy, Educated and Wealthy Nation through the CPF, Singapore: Times Academic Press, 1997, pp. 14–21. 14 Overviews of these systems can be found in M. Roemer, National Health Systems of the World: The Countries, New York: Oxford University Press, 1991. Roemer calls the Asian health systems “entrepreneurial,” underlining the private-sector role. See also C. C. Griffin, Health Care in Asia: A Comparative Study of Cost and Financing, Washington, DC: World Bank, 1992. 15 Ku, Welfare Capitalism in Taiwan, p. 40. 16 The following draws on Roemer, Health Systems. 17 Ramesh, Welfare Capitalism, p. 97. 18 J. McGuire, “Social policy and mortality decline in East Asia and Latin America,” World Development, 2001, vol. 29, no. 10, pp. 1673–97. 19 Birdsall, Ross, and Sabot, “Inequality and growth”; A. Mingat, “The strategy used by high-performing Asian economies in education: some lessons for developing countries,” World Development, 1998, vol. 26, no. 4, pp. 695–715. 20 E. S. Mason et al., Economic and Social Modernization of the Republic of Korea, Cambridge, MA: Harvard University Press, 1981, p. 345; M. Seth, Education Fever: Society, Politics and the Pursuit of Schooling in South Korea, Honolulu: University of Hawaii Press, 2002. 21 See, for example, S. Gopinathan, Towards a National Education System 1946–1973, Singapore: Singapore University Press, 1974; L. E. Tan, The Politics of Chinese Education in Malaya, 1945–1961, New York: Oxford University Press, 1997. 22 Ku, Welfare Capitalism in Taiwan, p. 176. 23 Kwon, “Democracy and the politics of social welfare.” 24 This literature is vast, but an outstanding summary can be found in E. Huber and J. Stephens, Development and Crisis of the Welfare State: Parties and Policies in Global Markets, Chicago: University of Chicago Press, 2001. 25 The role of democracy in the evolution of the European welfare state naturally comes up when viewed over a longer time frame. See, for example, A. Hicks, Social Democracy and Welfare Capitalism: A Century of Income Security Politics, Ithaca, NY: Cornell University Press, 2000.

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26 The following draws on Lamberte, “Social adequacy,” and Ramesh, Welfare Capitalism. 27 J. P. Tan and A. Mingat, Education in Asia: A Comparative Study of Cost and Financing, Washington, DC: World Bank, 1992, p. 55. 28 See Low and Aw, Housing a Healthy, Educated and Wealthy Nation. 29 S. Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, NY: Cornell University Press, 1990, pp. 110–13. 30 Jomo K. S., U-Turn? Malaysian Economic Development Policy after 1990, Cairns: Centre for East and Southeast Asian Studies, James Cook University of North Queensland, 1994. 31 T. J. Cheng and S. Haggard, “Democracy and deficits in Taiwan: the politics of fiscal policy, 1986–1996,” in S. Haggard and M. McCubbins (eds), Presidents, Parliaments and Policy, New York: Cambridge University Press, 2001, pp. 183–225. 32 See H. J. Kwon, The Welfare State in Korea: The Politics of Legitimation, New York: St Martin’s Press, 1999. 33 H. K. Song, “The birth of a welfare state in Korea: the unfinished symphony of democratization and globalization,” Journal of East Asian Studies, 2003, vol. 3, no. 3, pp. 405–32. 34 G. Reineke, “Social security in Thailand, political decisions and distributional impact,” Crossroads, 1993, vol. 8, no. 1, pp. 78–116. 35 E. Lee, The Asian Financial Crisis: The Challenge for Social Policy, Geneva: International Labor Organization, 1998; S. Haggard, The Political Economy of the Asian Financial Crisis, Washington, DC: The Institute for International Economics, 2000. 36 I. Holliday, “Productivist welfare capitalism” is exemplary of this approach. 37 See, for example, Deyo, Beneath the Miracle; and Huber and Stephens, Development and Crisis. 38 S. Haggard and R. Kaufman, The Political Economy of Democratic Transitions, Princeton, NJ: Princeton University Press, 1995. 39 An overview of fiscal issues is contained in a special issue of Journal of Asian Economics, 2001, vol. 12, no. 3. 40 Exemplary of this new line of thinking is I. Mares, The Politics of Social Risk: Business and Welfare State Development, New York: Cambridge University Press, 2003. 41 J. E. Campos and H. Root, The Key to the Asian Miracle: Making Shared Growth Credible, Washington, DC: The Brookings Institution, 1996.

9

Transplanting the neoliberal state in Southeast Asia Richard Robison, Garry Rodan, and Kevin Hewison

When the 1997 Asian financial crisis brought down many of the so-called miracle economies, it dealt a seemingly fatal blow to those claims about the functional superiority of a highly centralized, state-led system of “Asian capitalism” and expectations of an imminent Asian Century that had been so central to the rhetoric of many Asian political leaders in the previous decade.1 For neoliberal reformers within the World Bank and the IMF, and in the treasuries and finance ministries of Western governments, the crisis confirmed that the various models of “Asian capitalism” were in fact outmoded and dysfunctional in an age of global markets. Convergence, once again, became part of the vocabulary of policy-makers in the West as Asian governments were urged to eliminate cronyism and embrace the natural efficiency of the market.2 The crisis, indeed, represented an important stage in an ongoing and internecine struggle by the international financial institutions and some Western governments and businesses to undo the systems of state-led industry policy and predatory cronyism that had variously defined the economic and political organization of most Asian economies and underpinned their successful mercantile assaults on global markets. But neoliberal reform agendas were not just about markets. They necessarily sought fundamental transformations in systems of state power and governance, spelling the end of the strategic interventions through industry and trade policy identified as the defining elements of the developmental state, as well as the discretionary interventions of predatory state power through various clientelist mechanisms (cronyism). For neoliberals, market capitalism required that the function of the state become one of regulating and facilitating an abstracted market driven by its own laws. The regulatory state was envisaged as a state where “technopols” would be able to get on with the job of creating rationally efficient policies and institutions insulated from the raids of predatory alliances and the demands of vested interest.3 The crisis posed an important structural question. It concentrated minds on the question of whether either developmental or predatory models of capitalism and state power could continue to survive in a world of global markets. Must the strategies of Asian economies now focus on how to build their hegemony within the terms of a neoliberal model of market capitalism? For countries like Singapore, constituting an archetypical developmental system where a highly

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organized central state not only managed key financial and capital institutions but presided over a framework of trade and industry strategies, the question was how far to abandon these, to focus, instead, on building corporate, financial, and capital institutions able to compete in a highly fluid and volatile global market economy. This was no simple policy choice. Whether such a transition could be achieved without eroding the hierarchy of state and social power embedded in the existing arrangements was the central dilemma faced in Singapore. In countries like Indonesia, Thailand, and South Korea, where beleaguered governments struggled to contain fiscal crisis, economic contraction, and widespread corporate bankruptcy, the dilemmas were more immediate. The crisis meant that a much more instrumental power lay in the hands of the IMF which demanded the implementation of reform measures aimed at deregulating markets, privatizing state sectors and imposing fiscal austerity—the key policy ingredients of the programs of structural adjustment identified as the Washington Consensus—as conditions for the huge rescue packages it provided.4 These deregulatory measures were supplemented by reforms aimed at insulating the administration from outside influences that might impede “rational” policymaking. Reform packages included programs for “good governance” that included market-based schemes to limit the discretion of state officials, increasing the independence of central banks and the judiciary from the political apparatus, contracting out state functions, introducing regulation that separates officials from bidders in procurement and contracting, and making rules more transparent.5 The ultimate aim was to empty the state of politics and to replace it with a notion of “governance” conceived as a technically rational and abstracted process, thus neutralizing predatory interests that distorted policy. Yet, the triumph of the neoliberal regulatory state has been ambiguous and inconclusive. In Singapore, the government has attempted to introduce new strategies of accommodation to the dramatic transformation of global markets without disturbing the essence of those existing structures of the developmental state within which a specific set of power relations was embedded. Even where the path of the crisis was most destructive, and where the political frameworks and global financial markets that had glued together and papered over fragile economic regimes began to come apart, attempts to reorganize banks and financial regimes, to transform systems of corporate governance, and to replace systems of money politics with representative forms of political democracy have been bitterly contested.6 In Thailand, Indonesia, and South Korea, a range of powerful political and economic interests were intent on undermining market reform where it threatened their social power or sought to engage with elements of the reforms where this promised that privilege and power might be maintained. These apparent paradoxes raise important questions about the underlying relationship between markets and states; between the evolution and globalization of capitalism and the processes of institutional and regime change. Are we simply at the early stages of a long and drawn-out process of convergence or can market capitalism survive and even flourish in a range of different institutional

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frameworks? In attempting to unravel the dynamics of change, the three case studies, Singapore, Indonesia, and Thailand, offer contrasting insights into the importance of different ensembles of factors. Is it easier for a developmental state to make the transition to liberal market capitalism than a state that is more predatory in nature? Singapore offers a model where a highly efficient and insulated state already presides over a prosperous, if highly disciplined society. No institution building is required here—just a process of deregulation. But do the very economic successes of the developmental state and the political insulation of its ruling interests mean it is better able to accommodate markets without changing its state structures? Or are there now a large corps of public and private managers better able to survive in the cold winds of the market and for whom the developmental state is a constraint? At the same time, both Indonesia and Thailand represented systems where state power was more porous and fluid and the distinction between public and private authority more ambiguous than in the statist regimes of East Asia. In these cases, the parallels with the early systems of unconstrained laissez-faire and money politics that characterized liberal market capitalism in Europe and North America are clearer. Here, the task for liberal reformers was not to unravel a suffocating state but to enhance its ability to regulate unconstrained and destructive systems of private expropriation of public authority. This was not simply a technical matter. It also meant that a technocratic elite must be able to impose its will on current state–business alliances or that power must shift from interests reliant on rents to those who see advantage in rules and regulations that govern the general interests of capital. At the same time, despite the many similarities, the differences between Thailand and Indonesia are important. From the 1980s in Thailand, the relationship between state power and powerful private commercial interests was mediated largely through a system of money politics based on political parties, parliaments, and elections. By contrast, the growth of large private corporate groups in Indonesia was, until recently, embedded and orchestrated within a highly centralized system of state authority and is only now being reaccommodated within a more diffuse democratic regime of money politics. How do these two sets of state–business relations influence the relative prospects for a transition to the regulatory state?

Conceptualizing the problem: three paradigms In the choice-theoretic approaches of neoclassical economics it is assumed, at its simplest level, that utility-maximizing individuals emerge spontaneously to address collective action dilemmas, creating institutions that deal with transaction costs and imperfect information that arise as markets change and prices alter. In this abstracted telos of efficiency, questions of power and conflict are absent, and even the notion of the state is nowhere to be seen. Hence, continuing resistance to market capitalism and to the regulatory state after the crisis was puzzling where it had been assumed that economic shocks resulting from crisis would force a process of learning that would result in policies that

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addressed issues of efficiency. Yet, bad times apparently brought neither “good” policies nor a regulatory state. As expectations of a frictionless transformation were disappointed, rational choice political economists introduced politics into the neoliberal equation. Realizing that markets were far from self-regulating, they proposed that deregulation in itself was not enough and might play into the hands of predators and rentseeking coalitions where the institutional framework was weak.7 Hence, the failure of the neoliberal agenda was explained in terms of a failure of institutions and of the capacity of the state to insulate its “technopols” from rent-seeking coalitions.8 This translated into a political agenda designed, ironically, to free the state of “politics” and subordinate the rationality of politics to the rationality of economics; to create a form of technocratic and even antidemocratic rule. Where did social power and interest enter the equation? Neoliberals became increasingly aware of the substantial lack of enthusiasm and even opposition to their agendas coming from within the broader society. This was understood, not as the product of opposition to the social implications of neoliberalism but as a fundamental weakness of “social capital”; that set of values, norms, and networks in society that would support markets.9 Hence, building social capacity and incorporating NGOs and other groups within the neoliberal umbrella were added to the building of the institutional capacity of the regulatory state as a second central pillar in the neoliberal agenda. A quite different approach was taken within the broad camp of historical institutional theory and by many statist political economists. In a world where markets are not abstract mechanisms driven by their own internal laws but the constructions of politics and governments, liberal market capitalism and the regulatory state are conceived as the evolving products of a specific Anglo-Saxon historical trajectory and embody the immediate national interests of American capitalism.10 In a global clash of different capitalisms, the failure of the regulatory state becomes the pathology of a rejected transplant unable to survive in the alien environment of a different historical institutional pathway.11 Indeed, Wade and Venoroso argued that hasty and imprudent attempts to impose liberal financial and political regimes only led to disaster as they ruptured established and working high-debt models that underpinned the economies of Northeast Asia.12 This is a seductive view and one that neatly captures the way institutions resist over time and through traumatic changes. But its benign view of institutions as the product of incremental change within cohesive social amalgams gives a false sense of immutability. Such a view does not account for the bitter conflicts and violent shifts that have propelled and defined change in Indonesia and Thailand, for example, in the past decades. Similarly, liberal markets and the regulatory state are hardly the “natural” historical expression of AngloSaxon capitalism but have emerged in prolonged struggles between those alliances supporting the social democratic agenda and those powerful interests in America and Britain seeking to dismantle and to escape those representative systems, environmental and welfare lobbies, tax regimes, and organized labor that have been part of social democratic tradition.

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The point is that the institutions that shape economic and social life are forged in conflicts between shifting and fluid coalitions of state power and social interest. Institutions are more than mechanisms for resolving the collective efficiency dilemmas of individual actors, they are about the concentration of power and its allocation.13 At stake is nothing less than the social order. This is why the beneficiaries of the old order will resist institutional reform even where the economic costs are high if it threatens their social and economic interest and political authority.14 In this view, the Asian crisis is significant, not because it demonstrates the inherent inefficiency of entrenched economic regimes and states but for the extent to which it has fractured and weakened those coalitions underpinning developmental and predatory systems and created opportunities for the building of neoliberal coalitions. The formation of these coalitions is not an abstracted or timeless process. They are decided in the specific context of an evolving global capitalism which not only shifts the configuration of power itself as new classes emerge and others decline but changes the very issues and questions around which conflict is focused; questions about the legal framework of property rights, regulation and public administration, the opening of financial and capital markets and trade regimes, rationalization of production through outsourcing and subcontracting, and the introduction of new technologies. In this context, we have two primary questions. First, why has neoliberalism failed politically to mobilize and organize coherent and effective coalitions around its agenda? Second, how have those state and social interests, the beneficiaries of existing or previous regimes, managed to preserve or reorganize their ascendancy and to accommodate the political and economic challenges of the postcrisis era? It has been argued that crises often liberate naturally progressive and “overdeveloped” middle classes and capitalist interests nurtured within various systems of nationalist, predatory or state capitalism but for whom these have now become a constraint. Now requiring free access to global markets, rule of law, and an end to arbitrary authority, they become the potential beneficiaries of neoliberal reform and the regulatory state.15 The failure of such a metamorphosis suggests at one level that there is a continuing weakness of a “progressive” middle class and bourgeoisie or the underdevelopment of a civil society. Yet, the reality of powerful corporate interests and an increasingly prosperous middle class provides an apparent paradox. The answer lies, not in the absence or weakness of these forces but in the fact that they have so far found their interests advanced in illiberal economic and political regimes. In Singapore, it is the developmental state that has offered a pathway to prosperity to the middle classes and the political elite has been able to accommodate global markets successfully without rupturing the specific framework of state control. In Thailand and Indonesia, the embrace of neoliberal ideas has rarely extended beyond technocratic elites in the public and private sectors who see themselves as the beneficiaries of an insulation that is part of the managerial revolution and the regulatory state. While various reformist middle-class forces in Indonesia and Thailand might have seen the IMF as a means of pursuing

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their assault on arbitrary state power and the ascendancy of predatory leagues of oligarchs, their commitment to markets has been less certain and their support for nationalist and populist appeals strong. Basically, while the crisis may have precipitated the fall of governments in Thailand and of an entire regime in Indonesia, the apparatus of the state and that ensemble of power relations embedded within it has remained intact even where new political institutions have emerged and where old elites must now reorganize themselves, often within expanded social alliances. Rather than institutional reform driving a reorganization of power and interest, entrenched interests have reorganized themselves to give life to the new market economies and political democracies that have emerged in the wake of the crisis. Most important, there is an ambiguous support for neoliberal reform agendas among the international business community. In a more pragmatic assessment, political order assumes a priority in the immediate tasks of enforcing property rights, removing obstacles to investment, and sweeping away distributional coalitions over systems of governance that are accountable and transparent and over democratic transition. After all, big global corporate players flourished under authoritarian rule in precrisis Asia and within highly protective and predatory economic regimes. It is the uncertainty and disorder of economic life in postcrisis Asia that are disturbing, not the absence of liberal institutions.

The case studies The impact of the Asian crisis was different in Singapore, Thailand, and Indonesia. In the latter two countries, financial crisis extended into a destructive cycle of corporate and political collapse and direct intervention by the IMF. In Singapore, the economy and state remained intact, forced to respond to structural aftershocks rather than any instrumental imposition of reform agendas. But these were not the only differences. In Indonesia and Thailand, the main concern of the IMF was not only deregulation and fiscal constraint but the reform of a system of state–business relations based on the discretionary allocation of state monopolies, resources, contracts, and guarantees. In the case of Singapore, governance and regulation were not the central issues. If ever there was a model of the regulatory state and rule by technopols, it was Singapore. Perhaps the most interesting question is whether a transition towards liberal market capitalism and the sort of regulatory state neoliberals advocate is easier where an efficient and insulated state is already in place, although presiding over a developmental economy, or where the institutions of state power are porous and ineffective but there is greater volatility in social power vis-à-vis the state. Singapore Before the Asian crisis, Singapore seemed to be the case of the developmental state par excellence. For decades the state had played a decisive and systematic role in shaping the costs of the various factors of production to influence the

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city-state’s comparative advantage in international trade. This involved the state in activities ranging from the establishment of statutory bodies to plan and coordinate industrial development, the subsidization of social and physical infrastructure costs for capital, institutional mechanisms to control wages, direct state investments to initiate and support the industrial drive, to an extensive array of social and political controls meant to consolidate and extend central policy control.16 Yet while this state was characterized by a significant degree of relative political autonomy of policy elites from capital and labor and high levels of efficiency, by no means did this amount to the removal of interest or politics from the policy process. On the contrary, the policy choices of technopols and the structures through which they were developed reflected the political, material, and ideological interests of the People’s Action Party (PAP). Indeed, the ruling party’s interests had become so enmeshed with the operations of the public bureaucracy and public institutions that a one-party state had effectively been in place since the late 1960s.17 Consequently, state paternalism, political authoritarianism, and an institutionalized ideology of elitism—all of which were meant to blunt political opposition and reproduce PAP hegemony—were integral features of the broader relationships within which the developmental state operated. The impact of the 1997–8 Asian crisis on Singapore was severe and did raise some questions about the future form, if not viability, of the developmental state. Economic growth plummeted from an impressive 8.4 percent in 1997 to just 0.4 percent in the subsequent year. The immediate policy response was swift and included a fuller embrace of economic deregulation and liberalization involving the banking, services, telecommunications, and power sectors. Initial economic recovery was dramatic, with Singapore enjoying 10.3 percent growth in 2000. In the following year, though, the economy shrank by 2.0 percent in the worst recession since independence in 1965. The same acute export dependence on the US economy by the electronics sector that had underwritten the sharp recovery had just as rapidly set the economy back. In this context, forces aligned to a more robust neoliberal reform agenda, most notably those associated with international finance capital, have subjected Singapore’s developmental state model to unprecedented critical scrutiny. Private-sector economists within brokerage firms and other investment houses have been at the fore of this campaign. Policy recommendations from these quarters have included increasing private consumption and lowering national savings, and “de-linking GLCs from the government,”18 as well as the transfer of some of the S$62 billion of the compulsory national superannuation scheme money—through the Central Provident Fund (CPF)—to private fund managers and private superannuation companies. But such changes also have the potential to diminish the PAP’s capacity for social, political, and economic control, a threat that the PAP is acutely aware of. Yet the crisis also combined with structural changes in the global economy to foster a major reassessment by PAP leaders of how best to protect and advance

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the various interests so well served by the political economy of the established developmental state. Ironically, as is argued below, a partial embrace of neoliberal economic reforms might be functional for that objective, although such a direction may not be without a degree of tension and even occasional conflict. The challenge, in effect, is for the PAP state to become more strategic and flexible about the protection and advancement of its various interests at the same time as increasing the opportunities for international access to domestic markets. Retention of fundamental power relations underlying the prevailing developmental state, and not all the intricate forms of that state, are the priority for the PAP. Nowhere is the challenge more conspicuous than with regard to the role of government-linked companies (GLCs). GLCs and statutory bodies dominate the commanding heights of the domestic economy,19 much of this through Temasek Holdings that handles approximately S$90 billion.20 GLCs also accounted for as much as 60 percent of Singapore’s foreign investment in 1998,21 as they sought new accumulation opportunities beyond the limits of the city-state economy.22 Yet Singapore Inc. and the wider economic role of the state embody power relations critical to the PAP. State control of capital and resources underscores political paternalism central to the authoritarian regime.23 Moreover, state capital has created something approaching a new establishment of political and economic elites.24 Past and present government leaders and their relatives, as well as former senior military commanders have joined a select group of politically trusted senior civil servants as either directors or executives of GLCs.25 By the time the Asian crisis hit, government leaders had drawn a number of conclusions about the implications of the changing global economy for the ambitions they harbored for the further internationalization of the GLCs and the upgrading of the Singapore economy.26 After asserting in his 1999 National Day Rally Speech that globalization was an irresistible force, Prime Minister Goh Chok Tong emphasized the need to build “world-class Singapore companies,” with his approving comments about GLCs making it abundantly clear which companies he had in mind.27 He added that: “We should now go global by forming strategic alliances or mergers with other major players. Indeed, we have no choice—where the industries are consolidating worldwide, we either become major players, or we are nothing.”28 These strategic alliances were essential, according to Goh, for “organizational strength, technology, access to global markets, and a worldwide network.”29 The internationalization of Singapore-based companies was presented as a crucial element in the transition to a knowledge-based economy, but it seemed to dawn on Goh that strategic alliances would be difficult to forge while global players were substantially blocked from key domestic markets. The seriousness of the economic crisis led to the establishment in late 2001 of the Economic Review Committee (ERC) to finds ways to “upgrade, transform and revitalize the economy.”30 Headed by Deputy Prime Minister Lee Hsien Loong, the ERC released some of the subcommittee recommendations in 2002 and its final report in early 2003. Essentially the ERC attempted to satisfy

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private-sector aspirations for lower business costs and increased access to the domestic market without serious damage to the GLCs or strategic state economic and social control more generally. The ERC recommended the deferral of restoration of employer contributions to the Central Provident Fund to pre-Asian-crisis levels as well as the refinement of the Central Provident Fund to reduce the costs on employers from employing older workers—those most affected by structural unemployment. The changes would also open up selective opportunities for more private banks, insurance companies, and financial service providers to gain access to national savings. However, the complete overhaul of the Central Provident Fund that various interests among international capital had been calling for was not seriously entertained. Meanwhile, increased labor market flexibility linking wages more closely to individual company profitability was also championed and rationalized in terms of globalization ideology, signaling a more uncertain and insecure environment for labor ahead.31 Importantly, the significance of the GLCs to Singapore’s economic future was confirmed by the ERC’s subcommittee on Entrepreneurship and Internationalization which stated that Temasek’s key mission should be to grow GLCs into globally competitive enterprises that are anchored in Singapore. Temasek should compel GLCs to scale up their core competencies to build global businesses, as opposed to concentrating on the local market to build a diverse range of unrelated businesses.32 The ERC further underlined the GLCs’ “significant technical capabilities and management depth.” The appointment in May 2002 of Deputy Prime Minister Lee’s wife, Ho Ching, to the newly created position of executive director of Temasek, to oversee the “rationalization and consolidation of its holdings,”33 also did little to foster hopes of a serious depoliticization of the GLCs. However, the ERC did try to allay some of the concerns within the international business community about the political nature of GLCs and what that meant for other market players trying to compete with them: “All GLCs should be run on strict commercial principles and be subject to the discipline of the market.”34 It was precisely a focus on this principle that was largely responsible for the protracted nature of negotiations between Singaporean and their respective United States and Australian counterparts in recent Free Trade Agreements. In the case of the agreement with the USA, the Singaporeans ultimately made a number of concessions to improve market access for select US banks, insurance companies, and other service industries as well as to improve the transparency and independence of decisions by regulatory authorities to curtail perceived GLC advantages. The Singapore government has also agreed to divest its interests in Singapore Telecommunications (SingTel) and Singapore Technologies Telemedia. Significantly, though, no schedules were attached to this undertaking.

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The significance of these tensions between the established developmental state and the interests of international capital should be recognized but not overstated. What we are witnessing is a refashioning of the developmental state or a rationalization of it rather than its demise. In many respects, the pressures for change exerted on the Singapore government from within the international business community are ambit claims. There is no expectation or even desire of a wholesale dismantling of all the elements of the developmental state, but there are attempts to enforce a greater opening up of the space for domestic competition. To secure the conditions for the GLCs’ own internationalization, we can expect continuing pragmatic but cautious responses to these pressures—as we can on other proposed reforms that have the potential to diminish the PAP’s social and political control. Broadly, the government is seeking to effect a rationalization of its role in the economy that consolidates its strategic influence, selectively opens up increased access to domestic markets for international capital, and relieves it of certain social responsibilities it has customarily assumed. Thailand Prior to the Asian crisis, Thailand was one of the world’s most successful economies, often lauded by international financial institutions as a model for developing countries. In fact, however, Thailand was not a model of a liberal, market-driven economy promoted by these institutions. Neoliberal analysts captured this in their descriptions of patronage and rent-seeking that they argued meant that state intervention prevented effective policy-making and resulted in slower growth than would have been possible with more market-driven policies.35 In other words, the Thai state was not the regulatory state favored by neoliberals. Nor was it an exemplar of the developmental state usually associated with Asian capitalism. Institutional economic and political theorists explained that Thailand’s economic success was driven by an ensemble of nonstate institutions such as commercial banks and business associations.36 They viewed the state as fragmented and relatively weak, especially when compared with Asian developmental states.37 Even so, both sets of theorists agreed that Thailand’s economic success owed something to the fact that the state’s fiscal and economic offices were controlled by technocrats and were insulated from patronage. In fact, by the 1990s, Thailand’s state was in a process of transformation. In the 1960s, the state was dominated by the military, supported by senior bureaucrats and technocrats. The military had supported the development of capitalism and a strong domestic capitalist class.38 However, uprisings in 1973 and 1992 had challenged the military’s political power. While the military attempted to maintain its position, the state changed during the 1980s. In this decade, a relatively small group of Bangkok-based, family-controlled conglomerates dominated the economic structure, and although seldom directly involved in electoral politics, supported various political parties and had well-organized lobby organizations.39 In this period, economic policy was controlled by technocrats, who promoted domestic business through various incentives including

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increased tariff protection.40 However, as the economy boomed and the influence of technocrats and the military waned, political contestation became focused on the cabinet, and parliamentary politics became increasingly corrupt under the influence of “money politics.” The parliamentary dominance of provincial business derived from the fact that most members of parliament were returned from provincial constituencies.41 These scions and representatives of provincial business were required to reimburse election expenses and make as much money as they could for their business supporters and their parties prior to the next elections. Even though the Thai state had generally maintained policies that protected and promoted their economic interests, the Bangkok-based conglomerates increasingly found that their political and economic prerogatives were challenged by provincial politicians. Likewise, senior technocrats were unhappy that provincial politicians were establishing control over economic policy.42 The 1991 coup, where the military overthrew a corrupt government of rent-seeking politicians, reflected this dissatisfaction with the dominance of money politics. Shortly after, the 1992 uprising demonstrated the political impossibility of continued military rule. Clearly, the state was yet to be fully transformed, and struggles to control it remained critical to political and economic power. These struggles were mitigated by the economic boom that continued until 1996, and it was the Asian crisis that brought these struggles to a crescendo. As will be shown below, the result was the political reorganization of the power of the remaining elements of the domestic capitalist class to take control of the state and implement policies that protected their economic interests. When the economic downturn hit, there was a resurgence of neoliberal policy advice to the Thai government, most of it from the international financial institutions. Neoliberals identified “market distortions” resulting from state intervention as contributing to the crisis. Analysts identified weak state and corporate governance, inadequate institutions, cronyism, moral hazard, corruption/rent-seeking/patronage, and the resource misallocation as factors in the crisis. For neoliberal analysts the correct response was a move to a rulesbased market system, further liberalization, and market-enhancing reform, preferably implemented by technocrats and institutions insulated from political influences. The baht devaluation on 2 July 1997 meant that most of Thailand’s medium and large-scale companies were essentially insolvent. Those that were not, as well as small businesses, found that they were unable to obtain funds from a banking system that had all but collapsed.43 Thailand had little choice but to turn to the IMF for a US$17 billion facility that came with policy strings attached. These required a tightening of monetary and fiscal policy, substantial governance reform, liberalization, and restructuring that all followed the neoliberal model.44 Behind these “remedies” was a desire to transform the ways of business and politics.45 In essence, the IMF believed that this transformation required: keeping wages low; privatization of state enterprises; civil service reform; reform of the regulatory environment; an easing of restrictions on, and

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an increase in, foreign investment; improvements to corporate governance; and increased private-sector participation in infrastructure projects.46 With the support of the international financial institutions, the Thai government, led by new Prime Minister Chuan Leekpai and a coalition of parties, announced a number of measures to further reform, emphasizing privatization. The second Letter of Intent (LoI) with the IMF noted progress in “bringing the legal and regulatory framework in line with international standards” and a raft of new and revised laws and regulations to facilitate financial restructuring and liberalization were announced.47 The aim was to make the Thai regulatory environment more like those of the West. As then US Treasury Secretary Robert Rubin explained, solving the problem of cronyism required considerable political will, “the help of the international community and a reorientation of the role of government.” 48 For a time, the Chuan government’s “bold” reform program was a successful political approach, but it failed as an economic strategy. Domestic business was initially supportive of the government, with bankers and representatives of Bangkok-based conglomerates reacting positively.49 For example, telecommunications tycoon and budding politician Thaksin Shinawatra gave his support to the government and the IMF reforms.50 Indeed, the government made a point of seeking advice from the largest businesses. This was essential as the government needed a political honeymoon period as it devoted its attention to bailing out state and private banks, guaranteeing depositors and creditors, nationalizing failed banks, and closing insolvent finance companies.51 However, this political honeymoon was short, for as the crisis deepened, so a political reaction set in, involving a widespread opposition to the IMF’s program.52 More significant though was the way powerful interests were able to overcome historical animosities, political rivalries, and business competition to organize a political revival meant to save the domestic capitalist class. The US Embassy’s belief that “resistance” to neoliberal reform from “indigenous business and political interests,” would be easily overcome,53 was well wide of the mark. As local business struggled to survive, it complained about high interest rates, a lack of liquidity, and about the “fire sale” of valuable assets to foreigners. Business and academic economists argued for increased attention to an economy that was spiraling further into negative territory. The government began to take notice, and the third LoI set out a strategy for further bailing out the banks, an expansion of government spending, more attention to the social impacts of the crisis, and increased liquidity, but the real economy remained in serious trouble.54 Amid growing political opposition, the government added provisions to reduce interest rates and further expand its deficit.55 Significantly, however, the government maintained its plans for privatization; regulatory reform, liberalization, improved corporate governance, and further foreign investment. Domestic business now concluded that Chuan and his Democrat Party were committed to a neoliberal restructuring program that was weakening the control of local capitalists and threatened the political and economic demise of the class.56

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What was it about the Chuan government’s reform agenda that motivated business opposition? Various elements of the package were, in fact, attractive to some local businesses. For example, the new bankruptcy provisions assisted some of the remaining banks. But there were problems with the thrust of the total package. Privatization is a useful guide. Privatizing state enterprises had long been supported by the domestic private sector. However, privatization in the depths of the crisis was a problem. With the further opening of the economy to foreign investors, at a time when domestic business was strapped for cash, and when banks were not lending, meant that domestic capitalists were at a severe disadvantage. Selling state banks and other enterprises—the Bangchak refinery, the Ratchaburi power plant, Thai Airways, and a range of utilities57— that might have been attractive to domestic investors when only foreign investors could benefit was a particular threat. In essence, Chuan’s government (and the IMF) were prepared to support capitalism, but only capital in general, rather than domestic capital specifically. In previous economic crises, foreign capital had retreated and domestic business expanded. This time the reverse was true, and liberalization was making matters worse. Capitalist crises rearrange the architecture of capital, but this crisis saw domestic capital being out-competed by cashed-up foreign businesses. Time and again the reforms proposed by the Democrat-led government appeared to threaten domestic business. Compounding this, it seemed that the Democrats had forgotten domestic business and had accepted notions of “crony capitalism,” and were determined to restructure Thai capitalism with foreign investors having a much increased role. In LoIs, the government expressed its commitment to “further market opening,” and especially in those sectors “sheltered from foreign investment.”58 It argued that further liberalization was essential for recovery, and moved to enhance foreign investment in real estate, a sector protected for decades.59 The bills required to further liberalization were opposed and amended in parliament, although most eventually passed into law. Domestic business saw the Chuan government implementing a neoliberal agenda that was, by late 1999, of little benefit to them in the short term, and which promised long-term negative impacts, while foreign capital benefited. It became apparent to the remaining tycoons that domestic business needed to direct public policy; the threat of extinction meant they had to control the state. They withdrew their support from Chuan and the Democrats, and gave it to Thaksin Shinawatra and his new Thai Rak Thai Party (TRT). TRT became the vehicle to give an “edge” back to domestic business. This was symbolized in the TRT’s January 2001 election victory. Thaksin was one of the most successful of the new magnates created by the economic boom. From a small computer business in the early 1980s, Thaksin was, by 1996, listed in Forbes magazine as Thailand’s fifth wealthiest person, with assets of $2.1 million.60 On the local stock market, in 2000 Thaksin and his family held shares worth almost 37 billion baht, mostly in the communications sector.61 While he had dabbled in national politics from 1994 to 1997, much of

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Thaksin’s business success was due to state concessions in telecommunications and related areas; he had excellent links to the military and government.62 While his businesses were damaged by the crisis, he was one of the first local capitalists to expand after 1997. As Pasuk and Baker show, Thaksin quickly came to arrangements with former business rivals and built business and political alliances.63 Having great wealth and powerful alliances were critical factors in the construction of TRT and paved the way for the election victory.64 Thaksin and TRT promised electors a new form of politics, building on the new, reformist constitution that had been adopted in 1997.65 Using techniques drawn from US campaign experience and marketing, TRT created an electoral platform that addressed the aspirations of many voters and built on the widespread dissatisfaction with the social and economic impacts of the crisis and neoliberal policy. TRT’s slogan emphasized that something new and inclusive was required: “New thinking, new ways, for all Thais.” This slogan and the party’s platform, tinged with nationalism and promises for those suffering from the economic downturn, was appealing, especially to poor, rural voters. These promises and policies marked Thaksin’s policies as different from the neoliberalism of Chuan and the IMF. Thaksin’s government quickly implemented its measures for the poor. However, this was a government by and for the rich. His cabinet included a range of business leaders drawn from those conglomerates that remained forces in the postcrisis era, including: Thaksin’s own Shin Corporation, Jasmine, Charoen Phokphand, Bangkok Entertainment, the Thai Military Bank, Thai Summit, and a range of others.66 The government set about helping domestic business, including those of its leaders. It did this in two ways: first, by introducing measures to protect domestic business; and second, by strengthening the TRT government. To support local business, the government pumped money into the domestic economy, increasing consumption. It also rolled back or slowed liberalization measures. It dawdled on privatization, allowing time for domestic investors to ready themselves for later involvement in these companies when they were slated for sale.67 In the telecoms sector, the government slowed liberalization and maintained domestic control through limits on foreign ownership, a move that benefited the Prime Minister’s companies.68 In other ways, the government slowed the pace of reform as the LoI timetables were forgotten. At the same time, investigations into pre-1997 financial shenanigans were dropped.69 State banks came to quick deals with Thaksin supporters and advisers who had been bankrupted by the crisis. To strengthen the government of domestic capital, Thaksin’s adopted policies amounted to a new social contract for Thai society.70 The developmental social contract, in effect since the early 1960s, affirmed that domestic business would deliver growth, while government would support domestic capitalists, with the poor gaining through the trickle-down of benefits of growth. This compact was shattered by the economic crisis. The IMF, the World Bank, and

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the Chuan government, in abandoning support for domestic business in favor of a more generalized support for business, including foreign investors, had shown that they would not put the old consensus back together. The constituent elements of the new social contract involved the protection of domestic capital by the government of the remaining rich, while delivering increased social protection to the poor (through a million baht village fund, a morotorium on farmers’ debts, and a universal health scheme).71 Thaksin also strengthened his party’s political control. Before the election, the National Counter Corruption Commission had threatened Thaksin’s political future.72 Thaksin won his case, but in questionable circumstances, and proceeded to threaten to reduce the powers of all of the independent watchdogs created under the 1997 Constitution. He also sought to fill them with his own appointees. TRT also moved to control the domestic and international media, effectively limiting their criticism of the government. At the same time, Thaksin made TRT a larger party by managing mergers with a number of smaller parties, so that TRT controlled almost two-thirds of the seats in the Lower House. This reduced parliamentary scrutiny and meant that there was little to worry about in managing parliament. By minimizing and managing opposition, TRT was making the government of business “safe.” The Thaksin-TRT government is Thailand’s first government of tycoons. Previously big business had remained aloof from the cut and thrust of parliamentary politics; in any case, their primary concern was in controlling business and making money. However, when the crisis struck, competing capitalists were brought together to manage their collective interest. While capitalists are normally competitive, the economic crisis meant that they needed the breathing space provided by the government of the rich in order to recover their competitive potential and to adapt to an economy that will, eventually, continue to liberalize. Indonesia Outside the communist bloc, the Soeharto regime in Indonesia was probably the most effective apparatus of state authority in the developing world. Constructed around a pervasive security apparatus and an array of state-sponsored corporatist organizations, not least being the state political party, Golkar, the state was the only legitimate arena for political organization and expression. A vast state-owned corporate sector further concentrated the power of this state and its control over resources and economic policy. Power in the New Order was concentrated in the hands of politico-bureaucrats who presided over the state apparatus and whose interest lay in the perpetuation of state authority and its insulation from popular accountability. It could be characterized, at this stage, in Anderson’s terms, as a “state qua state.”73 A growing middle class gained entry only at the political margins of this juggernaut or within the state bureaucracy. Business hovered around the powerful officials, receiving discretionary allocation of monopolies, contracts, and concessions. The peasantry and working classes remained under the watchful eye of the military.

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This form of state power underwent a metamorphosis in the 1980s. As selective programs of market deregulation took hold after the collapse of oil prices, an oligarchy of politico-business families, of which the Soeharto family was the most powerful, emerged from within the state itself to expropriate public authority, harnessing it to the development of their private interest and that of those large corporate conglomerates with whom they became allied. Reform, for the most part, simply meant that public monopoly became private monopoly while the authoritarian structure of the state remained intact. Indonesia, then, was a curious amalgam of an almost Leninist centralized state capitalism and a system of predatory relationships that provided the cement of a new ruling alliance.74 While the “technopols” may have achieved some autonomy in setting macroeconomic policies, the state could by no means be seen as insulated. Indeed, it was crudely instrumental. Its president, Soeharto, not only stood at the apex of state power, he was the head of Indonesia’s most pervasive politico-business family and was the very pivot around which rents were allocated. Nevertheless, until the very moment of crisis in 1997, the management of the Indonesian economy had been regarded within the neoliberal policy communities in Western governments and in the World Bank as a model of macroeconomic responsibility. A consortium of Western creditors maintained a flow of loans and aid that sustained a balanced budget. International banks jostled to lend to huge infrastructure projects they knew to be viable only because of state guarantees and political favor. Even as the crisis loomed, Western securities and business analysts expressed confidence that Indonesia possessed the fundamentals to weather the storm.75 After all, inflation was low, the current account was not critical, debt appeared under control and Indonesia was not burdened with huge budget deficits. All the indicators important within the Washington Consensus were in place. In the political sphere, too, Soeharto had clearly demonstrated an almost invulnerable grip on power after emerging triumphant from a series of struggles with the military and civilian critics in the early 1990s. Yet, nowhere was the crisis to be more traumatic. By January 1998, the rupiah had fallen over 80 percent in value and in the ensuing year economic growth went into reverse. Fiscal crisis loomed and Indonesia was rescued only by huge loans from the IMF and from creditor nations under the auspices of the CGI (Consultative Group on Indonesia). Indonesia’s giant corporate groups, so recently presiding over rapidly expanding commercial empires, faced a nightmare as they contemplated repayment of large amounts of short-term, unhedged debt. By 1998, most had ceased even trying to repay and were technically insolvent. Mounting nonperforming loans paralyzed Indonesia’s public and private banks, drawing the state into a rescue operation of massive proportions that was to consume a huge proportion of the state budget.76 What distinguished the Indonesian case was that financial and economic crisis progressed quickly to political crisis, bringing down not only a government but a regime. Unable to control the panic and the currency collapse, the regime began to disintegrate from within. The man who had been its architect now became the greatest obstacle to the survival of those interests embedded within

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its structures. Soeharto’s fall from power appeared to open the floodgates to fundamental reform. When the IMF entered the scene in 1997 it immediately initiated a series of reform packages as conditions of its $43 billion bailout. Defined in successive Letters of Intent signed between the IMF and the Indonesian government, they stipulated new programs of privatization of the extensive state-owned enterprises, regular audits of state enterprises and agencies, administrative reform aimed at ending the authority of powerful gatekeeping institutions like the state oil company, Pertamina, to allocate licenses and monopolies, and the independence of Bank Indonesia. Anxious to clean up the paralyzed banking system and to resolve the huge debts that hung over Indonesia’s corporate world, it initiated programs for debt restructuring and the introduction of new bankruptcy laws and a commercial court to enforce and enable this restructuring.77 These were not simple technical reforms. They threatened the very heart of political and business power in Indonesia. Recapitalization and debt restructuring potentially spelt the end for many formerly dominant corporate groups while new investment laws theoretically signaled the introduction of international capital as a major player in sectors of former domestic monopoly. At the same time, the reforms directly challenged the expropriation of the state by its officials and by powerful politico-business oligarchies, terminating their control of extrabudgetary funding and the sources of patronage and clientelism that had been the cement of the political system in Indonesia. Once Soeharto fell, the reform agenda gathered steam. Previously untouchable conglomerate owners, including Liem Sioe Liong and the Soeharto family itself, were forced to hand over billions of dollars in assets and cash to repay for the recapitalization costs of their banks, many of which had been closed or taken over by the government. At the same time, the government cut a swathe through state gate-keeping institutions like Pertamina and Bulog, stripping hundreds of lucrative contracts and monopolies from well-connected business groups, particularly the Soeharto family.78 As the reformist movement swept the streets of Jakarta and other cities in 1997 and 1998, the political successors to Soeharto were forced to take up the calls for prosecution of corrupt businessmen and officials. It was this pressure that saw the remarkable spectacle of formerly untouchable figures dragged before the Indonesian courts. These included Soeharto’s business partner and forestry tycoon, Bob Hasan, Bank Indonesia Governor, Sabirin Sjahril, Speaker of the parliament, Akbar Tanjung, as well as Soeharto himself, his son, Tommy, and son-in-law, Hashim Djojohadikusumo.79 It soon became clear, however, that the reform agenda was stalling. Neither banking recapitalization nor debt restructuring programs produced a major shift in corporate ownership or allowed a substantial flow of new entrants into the arena. Attempts to reform the state apparatus foundered as the courts and judiciary as well as the police and military defied reformers within the government. Despite the symbolic importance of arrests and prosecutions of powerful political and business figures for corruption, in the end, few were ever convicted

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and jailed and some of the most important business tycoons remained apparently immune from prosecution despite clear records of breaches of banking regulations. Why has the reform agenda stalled? Uncertain progress under President Habibie’s brief rule was attributed to his deep links with the old regime, as a close confidant of Soeharto, architect of Indonesia’s nationalist industrial and high-tech investment program and as head of a major, second-tier politicobusiness family with corporate partnerships with many of the biggest Chinese conglomerates and with the Soeharto family. His successor, President Wahid appeared to bring none of this baggage. A long-time critic of the Soeharto regime, he ushered in a government that was free of most of the old cronies and contained prominent reformers, among them, Economics Minister, Kwik Kian Gie and State Enterprises Minister Laksamana Sukardi. As his government proved increasingly unable to drive the reform agenda, critics pointed to his unpredictable and idiosyncratic behavior and his inability to forge alliances and make deals, preferring an autocratic, take-it-or-leave-it stance that generated enemies. But these factors of behavior and leadership, so dear to rational choice models of transition, were only part of the story. Essentially, Wahid came to a presidency with little power to recast the state apparatus itself or to change the configuration of social power. He inherited a powerful and resentful state apparatus that proved uncooperative and resistant to reform. He commanded no powerful and cohesive party of reform. Above all, the new democracy that emerged in Indonesia slid into money politics, providing the ideal conditions for the established oligarchy to reorganize their power and for new political fixers and entrepreneurs to establish themselves in league with the old forces and within the old predatory power relations.80 These circumstances not only provided opportunities for old political interests to reorganize but enabled the main corporate players to avoid the loss of their corporate empires. Forced to default on their foreign huge debts, and to repay the government the costs of debt buyout and recapitalization in the banking sector amounting to Rp. 660 trillion—around US$85 billion, Indonesia’s corporate conglomerates faced ruin.81 Yet, the big corporate debtors managed to hang onto their main assets, effectively getting the government to warehouse their debt and carry the bulk of the cost. Most important, while recapitalization resulted in the closure of banks, it did not address the essential structural problems of a system where there was no division between borrowers and lenders. Nor did it open the door to new entrants. The old structure remained, potentially for the old players to re-emerge.82 How was this escape achieved? A web of opaque business statements and accounting practices enabled transfers of assets in settlement of debts subsequently revealed to be only a fraction of their original estimates. Besieged conglomerates were also able to rely on a notoriously corrupt court system where the government proved unable to pursue bankruptcy effectively.83 As fiscal pressures increased, the government was forced to speed up the process,

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forced to negotiate even more generous debt settlements.84 Nevertheless, with billions of dollars in assets and commanding over 70 percent of the banking system, the sale of these assets was expected in some quarters to allow foreign interests to enter the market at a premium and for international corporate capital to replace the old Chinese conglomerates and politico-business families. Yet, the political uncertainty of post-Soeharto Indonesia meant that asset dispersal rates were disappointing. Despite sales of several large private banks and the giant Indomobil group, there are suspicions that some of these assets have been bought back by the old owners and, in any case, there are few similar attractive assets left in the pipeline.85 Why, then has restructuring proven to be so difficult? In part, the answer lies in the ability of old and new business interests to forge alliances and reorganize their activities within the new political environment. Reformers faced difficulties in their efforts to reform those strategic gatekeeping state institutions such as Bulog and Pertamina, as well as the state banks, Bank Indonesia and the Ministry of Finance, that have long been sources of extrabudgetary funds for political parties and factions of political and bureaucrat power. This was because such sources of funds and patronage remained critical in the new world of democracy and parliament where the politics of patronage prevailed over the politics of ideological or social conflict. Already, such figures as Habibe, Wahid, and Akbar Tanjung have been implicated in scandals involving the diversion of funds from Bulog and Bank Indonesia into political party war chests.86 The basis of old relationships between business and the state remain open. Nor have post-Soeharto reformers proven able to control those regulatory arms of the state apparatus. Rather than being executors of the rule of law, Indonesia’s courts and its judiciary had evolved under Soeharto as instruments of political rule. As an editorial in the Jakarta Post observed, “subordination of the judiciary [under Soeharto] paved the way for total control by the state over every aspect of public life in Indonesia.”87 Elsewhere, the judiciary was characterized as operating within a “black state” outside the rule of law where the real business of power and politics took place.88 Powerful business and political interests have quickly found a path to the door of the judiciary and it is no surprise that attempts to enforce bankruptcy and to prosecute corruptors in Jakarta’s courts and judges have been consistently unsuccessful.89 This is a matter that goes beyond the courts. Indonesia’s notoriously corrupt police force remains a virtual law unto itself and a highly ineffective instrument for hunting down and prosecuting corruptors. When Police Chief Bimantoro refused to accept his dismissal by Wahid in May 2001, it definitively signaled that it lay beyond the authority of the government. While President Megawati Soekarnoputri has subsequently recognized that accommodation with these powerful forces is essential for political survival, it is not yet clear what cost has been negotiated. The problem is also one of failure to create a powerful and politically cohesive reformist coalition. This was surprising to those who saw the end of

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Soeharto and the fall of the old order opening the door for a new democratic era driven by a vital and progressive civil society. After all, political reforms in 1999 had removed those constraints on the formation of political parties and elections that had defined the authoritarian corporatism of the Soeharto regime. A vigorous and critical new press emerged. The 1999 elections were contested by thirty-eight parties and resulted in a dramatic fall in support for the former state political party, Golkar, from over 70 percent to just 22 percent. Those parties that emerged as major players in the new parliament were precisely those that had been the main parties for over 40 years in Indonesia. While they were organized symbolically on the basis of various attachments to religious or secular values, to the state or to progressive social agendas, they became the vehicles within which political entrepreneurs and fixers jostled to capture power and influence. No clear policy programs distinguished them.90 Within this seething new mass of predatory interests, nationalism, and populist agendas there were opportunities for old interests to reorganize their power. New operators moved into the political arena; former officials and local notables, gangsters, and thugs. Powerful conglomerates soon gravitated to the new centers of power in the parties and new figures have emerged within the parties to take control of the allocation of power and influence in the world of business.91 As decentralization of power and revenues spread to the regions, we have seen new struggles and bribery scandals surrounding the election of mayors and regional governors.92 Reformers became lost in this sea of fractured and dispersed power. Control over the forestry industry, for example, has become virtually impossible now that over 50 percent of logging is illegal, in the hands increasingly of local officials, the military, businessmen, and parliamentarians.93 As the World Bank itself has also admitted, reform lies increasingly in the hands of isolated and lonely officials and politicians, dependent upon the favor of powerful interests.94 The reorganization of old interests and entrenched power relations has been facilitated by other developments. Foreign investors have failed to flood into Indonesia to buy out the assets of the old conglomerates. It soon became apparent to the government that getting investment started again and recovering their huge outlays on bank recapitalization required the re-entry of Indonesian Chinese business money. This structural indispensability has given them greater leverage in negotiating debt restructuring and in avoiding prosecution. Most important, though, with growing foreign reserves and export success, Indonesia appears to be surviving without many of the institutional reforms demanded and regarded as functionally necessary by the IMF. Even though its banking system remains largely paralyzed, there appears to be no shortage of domestic investment, much of it flowing into the country outside the domestic banking system. Exporters are effectively using Singapore banks to channel their financing. Those absolute functional links between liberal markets, the regulatory state, and modern rational capitalism appear less certain than supposed.

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Conclusion: implications for policy At one level, both liberal and Marxist ideas about transition to liberal market capitalism are premised on the idea that a vigorous and powerful middle class will outgrow the confines of mercantilist, predatory or developmental systems of state power within which they may have been incubated. In these circumstances, the old institutions will become dysfunctional and will be replaced. Our case studies show us some interesting variants on this theme. In Singapore, developmental and statist institutions appear to have been successful in establishing both a prosperous middle class and a growing corporate sector. Where the assumed contradictions exist, they relate to the resolution of Singapore’s place in evolving global markets. Vigorous capitalism appears to survive without the sort of civil society and political democracy and even without many of the market mechanisms assumed to be necessary. In contrast, highly centralized regimes in both Thailand and Indonesia were pushed aside, and democratic systems established, not to sustain liberal markets and civil power but to give way to systems based on oligarchy and rents. Such a disjuncture between institutions, capitalism, and social power may simply be seen as part of a longer evolutionary process or as evidence that capitalism has no necessary functional affinity with political liberalism; that there may be many sorts of capitalism, some of them profoundly illiberal. However, neoliberal, rational choice theorists continue to see the problem in terms of institutions. These need not be the product of social forces but could be supplied and that once in place will shape and constrain subsequent developments. Referring to the process of democratic transition, for example, Juan Linz proposed that, “even bad democracies are better than authoritarian rule or chaos since we may assume that they may undergo processes of re-equilibration, and with improved conditions and leadership may become fully consolidated.”95 The same logic is applied to the transplantation of market institutions where the ending of intervention was assumed to put an end to the structural opportunities for corruption. In other words, change did not rely on politics but could be conceived as a technical problem to be solved by officials of governments or the World Bank or the IMF. Yet, formal democracies and market economies harboring corrupt, rapacious, and repressive systems of social power have existed for decades. In many cases they have provided no room for a “reequilibration” or the emergence of appropriate leadership. Exactly how long does it take? It matters what sort of social order these institutions are grafted onto. Building democratic institutions, for example, in a situation where a liberal social and political revolution is already underway, as in Britain in the eighteenth century, is different from constructing them in Indonesia. Attempting to construct markets where an authoritarian or predatory state has already provided the framework for capitalism and where business and the middle classes are already integrated into this system is more difficult than where these forces see their future only in the destruction of existing state power. Where then, does this leave us in terms of the questions asked in this chapter? Clearly, we suggest that

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the prospects for liberal transition in Singapore are undermined, not only by the very success of a developmental state in insulating itself from social pressures but by its success in incorporating a large and prosperous middle class and integrating with global markets. In some respects it already encompasses many of the central features of the neoliberal regulatory state and insulates business more effectively from civil society, labor, environmental claims, and social welfare demands it faces in Western social democracies or even in the USA. At the other end of the spectrum, the Indonesian state is clearly unable to provide the regulatory capacity sought by neoliberals and the merging of private interest and public authority is so great that the state is further than ever from escaping the demands of hegemonic predatory interests. Business is not only reliant on the favors and guarantees of state power but is in many respects, indistinguishable from the state. Thailand is taking a different path. The Thaksin government represents a situation where the capitalist class has taken control of the state within a reasonably liberal political environment. However, this situation is no cause for political optimism. As Bellin has suggested, for “late-developing” societies, capitalists (and labor) are “contingent democrats” who have material interests that they must protect, and usually they will only support liberal political outcomes where these support their material interests.96 In fact, Prime Minister Thaksin has stated that democracy is not his aim but rather economic success. In seeking to achieve this, he has expressed admiration for the Singapore political model, and desires an illiberal political system.97 However, in contrast with Singapore, he wishes to have a strong and internationally competitive domestic capitalist class, and this means that his government will adopt elements of the market where this suits the material interests of domestic capital. In this sense, not only are those capitalists represented in Thaksin’s Cabinet contingent democrats, but they are also contingent economic liberals.

Acknowledgement Funding for this research came from a variety of sources, including a City University of Hong Kong Strategic Research Grant (7001403) and an Australian Research Council Discovery Grant.

Notes 1 In the so-called Asian values debate it had been proposed that managed markets, social discipline, and political order serving the communal interest were proving functionally superior to the divisive and individualistic institutions of Western liberal capitalism. See, for example, M. Mohammed, “No freedom without responsibility,” New Straits Times, 20 May 1995, p. 10; F. Zakaria, “Culture is destiny: interview with Lee Kuan Yew,” Foreign Affairs, 1994, vol. 73, no. 2, pp. 109–26. For a broader critical analysis, see R. Robison, “The politics of Asian values,” Pacific Review, 1996, vol. 9, no. 3, pp. 309–28; G. Rodan, “The internationalisation of Asian values,” Pacific Review, 1996, vol. 9, no. 3, pp. 328–51.

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2 For example, M. Camdessus, “Asia will survive with realistic economic policies,” Jakarta Post, 8 December 1997, p. 5; T. L. Friedman, “Quit the whining, globalization isn’t a choice,” International Herald Tribune, 30 September 1997, p. 10. For an analysis of neoliberal realism, see K. Jayasuriya and A. Rosser, Economic Orthodoxy and the East Asian Crisis, Working Paper No. 4, Perth: Asia Research Centre, Murdoch University, 1999, pp. 1–19. 3 For critical analysis of the regulatory state see K. Jayasuriya, “Authoritarian liberalism, governance and the emergence of the regulatory state in post-crisis East Asia,” in R. Robison, M. Beeson, K. Jayasuriya, and H. R. Kim (eds), Politics and Markets in the Wake of the Asian Crisis, London: Routledge, 2000, pp. 315–30; S. Gill, “Globalisation, market civilisation and disciplinary neo-liberalism,” Millennium, 1995, vol. 24, no. 3, pp. 399–423. 4 The term “Washington Consensus” was originally coined by J. Williamson in Latin American Adjustment, How Much Has Happened?, Washington, DC: Institute for International Economics, 1990. In the view of the IMF, state intervention in financial and trade regimes, budget deficits, and large state sectors had created the conditions for “crony capitalism.” 5 World Bank, World Development Report 1997: The State in a Changing World, New York: Oxford University Press, 1997, pp. 2, 3, 28, 106; World Bank, Managing Development: The Governance Dimension, Washington, DC: World Bank, 1991. 6 For various “takes” on this point, see B. Cumings, “The Asian crisis, democracy and the end of late development,” in T. J. Pempel (ed.), Politics of the Asian Economic Crisis, Ithaca and London: Cornell University Press, 1999, pp. 17–44; R. Robison and A. Rosser, “Surviving the meltdown, liberal reform and political oligarchy in Indonesia,” in Robison et al., Political Markets, pp. 171–91. 7 See J. Stiglitz, “More instruments and broader goals, moving towards the postWashington consensus,” 1998 Wider Annual Lecture, World Bank, 1998. Available online: (accessed 27 March 2000); World Bank, East Asia: The Road to Recovery, Washington, DC: World Bank, 1999. 8 D. North, “Economic performance through time,” American Economic Review, 1994, vol. 8A, no. 3, pp. 359–68. 9 J. Stiglitz, “Towards a new paradigm for development strategies, policies and processes,” Prebisch Lecture at UNCTAD, Geneva, 19 October 1998. Available online: (accessed 19 April 2004). Also in H. J. Chang, Joseph Stiglitz and the World Bank: The Rebel Within, Wimbledon: Anthem, 2001. For a critical look at the influence of social capital, see B. Fine, Social Capital versus Social Theory, London: Routledge, 2001. 10 See R. Wade and F. Veneroso, “The Asian crisis: the high debt model versus the Wall Street–Treasury–IMF complex,” New Left Review, 1998, no. 228, pp. 3–23; L. Weiss and J. M. Hobson, “State power and economic strength revisited, what’s so special about the Asian crisis?” in Robison et al., Politics and Markets, pp. 53–74. 11 A clear statement of the historical institutional position is given in J. Zysman, “How institutions create historically rooted trajectories of growth,” Industrial and Corporate Change, 1994, vol. 3, no. 1, pp. 243–83. 12 Wade and Veneroso, “The Asian crisis,” pp. 3–23. 13 See K. A. Chaudhry, The Price of Wealth: Economies and Institutions in the Middle East, Ithaca, NY, and London: Cornell University Press, 1997; and K. A. Chaudhry, “Economic liberalisation and the lineages of the rentier state,” Comparative Politics, 1994, vol. 27, no. 1, pp. 1–25. 14 The point is made by P. Bardham, “The new institutional economics and development theory: a brief critical assessment,” World Development, 1989, vol. 17, no. 9, pp. 1389–95. 15 N. Harris, “New bourgeoisies,” The Journal of Development Studies, 1988, vol. 24, no. 2, pp. 237–49.

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16 L. Lim, “Singapore’s success: the myth of the free market economy,” Asian Survey, 1983, vol. 23, no. 6, pp. 725–64; G. Rodan, The Political Economy of Singapore’s Industrialization, London: Macmillan, 1989. 17 R. Worthington, Governance in Singapore, London: RoutledgeCurzon, 2003. 18 D. Lian, “Singapore—new economy proletariat or bourgeoisie?” Singapore: Morgan Stanley Dean Witter, 2001. Available online: (accessed 19 January 2001). 19 GLCs account for nearly half of the 20 largest listed companies and 41 percent of those on the local Straits Times Index (see J. Burton, “Doubts grow about the value of state business: government linked companies,” Financial Times, 12 April 2002. Available online: (accessed 12 April 2002). They are spread across nearly all sectors, including banking, telecommunications, transport, and electronics. 20 Temasek has about eighty key companies under its direct control, but interests in more than a thousand overall. 21 D. Lian and A. Chung, “Singapore: external economy—low return is a concern,” Global Economic Forum, 2001. Available online: (accessed 22 October 2003). 22 H. Yeung, “State intervention and neoliberalism in the globalizing world economy: lessons from Singapore’s regionalization programme,” Pacific Review, 2000, vol. 13, no. 1, pp. 133–62. 23 The dispensing of rewards is the most obvious dimension of this. But the potential for political discrimination in the administering of access to those resources—commercial contracts, employment opportunities or public housing upgrades—is also involved. 24 Worthington, Governance in Singapore. 25 B. S. Tan, “Why it might be difficult for the government to withdraw from business.” Available online: (accessed 10 February 2002). 26 Linda Low has described the resulting policy direction as a new phase in the “retooling of the developmental state.” See L. Low, “The Singapore developmental state in the new economy and polity,” Pacific Review, 2001, vol. 14, no. 3, pp. 411–41. 27 C. T. Goh, “First-world economy, world-class home,” National Day Rally Speech. Available online: (accessed 22 August 1999). 28 Ibid. 29 Ibid. 30 H. Restall, “Singapore’s Reagan revolution,” Asian Wall Street Journal, 5 December 2001, p. 11. 31 According to the ERC: “We need to refocus safety nets on the truly needy, and minimize the people’s dependency on the State. An individual’s success must depend on his [sic] own efforts and abilities, rather than on handouts from the State.” See Economic Review Committee Report, Part I, Singapore: Ministry of Trade and Industry, 2003, p. 35. Available online: (accessed 19 April 2004). 32 Business Times Online, “Time for government to let private sector lead,” 31 May 2002. 33 Quoted in Reuters, “Singapore’s Temasek makes top-level changes,” 20 May 2002. Available online: (accessed 20 May 2002). 34 Economic Review Committee Report. 35 S. Christensen, D. Dollar, A. Siamwalla, and Pakorn V., The Lessons of East Asia. Thailand: The Institutional and Political Underpinnings of Growth, Washington, DC: World Bank, 1993, pp. 1–8. 36 R. F. Doner and A. Ramsay, “Competitive clientelism and economic governance:

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the case of Thailand,” in S. Maxfield and B. R. Schneider (eds), Business and the State in Developing Countries, Ithaca, NY: Cornell University Press, 1997, pp. 237–76. R. F. Doner and G. Hawes, “The political economy of growth in Southeast and Northeast Asia,” in M. Dorraj (ed.), The Changing Political Economy of the Third World, Boulder, CO: Lynne Rienner Publishers, 1995, pp. 168–9. See K. Hewison, “The state and capitalist development in Thailand,” in R. Higgott and R. Robison (eds), Southeast Asia: Essays in the Political Economy of Structural Change, London: Routledge and Kegan Paul, 1985, pp. 266–94. Pasuk P. and C. Baker, “Power in transition: Thailand in the 1990s,” in K. Hewison (ed.), Political Change in Thailand: Democracy and Participation, London: Routledge, 1997, pp. 25–9. Ibid., p. 26. On money politics, see J. Girling, Interpreting Development: Capitalism, Democracy, and the Middle Class in Thailand, Ithaca, NY: Southeast Asia Program, Cornell University, 1996. It is generally acknowledged that these provincial business people who dominated parliamentary politics were often at the margins of legitimate business; see the essays in Ruth McVey (ed.), Power and Money in Provincial Thailand, Richmond, Surrey: Curzon Press, 2000. Pasuk and Baker, “Power in transition,” pp. 27–8. See K. Hewison, “Thailand’s capitalism before and after the economic crisis,” in R. Robison, M. Beeson, K. Jayasuriya, and H. R. Kim (eds), Politics and Markets in the Wake of the Asian Crisis, London: Routledge, 2000, pp. 192–211. See IMF, Letter of Intent (1st LoI), 14 August 1997. Pasuk P. and C. Baker, Thailand’s Crisis, Chiangmai: Silkworm Books, 2000, pp. 35–7. IMF, 1st LoI, 14 August 1997. IMF, 2nd LoI, 25 November 1997. R. E. Rubin, “Remarks,” Press Release 130/98, Bangkok: United States Information Service, 1998, p. 1. Available online: (accessed 30 December 1998). Nation, 22 July 1998. Bangkok Post, 26 and 27 July 1998. T. Endo, M. Griffiths, V. Haksar, S. Schwartz, S. Barnett, and I. H. Lee, Thailand: Selected Issues, IMF Staff Country Report No. 00/21, Washington, DC: International Monetary Fund, 2000. See K. Hewison, “Resisting globalization: a study of localism in Thailand,” Pacific Review, 2002, vol. 13, no. 2, pp. 279–96. US Embassy in Thailand, “1998 investment climate statement for Thailand,” Economic Section, Bangkok: Department of State, United States Embassy, 1998, p. 1. Available online: (accessed 11 December 1998). IMF, 3rd LoI, 24 February 1998. IMF, 4th LoI, 26 May 1998. For an example of this threat, see K. Hewison, “Pathways to recovery: bankers, business, and nationalism in Thailand,” in E. T. Gomez and M. H. H. Hsiao (eds), Chinese Enterprise, Transnationalism, and Identity, London: RoutledgeCurzon, 2004, pp. 232–77. IMF, LoI, 23 March 1999. IMF, LoI, 25 August 1998. IMF, LoI, 23 March 1999. Reported in Bangkok Post, 22 June 1998. Kan ngeon thanakhan (Money and banking), December 2000, p. 148. Pasuk P. and C. Baker. “The Only Good Populist is a Rich Populist”: Thaksin Shinawatra and Thailand’s Democracy, Working Papers Series No. 36, Hong Kong: City University of Hong Kong, Southeast Asia Research Centre, 2002.

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63 Ibid. 64 The election victory has been discussed elsewhere in detail, see, for example, ibid. 65 For details of the nature of the 1997 Constitution, see M. Connors, “Framing the ‘People’s Constitution,’” in D. McCargo (ed.), Reforming Thai Politics, Copenhagen: Nordic Institute of Asian Studies, 2002, pp. 37–56. 66 See Pasuk and Baker, “The Only Good Populist.” 67 Privatization was delayed until 2004–5; see Bangkok Post, 23 January 2004. 68 After some controversy, it was agreed that the measure was to be revised. Even so, the message was clear. 69 Pasuk and Baker, “The Only Good Populist.” 70 K. Hewison, The Politics of Neoliberalism: Class and Capitalism in Contemporary Thailand, Working Papers Series No. 45, Hong Kong: Southeast Asia Research Centre, City University of Hong Kong, 2003. 71 Ibid. 72 Thaksin was accused of concealing assets by transferring these to maids, gardeners, and other staff. He argued that this failure to report billions of baht had been an oversight. 73 B. Anderson, “Old state, new society, Indonesia’s new order in comparative historical perspective,” Journal of Asian Studies, 1983, vol. 42, no. 3, pp. 477–96. 74 R. Robison, “Indonesia’s crisis, oligarchy and reform,” in G. Rodan, K. Hewison, and R. Robison (eds), The Political Economy of South-East Asia: Conflicts, Crises, and Change, Melbourne: Oxford University Press, 2001, pp. 104–37. 75 See the comments from Lehman Bros. and Stanley Morgan Asia, Jakarta Post, 2 August 1997, p. 1; 5 November 1997, p. 1. 76 For details on the economic collapse see R. Robison and A. Rosser, “Contesting reform, Indonesia’s new order and the IMF,” World Development, 1998, vol. 26, no. 8, pp. 1593–609; A. Rosser, The Politics of Economic Liberalization in Indonesia: State Market and Power, London: Curzon, 2002, chapter 8; World Bank, Indonesia in Crisis, Washington, DC: World Bank, 1998. 77 Government of Indonesia, “Letter of Intent and Memorandum of Financial and Economic Policies,” 1997, 1998, 1999, 2000. Available online: . 78 Robison, “Indonesia crisis,” pp. 120–9; Rosser, The Politics of Economic Liberalization, chapter 8. 79 Indonesia’s corruption trials have been staple diet in the Jakarta press for several years. See Jakarta Post, 13 March 1999, p. 1; 27 March 1999, p. 1; 22 September 2000, p. 1; Tempo, 26 February 2001, pp. 14 and 15. For overviews, see D. Howard “Survey of recent developments,” Bulletin of Indonesian Economic Studies, 2001, vol. 37, no. 1, pp. 7–24. 80 V. R. Hadiz, “Contesting political change under Soeharto,” in A. Budiman, B. Hatley, and D. Kingsbury (eds), Reformasi; Crisis and Change in Indonesia, Clayton: Monash University, Centre of Southeast Asian Studies, 1999, pp. 105–26. 81 Asian Wall Street Journal, 11–12 June 1993, p. 3. 82 I. P. G. A. Suta, “Reforming the Indonesian banking system,” Jakarta Post, 12–13 July 2000, p. 5. 83 T. Lindsey, “Black letter, black market and black faith: cronyism and the failure of law reform,” in Indonesia in Transition: Social Aspects of Reformation and Crisis, Singapore: ISEAS, 2000, pp. 278–92. 84 World Bank, Indonesia: Accelerating Recovery in Uncertain Times, Jakarta: East Asia Poverty Reduction and Economic Management Unit, 2000, p. 14; Tempo, 22 May 2000, pp. 102–3; 16 July 2000, p. 104. 85 World Bank, Indonesia: Accelerating Recovery, p. 13; M. Pangestu, “Survey of recent developments,” Bulletin of Indonesian Economic Studies, 2001, vol. 37, no. 2, pp. 141–71. 86 Organizations such as the Supreme Audit Agency and Indonesia Corruption Watch

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reported continuing levels of corruption and nonbudgetary funds flowing from Bulog, Bank Indonesia, and other key state organizations. See Tempo, 12–18 February 2002; R. Siregar, “Survey of recent developments,” Bulletin of Indonesian Economic Studies, 2001, vol. 37, no. 3, pp. 277–303. Jakarta Post, 22 November 1999. Lindsey, “Black letter,” p. 288. Jakarta Post, 11 March 2000, p. 1; 13 March 2000, p. 4. Tempo, 17 September 2001, pp. 16–21. Panji Masjanakat, 30 August 2000, pp. 24–31; Tajuk, 2 March 2000, pp. 18–21; R. Robison, “What sort of democracy? Predatory and neoliberal agendas in Indonesia,” in C. Kinvall and K. Jonsson (eds), Globalization and Democratization in Asia, London: Routledge, 2002, pp. 102–5. Kompas, 22 March 2000; 17 April 2000; Detikcom, 17 July 2000. World Bank, Indonesia: Accelerating Recovery, p. 40; Jakarta Post, 14 August 2000, p. 3; 4 October 2000, p. 10. World Bank, Indonesia: Accelerating Recovery, p. 43. J. J. Linz, “Some thoughts on the victory and future of democracy,” in A. Hadenius (ed.), Democracies’ Victory and Crisis, Cambridge: Cambridge University Press, 1997, p. 408. E. Bellin, “Contingent democrats. Industrialists, labor, and democratization in latedeveloping countries,” World Politics, 2000, vol. 52, pp. 178–9. See R. Chandrasekaran, “Thai leader consolidating power; opponents say Thaksin is trying to drown out criticism,” The Washington Post, 23 March 2002.

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Index

agriculture: land reform 132, 146; pricing policies 146; Taiwan 85, 96–7 Asia: financial market governance 56–60; political processes of 45; state industrial policies 51–6; trade export orientation 50; transition to democracy 53 Asia-Pacific Economic Cooperation 31 Asian crisis 24, 29–31; questions neoliberalism 172–4; social dimension 164 Asian states: Cold War context 27, 28–9; effects of globalization 30; imposed neoliberalism 39; international construction 14, 15; “miracle” of 24; social capital 36 Association of Southeast Asian Nations (ASEAN) 31; policy regimes 38 authoritarianism 3; electoral incentives for welfare 156–64; Soeharto 186–8, 190–1; targeted social provision 147–8; and welfare provision 168–9 Bank of Communications (Taiwan) 86 Bank of Thailand 59–60 banks and financial institutions: China 113; Daiwa Bank scandal 75–6; Indonesia 190; Japan 74–6; state and 46; state governance 56–60; strong controls 28; Thailand 53, 181 Brazil: opposition to US hegemony 38 Britain: colonial social institutions 147, 151–2; neoliberal regimes 39 bureaucracy: Chinese model 121–2; Chinese party organization 116–22; executives and 6; role in states 5–6; strength in Japan 10–11; Taiwan 94–7; Weberian 94, 110, 121–2 business: competition in Japan 73–4; global networks 33–4; governmental

relations 50–1; Japanese firms 11; Japan’s Fair Trade Commission 71; Korean chaebols 51–2, 53–4, 56–7, 112; Korean labor relations 140–3; labor policies 49; Malaysian elite 55; monopolies in Taiwan 87–8; Singapore’s government-linked 179–81; social spending and 165–7; successful Thai 181–2 capitalism: Confucian 23; of “cronies” 4, 37; European experience of 20–1; mass consumption 28; neoclassical 24; speculative bubbles 30–1; see market; neoliberalism Carter, Jimmy 134 Chang Myon 133 Chen Cheng 100, 103–4 Chiang Ching-kuo 100, 104 Chiang Kai-shek 93, 104, 149 Chiang Soong Mei-ling 103 China: bureaucracy 113; cadre responsibility system 12; communist takeover 84, 85–6; defeat of the Kuomintang 57; developmental state model 122–4; diaspora 37; economic growth of 11; guanxi 27; increasing importance 38; local incentives 117–22; mainland versus Taiwan 95; opposition to US hegemony 38; party organization 116–22; petitioning 119; planning agencies 112; private sector links 115; revolution of 27; social factors 119–20; support for Hong Kong 31; and Taiwan 11, 103; town/village enterprise 111–16; township politics 120–1 China Engineering 87 China Merchants Steam Navigation Co. 91

220

Index

China Petroleum 86, 87 China Stock Finance Co. 86 Chinese Communist Party: local cadres 117–22 Chinese diaspora: in Malaysia 150, 159–60 Chinese medicine 33 Chonpyong 131 Christianity: liberation theology 135 Chuan Leekpai: reform agenda 183–5 Chun Doo Hwan 142, 163; repression of labor 137–40, 142 civil service: in Korea 151; in Germany 70; in the US 70 civil society: middle classes and capitalism 176; scales of political organization 22; and state 10, 24 Cold War: Japanese state structures 7–8; state and national security 27 colonialism/imperialism 24; financial 59; heritage in state institutions 16; institutions of 150–4; national security 27; social institutions 147 communication and information technology: knowledge-based economies 34–9 Council for Korean Worker Welfare 140 crime and corruption 110; Indonesia 188–9; Japanese yakuza 67 currency: global monetary issues 30, 32; Taiwan 97, 102 Daehan Nochong see Korean Trade Unions/Daehan Nochong (FTU) Daiwa Bank scandal 75–6 democracy: electoral incentive 156–64; transition to 148; and welfare provision 169 developmental state model: active pursuit of growth 14, 23; alternate framework 39–40; beyond market–state 21; Chinese case 122–4; context of state–labor relations 129–30; corruption and 110; culturalist approach 22, 23–6; as economic growth 3–4; Fordism and 26; market-centered 22–3; policy theory 24; revisionist positions 44; role of state within 4–9; state–economy dichotomy 24–5; state–society unity 43, 45; technocracy and 83–4; use of 1–3; Western projection on Asia 2; Western thinking 2–3 economics: development state theory and 3–4; domestic and international 7;

elements of 5; export-led 26, 29; households and growth 155; middle classes and capitalism 176; neoclassical paradigms 174–7; repoliticization of xiv; separation from state 9–10, 24; short- and long-term 33; state intervention 24; see also business; market education: government motives 146, 153–4; political pressure for 167 European Union 38; experience of capitalism 20 Fordism 10, 22; crisis in 39; domination by 26; Germany: civil servants 70 globalization: distantiation and compression 35; export-oriented trade 50; knowledge-based economies 31–3, 34–9; monetary systems 30, 32; multilevel governance 34, 38; networks of firms 33–4; space–time and 32–3; state and market 19; and welfare provision 164–9 Goh Chok Tong 179 Government Officials Pension Act (Thailand) 151 growth, paradigm of xiii Habibie, Bacharuddin Jusuf 189, 190 Haraldson, Wesley C. 104 Hasan, Bob 188 Hashim Djojohadikusumo 188 health services: provision of 152–3; social policy and 146; spending on 157 Hashimoto, Ryutaro 77 Ho Ching 180 Hong Kong: colonial domination 28; cyberport 33; effect of crisis 31; income distribution 145–6; knowledge-based economy 35; Listian state 26; national security 27 Hosokawa, Morihiro 77 Hsu Peh-yuan 90, 103-4 imperialism see colonialism/imperialism incentives: local cadres in China 117–22 India: opposition to US hegemony 38 Indonesia: effect of crisis 31, 173, 192–3; income distribution 145–6; neoliberal reforms 13–14; post-crisis reform 177; response to crisis 188–91; social changes 175; Soeharto’s authority

Index 186–8, 190–1; state power 174; technocratic elite 176–7 industrialization: export-led 26; strategies of 146 information and communication technology: knowledge-based economy 31–3 intellectual property: commodification of knowledge 35; Trade-Related Intellectual Property Rights 35 International Monetary Fund (IMF): after Asian crisis 173; constructing states 15; free market mechanism 22–3; Indonesia and 187–8, 191; neoliberal conditions 31; and technocratic elite 176–7; Thailand and 184, 185 investment 71, 102

221

Korean Communist Party: US outlaws 131 Korean Trade Unions/Daehan Nochong (FTU) 131, 140, 142; Park’s policies 133; Rhee’s policies 133 Korean War 27, 132 Kukje group 53, 64 Kwik Kian Gie 189

Japan: banking and finance 74–6; Civil Execution Law 77, 78; civil servants 70; Code of Civil Procedure 78; Cold War politics 7–8; colonial rule 131, 148; conditions for competition 73–4; constructing states 15; deliberation councils 115; developmental state model 23; economic bureaucracy 7; Fair Trade Commission 71; foreign investment 71; Freedom of Information Act 77; hegemony 38; income distribution 145–6; information society 34; institutional structure 30, 69–73, 77–9; Lawyers Law 70; List and 26; MITI 70, 72, 74; paradox of power and authority 67–8; planrational state 3; political institutions 76–8; private sector links 115; Public Election Law 77; weakness of state 10–11; yakuza 67

labor: attracting investor 99; civil servants 70; context for developmental model 129–30; effect of Asian crisis 164; effect of Korean relaxation 141–2, 143; as fictitious commodity 21, 26–7; Japan 78–9; Park’s corporatist policies 132–7; repressed in Korea 137–40; South Korea 12–13; state and business 49; in Taiwan 149; wage as production cost 27–8; wage growth 145; welfare provision for 151–2; workman compensation 157 Laksamana Sukardi 189 land reform 132, 146 Latin America 146 leadership: executive 6; see also authoritarianism; democracy Lee Hsien Loong 179 Lee Kuan Yew 149, 154; social policy 158–9 Li, K. T. 84, 90 liberalism, defining 2 liberation theology 135; and Korean workers 135 Liem Sioe Liong 188 List, Friedrich 26 Listian workfare national state (LWNS) 39–40; crisis tendencies of 29–31; features of 26–9 Liu Harng-chen 90

Kaohsiung Actinium Sulphate Co. 91 Keynesianism 22; state intervention 24 Kim Dae Jung 134; social issues 162, 166 Kim Young Sam 163 KK Fuji Bank v. Maeda 78 Korea: authoritarianism 149; chaebols 51–2, 53–4, 56–7, 112; creation of welfare provision 150–4; division of country 148–9; education 153–4; financial policies 56–7; health care spending 157; industrial policies 51–2, 53–4; national security 27; power and authority 67; state–market condominium 60–1; Yushin Constitution 162

MacArthur, General Douglas 150 Magsaysay, Ramon 157 Mahathir bin Mohamad 52, 160 Malayan Communist Party 150 Malaysia: bumiputras 58; business elite 55; colonial rule 148–9; education 154; effect of crisis 31; ethnic politics 150; financial policies 58–9; health care 153, 157; income distribution 145–6; industrial policy 52, 54–5; knowledgebased economy 35; long-term orientation 36; Multi-Media SuperCorridor 33; national security 27; social provision 13, 146–7, 159–60; state–market condominium 60–1

222

Index

Manchuria 71 Marcos, Ferdinand 156–8 market: bazaar/canteen 16; “marketbased society” 44–5; neoliberal policies 22–3; reinforcing 114; relation to state 19–22; self-interest of agents 47–8; state policy processes 48–51 Marxist theory: state–market relations 20, 21 Megawati Soekarnoputri 190 mercantilism 24 military: economics of 7; Taiwan 90–1, 96; welfare provision 151 motor industry: Taiwan’s 99–100 Murayama, Tomiichi 77 National Council of Korean Trade Unions (Chonpyong) 131 national security 12 neoliberalism: admiration for Soeharto 187; experience of Asian crisis 192–3; free market mechanism 22–3; global 19, 39; laissez-faire mythology 23; postcrisis reforms 13–14; questioned by Asian crisis 172–4; restructuring 32; and social implications 175; Thailand’s reform 181–6 newly industrializing countries (NICs) 19 Nissan Motors 100 non-governmental organizations (NGOs) 175 North Korea 134 Nukul Commission 60 Olympic Games: in Seoul 139 Park Chung-hee 51; assassination 137, 142; labor policies 133–7; social policy 162–3 patronage 110 Philippines: colonial rule 148; creation of welfare provision 150–4; dominant political features 150; Huk rebellion 157; nature of the market 16; rural orientation 155; social insurance 146–7; social provision under Marcos 156–8; social welfare 13 plan-rational state 1, 3 Polanyi, Karl: market-based society 44–5; politics: and Asian economies xiv; and bureaucracy 5–6; Chinese party organization 116–22; government/governance 37; in Japan 76–8; rural orientation 155; townships

120–1; zero-sum thinking 24; see also democracy poverty: income distribution 145–6; Thailand 185 power relations: Chinese petitioning 119; despotism versus infrastructure 11; Japan’s paradox 67–8; neoliberal reforms and 13–14; state 9; Weber’s notion of 105 public and private domains: state mediation 46 Quezon, Manuel Luis 150 religion: in Japanese society 67 Rhee Syngman 51, 142, 149; labor policies 132–3; land reform 132 Roh Tae Woo 141, 163 Rubin, Robert 183 Saemaul Factory movement 136–7 Sarit government 149, 151 Shen Chen-nan 89–90 Shen, T. H. 84 Shumpeterian state 39–40 Singapore: authoritarianism 149; Central Provident Fund 178; colonial rule 148–9; creation of welfare provision 150–4; crisis aftershocks 177–81; education 154; effect of crisis 31, 192–3; government-linked companies 179–81; income distribution 145–6; intelligent island strategy 34; internationalization of 165, 172–3, 179–81; middle classes 176; national security 27; neoliberal reforms 13–14; People’s Action Party 178–9, 181; social provision 13, 146–7, 158 Sjahril, Sabirin 188 Smith, Adam 47 social capital: Asian 36; weakness of 175 social policies: incentive to promote growth 119–20; marginalized 12; projects in Asia 13; state involvement 21 socialism: social provision 146 society: kinship 67 Soeharto, Thojib N. J.: authority of 186–8, 190–1 South Korea: Chun represses labor 137–40; context for state model 129–30; effect of Asian crisis 173; Great Worker Struggle 140; income distribution 145–6; Japan’s colonial

Index rule 148; knowledge-based economy 34; labor relations 12–13; land reform 132; new state and labor 131–2; Park’s labor policies 132–7, 140; private sector and social spending 165–7; private sector links 115; relaxation in labor intervention 141–2, 143; Saemaul Factory movement 136–7; social provision 13, 146–7, 161–3; Yushin system 134 space: distantiation and compression 35; geographical locations 32–3 state: agency of 11–12, 83–4, 106; apparatus of 16; autonomy of 47, 50; bureaucracy of 5–6; and businesses 43–4; Chinese local institutions 122–4; democracy and 53; development project 14; dichotomy with society 10; economic instititutions of 46; industrial policies 51–6; institutions of 37; international policies 37–8; Korean labor policies 133–43; labor and developmental model 129–30; multilevel governance 34, 38; as national community 27; plan-rational 1, 3; policy-making 46–51; power and neoliberalism 13–14; power relations 9; relation to market 19–22; role in developmental paradigm 4–9; security of 27; separation from economy 9–10, 24; society and 24, 43; strength of 27; technocracy and agency 83–4; Thai response to crisis 182–6; types of intervention 24; varied structure of 6; Weber’s concept of xiii–xiv; Western models 14; see also Asian states; authoritarianism; democracy state–market condominium 49–50; concept of 44–51; conclusions from case studies 60–1 Sun Yat-sen: Three Principles 98 Taiwan: attracting investors 99; bureaucracy 94–7; and China 11; colonial rule of 148, 149; e-Taiwan project 34; economic institutions 84; education 153–4, 154; effect of crisis 31; establishment of Kuomintang 84–8; financial institutions of 88; financial policies 57–8; growth of economy 83–4; income distribution 145–6; industrial policy 54; intrastate rivalries 88–91, 105–6; investment 102; the Kuomintang 57; and the mainland

223

103; military 90–1, 96; monopolies 87–8; National Resources Commission 89; national security 27; planning institutions 91–4, 97–100; power politics and state agency 100, 101–5; private sector and social spending 165–7; private sector links 115; Production Board 89, 102; relation to mainland 95; social insurance 146–7; social provision 13, 160–1; state agency 11–12, 106; state–market condominium 60–1; Sun Yat-sen’s Three Principles 98; technocratic development 83–4 Taiwan Electricity 86 Taiwan Sugar 86, 89–90 Tanjung, Akbar 188, 190 taxes and tariffs: Japan’s structure for 71; state policy 52; Taiwan 96–7 technocracy and technocrats: developmental state model 83–4; economic development and 3–4; Thailand 56, 59 technology: globalization and 30; inevitable progress 36 Temasek Holdings 179–80 Teng-Eng Iron 91, 100 textiles: Korean protests 135; Taiwan 101–2 Thai Rak Thaik party (TRT) 184, 186 Thailand: authoritarianism 149; Bank of Thailand 59–60; business and state 174; Chuan’s reform agenda 184–5; creation of welfare provision 150–4; effect of crisis 31, 173, 192–3; exportdriven 55–6; financial policies 59–60; health care spending 157; industrial policy 52–3, 54, 55–6; nature of the market 16; neoliberal reforms 13–14; political independence 148; post-crisis reform 177, 181–6; private sector and social spending 165–7; rural orientation 155; social changes 175; social provision 13, 146–7, 161, 163, 185–6; state–market condominium 60–1; technocratic elite 176–7 Thaksin Shinawatra 193; reform policies 185–6; successful business 184–5 trade: export-driven 55–6; export orientation 50; Taiwan 99–100; see also globalization; market transparency: Japan’s Freedom of Information Act 77 Tsiang, S. C. 84

224

Index

United States: civil servants 70; constructing Asian states 15; demands Taiwanese reforms 104; international policy regimes 38; interventionism 148; knowledge-based economy 35; in Korea 131; neoliberal regimes 39; stops aid for Taiwan 97 Veterans Commission (Taiwan) 86, 87 Wahid, Abdurrahmin 189, 190 Weber, Max: bureaucracy 110; concept of state xiii–xiv; developmental state 2; public power 105 welfare provision: cause or result? 146; delivery 167–8; economic growth and 168–9; effect of Asian crisis 164; electoral incentives 156–64; historical origins in Asia 148–55;

households and growth 155; “nation building” 147; private sector influence 165–7; targeted by authoritarians 147–8 working-class social movements 45; see also labor World Bank: constructing states 15; free market mechanism 22–3; neoliberal conditions 31 World Trade Organization (WTO): intellectual property rights 35 Yan, T. L 100 Yangming Shipping 91 Yin, K. Y. 84, 90, 101–5 Yue Loong Motor 99–100 Yui, O. K. 103 zero-sum thinking 19, 24, 37