Capital and Knowledge in Asia: Changing Power Relations (Routledgecurzon Studies in the Growth Economies of Asia)

Capital and Knowledge in Asia

Global economic integration, widening communication networks and government policies supportive of private enterprise are changing the opportunities for accumulating wealth, status and power in Asia in unprecedented ways. This is accompanied by the development of highly sophisticated service enterprises, such as banks, law, accountancy and consultancy firms, and IT businesses, which provide access to the resources required for a profitable connection to the wider world. This volume investigates whether these producer services thrive in Asia’s highperforming economies as much as they do in the West. The book has a three-tiered approach focusing on: • • •

The role of producer service enterprises in channelling the access to markets, capital and commercial knowledge. Opportunities for social mobility within the expanding services sector itself. The role played by the state as facilitator of middle-class economic prosperity and progress, incubator of capitalism, and provider of political stability, employment, education, and legal frameworks for business operation, as opposed to a state that operates through patronage to established elites.

The authors collected here examine producer services and social mobility within the context of specific Asian nation states – including China, India, Malaysia, the Philippines and Singapore. Heidi Dahles is Associate Professor in the Department of Culture, Organisation and Management at Vrije Universiteit Amsterdam, the Netherlands. Otto van den Muijzenberg is Professor of Sociology and Modern History of South and Southeast Asia at the Universiteit van Amsterdam, the Netherlands.

RoutledgeCurzon Studies in the Growth Economies of Asia

1 The changing capital markets of East Asia Edited by Ky Cao 2 Financial reform in China Edited by On Kit Tam 3 Women and industrialization in Asia Edited by Susan Horton 4 Japan’s trade policy Action or reaction? Yumiko Mikanagi 5 The Japanese election system Three analaytical perspectives Junichiro Wada 6 The economics of the latecomers Catching-up, technology transfer and institutions in Germany, Japan and South Korea Jang-Sup Shin 7 Industrialization in Malaysia Import substitution and infant industry performance Rokiah Alavi 8 Economic development in twentieth century East Asia The international context Edited by Aiko Ikeo 9 The politics of economic development in Indonesia Contending perspectives Edited by Ian Chalmers and Vedi Hadiz 10 Studies in the economic history of the Pacific rim Edited by Sally M. Miller, A.J.H. Latham and Dennis O. Flynn

11 Workers and the state in new order Indonesia Vedi R. Hadiz 12 The Japanese foreign exchange market Beate Reszat 13 Exchange rate policies in emerging Asian countries Edited by Stefan Collignon, Jean Pisani-Ferry and Yung Chul Park 14 Chinese firms and technology in the reform era Yizheng Shi 15 Japanese views on economic development Diverse paths to the market Kenichi Ohno and Izumi Ohno 16 Technological capabilities and export success in Asia Edited by Dieter Ernst, Tom Ganiatsos and Lynn Mytelka 17 Trade and investment in China The European experience Edited by Roger Strange, Jim Slater and Limin Wang 18 Technology and innovation in Japan Policy and management for the 21st century Edited by Martin Hemmert and Christian Oberländer 19 Trade policy issues in Asian development Prema-chandra Athukorala 20 Economic integration in the Asia Pacific region Ippei Yamazawa 21 Japan’s war economy Edited by Erich Pauer 22 Industrial technology development in Malaysia Industry and firm studies Edited by K.S. Jomo, Greg Felker and Rajah Rasiah 23 Technology, competitiveness and the state Malaysia’s industrial technology policies Edited by K.S. Jomo and Greg Felker 24 Corporatism and Korean capitalism Edited by Dennis L. McNamara 25 Japanese science Samuel Coleman 26 Capital and labour in Japan The functions of two factor markets Toshiaki Tachibanaki and Atsuhiro Taki

27 Asia Pacific dynamism 1550–2000 Edited by A.J.H. Latham and Heita Kawakatsu 28 The political economy of development and environment in Korea Jae-Yong Chung and Richard J. Kirkby 29 Japanese economics and economists since 1945 Edited by Aiko Ikeo 30 China’s entry into the World Trade Organization Edited by Peter Drysdale and Ligang Song 31 Hong Kong as an international financial centre Emergence and development 1945–1965 Catherine R. Schenk 32 Impediments to trade in services: measurement and policy implication Edited by Christoper Findlay and Tony Warren 33 The Japanese industrial economy Late development and cultural causation Ian Inkster 34 China and the long march to global trade The accession of China to the World Trade Organization Edited by Alan S. Alexandroff, Sylvia Ostry and Rafael Gomez 35 Capitalist development and economism in East Asia The rise of Hong Kong, Singapore, Taiwan, and South Korea Kui-Wai Li 36 Women and work in globalizing Asia Edited by Dong-Sook S. Gills and Nicola Piper 37 Financial markets and policies in East Asia Gordon de Brouwer 38 Developmentalism and dependency in Southeast Asia The case of the automotive industry Jason P. Abbott 39 Law and labour market regulation in East Asia Edited by Sean Cooney, Tim Lindsey, Richard Mitchell and Ying Zhu 40 The economy of the Philippines Elites, inequalities and economic restructuring Peter Krinks 41 Private enterprise in China Edited by Ross Garnaut and Ligang Song

42 The Vietnamese economy Awakening the dormant dragon Edited by Binh Tran-Nam and Chi Do Pham 43 Restructuring Korea Inc. Jang-Sup Shin and Ha-Joon Chang 44 Development and structural change in the Asia-Pacific Globalising miracles or end of a model? Edited by Martin Andersson and Christer Gunnarsson 45 State collaboration and development strategies in China The case of the China–Singapore Suzhou Industrial Park (1992–2002) Alexius Pereira 46 Capital and knowledge in Asia Changing power relations Edited by Heidi Dahles and Otto van den Muijzenberg 47 Southeast Asian paper tigers? From miracle to debacle and beyond Edited by Jomo K.S. 48 Manufacturing competitiveness in Asia How internationally competitive national firms and industries developed in East Asia Edited by Jomo K.S. 49 The Korean economy at the crossroads Edited by MoonJoong Tcha and Chung-Sok Suh 50 Ethnic business Chinese capitalism in Southeast Asia Edited by Jomo K.S. and Brian C. Folk 51 Exchange rate regimes in East Asia Edited by Gordon De Brouwer and Masahiro Kawai 52 Financial governance in East Asia Policy dialogue, surveillance and cooperation Edited by Gordon De Brouwer and Yunjong Wang

Capital and Knowledge in Asia Changing power relations Edited by Heidi Dahles and Otto van den Muijzenberg

First published 2003 by RoutledgeCurzon 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by RoutledgeCurzon 29 West 35th Street, New York, NY 10001 This edition published in the Taylor & Francis e-Library, 2003. RoutledgeCurzon is an imprint of the Taylor & Francis Group © 2003 Heidi Dahles and Otto van den Muijzenberg for selection and editorial material; individual contributors, their own chapters All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Capital and knowledge in Asia : changing power relations / edited by Heidi Dahles and Otto van den Muijzenberg. p. cm. Includes bibliographical references (p. ) and index. 1. Asia–Economic conditions–1945– 2. Service industries–Asia. 3. Service industries–Asia–Case studies. 4. Social mobility–Asia. 5. Industrial policy–Asia. I. Dahles, Heidi. II. Muijzenberg, Otto Diederik van den. HC412 .C365 2003 338.095–dc21 ISBN 0-203-71178-5 Master e-book ISBN

ISBN 0-203-34572-X (Adobe eReader Format) ISBN 0–415–30417–2 (Print Edition)

Contents

List of tables Notes on contributors Preface Acknowledgements 1 Producer services, social mobility and the state in Asia: Lessons from Western economies

xi xiii xvii xix

1

H E I D I DA HL E S

PART I The new economy: boosting new people or bolstering old ties? 2 Networking for domination: The interconnectivity among business and government actors in the information technology industry of Hong Kong

21

23

Y I N - WA H C H U

3 The status of non-banking financial companies in India: A case study from Ahmedabad, Gujarat

40

D I N E S H N. AWAST HI

4 Cyber gurus and social mobility in India’s ‘Silicon Valley’

51

S A L I M L AK HA

5 Restructuring capitalist power in the Philippines: Elite consolidation and upward mobility in producer services M I C HAE L P I N C HES

64

x

Contents 6 Land investors during the property boom of the 1990s and the elite of Metro Cebu

90

E D S E L E . S AJ O R

Part II Engineering a new middle class: Singapore and Malaysia 7 Brokering change, changing brokers: The Chinese business elite and decolonization politics in Singapore, 1945–65

109

111

S I K KO V I S S C H ER

8 Social networks and modern management style: Pawnbroking business in Singapore

131

S E L I NA C H I N G C HAN

9 Establishing an enduring business: The Great Eastern–OCBC group

146

L E E K AM HI N G

10 Local merchant shipping companies in Malaysia: Expansion and diversification

171

LO H W E I L E N G

Part III Producer services in transitional economies

185

11 New entrepreneurs in reform China: Economic growth and social change in Taiyuan, Shanxi

187

DAV I D S. G. GOO D MAN

12 Business services in transitional economies: The case of Russia

198

O LGA GR I T S A I

13 Conclusion

209

OT TO VAN D E N MU IJZ ENBERG

Bibliography Index

217 236

Tables

2.1 3.1 5.1 6.1

Global networks and determinants of connectivity NBFC status in India at a glance Percentage of employment by economic activity Number of annual land development projects in Metro Cebu, 1988–2000 8.1 Pawnshops owned by Lam H.A.’s descendants 8.2 Pawnshops of Lam H.A.’s descendants that were closed down 8.3 Clansmen whose ancestors previously worked in pawnshops owned by Lam H.A.’s family 9.1 Hokkien family networks in the Malacca–Singapore–Java section 10.1 Selected merchant shipping companies of the nineteenth century 10.2 Selected shipping companies active in the northern region of Malaya (1890–1922) 10.3 Selected shipping companies active in Singapore and Southeast Asia (1880–1939) 10.4 Fleet development in Malaysia: the Malaysian International Shipping Corporation Bhd. (selected years) 11.1 Average fixed assets and profits after tax for different categories of enterprise by sector, million yuan per annum, Taiyuan 1997 11.2 Entrepreneurs and the party-state, percentage in each category of entrepreneur, Taiyuan 1996–99 13.1 Sub-sectors of producer services studied in this volume

26 44 66 93 134 135 135 149 174 176 179 180

190 194 210

Contributors

Professor Dinesh N. Awasthi has a PhD in Economics and is Director Designate, Entrepreneurship Development Institute of India (EDI), Ahmedabad. He was Professor of Strategic Management at the Indian Institute of Management, Lucknow (India) before he took up his current assignment. He has worked for several organizations like the Small Industries Development Bank of India, the International Labour Organization, the United Nations Industrial Development Organization, the United Nations Development Programme, etc., as a consultant. His major research interests envelop entrepreneurship, non-profit organizations, evaluation studies and emergence and growth of small and medium enterprises. He has published four books, a number of research papers and book reviews. He is also Associate Editor of the Journal of Entrepreneurship. E-mail: [email protected], http://www.ediindia.org Dr. Selina Ching Chan has a PhD in Social Anthropology from Oxford University. She currently teaches in the Department of Sociology at the National University of Singapore. Her areas of research include the study of kinship, tradition and identity in both Hong Kong and Singapore. She is currently also working on temple reconstructions in the People’s Republic of China. E-mail: [email protected] Dr. Yin-wah Chu is Associate Professor at the Department of Sociology, University of Hong Kong. Areas of Expertise are East Asian Development (Economic Institutions, State–Business Relations, Democratization, Labour Conditions), Social and Political Movements, and Informational Society. Recent Publications include ‘Ideology and Organization in the Oppositional Movements of Taiwan and South Korea’ in: Research in Social Movements, Conflicts and Change, 21, 1999 and Economy and Society of Taiwan, Hong Kong, and Mainland China (co-edited with Chang Wei-an), Taipei: Sheng-Chih Books, 2000. E-mail: [email protected] Dr. Heidi Dahles obtained her PhD in Anthropology from the University of Nijmegen. She was Assistant Professor at the Department of Leisure Studies of Tilburg University, Dutch senior fellow at the International Institute for Asian Studies (Leiden) and postdoctoral researcher at the Centre for Asian Studies Amsterdam, University of Amsterdam. At present she is Associate Professor in the Department of Culture, Organization and Management at Vrije Universiteit Amsterdam. She is author of Tourism, Heritage and National Culture in Java: Dilemmas

xiv

Contributors of a Local Community (Richmond, Surrey: Curzon, 2001). Her research interest is in organizational culture in business networks in transborder areas in Southeast Asia. E-mail: [email protected]

Professor David S.G. Goodman is Director, Institute for International Studies, University of Technology, Sydney. Recent publications include Social and Political Change in Revolutionary China, Rowman & Littlefield, 2000; and China’s Communist Revolutions (with Werner Draguhn) Routledge, 2000. E-mail: [email protected] Dr. Salim Lakha lectures in Development Studies at the University of Melbourne and his research interests include industrialization, international migration, and globalization. Dr. Lakha’s current research work is concerned with the growth of the Indian computer software industry and the migration of computer professionals from India. Recent publications include ‘The State, Globalization and Indian Middle-Class Identity’ in M. Pinches (ed.) Culture and Privilege in Capitalist Asia, London: Routledge, 1999 and ‘The New International Division of Labour and the Indian Computer Software Industry’ in J. Bryson et al. (eds) The Economic Geography Reader: Producing and Consuming Global Capitalism, Chichester: John Wiley and Sons, 1999. E-mail: [email protected] Professor O.D. van den Muijzenberg is Professor of Sociology and Modern History of South and Southeast Asia at the University of Amsterdam. He carried out field research on rural–urban migration between Nueva Ecija and Manila. In the course of time his Philippine interests broadened to rural development, urbanization and urban lifestyles, the role of the state in development, and regional development. Current interests include urban development, emerging classes in South and Southeast Asia and international labour migration. Recent publications include ‘Faces of the Nation on Postage Stamps’ in C.J.-H. Macdonald and G.M. Pesigan (eds) Old Ties and New Solidarities: Studies on Philippine Communities (Manila, 2000) and Four Centuries of Dutch–Philippine Relations, 1600–2000 (Manila, 2001). He is co-ordinator of the international research programme ‘Brokers of Capital and Knowledge: Producer Services and Social Mobility in Provincial Asia, 1960–2000’. E-mail: [email protected] Dr. Michael Pinches is Senior Lecturer in Anthropology at The University of Western Australia, Perth, and former President of the Philippine Studies Association of Australia. He has edited Culture and Privilege in Capitalist Asia, London: Routledge, 1999, and has co-edited Wage Labour and Social Change: The Proletariat in Asia and the Pacific (Centre of Southeast Asian Studies, Monash University, 1987; Quezon City: New Day Publishers, 1992). He is author of a number of articles on urbanization, class, culture and politics in the Philippines. E-mail: [email protected] Dr. Lee Kam Hing was Professor of History at the University of Malaya and is presently Research Editor at The Star, Kuala Lumpur, Malaysia. He co-edited The Chinese in Malaysia, Oxford University Press, 2000. His earlier publications

Contributors

xv

include Politics and Education in Indonesia, 1945–1965, Kuala Lumpur: University of Malaya Press, 1994; The Sultanate of Aceh: Relations with the British, 1760–1824, Kuala Lumpur: Oxford University Press, 1995; and Biographical Dictionary of the Chinese in Malaysia (together with Chow Mun), Petaling Jaya: Pelanduk, 1997. E-mail: [email protected] Dr. Loh Wei Leng is Associate Professor in History at the University of Malaya, Kuala Lumpur. Her research interests include business and maritime history of Malaysia. Recent publications include ‘The Colonial State and Business: The Policy Environment in Malaya in the Inter-war Years’ in Journal of Southeast Asian Studies, 33(2), June 2002; ‘The Role of Large-Scale Western Enterprise’ in Cheah Boon Kheng (ed.), Vol. VII, Modern History, The Encyclopedia of Malaysia, Singapore: Editions Didier Millet, 2001; and ‘Chinese Business Research in Malaysia’ (with E.T. Gomez and Lee Kam Hing) in E.T. Gomez and H.H.M. Hsiao (eds), Chinese Business in Southeast Asia, Curzon, 2000. E-mail: [email protected] Dr. Edsel E. Sajor is Assistant Professor at the Urban Environmental Management Field of Study, Asian Institute of Technology, Thailand. From 2000 to 2001, he was a postdoctoral researcher at the Centre for Asian Studies Amsterdam, University of Amsterdam. He obtained his MA and PhD in Development Studies at the Institute of Social Studies, The Hague. He has published on the subjects of environmental politics, state–society relations in livelihoods, and changes in rural labour regimes. His current research interests are on urban governance issues in Southeast Asian cities, especially on urban land policy and real estate development and on local state–society relations in environmental management. He worked for a long time with several Philippine NGOs involved in grass-roots development projects and research on various socio-economic issues both in rural and urban settings. E-mail: [email protected] Dr. Sikko Visscher has recently attained his doctorate at the Vrije Universiteit, Amsterdam with his dissertation entitled ‘Business, Ethnicity and State; The Representational Relationship of the Singapore Chinese Chamber of Commerce and the State, 1945–1997’. In 1992, he finished his study ‘Modern Asian History’ at the University of Amsterdam. His areas of research interest include Sino-Indonesian relations, Chinese businessmen and their organizations, and most recently questions of money, knowledge and power in the global–local business interface. E-mail: [email protected] Dr. Olga Gritsai is a leading researcher at the Institute of Geography, Russian Academy of Sciences and a guest researcher at the Study Centre for Metropolitan Environment, University of Amsterdam. She is the author of two books and numerous articles on urban and regional development. Her current research interests are in the field of globalization and world city development, with a particular emphasis on the economic and urban restructuring in Russia. E-mail: [email protected]

Preface

Asia’s economic ‘boom’ and recent economic crisis have drawn attention, once more, to the connections between global processes and local transformations. In unprecedented ways, global economic integration, widening communication networks, and government policies supportive of private enterprise are changing the opportunities for accumulating wealth, status and power, and redefining the avenues of social mobility. This process is accompanied by the development, throughout provincial Asia, of highly sophisticated service sectors which provide access to the resources required for a profitable connection to the wider world. This volume focuses on the key role played by producer services in channelling the access to markets, capital, and commercial knowledge, and thus in shaping new business arenas and new patterns of social mobility. More specifically, this volume features: (1) the central role of the producer services enterprises as brokers of capital, knowledge, and commercial connections, which may contribute in vital ways to the rise of new entrepreneurial categories and/or the demise of existing ones; (2) opportunities for social mobility within the expanding services sector itself, which may contribute to the development of new professional classes in provincial societies. Assessing the role of producer services as gate-keepers governing access to fundamental resources such as land, capital, labour and knowledge demands an understanding of the manifold institutions and networks operating in Asian societies under various political and economic regimes. It is within this context that the social impact of new challenges and opportunities must be placed. Knowledge, like the more tangible bases of production, must also be seen as a scarce resource, the control of which can generate both power and wealth. Access to knowledge is influenced by existing power relations, but its successful use also depends on the capacity for fast and flexible response to changing circumstances. Access to these resources is fundamental in deciding ‘who gets what’, and at the same time, increasingly international markets impose new disciplines and reward new skills. Established businessmen with contacts and capital are relatively quick to recognize the need for and benefits of new forms of access, and may consolidate their position, thus creating a two-tiered system of increasingly wealthy innovators versus increasingly isolated small businessmen. On the other hand, a declining emphasis on political patronage or ethnic networks and a more open market may offer more men and women the chance to create their own connections and gain access to capital, markets and knowledge.

xviii

Preface

These conflicting forces that characterize Asian societies in the knowledge-based economy are the focus of an international research programme at the Centre for Asian Studies Amsterdam, a co-operative effort of both the Universiteit van Amsterdam, and Vrije Universiteit Amsterdam. This programme titled ‘Brokers of Capital and Knowledge: Producer Services and Social Mobility in Provincial Asia (Malaysia, Philippines, Indonesia and India), 1960–2000’ aims at generating empirical evidence and theoretical reflection on the operations of producer services in Southeast and South Asian countries, such as the Philippines, Indonesia, India and Malaysia, and the dynamic relationships between the actors in this services sector and their movements in social hierarchy against the background of shifting power relations. This volume, which is the result of an international workshop organized by the researchers involved in this programme, brings together a number of contributions that revolve around issues of elite continuity versus social change for specific producer services sectors and in different Asian societies. Heidi Dahles Otto van den Muijzenberg Amsterdam, December 2002

Acknowledgements

The editors wish to acknowledge the shared intellectual property and the unfailing support and inspiration of their colleague researchers affiliated to the programme ‘Brokers of Capital and Knowledge: Producer Services and Social Mobility in Provincial Asia (Malaysia, Philippines, Indonesia and India), 1960–2000’: Heather Sutherland, Henk Schulte Nordholt, Mario Rutten, and Rosanne Rutten, the PhD students Pepijn van de Port and Harald Bekkers, and postdoctoral researcher Edsel Sajor. Vital assistance and logistic support was provided by the student assistants Susan Keulards, Chantal Oudkerk Pool and Michiel Baas. The chapters of this volume were first presented at an international workshop titled ‘Brokers of Capital and Knowledge’, 3–5 May 2000, at the University of Amsterdam. The editors are indebted to Mark Rutherglen who played an indispensable role in the successful organization of this meeting. The workshop benefited greatly from the intellectual input provided by scholars who took a vivid interest in the presentation of papers and the discussion. The editors wish to thank the contributors to this volume and the following persons for their participation: Rajeswary Brown, Leo Douw, Paul Hutchcroft, Peter Post, Paul Richards, Henry Sandee and John Sidel. Additionally, the editors would like to acknowledge the support of the following institutions: • • •

The Netherlands Foundation for the Advancement of Tropical Research (WOTRO) as the principal sponsor of the research programme; The International Institute for Asian Studies (IIAS) and the European Science Foundation, in particular its Asia Committee which supported this workshop with a grant from its Annual Asia–Europe Workshop Series; The Centre for Asian Studies Amsterdam, the Amsterdam School for Social Science Research, the Universiteit van Amsterdam, and Vrije Universiteit, Amsterdam for their institutional support.

Last but not least, the editors wish to express their gratitude to Dick van der Meij for his meticulous presentation work and to Heidi Bagtazo, editor of the Politics and International Studies section of Taylor & Francis, for her excellent coaching in the final phase of preparing this volume for publication. Heidi Dahles Otto van den Muijzenberg

1

Producer services, social mobility and the state in Asia Lessons from Western economies Heidi Dahles

In unprecedented ways global economic integration, widening communication networks, and government policies supportive of private enterprise are changing the opportunities for accumulating wealth, status, and power, and in the process, are redefining the avenues of social mobility. Much of the recent literature on the global economy allocates a key role to the service industries, particularly the producer services, in future developments of post-industrial society (Castells, 1996; Sassen, 2000). A pivotal role seems to be carved out for the producer services entrepreneurs as gatekeepers controlling access to resources that may be distinguished in terms of economic capital (money, land, labour), cultural capital (knowledge and expertise acquired through formal training), and social capital (formal and informal networks, kinship relations, ethnic, political, and religious linkages) (cf. Bourdieu, 1977). Economic restructuring entails a shift in the balance between these resources in favour of cultural and social capital, which have come to constitute the major assets in what is called the New Economy. In Asia, the process of rapid economic growth and successful participation in the global economy is accompanied by the development of highly sophisticated service enterprises (such as banks, insurance companies, accountancy, consultancy and law firms, business schools and IT firms), which provide access to resources required for a profitable connection to the wider world. This process differs in scope and scale among Asian countries and between urban and rural areas within these countries. It seems that producer services, which utilize capital and knowledge-intensive technology, thrive in Asia’s high performing economies much like they do in Western countries. The service sector in Asia’s developing economies on the other hand appears to be dominated by consumer services and shows little growth of producer services. Theoretical debates revolve around the question to what extent producer service entrepreneurs acting as brokers of the different sorts of capital may not only represent but also contribute to the rise of new entrepreneurial and social categories and the decline of established ones. Explorations into current theories reveal that hypotheses about the future development of the business community and of social mobility within this community focus either on ‘elite continuity’ or the rise of ‘new middle classes’. The ‘elite continuity’ hypothesis argues that established social groups operating in long-standing networks and possessing capital are quick to respond to new opportunities, and consolidate their position by combining both their

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Heidi Dahles

traditional and newly arising sources of power. In this process they may emerge as increasingly wealthy innovators, pushing smaller competitors into marginality and contributing to the polarization of economy and society. The hypothesis that features the ‘rise of the new middle classes’ is more optimistic about the future prospects for upward social mobility of relatively unconnected people. Declining emphasis on traditional power structures and a more open market favours new entrepreneurs with an international orientation, knowledge, and taste to create their own networks and gain access to new markets. They constitute the ‘new professional classes’ in metropolitan and provincial societies. The theories that have been examined for this chapter have been largely designed for the ‘advanced’ economies of the Western hemisphere, where the development of producer services has begun and where one finds the largest concentration of producer services (cf. Martinelli and Moulaert, 1993). Economic and urban restructuring, processes of regionalization and the emergence and location of producer services as fields of study have been empirically and theoretically developed by economic geographers and (urban) sociologists, with a clear focus on industrial areas in the United Kingdom, the United States, and Canada. Despite the disciplinary and regional bias, the literature offers interesting perspectives that may be very valuable to generate research questions for scholars focusing on the operations of producer services from a more socio-culturally oriented approach and in different parts of the world. Although conditions under which producer services develop in Asia are different from Western countries, it is worthwhile to explore the prevailing views on the development of producer services in the West in order to establish a theoretical context for a comparison between ‘Western’ and ‘Asian’ routes to economic development and social mobility, particularly as little empirical research has been done on Asian experiences with new economic and social opportunities. Therefore, to generate a better understanding of the social position of producer services entrepreneurs, a closer examination of theoretical literature in the following related areas is called for: 1 2 3

The role of producer services as generators of new professions in the restructuring of Western economies. The relationship between producer services and social mobility, in particular the emergence of the new middle classes. The role of market forces versus state intervention in the advancement of the new professions.

This chapter starts with a discussion of economic theories regarding the character of producer services and their position in Western economies, and continues with sociological concepts describing the relationship between the emergence of producer service enterprises and social mobility. Finally, the role of the state in processes of economic restructuring will be discussed in order to gain a thorough understanding of the ways in which government intervention can either facilitate economic opportunities for new entrepreneurs in new professions or maintain or even enhance privileged access for established social groups. Based on this exploration of Western

Producer services, social mobility and the state in Asia 3 economies, questions will be raised which may be considered relevant for the social and economic processes in a number of Southeast Asian countries. This chapter concludes with an overview of the contributions to this volume.

Producer services in Western economies The rise of producer services Ever since Adam Smith’s economic theory, services have been the ‘Cinderella’ of the economic discipline. Manufacturing continues to be regarded as the sole wealthcreating sector of the economy, whereas services are viewed as intangible, nontradable, ephemeral, and less productive (O’Farrell and Hitchens, 1989). In contrast with the optimistic scenario projected in the writings about a post-industrial society in which flexible, well-paid, and knowledge-based service industry employment figures were high, more pessimistic versions pointed out that the output in the service industries grows much more slowly than in manufacturing, as did the productivity, the quality in labour, and the wages (Fuchs, 1968; Daniels, 1985; Petit, 1986). Still, scenarios of a workless society, jobless and unbalanced growth and the rise of a service proletariat have an impact on the image of a services-based economy (Esping, 1993). Producer services as distinct from consumer services emerged as a substantial economic sector in the 1950s in the United States and in the 1960s in Europe. Between 1970 and 1990 producer services showed considerable expansion and employment more than doubled in this sector during this period (Hermelin, 1997: 29). The conventional view held that producer services appear in response to demand from manufacturing industry (Daniels, 1985: 178). This view is reflected by many typologies, which assign a ‘residual’ position to the services in general and to producer services in particular. Most prominent in this respect are the well-known ‘sectoral classifications’ that allocate the most important productive potential in agriculture (primary sector) and manufacturing (secondary sector), while services establish tertiary (consumer services), quaternary (producer services), and even quinary (information technology) sectors (Daniels, 1985). According to the ‘International Standard Industrial Classification’ (cf. Petit, 1986) services are classified into: • • • •

wholesale and retail trades, hotels, and restaurants; transport, storage, and communications; finance, insurance, real estate, and advanced business services; and community, social, and personal services.

This classification fails to take into account the basic difference between producer and consumer services. Producer services are mainly geared to the needs of other producers rather than to end-consumers. ‘Their principal function is to provide intermediate inputs into the production processes of client firms in order either to facilitate product development and promotion or to ensure the efficient operation of the firm, including the provision of finance for its activities’ (Juleff-Tanter, 1996: 389). Therefore some authors use the term ‘intermediate services’ to capture

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the specific character of these services in contrast to ‘final demand services’ (Goe, 1990; Bagchi-Sen and Sen, 1997). Other terms used interchangeably for producer services are ‘business services’ (Birley and Westhead, 1994), ‘corporate services’ (Sheets, Nord and Phelps, 1987) and ‘specialist services’ (Sassen, 1991). As Gritsai (Chapter 12 in this volume) points out, the term ‘producer services’ emphasizes the difference of this sector from consumer services, whereas the term ‘business services’ (and this applies to ‘specialist services’ as well) reflects the character of these services. Daniels (1985: 129) defines ‘business services’ as a subgroup of producer services. The term ‘corporate services’ suggests that large corporations are the main users of these services and, as a consequence, fails to capture the increasing business-tobusiness services among small and medium-sized enterprises. In this volume the contribution of the service sector to the New Economy is of crucial importance, so the differences between producer and consumer services are highly relevant. As will be argued below, it is the growth of the producer services in particular with their high input of knowledge and expertise requiring well-trained people which has become the engine of the New Economy. Therefore preference is given to the concept of producer services here. The view of a dependent ‘residual’ sector has been challenged by findings in urban and regional studies pointing to a growing prominence of service activities (Sassen, 2000). Prominent theorists (Bell, 1973; Lash and Urry, 1987; Castells, 1996) offer explanations of long-term shifts towards a service-dominated society as a consequence of a general increase in wealth that generates changes in demand – demand for more expensive goods, public infrastructure, and consumer services. Manufacturing becomes more complex, emphasizing research and development, and employing a more educated and skilled workforce, and more elaborated sales and marketing strategies. Competition requires costs to be kept low, so that more capital-intensive methods are introduced. While the portion of workers directly engaged in goods production declines, the share of supporting service work increases. Under these conditions the demand for manufacturing still increases with the scale of production, but at a decreasing degree, while the demand for services and, in particular, producer services, grows at an increasing rate due to an expanding specialization of manufacturing as well as other service firms (Bagchi-Sen and Sen, 1997). These developments are characteristic of the post-industrial society, i.e. a technologically advanced, information-based, high-wage, high-expertise-based society (Marshall and Wood, 1995). The growing demand for producer services in post-industrial society is stimulated by the increasing flexibility and vertical disintegration of enterprises and the externalization, outsourcing, or subcontracting of production processes. These processes entail increased product innovation and differentiation, greater efficiency and rapid adjustment to changing economic circumstances, increasing complexity of the national and international business environments, increased government intervention, and the expansion of management and administration tasks within firms (Coffey, 1996). These changes require the intervention of specialists: engineers, lawyers, accountants, management consultants, advertising professionals, who can analyse situations, provide information and documentation, and assist in

Producer services, social mobility and the state in Asia 5 decision-making (Coffey and Bailly, 1992). In advanced economies, producer services that are purchased externally have achieved the highest rates of employment growth among all industrial sectors, as more and more firms encounter in-house technical limitations, restrict themselves to core functions, and limit the number of personnel on the payroll, while external services can be purchased less expensively (Coffey and Bailly, 1992). As a consequence, producer service firms become more specialized as the range of services is increasingly diversified and as technological innovations require more advanced types of expertise. Much of this social division of labour occurs through spin-offs from existing service firms and results in a dense network of firm linkages and, in particular, in small-firm growth. Differentiation of producer services While producer services as a whole play a key role in economic development in terms of investments, innovation, and technological change, it is not clear which activities establish this sector. Classifications are abundant, and each typology applies different criteria to differentiate among producer services. According to the Standard Industrial Classification (SIC), producer services are subdivided into (cf. O’Farrell and Hitchens, 1989: 165): • • • • •

hotels, catering, and distribution; repairs; transport and communications; banking, finance, and business services; and other services.

Contrasting with the idea that banking, finance, and business services can be lumped together in one undifferentiated category (as in the SIC typology), it has been pointed out that there are fundamental differences between two major sectors within this category, i.e. the advanced business services (APS) and the finance, insurance and real estate sector (FIRE). Comparing FIRE and APS establishments in the Montreal metropolitan area in the 1990s, Coffey (1996) found a number of striking differences between both sub-sectors. In terms of ownership, APS establishments show a higher propensity to be independently owned with no affiliates. FIRE establishments, on the other hand, are much more likely to be branches of another firm or to have formal affiliations with a larger network of establishments. Therefore, APS establishments, being independently owned, are usually small-scale, in terms of employees and office space. FIRE establishments are larger in terms of the number of employees and office space. When it comes to workforce, APS establishments offer managerial and professional occupations, closely associated with ‘symbolic analytical’ activities, generating recommendations, advice, and evaluation based on authority acquired through formal training and diplomas (Lensink, 1989: 45; Tordoir, 1993: 4). APS activities deliver hand-crafted and made-to-measure products. Therefore, APS establishments are also denoted as ‘strategic producer services’ or ‘high-order producer services’ (Phillips, MacPherson and Lentnek, 1998). FIRE

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establishments, and banks in particular, employ lesser-skilled workers most of whom perform repetitive tasks. They more often resign to mass-production techniques and the value of their output is more easily measured in quantity than is the case with APS activities. APS establishments tend to be significantly younger in terms of the length of time they are in operation than are FIRE establishments. Again, this may point to APS being related to the ‘new professional classes’ and FIRE to older established social groups. As far as the relationship with clients is concerned, FIRE establishments turn to external producer services and generate further growth in this service sector. APS establishments are inclined to generate these services internally as they are too small to afford external services (Wood, 1991: 167). However, research on small firm development in the APS sector in the early 1990s points to major spin-off effects among these firms (Coffey and Bailly, 1992; Keeble, Bryson and Wood, 1991; Wood, 1991). APS establishments (more than FIRE establishments) represent a paradox to conventional wisdom: being predominantly small enterprises they emerge as a driving force in economic development precisely when technological change seems to require increasingly large quantities of research and development resources amassed, organized and funded by giant corporations (Castells, 1996; Kirchhoff, 1994). Instead of small entrepreneurship losing its significance to large-scale corporations in a post-capitalist economy, small firms create most jobs and represent the dynamics of capitalism (Kirchhoff, 1994: 2). Small firms, especially in the APS sector, benefit from low cost of entry and low overheads. The market niches occupied by small firms in this sector and their choice of location are largely defined by large corporations hiring their expertise (Daniels, 1985), while these small firms establish networks of mutual aid among themselves which generate further growth in the number of small firms. The range of specialized market niches for small, specialized business firms has multiplied in recent years due to the principle of flexible accumulation becoming dominant in advanced economies. Flexible accumulation is characterized not by the contract between capital and exploited labour, but by that between capital and expert labour, as Wood (1991) points out. However, it has still to be shown whether the success of the small service firm is sustainable. It is also true that most of these firms are quite young and therefore in the phase of expansion in their lifecycle. Older firms, though less flexible and less innovating, are more likely to survive if they are large. This applies particularly to sectors relying on strong established reputations like consulting and legal firms (Beyers and Lindahl, 1997). The idea that ‘new professionals’ operating in the APS sector are dependent on larger corporations in the manufacturing sector has been undermined by research (cf. Daniels, 1985: 131). It is true that large firms in the manufacturing sector externalize specialized services. The more specialized a service, the greater the chance that firms hire experts from outside their own firm. However, more importantly, firms which supply such specialized service do use such services themselves. Producer services maintain forward as well as backward linkages with other producer service firms. As Juleff-Tanter (1996: 397–8) found in Britain, the FIRE sector, in contrast with conventional thinking, shows a tendency to internalize most of its service usage, while industries which are dominated by small firms, for example consultant

Producer services, social mobility and the state in Asia 7 engineering, tend to externalize more of their APS needs than other industries. This dependence results in a small-scale, flexible, post-Fordist kind of organization with horizontal linkages with other businesses, with small offices, small overheads, and a strong emphasis on networking; therefore brokerage is their basic mode of operation. We are dealing here with predominantly self-employed, well-educated males. These establishments offer tailor-made products and their relationships with clients require an outgoing approach to attract and maintain relations with (potential) contractors. Office space and representation is less important for APS establishments than for FIRE establishments. The location of producer services In advanced economies, APS establishments, especially of the strategic and highorder kind (like strategic management and financial consulting), have become increasingly concentrated in the core areas of large metropolitan centres, while less sophisticated producer services tend to be more widely distributed across the urban system (Daniels, 1985; Keeble, Bryson and Wood, 1991; Makun and MacPherson, 1997; Phillips, MacPherson and Lentnek, 1998). This distribution of producer services is reminiscent of the central-place theory that was designed by Christaller in the 1930s to explain regularities in the size and spacing of settlements (i.e. in southern Germany). Central places are usually metropolitan locations where administrative headquarters, advertising agencies, banks and other financial intermediaries, law firms, public relations firms, management consultants, and other business services are already clustered. The more complex and specialized the services, the more likely they are to be found in only the very largest central places where they can gain access to a market of sufficient size (Daniels, 1985). This phenomenon has been analysed by Sassen (1991) in terms of the ‘global-city theory’. Sassen’s central point is that cities concentrate control over vast resources, while finance and specialized service industries have restructured the urban social and economic order, giving rise to the global city, representing the most advanced production site for producer services. The hierarchical (vertical) relationship between places, as proposed in the centralplace theory, and in Sassen’s global-city theory, contrasts with the ‘urban field’ or urban system approach – a system of horizontal interdependencies between urban conglomerates organizing flows of people, information, money, and goods – that emerged in the advanced economies in the 1970s (Pred, 1977). Booming business in the world’s cities has brought about disadvantages of the central location of firms and offices, like high rents, costs related to traffic jams and pollution, and lack of qualified personnel. Added to the fact that the amenities of the big city (like cultural, social and entertainment facilities) are also available in smaller urban centres, relocation of many producer services to suburban settings is taking place to an increasing degree (Marshall and Wood, 1995; Daniels, 1985). Modern information technology facilitates this move making enterprises more independent of location. Castells (as quoted in Marshall and Wood 1995: 47–49) points out that service growth arises from intermediate demand for specialist services between regions, moulded by the requirements of large corporate organizations. This generates agglomeration of

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specialist services not only in major metropolitan centres but also in ‘industrial districts’ (Marshall, 1985) or ‘New Industrial Spaces’ where ‘innovative milieux’ emerge. In these spaces, firms establish networks which facilitate strategic alliances among enterprises and generate strong incentives for innovation. Recent location theories regard both concentration and de-concentration as integral parts of the same process of economic restructuring. The concentration of producer services in metropolitan space is undeniable. Despite the increasing ease with which information and specialized know-how can be electronically or physically transported over long distances, close proximity between providers and users can play an important role in the innovation efforts of firms. A related factor is that technologically important interactions often occur on the basis of informal meetings between members of spatially localized business networks. The potential for useful interaction is clearly stronger in locations that contain dense clusters of specialists (Makun and MacPherson, 1997). In large cities, forces of agglomeration produce a complex of corporate activities and a symbiosis of head offices, high-order FIREestablishments and highly specialized producer service firms (Coffey and Bailly, 1992). Daniels (1985) suggests that small service firms become more and more dependent upon the location of their larger counterparts. The control functions of headquarters tend to concentrate in and around metropolitan areas, while routine production tends to disperse to smaller urban and even rural areas (Martinelli and Moulaert, 1993; Marshall and Wood, 1995). Whereas secondary cities benefit from the establishment of divisional and regional offices of large corporations, the major metropolitan areas remain the centres of information exchange and processing, skilled labour training, and major investments in communication technology. To conclude this description of the producer service sector, it seems that APS establishments most likely represent the ‘new professions’, while FIRE establishments are owned by either ‘old elites’ or large corporations. In terms of social mobility, APS firms seem to offer opportunities for young, well-educated, and relatively unconnected people, the more so as these firms are small or medium-sized, require little economic capital, and position themselves flexibly in the market as far as their location as well as mode of operation is concerned. FIRE establishments, on the other hand, require large capital input due to their size. They depend on reputation established through time and long-standing relations of trust and co-operation. Being located in metropolitan areas, these firms most likely recruit their managers through established networks and, therefore, less likely offer opportunities for social climbers.

The new professional classes The distinction between FIRE and APS establishments is of vital importance in order to develop a sociological approach to opportunities of social mobility offered by this sector. Research in Western societies (cf. Coffey, 1996) has shown that the FIRE sector is characterized by a Fordist style of organization and management. FIRE establishments are large-scale firms that require large amounts of economic capital. Representation is an important aspect of doing business for FIRE firms as

Producer services, social mobility and the state in Asia 9 their clientele is expected to visit their offices for business deals. Therefore, they are established in large, attractively located office buildings. The workforce is constituted of lesser-qualified and lesser-educated employees who are trained to perform standardized tasks and who are managed in a top-down hierarchical manner. The management may be predominantly recruited from established social groups who rely on privileges derived from being a member of an old elite and who participate in formal and informal ‘old-boys-networks’. The APS sector, on the other hand, consists basically of small and medium-scale entrepreneurs with highly specialized skills and network relations with business partners that require authority and trust. For the APS businesses, the professional standing of these entrepreneurs is based on academic education and training, i.e. professional expertise and knowledge. Most of the APS firms in Britain that emerged from the 1980s onwards are small independent companies, set up, owned, and managed by one or more professionals with existing expertise in their sector. The majority of their employees are professional staff, possessing high level expertise and/or professional qualifications and earning above average incomes. Therefore, business service firms are likely to bring greater economic benefits to the areas in which they operate than do firms in many other sectors (Hansen, 1990; Keeble, Bryson and Wood, 1991). In Daniel Bell’s pioneering work on the post-industrial society defined by service employment dominance, the rise of the ‘new middle classes’ plays a pivotal role. The new middle classes are established by professional-technical and managerial cadres whose privileged social position is derived from their control of scientific knowledge and the means of information. This category of university and polytechnic graduates clearly benefited from and at the same time accelerated the emergence of the service industries. This new class of high-income workers are the new professionals whose numbers increased dramatically in the metropolitan areas of the advanced economies (Esping, 1993). The new middle classes – or what have been termed the service classes (Lash and Urry, 1987) – are constituted by a large generational cohort, the 1960s generation, which entered higher education in larger numbers than ever before, and which developed orientations, tastes, and dispositions that make them specialists in symbolic production (Featherstone, 1990). Figuring as the ‘new cultural intermediaries’, this group is engaged in providing symbolic goods and services that overlap with the economists’ definition of professionals in the advanced producer services: marketing, advertising, public relations, media and information technology, and the ‘expressive’ or ‘creative’ professions. The post-Fordist professions form a new elite that pushes both the old corporate elites and the old middle classes who were firmly rooted in traditional Fordist hierarchies and in the manufacturing industries, to the margins of the social hierarchy (Esping, 1993; Sassen, 2000). In the advanced economies, so it seems, there is social discontinuity to the advantage of new professional groups. Many of the services provided by the new professions have a strategic value for the administration, innovation, and adaptation of complex organizations. Under conditions of post-industrial society more and more advanced services are offered by professionals acting as independent entrepreneurs. Much professional service work that used to be organized in-house by large organizations is nowadays done

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by specialist and independent professional service firms. Consequently, professional mobility that was once offered mainly by large and vertically-integrated organizations is moving to small and medium-sized enterprises that have become more efficient than large corporate firms. Specialized professional firms offer new opportunities for new entrepreneurs who would otherwise be employed by large corporations. Moreover, the new specialist firms can provide small and medium-sized companies with access to professional knowledge that used to be the monopoly of large corporations (Tordoir, 1993). The new professional-cum-entrepreneurs form professional communities that establish their own quality measures institutionalized in specific educational programmes, certified by diplomas and licenses, materialized in journals and associations, and guarded by peer judgement (Tordoir, 1993). These professional communities belong to the high-income categories who are attracted to urban lifestyles and who prefer to live in central areas rather than in suburbs. They are regarded as the new middle classes, which are supposed to act as the economic dynamizers of this century. With their impressive amount of cultural capital, they challenge the old bourgeois class with their power base in economic capital. Adopting a learning mode toward life, the new intellectuals (Bourdieu, 1989: 370) are fascinated by identity, lifestyle, appearance, impression management, and a quest for new experiences as means of distinction. They frequently show a lack of anchoring in terms of a specific locale or community (Featherstone, 1990). Instead they act as culturally competent cosmopolitans who easily adjust to ever changing social and cultural settings (Hannerz, 1990). The new middle classes constitute the new markets for consumer goods and services: processed foods, computer software, educational services, films and TV soaps, and travel services. The power of the new middle classes has widespread social implications, overlapping into and stimulating other service arenas, especially consumer and leisure services. Under the growing demand for consumer and leisure services, big cities are more and more characterized by consumer culture – tourism, recreation and fun-shopping – which stimulates urban growth and revitalization, at the expense of manufacturing and commercial production (Marshall and Wood, 1995). With the advent of the new professional classes the urban landscape undergoes ‘high income gentrification’, as Sassen (1991, 2000) argues. Whereas Fordist middle classes in the suburbs were characterized by mass consumption, the new urban professionals demand labour intensive, customized goods and services. Besides providing an avenue for social mobility for the well-educated new professional groups and generating processes of gentrification in metropolitan residential areas, there is also a rise of an underclass. The increasing demand for consumer and leisure services creates new jobs particularly in the lesser-paid and lesser-skilled consumer services sector fuelling a large service proletariat (Esping, 1993; Sassen, 2000). In the United States producer services have had a significant effect on the growth of underemployment in the service industries (Sheets, Nord and Phelps, 1987, as cited in Sassen, 2000). The growth of high-level services often depends on the support of poorly paid and insecure employment in many informal jobs. Some scholars developed a rather pessimistic view on post-industrial society in terms of increasing un- and underemployment due to automation (the ‘workless’ society), Gershuny’s

Producer services, social mobility and the state in Asia 11 ‘jobless growth’ or Baumol’s ‘unbalanced growth’. Sassen argues that the ‘overall result is a tendency toward increased economic polarization’ (2000: 136). The point is that the middle classes as a whole are not expanding. Instead certain segments, i.e. the new professional groups, are gaining income and become wealthier, while others (the service proletariat) become poorer. Post-industrial society is nurturing a novel kind of dual system: the service sector becomes the launching pad for high-wage careers of the well-educated professionals in the producer services as well as the dumping ground for uneducated and unskilled labour and ‘stop-gap jobs’ for youth and immigrant workers in particular in the consumer services (Esping, 1993).

The role of the state Recent economic developments and in particular the rise of the ‘New Economy’ have challenged established social hierarchies as well as established national borders (Castells, 1996; Donnan and Wilson, 1999). There is increasing permeability of national borders that facilitates economic transactions, technology transfer, and capital flows. The establishment of ‘borderless trade corridors’ in many parts of the world is symptomatic of the dynamics of the global economy. These dynamics have also generated a major debate among scholars regarding the relationship between the state and the private sector. Those who adhere to a neo-classical perspective usually anticipate a rather reduced role played by the nation state in favour of supranational organizations in the near future. According to neo-classical thinkers, the growth of producer services and the increase of transnational business networks may result in the reduced role of the nation state in the regulation of key sectors in their economies and the corresponding ascendance of other institutions, for example, global markets, global cities, and corporate headquarters (cf. Sassen, 1991). This point of view is not shared by prominent theorists, such as Manuel Castells, when examining the role of technological innovations for societal change in both capitalist and informational economies. Nations, as much as firms, are agents of economic growth. Reformist scholars have pointed to the intensification of international exchanges at political, economic and cultural levels that are organized and controlled by national governments (Scholte, 2000). Castells (1996: 7–8) shows that the state can either suffocate or accelerate processes of technological modernization and, by doing so, can change the destiny of a society for generations to come. Based on a historical account of Chinese society, Castells contends that the state can be ‘a leading force of technological innovation; on the other hand, because of this, when the state reverses its interest in technological development, or becomes unable to perform it under new conditions, a statist model of innovation leads to stagnation, because of the sterilization of society’s autonomous innovative energy to create and apply technology’ (1996: 10). The ‘New Economy’ has basically been facilitated by states who have engaged in deregulating markets and privatizing public enterprises, particularly in strategic, profitable sectors such as energy, telecommunications, media, and finance (Castells, 1996: 89). There are many examples of states being the facilitator of technological innovations. In Japan, India, the United States and the European Union, the state,

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more than the private sector, has put a great deal of effort into strategic planning, development, and research of their technology and informational industries. Under state funding and guidance, and linked to its military-industrial sector, technological programmes, in particular in the advanced information technologies, have been set up in order to keep up with international competition. At the same time, technological discoveries were stimulated by the emergence of ‘milieux of innovation’ which were supported by the industry as much as by the state. The synergy that is generated by locational clustering is illustrated by industrial districts in Europe (North Italy, Baden-Württemberg), the United States (Silicon Valley), and India (the Bangalore area). Technological innovation does not come about in isolation, but as a reflection of a given body of knowledge, an environment conducive to innovation and problem solving, a network of producers who use their findings cumulatively, and a supportive cultural style of doing business. Inter-firm networks are embedded in rules, norms and conventions established by a multitude of institutions (like trade unions, religious affiliations, ethnic ties, kinship systems, and other informal community-based institutions) of which the state is one of the most powerful. As Castells comments: ‘It is indeed by this interface between macro-research programs and large markets developed by the state, on the one hand, and decentralized innovation stimulated by a culture of technological creativity and role models of fast personal success, on the other hand, that new information technologies came to blossom’ (1996: 60). The question that remains to be answered is under which conditions these state-supported cultures of innovation provide new opportunities for relatively unconnected people or rather remain in the hands of established power elites. As the ways in which technological innovation and change impacts upon culture depends on ‘the pattern of relationships between state and society’ (Castells, 1996: 10), we need to explore this relationship for specific countries. For this purpose, we will turn to Asia in the next section.

Lessons from the West: producer services, the new middle classes, and the state in Asia Producer services in Asia The ‘Asian Miracle’ has basically been driven by foreign investment associated with an export-based manufacturing development. Most economies in the region depend on manufacturing, and employment in this sector is high. However, in the 1990s, the share of employment in tertiary industry of Asian countries quickly caught up with the trends in Europe and North America (O’Connor and Hutton, 1998: 139). Estimates from the World Trade Organization indicate that in 1995 over US $1.2 trillion worth of services were traded worldwide, $496 million of which were in the Western hemisphere and $925 million in the Asia Pacific region (Yadong Luo, 2001: 12). Moreover, investments in the service sectors soared in the 1990s. Fifty per cent of global investment stock was in services in the early 1990s, with service industries accounting for over 60 per cent of annual foreign direct investment (FDI) inflows in many Asian economies (Yadong Luo, 2001: 15). The significance of FDI in Asia’s

Producer services, social mobility and the state in Asia 13 service sector is illustrated by the location of regional offices of corporations in the region. This development was boosted by the refinement and integration of the telecommunications and telephone technology, matched by an increased mobility of investment funds. Large capital markets emerged in Asia located in a number of large cities (e.g. Tokyo, Hong Kong, and Singapore) and linked by a network of flows of investments, technology, information, and knowledge (O’Connor and Hutton, 1998: 140–1). Service industries, and in particular producer services, play a substantial role in the transfer of technology, trade, and business practices between Western and Asian economies and within Asia. For the manufacturing-driven economies of most Asian countries, it is of great significance that service industries are among the most important customers of and suppliers for manufacturing. They buy many of the manufacturing sector’s most technologically advanced products and provide important inputs for manufacturers, offering them opportunities for cost-reduction. Services substitute, or supplement, the functions of industrial firms, and contribute to the companies’ productivity, growth, flexibility, and output quality. The major contribution of foreign service companies in Asian countries, however, must be sought in the enhancement of the skill levels of employees and average income (cf. Morshidi Sirat, 1998). As a survey conducted under the auspices of the United Nations has shown, foreign service affiliates are relatively high-skill operations. The average compensation per employee in service affiliates in host countries reaches almost 70 per cent of that of their parent firms while the corresponding ratio for manufacturing affiliates amounts to 30 per cent. As a result, the compensation level in service affiliates in host countries is 80 per cent higher than it is in manufacturing affiliates. In addition, compensation in service affiliates in developing countries is almost the same as in developed countries, while the comparable figure for manufacturing affiliates is 43 per cent (UNCTC, 1989: 16). In addition, the high skill level in foreign service affiliates points to a major difference with manufacturing: the latter seem to be more able to take advantage of low labour costs in developing countries than do service firms (UNCTC, 1989: 17). Moreover, service operations abroad require a labour force no less skilled than in home countries. It is as yet unclear to what extent the obvious growth in services, and producer services in particular, in Asian economies contribute to the rise of new professions and offer avenues for social mobility for well-educated but relatively unconnected people. There are indications that even in a service economy such as Singapore, the rise and growth of the middle class is largely related to employment in foreign service corporations, not in the development of an independent domestic category of service entrepreneurs (Dahles, 2002). While it may be true that the presence of foreign service companies generates prosperity for the host country at large, it is also true that without the development of a domestic entrepreneurial class, this prosperity is built on shaky grounds. In a global economy, transnational companies easily relocate to new areas either to benefit from low-cost labour or attractive business conditions (Dahles, 2002).

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The new middle classes The new middle classes in Asia, like their Western counterparts – are regarded as the engine of the New Economy. They are the joint venture partners, the (co-)investors, the financiers and facilitators that Western companies need to make their investments bear fruit (Robison and Goodman 1996a: 1). The middle classes in Asia – or the New Rich, as Robison and Goodman term them (1996a) – have their common basis of social power in money, credentials, and expertise rather than patronage or positions in the state apparatus or feudal hierarchy. However, these middle classes do not constitute a homogeneous category. The concept of the middle class is far from clear and problems of definition that have led to lengthy debates among scholars in Western contexts are repeated in the Asian context (cf. Robison and Goodman, 1996a: 10). Distinctions within the concept of the new middle classes are manifold depending on the criteria applied. Distinctions are made between their sources of power and wealth, the economic sector and the location (urban or regional/local) within which they operate. The most important distinction is that between the bourgeoisie and the professional middle class, i.e. between owners of property (capital, real estate) and possessors of qualifications, managerial and technical skills. They are both new allies and new enemies for old power-holders (Robison and Goodman, 1996a: 7). Middle class economic success may result in the revival of old power holders. The members of old-established elites throughout the region base their power in landholdings and businesses, titles, family reputations and political dynasties (Pinches, 1999a: 31). Historically, the colonial bureaucracy provided the vehicle through which indigenous nobilities continued to exercise power. Additionally, colonial rule generated a substantially new bureaucratic middle class whose prestige rested principally on occupation rather than birthright in countries such as India, Indonesia, Malaya, and the Philippines. One may theorize that the indigenous bourgeoisie nowadays operate the FIRE sector of the producer services as their businesses require a considerable amount of economic capital input and connectedness to traditional and political power elites. Vice versa, the new middle classes in terms of new professions are more likely to operate in the advanced producer services, which require the input of cultural and symbolic capital (knowledge, expertise, advice, and judgement) and only little money investment. Moreover, the bourgeoisie may be strongly represented among the larger, urban corporate business groups, while the new middle class may thrive in regional or local business centres catering to the branch offices of the urban corporate firms. The ‘elite continuity’ hypothesis that argues that established social groups operating in long-standing networks and owning capital are quick to respond to new opportunities, and consolidate their position by combining both their traditional and newly arising sources of power, may apply to entrepreneurs in the FIRE sector based in metropolitan areas. These entrepreneurs relying on ‘old’ money and traditional power relations may emerge as increasingly wealthy innovators, pushing smaller competitors into marginality and contributing to the polarization of economy and society. The ‘new opportunities, new people’ hypothesis may apply to the ‘new’ entrepreneurs in the APS sector. Prospects for

Producer services, social mobility and the state in Asia 15 upward social mobility of these relatively unconnected people are closely related to the enhanced significance of formal education, knowledge, expertise, trust, and discernment in the informational society. Declining emphasis on traditional power structures and a more open market favours these new, often small-scale and flexible, entrepreneurs with an international orientation, knowledge, and taste to create their own networks and gain access to new markets. They constitute the ‘new professional classes’ in provincial societies, while large-scale corporate entrepreneurs based in established elites maintain their position in metropolitan areas. Besides economic revitalization, high hopes are invested in the new middle classes’ impact on political democratization. A strong, dynamic entrepreneurial middle class is expected to act in a socially responsible manner and to lend political support to the concepts of human rights and freedom, liberal-democratic social and governmental structures, and government by the rule of law. The new owner-entrepreneurs and manager-entrepreneurs form a group of people who have learnt to develop initiative, to organize, and find solutions to problems. These new aptitudes are not only applied in the economic and technical sphere, but are sooner or later also extended to political and social spheres and create favourable conditions for shared decision making in the socio-political sphere. These abilities strengthen the foundations for political democracy in society. The political revolts in the Philippines (1986), South Korea (1987), China (1989), Thailand (1992), and recently in Indonesia have been interpreted as manifestations of (frustrated) middle-class ambitions (Robison and Goodman, 1996a: 7–8). There seems to be plenty of evidence that the rise of the new middle classes in Asia is involving important challenges to hierarchy and elitism. The traditional notions of honour, dignity, and status, and presumptions of virtue and self-righteousness are confronted with a culture of the new intellectuals and educated, a culture characterized by law, merit, the rights of citizenship, and private property (Robison and Goodman, 1996a: 2). These reflections raise the question of what role Asian states play with regard to both the facilitation of the producer services sector and the new professions rising from its ranks. The role of the state in economic development In contrast to the Anglo-American model of states which play a facilitating role only in the economy, most Asian states are directly involved in economic decisions taken by private entrepreneurs in their country. In Asia, states do not shy away from fargoing interventions like forced savings, tax policies to attract (foreign) investments, restricting capital outflow, and repressing interest rates. The level of state intervention shaping financial market activity in Japan and Korea, providing logistics infrastructure in Hong Kong and Singapore, and targeting service-rich sophisticated manufacturing in a number of other places (such as Malaysia and Taiwan) strongly influences the pattern of service sector location and growth in Asia (O’Connor and Hutton, 1998). The service trade, in particular, is protected by states in the region and service trade is more regulated than commodity trade (Yamazawa, 1998: 176, 179).

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While neo-classical economists argue that high speed economic growth such as in the four Asian Tiger economies – Singapore, Hong Kong, South Korea, and Taiwan – came about only after the state dismantled protective industries policies, development economists point out that it is the capitalist developmental state which is at the basis of the region’s economic success (Chui and Lui, 1998). The developmental state does not fully embrace the liberal market model, but it does not attempt to replace market mechanism and private decision making either. The basic characteristic of the capitalist developmental state is close state–business interdependence. Under this model, the state strives to influence private business decisions by ‘persuasion, coercion, and by manipulating the parameters of private decision making’ (Chui and Lui, 1998: 145). As economic growth in Asia is largely state and corporate-based, it is ‘not easily attributable to the ideal personage of neo-classical economics: the free-wheeling, individual capitalist entrepreneur’ (Pinches, 1999a: 14). Private entrepreneurs are often in a dependent position, and the role of the state in promoting local business has been decisive, whether through the formation of state corporations or monopolies, favoured access to loans, contacts and licenses, or other such practices (Pinches, 1999a: 15). Economic development being the foremost priority of state action, the market is closely governed by state managers who establish strategic industrial policy in a ‘market-conforming manner’ (Chui and Lui, 1998: 145). The members of the state bureaucracy are recruited less through patronage and more through meritocratic criteria, which generates a sense of unity and common identity among the bureaucratic elite. In terms of social mobility, the Asian developmental state may benefit different categories of people. This meritocratic principle may offer career opportunities to people with an excellent record of achievement (in education and work). However, this bureaucratic elite may also become self-perpetuating, barring upward social mobility for non-connected people. The role of the developmental state is especially strong in a number of Asian economies (such as Japan, Korea, Singapore, and Malaysia), while it is much less so in others (such as Hong Kong, Taiwan, Thailand, and the Philippines). In Japan, the Ministry of International Trade and Industry (MITI) played a major role in economic development starting in the late 1940s. Run by highly trained ‘pragmatic bureaucrats’ this ministry possessed powerful policy instruments to intervene in the market and push private companies into the state-projected directions (Castells, 1996; Chui and Liu, 1998). A comparable role was played by the South Korean government, which also acted as banker and entrepreneur in order to make the South Korean economy competitive in a worldwide market. In both Japan and South Korea, state intervention has benefited a selected group of large conglomerates. The success of the other Asian economies came about under less intensive state intervention, but nevertheless under state intervention. In Singapore the omnipresent state acts as the rather successful entrepreneur and owner of the largest local firms. Moreover the state facilitates economic activities by fiscal measures, providing infrastructural facilities and labour market policies. In Hong Kong, before 1997, the state largely refrained from intervening in the allocation and management of resources, and public ownership of productive enterprises were almost negligible. However, state–market relations have been under rapid change ever since (cf. Chu,

Producer services, social mobility and the state in Asia 17 Chapter 2 in this volume). The export-oriented industrial structure of Hong Kong originated in small-scale family-based firms. In Taiwan, the state–market relationship is a rather complex one. The Taiwanese state was a major investor in production, but at the same time, the economy is largely thriving on small and mediumsized export enterprises that are privately owned (Chui and Lui, 1998). The weak point in these small-scale Chinese business networks is their inability to undertake major strategic transformations, requiring, for instance, research and development investment, knowledge of world markets, large-scale technological modernization, or off-shoring of production. In Taiwan, Hong Kong, and mainland China the state has provided this critical strategic backing for Chinese networks to prosper beyond their profitable, but limited, local horizon (Castells, 1996: 189). While Thailand and Indonesia illustrate the movement towards greater independence for business (in particular the deregulation policy starting in the 1980s under the Suharto regime), Malaysia seems to have taken the opposite direction (McVey, 1992: 25). Through its New Economic Policy, the Malaysian government imposed increasing political controls on property and pushed its Chinese capitalists into dependency from the Malay population. While the ‘new rich’ among the latter owe their newly acquired wealth to ‘money politics’, they are the first generation of educated salaried managers and professionals in their country. As Pinches points out, ‘they represent a significant departure from the old indigenous middle class, who were based in the state bureaucracy. Their emergence in the corporate sector reflects not only the structural reorganisation of Malaysia’s … economy, but also a cultural shift from a civil service ethos to one that is business-oriented’ (1999a: 25). For indigenous elites all over Asia, careers in business become more attractive than careers in the bureaucracy, not only because businesses pay better salaries, but also because they stimulate better education and offer access to modern lifestyles (Pinches, 1999a: 26).

About this book Following this theoretically-oriented introduction to the theme of this book, papers which explicitly address the two contrasting key hypotheses form the focus of this volume. These papers are presented in the first part under the heading ‘The new economy: boosting new people or bolstering old ties?’ This part opens with the chapter by Yin-wah Chu which testifies to the continued importance of being well connected to the power elite for those who wish to venture into new business areas. Chu, therefore, subscribes to the ‘elite continuity’ hypothesis in her discussion of the position of the IT sector in the restructuring of the Hong Kong economy after 1997. As Chu points out, linkages between ‘old family networks’ and the state apparatus are of crucial importance for access to capital and knowledge in post-1997 Hong Kong and, therefore, questions the ‘new opportunities, new people’ hypothesis. In terms of the distinction made above between FIRE and APS enterprises, it is remarkable that the Hong Kong real estate sector was the first to see the potentials of the IT sector and invested in the development of IT firms. Chu shows that the state became of great importance to the business sector in general, and the IT sector in

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particular. This importance increased as the system changed from non-interventionist to interventionist; first as facilitator for the financial sector, and second as a broker of capital and knowledge itself. In contrast, Dinesh Awasthi adheres to the ‘new opportunities, new people’ hypothesis. Addressing the impact of the deregulation of the early 1990s of the non-banking financial services (NBFSs) that cater for small entrepreneurs and attract overseas Indian capital, Awasthi shows that the deregulatory measures by the state (that did not apply to regular banking) facilitated the growth of the NBFSs and hence the emergence of a new middle-class section. However, regular banking and large finance houses remained in the hands of the ‘old’ elite. In Salim Lakha’s and Michael Pinches’ analyses both hypotheses appear to apply in varying combinations to business life in the transforming economies of India and the Philippines respectively. Lakha analyses the IT software industry in India which provides new opportunities for established companies as well as for new entrepreneurs. The success of the IT industry is partly due to the support of the state that took deregulating measures to promote this industry. Regarding the entrepreneurs in this industry, Lakha concludes that both hypotheses apply: entry into the IT industry is not restrictive in terms of size of enterprise or amount of investment, but favours the middle class due to educational requirements and therefore provides intra-class mobility. As for the Philippines, Michael Pinches shows that since the 1990s deregulation generated a consumer boom and the emergence of a producer services sector. Within this, old elite families (who run private banking, property development, insurance, and transport sectors) dominate the finance, insurance, and real estate firms. At the same time, small entrepreneurs are emerging through producer services involvement. They experience upward social mobility through involvement in the more specialized advanced business services. By establishing a meritocracy, which represents the new Philippines, they become a threat to the old elite. In terms of the two central hypotheses, Pinches concludes that both apply, but that the ‘new opportunities, new people’ hypothesis is gaining ground. Finally, Edsel Sajor focuses on the ways in which the Philippine State consolidates established elites by favouritism in real estate transactions. Whether the growing strength of countermovements indicates the rise of new groups remains to be seen. Sajor presents a case study of the Philippines, describing the way in which the real estate boom in Metro Cebu (one of the Philippines’ major urban agglomerations) was brought about by the close relationship between the developers and the State that acted as facilitator of contracts fuelled by the ‘boosterism’ of local governments. Sajor focuses on the consequences of the close state/developers relationship for the provincial civil society and the countermovements as organized by non-governmental organizations. Extreme examples of state intervention in the moulding of the middle class through government-led economic restructuring are Singapore and Malaysia, two countries historically linked by manifold economic ties and business connections. The ruling parties in both countries have placed economic growth and rising living standards at the centre of their claims to legitimacy. For the time being, Singapore has been most successful in reaching the set goals and its government has proclaimed that the city-state constitutes a true middle-class society. As there is no domestic

Producer services, social mobility and the state in Asia 19 aristocracy struggling to consolidate their vested interests and as the government claims that Singapore is an open economy, the ‘new opportunities, new people’ hypothesis seems to apply to the city-state par excellence. In Malaysia, after the ethnic riots in the late 1960s fuelled by Chinese dominance of the economy, the Malaydominated government ventured into engineering a Malay middle class through their bumiputera policies. In their efforts to secure inter-ethnic parity, the government designated positions in universities and private companies to ethnic Malays, and nationalized foreign companies that were handed over to Malay management. Therefore, one may hypothesize, that in Malaysia – much like in Singapore – new opportunities emerged for new people under state orchestration. The contributions under the heading ‘Engineering a new middle class: Singapore and Malaysia’, however, throw a different light on social mobility in both Singapore and Malaysian societies. Sikko Visscher addresses the role of the Chinese elite (in particular the commercial elite acting through the Chinese Chamber of Commerce) in the political process in Singapore, in particular during the shift from the colonial system via political populism to the authoritarian state of today. Acting as brokers of Chinese culture they lost their role as the populist backing disappeared when the authoritarian state left no room for these ethnic brokers, banking upon their ethnic following. Selina Chan focuses on Chinese family businesses in the pawn-broking business, a closed system based on established networks. Addressing the ‘new opportunities, new people’ hypothesis within the context of the changing role of the state in Singapore which facilitates access for non-connected individuals to economic opportunities, she concludes that pawnshops are benefiting from new technologies and education, but remain basically in the hands of the old Chinese family networks. The state does not interfere with these networks. Lee Kam Hing relates how diaspora Chinese in Singapore ventured successfully into banking and insurance within one generation, strategically using capital, knowledge and networks. Unconnected to the British colonial power, they emerged as a new elite benefiting from changing power relations under the colonial state. Finally, Loh Wei Leng describes the development of Malaysian shipping companies since colonial times. Benefiting from Chinese family ties across the region and close co-operation with the colonial state, these companies prospered until the 1950s/60s. Thereafter, a newly established National Shipping Company flourished under Malaysian State protection, displacing existing companies. The author provides an example of how an old elite loses out due to the severing of what were once close ties with the state and lack of competitiveness in the world market. The third part, entitled ‘Producer services in transitional economies’, brings together two chapters that deal with the ‘new opportunities’ that emerge in transitional economies: China and Russia. The authors, Goodman and Gritsai respectively, raise doubts about the general validity of the ‘new opportunities, new people’ hypothesis. The transition from a state-led to a liberal market economy seems to benefit established power elites, at least for the time being. Therefore, an elite continuity hypothesis seems to be more appropriate in both transitional economies as presented here. David Goodman discusses the effects of liberalization of the Chinese economy in the state industrial sector (coal mining) in Shanxi. Liberalization led to

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the emergence of a private sector: coal industry support activities and new technology industries that were originally perceived as small scale and as employment opportunities for the less-educated, unconnected, ‘excluded’ people. In the 1990s these supporting industries expanded due to co-operation with large state companies, employing well-educated young people from well-connected families. New opportunities are seized by the offspring of ‘old’ elites as the state continues to play a dominant role in the regulation of entrepreneurship and social mobility in China. Moving to a transitional economy outside Asia, Olga Gritsai focuses on booming business services in Russia in the 1990s. As centralization is strong in Russia, the new business services are concentrated in the central business districts in the major cities. This is also where the institutions of the state apparatus are concentrated, and, like in China, the business services maintain strong links with the old party-elite networks. The more so as former apparatchiks move into the professional services sector, while former professionals are absorbed by previously state-owned large-scale finance and banking institutions. Links with old centres of power are more important in Russia than capital, knowledge, and entrepreneurship. In the concluding chapter – based on a review and comparison of the previous chapters – Otto van den Muijzenberg focuses on the ways in which the state in different Asian countries either consolidates old elites or stimulates the rise of new groups. He reconsiders the validity of the guiding hypotheses in the light of the arguments brought to the fore in the previous chapters and offers more sophisticated hypotheses regarding the relationship of producer services and social mobility in Asia.

Part I

The new economy Boosting new people or bolstering old ties?

2

Networking for domination The interconnectivity among business and government actors in the information technology industry of Hong Kong Yin-wah Chu

Hong Kong suffered from drastic economic rather than political transformations in the few years after the 1997 transition, which at once undermined the good intentions of the Chinese and British authorities, contradicted the popular expectation (or fear) before 1997, and threw into doubt the Special Administrative Region government’s ability to govern. It was not political interference from Beijing, but the Asian financial crisis, real estate market crash, and the ensuing economic recession that had become the foremost concerns of the Hong Kong people. As the territory recovered gradually from the deep recession in late 1999, its economy was no longer driven by the bullish real estate and financial services sector. Many new businesses tapping the information and communication technologies emerged in the year 2000 and a lot of people placed their hopes in the ‘new economy’. With hindsight, it was clear that much of the boom was driven by a speculative spree. Some of the newly emerged IT businesses had aimed at a non-existent market. Even the projects that had a chance of success were affected adversely by the burst of the global dot-com bubble. However, as the dust begins to settle, one may still conclude that the territory is heading towards the ‘new economy’. In this chapter, some important phenomena in Hong Kong’s recent shift towards the information-based new economy will be explored. Of particular concern are the agents that have contributed to the emergence of the new economy. The question will be raised whether new knowledge brokers have emerged as the driving force or whether the incumbent economic interests continued to play leading roles in the new economy. In this vein, this chapter explores to what extent both the ‘elite continuity’ thesis and the ‘new economy, new people’ thesis offer an interpretive framework for recent developments in the new economy of Hong Kong. Do the established economic actors capitalize on new opportunities by strategically employing both their traditional and newly arising sources of power, while emerging as innovators, pushing smaller competitors into marginality and contributing to the polarization of economy and society? How does the new economy affect the position of new entrepreneurs with knowledge of new technologies and access to new markets? To answer these questions, this chapter will focus on the state and the real estate developers, examining the government’s unprecedented steps to restructure the economy and the real estate developers’ effort to ally with the global IT firms. In addition to charting Hong Kong’s economic, political, and social changes during the last few

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years, data generated by interviews with managers in the producer services sector and contents analysis of newspapers and magazines will be used to examine some central hypotheses concerning the state, business networks, and the globalization of the information economy as well as their implications for economic opportunity and social mobility.

Globalization and information technology Peter F. Drucker (1993), the world-renowned management expert, told us that we have already entered the age of the ‘post-capitalist’ economy. This type of economy is still a market economy, but it is no longer driven by land, labour, and capital – factors of production that have underwritten the rise of the capitalist economy. Knowledge has taken their place and generated the bulk of economic productivity and wealth during the last forty years. Hence, the economic centre is dominated by industries that produce and distribute information and knowledge. Examples include pharmaceuticals, telecommunications, information-processing tools (e.g. computers and Internet), as well as producers of knowledge and information (e.g. movies, television shows, and education). It is the age of the ‘knowledge economy’. Although Manuel Castells has come from a much more radical academic tradition, he has concurred with Peter F. Drucker. In his opinion, ours is an informational economy where ‘productivity and competitiveness are increasingly based on the generation of new knowledge and on the access to, and processing of, appropriate information’ (Castells and Hall, 1994). Castells has adopted a very broad definition of information technology, which includes knowledge that pertains to computing, telecommunication, medicine, and the like. Observers of the information economy have argued vigorously that its emergence is intertwined with globalization and characterized by the proliferation of business networks (Castells, 2000; Ernst, 1994; Saxenian, 1994; Harvey, 1990). In the first place, not only has information technology thrived by capturing the ever-expanding global market, it has also made possible a genuine process of globalization. By a global economy, Castells refers to one ‘whose core activities work as a unit in real time on a planetary scale’, be it for capital, management, labour, technology, information or markets (1999: 4). Through innovations in telecommunications, information systems, micro electronic-based manufacturing and processing, information-based air transportation, container cargo transport, high-speed trains, and international business services, information technology has provided the infrastructure to integrate global production and hence make possible the truly global economy. In the second place, given the features of real-time global production, rapid technological change, and small-batch production to satisfy the whims of ‘personal taste’, the information economy has necessitated a flexible and versatile organizational infrastructure.1 Network, defined as ‘a set of interconnected nodes [that] may have a hierarchy, [but] no centre’, has emerged as such an institutional form (Castells, 1999: 6). On the one hand, economic production has shifted progressively away from vertical bureaucracies to global business networks that encompass firms with different sizes, divergent cultures, and disparate institutional structures. The

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latter might include corporations that rely on bureaucracy and formal contracts, Japanese conglomerates that make use of lifetime employment, Chinese firms shot through with patriarchalism, informal sector employees, and the like (see Ong, 1991; Harvey, 1990; Deyo, 1989).2 On the other hand, successful large corporations have also been transformed increasingly into horizontal corporations, which are a ‘strategically planned network of self-programmed, self-directed units based on decentralization, participation, and co-ordination’ (Castells, 2000: 166; see also Whittle, 1996; Coriat, 1994; Aoki, 1988). Given the nature of competition, aspiring firms can hope to surpass the barriers to entry and established corporations to survive only through the sharing of knowledge and risk. Networks perform the role of gatekeepers such that ‘[I]nside the networks, new possibilities are relentlessly created [and] outside the networks, survival is increasingly difficult’ (Castells, 2000: 187). Whether ‘globalization’ and ‘network’ are concepts that best characterize the information economy is an issue that will continue to attract critical appraisal. The present study will side-step (or bracket) the debate and, instead, explore the conditions that determine the sprawl of the networks on a global scale. Observers of the information economy have identified a number of factors that determine whether a region will get connected to the global networks. They include technological capacity, market, and production costs (Castells, 2000: 105). While agreeing that these are some of the most important factors, the author contends that other factors are equally important. They include the quality of political, legal, and financial institutions necessary to protect property rights and facilitate investments. They comprise the geopolitical factors that may lead to the imposition of political barriers to the exchange of goods and technology. They involve ‘culture’, which influences the ability to generate and the propensity to consume the information and knowledge products of the information economy. Finally, they also consist of the agents that broker such ties. In so delineating the list of factors, the author argues implicitly for a positive role for the state. Indeed, some advocates of the theory of globalization have maintained that the global economy recognizes no national border. On the one hand, the advancement of information technology has rendered the global economic exchange so complex and rapid that it defies state surveillance (Harvey, 1990). The Asian financial crisis that broke out in October 1997, for instance, was an indication of the diminishing influence of the Asian developmental states over their national and global economies (Castells, 2000: 219). On the other hand, given the oneness of the global economy, proponents of globalization also suggest that corporations have increasingly devised their strategies from a global rather than national perspective. However, other observers have contested the most radical view of globalization (Hirst and Thompson, 1996). Corporate nationality has continued to exert farreaching impacts on corporate behaviour. At the same time, given the profound influences of economic performance on political strength, the national states have found it necessary to continue to exert influence over the structure and dynamics of the new economy (Castells, 2000: 97).3 Under most circumstances, the national state can exert much influence over the strength of its financial and legal institutions,

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its politico-military relations with other countries, and even its cultural affinity and, therefore, the probability of the country’s connection to the global networks. In addition to highlighting the political, legal, economic, technological, and cultural factors that determine the sprawl of the networks on a global scale, it is also necessary to differentiate the types of network. For the importance of a factor depends on the type of network on hand. Hence, while low production cost is critical for a region’s insertion into the network of suppliers, it has less impact on its connection to networks of technology co-operation. Conversely, while the strength in research is crucial for a region’s incorporation into the technology co-operation network, it means very little for the region’s insertion into the customer networks. Dieter Ernst (1994) has identified five types of networks. They include (a) supplier networks; (b) producer networks; (c) customer networks; (d) standard coalitions; and (e) technology co-operation networks. In a slightly different vein, Harvey (1990) has highlighted the financial network in the global economy. Table 2.1 attempts to combine the determinants of connectivity as identified by Castells (2000) and the types of networks highlighted by Ernst (1994) and Harvey (1990). This table will serve as a convenient starting point to think about the spread of networks and the shifting global division of labour. This is said without implying that the factors so identified are exhaustive or logically impeccable. Thus presented, the conceptual framework has left unspecified a number of factors that determine the distribution of mobility opportunity in the global information economy. To begin with, ‘information technology’ has been defined very broadly and one has reasons to believe that different industrial sectors may emphasize different conditions of competitiveness. Furthermore, in describing the spread of global business, observers have found small firms, informal workers, and conglomerates to get connected to the same network (Harvey, 1990; Deyo, 1989). A study of Silicon Valley also pointed to the dynamism generated by flexible specialization and co-operative networks among the firms (Saxenian, 1994). Finally, the local economic structure and the social ties that disseminate the economic opportunities have also been left unspecified in the above framework. Taking together these three considerations, the author would caution against any premature conclusions

Table 2.1 Global networks and determinants of connectivity Global networks

Connectivity and its considerations

Capital

1. Finance

Market

2. Customer

Production

3. Supplier 4. Producer 5. Standard coalition 6. Technology co-operation

– Legal system: property rights – Financial institutions – Costs: tax rates – Market size – Culture – Costs: land, labour, capital, taxation – Human resources: education, R&D – Legal system: intellectual property rights – Geopolitical contexts and politico-military relations

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on whether the new economy presents new opportunities for novice businesses or that it tends to perpetuate the pattern of elite domination. Detailed studies, such as those undertaken in this volume, are necessary for arriving at such conclusions.

Hong Kong: changing economy, changing strategies Information technology, despite major breakthroughs and a growing impact on the global economy, has played a marginal role in 1990s Hong Kong. In 1996, for example, the production of electronic components, an indicator used by some researchers as a proxy of an economy’s entrenchment in high technology, was dismal. By contrast, ‘financing, insurance, real estate and business services’ generated 23.8 per cent of Hong Kong’s gross domestic product in 1996 (HKCSD, 2000).4 In the same year, property-related incomes contributed to 35 per cent of government revenue. Among the 33 corporations that constituted the Hang Seng Index in 1996, four were in banking and 12 were either property developers or conglomerates that specialized in real estate development. There was one telecommunications company and, among the conglomerates, only three had ventured into telecommunications (http: //www.hsi.com.hk). Real estate and financial services were the pillars of the Hong Kong economy. Today, Hong Kong is still a far cry from the information economy, but decisive moves have been made in that direction. As an indicator, the number of IT employees has increased tremendously from 38,069 in 1996 to 44,847 in 1998 and 61,356 in the year 2000 (HKVTC, 1998, 2000). The number of independent software vendors has also increased steadily from 500 in 1994 to 663 in 1997 and 725 in 1999 (HKPC, 2000). The venture board of the Hong Kong Stock Exchange was established in November 1999 and, by May 2001, 69 corporations were listed within the market (http://www.hkgem.com). The burst of the global dot-com bubble in the year 2000 has slowed down the momentum of transformation. However, changes that have taken place in the few years between 1998 and 2000 in Hong Kong are significant. They have left long-term impacts and generated important evidence for exploring the spread of the information economy in the territory. An important phenomenon in the recent surge of the information economy in Hong Kong is the significant role played by segments of the finance capital and, in particular, the real estate developers. To be sure, some of these real estate developers ventured into the ‘high-tech’ world even before 1997. Cheung Kong Holdings, for instance, has played a major role in the mobile phone sector of Hong Kong and England through its associate company, Hutchinson Whampoa. SHK Properties and New World Development have been similarly active in the mobile phone business. After March 1999, however, they have deepened their involvement. For example, in August 1999, SHK Properties announced its plan to join hands with the Hong Kong Industrial Technology Centre (HKITC) to launch an incubation centre for starters in software manufacturing. In November 1999, Sino Land recruited the former director of the HKITC to head its newly founded new technology division. Finally, New World Development and other real estate developers announced in July

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their intention to submit to the government a HK$20–25 billion-worth proposal on a Chinese pharmaceutical port (HKEJ, 7/8/1999).5 Apart from these attempts, which still show traces of property development, these corporations have also got involved in various forms of e-business and software development. The four largest real estate developers, Cheung Kong, SHK Properties, Henderson Land, and New World Development have ventured into web-based entertainment and information services. These newly founded businesses, which are ‘tom.com’, ‘Sunevision’, ‘Henderson Cyber’, and ‘New World Cyberbase’, respectively, have either been listed in the venture board or in the main board of the stock exchange. Indeed, among the 69 companies listed in the venture board, 14 are linked to firms listed in the main board.6 In the language of the economic analysts, the informational economy belongs to the ‘new’ economy, whereas banking, real estate, and other sectors of the finance capital belong to the ‘old’ economy proper. Regardless of the theoretical value of such a conceptual distinction, the empirical situation in Hong Kong is such that the distinction falls apart insofar as the recent development is concerned. The line between the new and the old economies is far from clear-cut. A conjunction of factors has prompted and allowed segments of the finance capital to change their strategies. They include (a) the burst of the real estate bubble in the aftermath of the Asian financial crisis; (b) perceived changes in government policy and the ensuing ‘ecological pressure’; and (c) global ICT boom and attempts of global firms to search for opportunities in East Asia. In turn, the dominant role played by segments of the finance capital in the spur of the technology-based industries is due in part to their timely mobilization of network capital, success in linking with the government and transnational corporations, and hence connections to the global technology and production networks.

The Asian financial crisis and burst of the real estate bubble The Sino-British Agreement had limited the sale of crown land to no more than 50 hectares per year before 1997. The provision was meant to ensure an adequate reserve of land for the government of the Special Administrative Region. This manmade scarcity, however, resulted in the skyrocketing of land and real estate prices. The same apartment that sold for one million Hong Kong dollars in 1990 would cost six million by 1997.7 By the time of the handover, it was evident that private housing was beyond the reach of even the middle class and the high land price had eaten into the profit of most businesses. To stabilize the real estate prices was imperative.8 In his first policy address, delivered in early October 1997, Mr Tung Chee-hua pledged to provide 85,000 units of public and private housing each year. The announcement did not have an immediate impact on the real estate prices. But when the Asian financial crisis hit Hong Kong on October 17, the stock market crash tied down much of the hot money that had fuelled the real estate boom and many people, speculators and investors alike, had to sell their properties in order to rid themselves of debts. Gradually, it became clear that the housing market was not as tight as it had seemed

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and the property prices began to slide. Depending on the type of property in question, prices dropped from 30 per cent to 55 per cent between 1997 and 1999 (http: //www.info.gov.hk/rvd/). The crash of the property market has forced real estate developers to diversify their investments.9 Hence, Cheung Kong Holdings expanded its supermarket chains in 1998. New World Development also ventured into mass transportation, taking over the China Motor Bus and the Yaumatei Ferry in 1998 and 1999, respectively. Even though ‘high technology’ has always been considered a risky and unattractive area of investment, the burst of the real estate bubble and the lack of investment opportunity have forced investors to review their priorities. Some developers have also been prompted by the extravagant claims concerning the business potential of the new economy. Nonetheless, as the following will show, the change of government policy has also generated incentives and engendered ‘ecological pressure’ that have led them to change their strategies.

Policy change and strategic reorientation10 The Hong Kong government has always prided itself for having abstained from intervening into the economy.11 The claim can indeed be sustained before the 1990s when it confined its role to ‘constituting the market’ (Block, 1997). In addition to maintaining law and order, the government has striven to revitalize the market institutions by updating the Banking Ordinance, reorganizing the Stock Exchange, and founding the Independent Commission against Corruption (Chu, 1998). Venturing deeper into the market, the government has subsidized public and private consumption. Examples include efforts to stabilize the price of basic foodstuffs and provide affordable homes for close to 50 per cent of its population (Schiffer, 1983; Castells, 1986). Important as these measures are, they have nonetheless fallen short of direct participation in production. As the government has declared, it has not made economic plans, set up state enterprises, or provided incentives for specific industries. Hence, it is to be distinguished from the developmental states of East Asia. Subtle changes occurred in the 1990s. An important step was the reorganization of the Industry Department, which became more proactive by making factory visits to help upgrade the technological level and in approaching selected multinational corporations to present Hong Kong as a prospective investment site. But the government remained cautious when it came to the provision of direct financial support. It brushed aside the recommendation of an international consultant firm to construct a Science Park and, after further consultation and tremendous delay, founded the much scaled-down Hong Kong Industrial Technology Centre in its place. Although the government agreed to provide indirect support through setting up the Industrial Support Fund and the Applied Research Fund to facilitate research with potential for industrial application, the budget totalled no more than HK$500 million,12 which signified the government’s indifference to the pursuit of industrial deepening. The situation changed tremendously after 1997. The policy addresses delivered by the Chief Executive, Mr Tung Chee-hua, and the annual budgets devised by the

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Financial Secretary, Mr Donald Tsang, lay out the visions, policies, and supportive measures.13 Government intervention has taken three major directions. In addition to reforming the housing market – discussed briefly above – they also involve the financial and business services sector as well as the information economy. The government has long considered the financial and business services sector to hold the future of Hong Kong. In the mid-1990s, some legislators and columnists called for greater governmental assistance in these respects. Indeed, the 1996 budget made proposals that dovetailed with such concerns. It recommended steps to revitalize the tourism industry and the financial services sector, and at the same time, proposed to set up a Service Support Fund and a Tourism Development Fund to help achieve the goals (FS, 1996). After the handover in 1997, the government has continued to devise policies by building on the territory’s existing strengths. Significantly, it established an International Events Fund, made a loan to the Ocean Park, as well as invested in the Disneyland project, all with a view to breathing new life into the tourism industry. The government also created the position of the Commissioner for Tourism so as to strengthen the institutional framework and provide better direction and co-ordination for the industry. In a similar vein, the government called upon a Steering Committee on the Feasibility of a Financial Services Institute to study the means to strengthen the human and institutional resources for the financial services sector. Hence, beginning in the mid-1990s, the government has started to play an active role in restructuring the local economy. As the strategies adopted are in line with the perceived competitive advantage of the territory, they might be called ‘market-following’ strategies (Wade, 1990; CE, 1998; FS, 1999). With the handover in 1997, the government has become more proactive. Indeed, the growing unemployment rate has forced it to come up with strategies to tackle the economic/structural problems faced by the territory.14 The government began to experiment with ‘market-leading’ policies. In March 1998, the Chief Executive’s Commission on Innovation and Technology was appointed and Professor Tien Chang-lin, a renowned engineer and the former President of the University of California at Berkeley, was recruited to head the Commission. The Commission submitted an interim report in September 1998 and a final report in June 1999.15 Among other things, the Commission envisioned Hong Kong becoming a leading city in the development and use of information technology as well as a centre for the development of health food and pharmaceuticals based on Chinese medicine (CE’s Commission, 1998). The Chief Executive gave unreserved support to the Commission, incorporated practically all the interim report’s recommendations into his 1998 policy address, and devised measures to implement the plans. In the first place, a HK$5 billion Innovation and Technology Fund was set up to support applied research that could contribute to Hong Kong’s technology-based industries. The University Grant Council, which provides funding for all the institutes of higher education, also set aside HK$380 million for so-called ‘areas of excellence’. The first round of such funding was awarded incidentally to projects in the fields of information technology and biotechnology. In the second place, the government also adopted the Commission’s recommendations and undertook a number of institutional reforms. Hence, when the CE’s Commission was dissolved in June 1999,

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the government appointed an Advisory Committee on Innovation and Technology as a standing body to counsel its technology policy.16 It also established a Centre for Applied Research to co-ordinate research with potentials for industrial application, upgraded the Industry Department, and streamlined other existing industrial support bodies.17 To entice scientists and engineers from the mainland and overseas, the government set up a Task Force on Immigration of Talents to study feasible arrangements. Finally, the Hong Kong Stock Exchange also launched the ‘growth enterprises market’ in November 1999, to facilitate the pooling of venture capital for technology-based companies. Most radical of all was the government’s direct investment in the Cyberport project. In the March 1999 budget speech, the Financial Secretary announced that the government was to enter into a joint venture with Pacific Century Cyber Works (PCCW), an enterprise started by Richard Li, to develop the HK$13 billion worth Cyberport project.18 The Cyberport will be located at the Telegraph Bay, a site close to the University of Hong Kong. When completed, the Cyberport will provide high quality residential and office spaces for firms within the information technology industry. That the government is to invest in a commercial undertaking and enter into a joint venture with one firm is unprecedented. The government has become more cautious after finalizing the Cyberport project. Local and international enterprises have presented proposals to set up a Chinese pharmaceutical port and a silicon-chip manufacturing plant. But the government queried the quality of the Chinese pharmaceutical port proposal and was unwilling to grant all the land and tax concessions to the silicon-chip project, one that had received unreserved support from Tien Chang-lin. In October 1999, Mr Tung devoted practically the entire Policy Address to examining issues of educational reform and environmental protection. Nothing more was mentioned of the high-technology industries. Similarly, in the Budget Speech of 2000, the Financial Secretary had only set aside money for educational reform. By the year 2000, it is clear that the government has distanced itself from its most interventionist moment. This does not change the fact that the government has experimented with both ‘market-following’ and ‘market-leading’ industrial policies between 1997 and 1999 and, therefore, served as a main agent of economic restructuring. Similarly, it would be wrong to think that the government has once again adopted the pre-1990s non-interventionist stance. In the press conference that took place after delivering his Budget Speech, Mr Donald Tsang quoted the former Financial Secretary, Sir Hadden-Cave, to say that Hong Kong should follow ‘positive non-interventionism’. But according to him, the proper interpretation is not to let the market take care of itself; rather, the government has to be proactive (ATV News, 3/8/2000). The change in government policy has transformed the environment for investing in technology-based industries in at least two ways. The first and most obvious impact concerns the direct investment and, therefore, the government’s role as the spearhead in the sector. The second, and perhaps more important, impact concerns the changes in the strategic choice of the local business actors.

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It is notable that the initial response of the local business actors to the government’s market-leading policies was less than enthusiastic. After the Chief Executive had presented his second Policy Address in October 1998, editors of a number of local newspapers criticized the government for its attempt to perform a task way beyond its capability. When the Financial Secretary announced the Cyberport project, the business community responded with overwhelming disapproval and major real estate developers requested to talk face to face with the Chief Executive (SCMP, 4/12/1999, HKEJ, 3/16/1999, HKEJ, 5/11/1999).19 They claimed that the Cyberport was a real estate rather than a high-technology project and, as such, instead of engaging in secret negotiations with one firm, the government should have called for open bidding.20 After initial complaints, however, the developers started to reorient their business strategies. Their responses, as the above discussion has suggested, can be sub-divided into two phases. The first phase involved the initiation of projects that show traces of property development. Hence, one firm has launched an incubation centre, while several others proposed to construct a Chinese pharmaceutical port. Judging from the massive piece of land requested in the Chinese pharmaceutical port proposal, developers appeared to have initiated high-technology projects as the pretext for grabbing cheap land from the government. The second phase saw a deepening in the developers’ involvement in the new economy. As noted above, some have launched Internet portals, while others have tried to provide information services as well as e-business solutions. Indeed, the government’s high profile announcement of its new economic policy, its willingness to supply inexpensive land, commitment to providing research funds, and plans to set up institutes for applied research have amounted to a change in the institutional environment, which sometimes leads to a change in relative price. The new government policy has fuelled and helped ‘bring’ to the local economy the global dot-com boom and the extravagant promises made of its business potentialities. As the boom roared, real estate developers in Hong Kong started to see the information technology industry in a favourable light and regarded it as not too bad a choice for the money that they desperately needed to invest. Furthermore, given the novelty of the information technology industry in Hong Kong, there were few major players in the local market. To gain a foothold or even a dominating position in the new economy was imperative and, equally important, to do so before one’s competitors had made the move successfully. Seen in the light of the above, one may say that the government policy has interacted with changes in the economic/structural environment to transform the business outlooks of the real estate developers and contributed to their phenomenal flocking into the information technology industry.

Networking for domination The change of government policy has enhanced the attraction of Hong Kong as a site for developing the information technology industry. But this applies to business enterprises, large and small alike. The dominant role played by the real estate

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developers in Hong Kong’s recent surge to the information economy has to be explained by other factors. Of particular significance is the ability of these firms to mobilize their network capital, gaining concessions from the government on the one hand and getting connected to the global technological and production networks on the other hand. In the first place, the real estate developers have privileged access to government officials, members and chairperson of the Chief Executive Commission on Innovation and Technology and, in some cases, even to officials of the Mainland Chinese government. In their great disapproval of the Cyberport project, for example, the twelve property developers were able to arrange a meeting with the Financial Secretary within half a day to voice their discontent. At the same time, judging from the timetable released by the government, it appears that Tien Chang-lin and the Chairperson of PCCW had engaged in a series of meetings and discussions before the Cyberport project was finalized (HKEJ, 4/15/1999). Indeed, Tien admitted that he had continued to meet on a regular basis with the company’s chairperson even after the project agreement had been signed (HKEJ, 2/21/2000). Finally, in the competitive bid for the controlling interest of Cable & Wireless–HKT between Singapore Telecommunications and PCCW, the latter has also been helped by its connection to officials in the mainland. In an interview with the Far Eastern Economic Review, PCCW’s deputy chairman, Mr Francis Yuen, noted that it was upon the urge of the authority in Beijing that the company considered the bid seriously (Gilley, 2000). That explains, in part, the rapidity with which the company could line up a loan package for the multi-billion dollar takeover. The above discussion has focused on the PCCW because the case has been widely reported. However, it would be too hasty to conclude that the company has received special treatment. Responding to the real estate developers’ criticisms, the Secretary for Information Technology and Broadcasting, Mr K.C. Kwong, pointed out that the government had contacted other developers about the Cyberport but only PCCW was interested (HKEJ, 3/6/1999). At the same time, Tien Chang-lin has also persuaded a Taiwan-based venture capitalist firm, Hambretch and Quist Asia, of which the CEO is his personal friend, to explore the possibility of establishing a HK$20–25 billion-worth silicon-chip manufacturing plant in Hong Kong.21 Indeed, many people have approached him with all sorts of projects (HKEJ, 2/21/2000). An interview with Professor Wu Jia-wei, the former vice-chancellor of the Hong Kong University of Science and Technology and a member of the CE’s Commission, also reveals that between 1999 and 2000, many real estate developers have approached him to explore the prospect of collaboration (HKEJ, 4/23/2001). Direct access to the decision-makers of Hong Kong’s new economic policy is a privilege not shared by the majority of smaller information technology firms. Despite their dissatisfaction, owner-managers of technology start-ups interviewed by the author in July 1999 had no channel, personal or institutional, to air their dissent. Lacking resources, these technology firms have also had difficulties proposing massive projects that are worthy of presenting to the chairperson of the CE’s Commission on Technology and Innovation. In fact, they have even found some of the institutional mechanisms devised to help the industry to work against their interest.

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As an example, the Applied Research Fund and the Industrial Support Fund have both required the applicant to write a formal research proposal and, in some cases, to have formed collaborative relationships with researchers either in Hong Kong or the mainland. Most of these technology start-ups have found such requirements impracticable and tend to favour university researchers or firms that are connected to them (Chu, 2000).22 The above by no means implies that the government has favoured individual firms when implementing its technology policy. The real estate developers, being the most powerful investors in the territory, have long-established close ties with both the local and mainland governments. Furthermore, the Chief Executive and the Chairperson of the CE’s Commission have been eager to see the swift accomplishment of their policies. That they have approached the most resourceful businessmen is, in this unique sense, understandable. Apart from mobilizing their connections to the government and semi-official personnel, the real estate developers have also taken advantage of their ability to connect to the transnational technology firms. As an example, SHK Properties has entered into an agreement with Microsoft to develop software for application in property management. As another example, the HongKong.Com Corporation, which is a subsidiary of the China.Com Corporation, has entered into a joint venture with America Online. Finally, the best example is perhaps Pacific Century Cyber Works (PCCW), which obtained the support of eight transnational technology firms before submitting the Cyberport proposal. The transnational technology firms include Hewlett-Packard, IBM, Oracle, Sybase, Yahoo, Pacific Convergence Corporation, Softbank, as well as Huawei Technology Company and they have indicated their interest to become tenants of the Cyberport, (HKEJ, 3/4/1999). The Pacific Convergence Corporation is a joint venture between PCCW and Intel to develop interactive information services for the Asia Pacific. More recently, PCCW has acquired Cable & Wireless–HKT, a local telecommunications firm, and entered into a joint venture with Telstra, an Australian communications carrier and content provider. There are other joint ventures that cannot be itemized here. Both the extent and nature of inter-linkages between local and global capital are novel. Indeed, Hong Kong has always been an open economy. Import and export, original equipment manufacturing (OEM), and other subcontracting arrangements are the basic stuffs of business life for most firms in Hong Kong (Sit and Wong, 1989; Chu, 1992). Among the technology-based firms established before 1999, some forms of partnership with transnational firms are not uncommon. For instance, some software firms have served as authorized problem-solvers of multinational software companies. However, entering into a joint venture or making a concerted effort to develop a product is rather unheard of (Chu, 2000). Using the parlance developed in Table 2.1, if Hong Kong was incorporated into the supplier and producer networks in the past, it has recently made a hesitant entry into the technological networks and been called upon to re-invigorate its role in the customer network. The conditions for connectivity highlighted in Table 2.1 provide some leads to the considerations behind the sharing of information, knowledge,

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and risk between the global technology firms and the local enterprises, especially the real estate developers. That firms in Hong Kong have been eager to get connected to the transnational technology firms is not difficult to understand. The transnational firms are known for their technological sophistication as well as their expertise in the production of information products. Local real estate developers, and indeed all other segments of finance capital, are new to the field and lack knowledge in the area. Getting connected to the global firms allows them to leapfrog the technological gap and rapidly gain a foothold in the information technology sector. Hong Kong has also had several attractions for the global technology firms. In the first place, the government’s intention to support the information technology sector and to launch the Cyberport was widely publicized. The transnational firms have accordingly come to the region in search of tax concessions and other benefits that will reduce their costs of production. In the second place, the transnational technology firms have been attracted by the economic prospects of Hong Kong, China, and East Asia in general. Significantly, Hong Kong has continued to enjoy a relatively high income even after the outbreak of the financial crisis. The territory has a 54 per cent mobile phone penetration rate in 1999 and, with the government’s vigorous promotion of digital literacy, the net population has increased most rapidly (http://www.info.gov.hk/censtatd).23 Apart from Hong Kong’s market for information products, the territory’s proximity to China is just as important. The Internet population of China has expanded rapidly, increasing from 16.9 million or 1.34 per cent of its population in July 2000 to 22.5 million or 1.78 per cent of its national population in January 2001 (http://www.cnnic.net.cn). As China becomes a member of the World Trade Organization, its enormous telecommunications market is destined to be open to the world. It is only natural that the transnational technology firms have become interested in the region. But economic affluence alone does not ‘make’ a consumer market (Granovetter and Swedberg, 1992). Several conditions have to be met and, in the present case, pertain to the cultural concerns on the one hand and legal/political preconditions on the other hand. First, notwithstanding the arguments made by some proponents of the globalization literature, cultural unity is far from being achieved in the contemporary world. The meaning of appropriate, exciting, fashionable, and good depends on the local culture in question. To market a product successfully, one needs to be sensitive to the local tastes and local concerns. This is particularly important if the product falls into the category of culture and information, which translates practically into most products of the ‘new economy’. Hence, the chairperson of Yahoo was very candid when he suggested that his firm needed localized content in order to penetrate the Chinese market (HKEJ, 3–14–1999). For global technology firms that lack an understanding of local culture, the alternative is to line up with corporations that are conversant with the local situation. SHK Properties, having gained tremendous knowledge about the real estate management concerns of the local Hong Kong people, is in a position to collaborate with Microsoft. Similarly PCCW, which launched Star TV a few years ago and thereby acquired much understanding

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of Asia’s cultural trends, has the credentials for entering into a joint venture with Intel (HKEJ, 3–12–1999). Apart from culture, legal/political factors have also continued to block the sprawl of producer and technology co-operation networks (Table 2.1). Significantly, investment involves risk, but the risk is heightened by the absence of well-developed market rules and institutions (Hamilton, 1985). Still on its way to thorough marketization, there exist many areas of ambiguity in the market institutions of mainland China. Being the first to enter the China market and having served for many years as the intermediary between China and the Western world, Hong Kong has established extensive connections and acquired in-depth knowledge of business operation in the mainland. They have, therefore, continued to play the critical role of signpost for global technology firms interested in exploring the information economy of China. A useful example here is the Japanese firm, Softbank. Its spokesperson pointed out that the company has set up an operation in Hong Kong as a base to launch Internet service for China (HKEJ, 3–19–1999). In summary, Hong Kong companies, the real estate developers in particular, have accumulated knowledge about and developed connections within markets in the region. The territory’s legacy as the media centre for Asia has provided a further advantage for corporations in Hong Kong to take up the role of knowledge brokers for the global technology firms. In the process of sharing knowledge and risk, these local firms have also benefited from the technological sophistication of the global firms and, therefore, aspired to gain a strong foothold in the emerging information economy in a short period of time.

Conclusion: global economy and brokers of knowledge This chapter has reviewed the emergence of Hong Kong’s information technology sector at the turn of the millennium and suggested that (a) segments of the finance capital and (b) the government have played the strategic role of knowledge brokers. That the finance capital, real estate developers in particular, has performed such a prominent role in the territory’s transition to an information economy can be traced to a number of reasons. In the first place, the Asian financial crisis and the burst of the real estate bubble in Hong Kong have forced these developers to search for new investment opportunities. In the second place, although Hong Kong investors are inclined to consider high-technology investments risky and low in return, the information technology sector has been given favourable consideration as a result of (i) the government’s apparent willingness to provide financial support, and (ii) the seemingly inexorable global dot-com boom. Finally and most importantly, these real estate developers have successfully mobilized their personal networks and their ‘cultural literacy’ to help them get connections with the global producer and technology co-operation networks. For the real estate developers, networking with the global technology leaders allows them to leapfrog the technological gap and rapidly gain a strong foothold in Hong Kong’s information technology sector. For the transnational technology firms, the Hong Kong real estate developers’ in-depth knowledge of the region’s culture and their extensive business networks within Hong

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Kong, China, and the region are very useful resources. They provide an attractive alternative route for these global technology firms to extend their reach into Asia. The findings presented so far have several implications for the literature on the information age. In the first place, the information economy has often been associated with the process of globalization. However, instead of observing an inexorable rise of the global tensions, struggles and conciliation between the global and local actors may perhaps be the ‘standard’ phenomena in the process. In the cultural domain, awareness of and sensitivity to local taste and local culture will play a critical role in the extension of the market for informational and cultural products. In the economic domain, although production no longer takes place within national borders and networks (or firms) have replaced the national state as the proper unit of analysis, it is untrue that transnational firms no longer recognize national or home boundaries. In technology co-operation in particular, politico-military factors loom large and have determined whether firms in certain countries can be ‘connected’. Hence, even though the information age might be characterized by its yearning for global reach, culture and politics will continue to regulate its sprawl. In the second place, the above discussion has also provided some support to the framework outlined in the section entitled ‘Globalization and information technology’. The contours of the ‘structural networks’ and the ‘conditions for connectivity’ have provided some useful guidance for the present analysis. In future research, it may be useful to pay greater attention to the social networks and explore their articulations with the structural ones. Finally and most importantly, the new economy does not necessarily generate mobility opportunity for new brokers of knowledge alone. Observers of the Asian economic miracles have found that enterprises of different sizes and with different organizational practices (e.g. formal Western enterprise, Chinese family firms, Japanese zaibatsu) have worked together to capture specific market niches. Researchers of the information economy have reiterated this point. Hence, in Hong Kong, at the same time as one can find a vast number of technology start-ups, we have also seen the successful attempts by segments of the finance capital to reinvent themselves. The prominent role played by the real estate developers was made possible by the interaction of specific circumstances: the global dot-com boom, the government’s eagerness to jump-start the industry, and the real estate developers’ timely and skilful mobilization of their business networks, and cultural literacy. Firmly established locally and well connected to old (Mainland officials) and new (local government agencies) power-centres, real estate developers have direct access to decision-makers. In this respect, real estate developers are privileged vis-à-vis small-scale new technology companies. Therefore, newcomers in the technology sector need established capital providers to access and maintain themselves in new markets, while the real estate developers need the new technology sector to innovate and maintain their competitive position in the process. Whether or not the latter will continue to play the most prominent role and whether they will squeeze out the technology start-ups are questions that can only be answered over time.

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Notes 1 Castells (2000) and Harvey (1990) have drawn upon the research on ‘flexible specialization’, ‘post-Fordism’, and the ‘Asian economic miracles’ to make their points. 2 The disparate institutional structure has been found to associate with either labour process and employment practices (Deyo, 1989) or with the exercise of authority (Hamilton and Biggart, 1988). 3 That the nation-state will help to structure the dynamics of the global economy does not change the fact that the information economy will sharpen the level of inequality not only between countries, but also within each country. The growth sectors will connect territories and persons deemed valuable, but disconnect everything that is not valuable or becomes devalued. 4 In turn, real estate contributed 41 per cent to the category in question. 5 New World Development announced in September that it had invested US$20 million in Yunnan, China, to develop Chinese medicine (HKEJ, 9–2–1999). Dates for media sources will follow the sequence of month, day, and year. 6 By linkage, I mean substantial ownership by the firms or CEOs of the firms. Among the 14 firms, ten are non-technology-based enterprises (http://www.hkgem.com). 7 A friend has drawn from her own experience to supply this piece of information. 8 In an interview, the Financial Secretary mentioned that the need to stabilize property prices was a view held by most Hong Kong people at the time (HKEJ 4–25–2001). 9 Real estate developers have also put pressure on the government, forcing it to announce that it encourages private home ownership, will only assist the neediest families, and will be flexible in implementing the housing policy announced in 1997. 10 Analysts of the developmental state have evaluated the extent of state intervention from three angles: (1) financial support; (2) institutional back up; and (3) direct investment (Haggard, 1990; Johnson, 1987; Gold, 1986). This chapter will use the same criteria. 11 Hong Kong has gone through four policy phases: laissez-faire (1950s–1960s), positive non-interventionism (1970s–80s), non-interventionism with intermittent support (1990–6), and crisis management through strategic re-positioning (1997–9). 12 The amount does not refer to the annual budget, but the total allocation. 13 The policy address is delivered each year around mid-October, while the budget speech is made every year around March. 14 In 1999, the unemployment rate reached the historical height of 6.2 per cent. Surveys by the Federation of Trade Unions found the unemployment rate to be around 10 per cent. Hong Kong, however, was used to an unemployment rate of no more than 3 per cent in the 1980s and much of the 1990s. 15 The first report outlined the visions while the second report proposed the institutional changes necessary for achieving such goals. 16 Due to difficulties in finding an appropriate chairperson, the Committee was appointed only in April 2000 (HKEJ, 4–25–2000). 17 The Industrial Estate Corporation and the Hong Kong Industrial Technology Center Corporation will no longer be run by separate administrations, but are to be integrated with the newly founded Science Park Corporation. According to a news report, Tien Chang-lin has proposed to restructure the Trade and Industry Bureau as well as the Telecommunications Bureau, but Mr Tung Chee-hua turned down such radical proposals (HKEJ, 3–25–1999, HKEJ, 4–15–1999). 18 Richard Li is the second son of Ka-shing Li, the largest shareholder of the Cheung Kong Group and the Hutchinson–Whampoa Group. 19 Eight real estate developers (SHK Properties, Henderson Land, New World Development, Swire Properties, Great Eagle Properties, Hysan Development, Hong Kong Land, and Hang Lung Properties) voiced their dissent in March, and Shun Tak Land, Wheelock, and HKR International were added to the group in May.

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20 The critics have made two points: (a) broad-band facilities are available in many commercial buildings and (b) the lack of technological skills in Hong Kong will result in the failing of the ‘technology’ component of the project. 21 The Hong Kong government was very cautious in this case and, although some progress was made in February 2000, the plan was scrapped around April 2000 (HKEJ, 2–21–2000). Ultimately, Hambretch & Quist Asia decided to build the plant in mainland China. 22 As a matter of fact, much of the Industrial Support Fund went to researchers working in various tertiary educational institutes. 23 According to surveys, the online population in Hong Kong has increased from 850,000 in April 1998 to 3.46 million in November 2000. Hong Kong has a population of approximately 6.5 million (http://www.nua.ie/surveys/).

3

The status of non-banking financial companies in India A case study from Ahmedabad, Gujarat Dinesh N. Awasthi

India, dedicated to creating an equitable and just society, has been striving to bring its underprivileged section into the mainstream of the economy, free of hunger, squalor and exploitation. As a means to create an egalitarian society, it has been trying to promote small businesses by facilitating the entry of a new breed of firstgeneration entrepreneurs. Several schemes have been launched aimed at promoting self-employment, such as the Integrated Rural Development Programme, the Training Rural Youth for Self-Employment Programme, Prime Minister Rozgar’s (Employment) Scheme, etc. However, the schemes achieved only limited success (cf. Hirway, 1986). Another set of policies adopted by the Indian government promoted small industries. Recognising the vital role of the small-scale enterprise (SSE) sector in facilitating first-generation entrepreneurs, the policy frame in India has increasingly laid emphasis on their promotion as reflected in all the Industrial Policy Resolutions (IPRs) since 1948.1 To encourage the growth of small enterprises,2 the Government adopted a twopronged strategy consisting of (i) promotional measures; and (ii) protective policies.3 Starting with a rudimentary base in the early 1950s, it has emerged as an important segment of the Indian economy. It accounts for 95 per cent of industrial units, 40 per cent of output of the manufacturing sector, 35 per cent of exports and provides employment for approximately 17 million people. Today, the number of small-scale units is estimated at 3 million in India (SIDBI Report, 1999). However, given the fact that the process of liberalization is there to stay, the emergence and growth of healthy and competitive small firms is mandatory. In India, one may expect that in a growing market under the new dispensation, there will be more opportunities for accumulating wealth, status and power by starting new ventures. However, there is also apprehension that due to tough competition, the SSEs might find it increasingly difficult to survive. The problem could be compounded owing to their lack of access to formal channels of credit. A study in India observed that despite a large network of commercial banks, credit remains a major bottleneck, especially among the smaller of the small firms (Awasthi et al., 1993). This is a major constraint that inhibits their survival and growth. The first-generation entrepreneurs among the SSEs, bypassed by the commercial banks, seek recourse to other private financial agencies such as non-banking financial companies (NBFCs) and also to informal channels of credit, like moneylenders.

The status of non-banking financial companies in India 41 Although, these agencies charge high rates of interest compared to commercial banks, the new class of entrepreneurs seeks credit from them as a last resort. To that extent, this class of financial intermediaries is playing an important role in facilitating the entry of small entrepreneurs in particular and the entrepreneurial class in general. However, not much is known about this segment of the financial sector. This chapter seeks to highlight the contribution of NBFCs, in particular, to the emergence and growth of a new entrepreneurial class from the middle and lower income strata of the Indian society. It also seeks to analyse strengths, weaknesses, opportunities, and threats facing these companies. This chapter also attempts to understand the role of NBFCs in the upward mobility of underprivileged segments of society in the process of economic integration leading to the emergence of a new middle class. In this respect, the approach in this chapter takes a different track to the central hypotheses addressed in this book. While defining the role of NBFCs as facilitators of social mobility, the issue is not whether these agencies themselves provide avenues for upward movement in the societal hierarchies through employment and career opportunities. The question is to what extent these agencies act as mediators of economic opportunities for self-employed people and small-scale entrepreneurs in other economic sectors. In order to capture the basic thought that runs through the chapters of this book, the question then is: who are these people who take recourse to the NBFCs? Are they from the lower strata of Indian society without economic and social capital to invest in their business start-ups? Or are these people who turn to the NBFCs members of established social groups who wish to respond to new opportunities through new economic ventures for which they require easily available sources of cash? In other words, are we dealing here with ‘new people’ looking for ‘new opportunities’ or rather with an old-established elite attempting to cash in on new opportunities? Based on interviews with officials of the Reserve Bank of India (the country’s central bank) and ten non-banking financial companies, this chapter focuses on NBFCs in Ahmedabad (Gujarat), a provincial city situated in the western part of India.

The national scenario The wind of economic liberalization sweeping across the world has been reshaping the contours of the global economy. Following these trends, India ushered in an era of liberalization in 1991 that assigned a greater role to market forces. Another common thread running across the world is the emergence of the service sector as the engine of growth (Daniels, 1985; Birley and Westhead, 1994). In India the service sector surpassed all other economic sectors in terms of its growth and share in the country’s gross domestic product (GDP) that stood at 48.7 per cent in 1997–8.4 Within the service sector, banking and insurance, real estate, and business services have emerged as the fastest growing areas in the last decade as a result of the reforms in the financial sector carried out by the Government of India. The level of development of the financial sector indicates the degree of vibrancy of an economy. In this respect, non-banking financial companies (NBFCs) have been playing an important role as an integral part of the financial system in India

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comprising of commercial banks, co-operative banks, development finance institutions and moneylenders, besides the NBFCs. The Reserve Bank of India (RBI), acting as the country’s central bank, controls and regulates the financial markets through monetary (credit) policies. These policies and guidelines are mandatory for all the institutions operating in financial markets. Besides the RBI, the financial sector in India can be classified into four major segments: 1 2

3 4

public sector banks and investment institutions; private sector banks, and non-banking financial companies, leasing and hire purchase companies, housing finance companies, mutual fund companies, etc.; co-operative banks; and micro finance institutions.

The public sector banks include all Indian financial institutions, such as the Industrial Development Bank of India (IDBI), the Industrial Credit and Investment Corporation of India (ICICI), the Industrial Finance Corporation of India (IFCI), the National Bank for Agriculture and Rural Development (NABARD), and the Small Industries Development Bank of India (SIDBI). The public sector also includes investment institutions like the Unit Trust of India (UTI), the Life Insurance Corporation of India (LIC), the General Insurance Corporation of India (GIC), and state-level financial institutions such as the State Finance Corporations (SFCs), incorporated by various state governments and operating within their respective states to extend credit to the small-scale industry sector. While the IDBI is the refinancing bank for commercial banks against their advances to large industries, the SIDBI refinances the commercial banks and SFCs against their credit advances to the small industry sector. The NABARD provides refinancing facilities to commercial banks against the credit advanced by them to agriculture and rural industries. The NABARD has also been giving credit to state governments for the creation of rural infrastructure. The IDBI, ICICI and IFCI, along with the LIC and UTI, cater to the needs of the large industry sector. At the second layer there are commercial banks, which cater to the needs of primarily large industries. However, under the government directives, they also extend credit to the priority sectors of agriculture, small business, small industries, irrigation, small road transport, etc. By government directives they are required to advance 40 per cent of their credit portfolio to this priority sector. SFCs lend primarily to the small industry sector and operate at the state level only. Non-banking finance companies cater to the working capital and term loan needs of the large as well as small and medium industry sectors, besides serving other customers by extending loans to purchase consumer durables such as cars and white goods. However, since most of the NBFCs are very small in terms of their capital base, they are hardly able to meet the needs of large industrial enterprises. They primarily cater to the needs of small entrepreneurs and meet their working capital requirements, and also provide small loans for hire purchase of machinery and equipment.

The status of non-banking financial companies in India 43 Co-operative banks cater to the credit needs of their members. There are various shades of co-operative banks ranging from industrial co-operative banks to agriculture co-operative banks. These institutions, by and large, operate at the local level. The sector of micro finance in India is of recent origin. It emerged about a decade ago. Micro finance institutions (MFIs) cater to the credit needs of marginalized and poor sections of the society, especially poor women. They facilitate credit facilities for micro-enterprises through self-help groups.

What are NBFCs? NBFCs are enterprises, which provide financial services of various descriptions to businesses. These financial services are distinct from normal banking services. During the early 1990s, the financial system was reasonably liberalized when the Government of India repealed the Capital Issues (Control) Act, deregularized the pricing of public issues and rights issues by corporate undertakings and opened the banking and financial sector to competition from the private sector, as a part of the financial sector reforms. While the banking sector remained constrained by comprehensive regulations, the relatively low degree of regulations on NBFCs stimulated the growth of NBFCs. Initially, the major activities of the NBFCs were confined to equipment leasing, hire purchase and loans. In the post-liberalization era the NBFCs have diversified to other activities such as bill discounting, investments, venture capital, housing finance, consumer finance, factoring and equity participation, and fee-based activities such as merchant banking, consultancy and counselling, loan/lease syndication, portfolio management services, stockbroking, debt trading, underwriting, etc. However, the major difference between a bank and a NBFC is that, while the banks are allowed to issue cheques for the use of their clients, the NBFCs are denied this facility. Moreover, NBFCs, by and large, accept only term deposits, whereas the banks have many saving products like current accounts, recurring accounts, savings accounts, etc. The major strength of NBFCs lies in their non-conventional approach to lending. This stands in contrast with commercial banks, which still adhere to conservative norms. Moreover, NBFCs have the edge over banks in terms of their willingness to accept risk, their processing speed (time taken in processing the loans), and their less strict supervision. Another major difference is that while banks normally lend to the corporate sector (except under government schemes of priority lending to smallscale industries), NBFCs usually have a large number of individual/partnership borrowers. Unlike banks, they also offer innovative, need-based products (such as loans for consumer durables, hire-purchase of industrial machinery and equipments, broking corporate and inter-corporate deposits to meet short term working capital requirements of companies, etc.) to their clients. It may also be noted that NBFCs have emerged as the major competitors of the commercial banks in India. Although the proportion of the total deposits mobilized by the NBFCs is only about 10 per cent of the deposits mobilized by the commercial banks, their deposits have been growing at about 20 per cent per annum compared to barely about 12 per cent in the case of commercial banks. The latter are also los-

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ing Non Resident Indian (NRI) deposits to NBFCs, which are vigorously mobilizing NRI deposits overseas. The attractiveness of NBFCs for overseas customers is in the returns. While the NBFCs offer about 17 per cent compound returns on a three year NRI deposit, the banks are offering only about 10 per cent. This applies also to domestic deposits. The growing importance of NBFCs in the financial sector of the country can be gauged by the fact that the total number of NBFCs increased from 7,063 in 1981 to 39,600 in 1999. However, according to a recent study of the Industrial Credit and Investment Corporation of India (ICICI), only about 700 of the 39,600 companies are active in the capital market in a big way. Almost 97 per cent of the deposits are raised or controlled by only 20–25 large NBFCs. The total assets of NBFCs grew at an average of over 40 per cent per annum between 1993–4 and 1998–9. Investment in NBFCs increased by about 98 per cent between 1997–8 and 1998–9 (see Table 3.1). The share of non-banking deposits to total bank deposits also grew at a fairly high rate. Their paid-up capital increased by 28.3 per cent, gross profits by 40.3 per cent and return on capital by 2.33 per cent between 1992–3 and 1993–4, and about 9 per cent per annum between 1994–5 and 1998–9.

The sobering of NBFCs The growth of NBFCs, however, could not be sustained. It slowed down during 1994–5 and 1998–9 (cf. Rajshekhar, 1996). This decline has a history. The year 1997 saw a sharp increase in scams among NBFCs. A large number of NBFCs closed down, cheating their depositors out of their hard-earned money. It all started with a major NBFC called CRB Capital that involved misappropriation of Rs.12,000 million (US$227 million) and a large number of small depositors. As a result, the RBI came up with harsh measures to regulate the sector in June 1997. It made credit rating for the NBFCs compulsory and stipulated the upper limit of deposits depending upon the credit rating of a particular NBFC. Registration of NBFCs with the RBI was also made compulsory. One of the conditions imposed for the registration was that NBFCs were required to have a paid-up capital exceeding Rs.2.5 million (US$5,556). All NBFCs were given time until February 2000 to get registered. This Table 3.1 NBFC status in India at a glance 1. Number of NBFCs

2. Total assets of NBFCs (Rs. in millions) 3. Investment in NBFCs (Rs. in millions) 4. Share of NBFCs in deposits as per cent of banks’ deposits

1981 1991 1992 1998 1993–4 1998–9 1997–8 1998–9 1996–7 1997–8 1998–9

7,063 10,166 12,817 39,545 288,000 967,000 77,500 153,760 4.1 4.4 7.4

The status of non-banking financial companies in India 45 had far-reaching consequences for the growth of NBFCs. Despite these regulatory measures, the sector has been growing reasonably well. Economic growth coupled with the trend of increasing liberalization offers new investment opportunities for entrepreneurs in India. With a GDP showing an average growth of 5 per cent per annum, export growth of about 20 per cent (in US dollar terms) and industrial growth of about 10 to 12 per cent, the Indian economy is poised to emerge as an important global economic player. Given the status of the financial sector, it is expected that NBFCs will flourish and grow at an increasing pace, despite the temporary setbacks. In order to gain a thorough understanding of the operations of NBFCs, the next section will closely investigate this sector in a large industrial city of Gujarat, the second most industrialized state in India.

The Ahmedabad case study The location of this study This investigation focuses on Ahmedabad, the industrial and commercial capital of Gujarat. With a population of over four million (about 5 per cent of the state’s population), Ahmedabad accounts for over 12 per cent of investments in plant and machinery, 25 per cent of manufacturing enterprises, and about 19 per cent of the employment of Gujarat State. The industrial history of the city dates back to 1864 when the first textile mill was set up in Ahmedabad. From these modest beginnings an industrial sector emerged which nowadays employs a workforce of about 265,000, worth Rs.39,783 million (US$884 million) investment and comprising about 44,800 manufacturing enterprises (Awasthi, 1999). Maturing as a textile city by the late 1930s with about 90 textile mills and employment of 70,000 workers (Streefkerk, 1985), the industrial base expanded to the production of textile parts and machinery in the early 1960s, dyes and intermediates in the early 1970s, and plastics, petrochemicals, drugs and pharmaceuticals in the mid-1970s. However, the late 1970s and early 1980s saw a sharp decline in the textile mill sector. During the late 1980s the electronic industry started taking roots in the city that was followed by the advent of the information technology sector in the 1990s. Non-banking financial companies (NBFCs) have played a very critical role at every stage of industrial growth of the city. Ahmedabad has a long tradition of well-developed financial markets. Besides the NBFCs, almost all the major financial institutions, such as IDBI, ICICI, IFCI, SIDBI, NABARD, UTI, LIC, etc. have their national or regional offices in Ahmedabad. Similarly, almost all the major commercial banks have their branches all over the city. There are about 500 branches of various domestic and international commercial banks, besides about 150 branches of various co-operative banks and the Gujarat State Financial Corporation (GSFC) that caters to 4.5 million people, over 45,000 manufacturing enterprises, and about 2,500,000 business ventures. Almost all the major national and provincial NBFCs have their presence in the city. According to the RBI, Ahmedabad, with one of the best-developed capital markets in India, accounts for 1,481 NBFCs, of which 291 have paid-up capital exceeding

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Rs.2.5 million. Another 1,093 are rather small NBFCs with a weak capital base of less than Rs.2.5 million of paid-up capital. Genesis of NBFCs in Ahmedabad As early as the nineteenth century, investment in land and moneylending by the business communities in India were the only avenues for deployment of their huge profits made through trading (Tripathi and Mehta, 1984). Likewise, in Ahmedabad, moneylending was the major activity associated with trading. The city owes its commercial growth to moneylenders (Tripathi, 1986). However, in the post independence era, most of the moneylending by the private sector continued in a somewhat clandestine manner, until the RBI made their registration compulsory under the ‘Money Lending Act’. Although the rules of the game changed after the Act, they were blatantly violated by most of the moneylenders by using ingenious practices to circumvent the stipulations of the Act. For example, they lured the public by offering various incentives like a set number of gold coins upon making deposits, promising high interest rates, using agents to garner savings, etc., that were not allowed under the banking rules and regulations. Moreover, through the NBFC route, several of them formalized and legalized their moneylending operations that were being conducted in unorganized and hitherto illegal manners. Nevertheless, they started feeling the heat of the Act and it put some check on their unbridled operations. Who owns NBFCs in Ahmedabad? While the larger NBFCs are controlled by either public sector or large private sector business enterprises, the presence of a large number of smaller NBFCs indicates the entry of first generation entrepreneurs as small-scale operators in this sector. The first ones to grab this opportunity were the moneylenders by launching their agencies, thus legalizing moneylending through NBFCs. Stockbrokers who were operating in the stock markets closely followed their entry. Subsequently, a good number of business enterprises also floated their subsidiaries (NBFCs), but primarily for the purpose of securitization of their assets, accessing cheap funds for their own investments and tax planning (which boils down to tax evasion). While the RBI puts the number of NBFCs in Ahmedabad at 1,481, unconfirmed sources in the sector put it at close to 80,000 with an overwhelming majority with capital base of less than Rs.2.5 million (US$55,556). Except for the national-level NBFCs, a few shroffs5 and subsidiaries of industrial enterprises, almost 75,000 operators fall in the latter segment in Gujarat, most of them operating from Ahmedabad. What are the major activities of the NBFCs in Ahmedabad? Besides the mobilization of savings, leasing and financing, most of the NBFCs are engaged in financing purchases of automobiles, consumer goods, real estate, and fee-based activities such as merchant banking, consultancy and counselling, loan/lease syndication, portfolio management services, stock broking, debt trading,

The status of non-banking financial companies in India 47 underwriting, etc. However, most of the NBFCs provide advisory and counselling services, portfolio management, automobile and consumer finance. Most of the subsidiaries of the industrial enterprises are basically interested in mobilizing deposits to meet their own interests. There are only a few large ones, which have a more diversified portfolio, including leasing, hire purchase, factoring, debt trading, foreign exchange management, and attendant advisory services. Major contributions of the NBFCs Since most of the NBFCs have a very small capital base, they cater to the needs of rather small entrepreneurs and low-end consumers. The large businesses require large-scale project funding, which will be beyond the capacities of the smaller NBFCs. Hence, commercial banks and larger NBFCs are servicing the larger portfolios. This has social implications as well. The existence of smaller NBFCs facilitates emergence of small-scale entrepreneurs – mostly first generation – that are left out by the regular/formal channels of credit, i.e. banks. To that extent NBFCs have facilitated social mobility in an otherwise hierarchical society. Moreover, NBFCs offer a wide range of differentiated products and business development services to their clients that are not offered by commercial banks. To that extent, they provide not only credit but also related services under one roof that facilitates smooth business transactions. Major weaknesses of the NBFCs Attracted by the potential profits in the sector, a large number of NBFCs emerged on the scene immediately after deregulation in 1991. Some of them were floated by unscrupulous, fly-by-night elements (such as share brokers, real estate agents, and builders with not so clean a track record of business) who were not interested in NBFCs as such, but wanted to make a quick profit when the sector was growing and the public at large had no clue about their credibility. Besides this segment, a few corporates also entered the field to manage inter-corporate deposits and to take advantage of the income tax benefits on loaning.6 Most of them had no professional support. While most could manage deposit mobilization fairly well, they did not have adequate knowledge and skills of lending money. Unlike commercial bankers, they did not know how to assess a project, how to conduct site inspection, how to prepare valuation reports, etc. Moreover, they were concentrating mostly in urban areas. Therefore, they could not tap rural financial markets that offered great potential. Among some of the NBFCs, it became a kind of status symbol to hire high-paid management graduates from top business schools like the Indian Institute of Management (IIM) in Ahmedabad, at very high salaries that the firms could not afford. An air-conditioned office became another status symbol, irrespective of the level of operations. It may be mentioned that most of the IIM graduates come from upper-middle-class families, which is ‘built-in’ in the process of their recruitment.7 Most of them were educated in good English-medium schools, have a much better exposure to Western culture, and are more articulate than lower-(middle-)class

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people, and also have the sophistication of an elite society. Therefore, unlike their counterparts in banking, these IIM graduates were not used to the arduous life of paying extensive field visits to creditors, which is required in lending operations and monitoring of loans. As a result they started finding shortcuts in terms of collateral, thinking that it would ensure recovery. They never realized that NBFCs did not have any legal instrument to enforce recovery. Only banks enjoy legal protection under the Recovery Act and are covered under a credit guaranty scheme. Not only did the NBFCs perform extremely poorly in lending operations, treasury management and asset-liability management, they also failed to comprehend the time dynamics of credit and deposit. They never realized that, while they mobilized short-term deposits, they entered into long-term lending. This misconception led to an imbalance between demand for credit and availability of loanable funds at their disposal. They lacked legal protection and good solicitors to give them proper advice. While initially they made good fortunes, they manoeuvred the sector into massive derangement during the late 1990s leading to a number of bankruptcies. This all happened as the sector was in its nascent stage. The crowding out of illmanaged NBFCs will do well to this sector in the long run. But it will be a Herculean task to restore investors’ confidence, as a very large number of small investors have lost their shirts in the process, due to lack of transparency and adequate legal protection. Only after this showdown has RBI been tightening its noose to regulate the sector by making credit rating mandatory for NBFCs.

Concluding discussion NBFCs have emerged as an important segment in the Indian financial market, largely because of the failures of the commercial banking sector. NBFCs have an important role to play in oiling the economy by providing the much needed finance and related business services that the commercial banking sector has failed to offer. However, all is not well with NBFCs, as some of them became unhealthy owing to their haphazard and unregulated growth coupled with market imperfections. Most NBFCs could not perform well as they lacked experience in banking operations and treasury management on top of the inadequate understanding of the capital markets on the part of most of the promoters of NBFCs. Nevertheless, NBFCs controlled by large industrial and business enterprises or by public sector banks are doing well as they have an in-depth understanding of the operations of financial markets. Notwithstanding certain market failures and weaknesses, the NBFCs facilitated the emergence and growth of first-generation entrepreneurs from the rural hinterland and helped diversify the base of entrepreneurial supply in terms of producer services otherwise inaccessible to small enterprises. NBFCs acted as facilitators of new business start-ups as well as providers of employment for well-educated graduates of business schools. In this respect they have contributed to the process of social mobility in the region. Hence, they deserve to be strengthened and supported by a supportive policy environment that protects investors and facilitates smooth

The status of non-banking financial companies in India 49 operations of NBFCs. While there is a need to regulate the sector, one must ensure that it is not over-regulated and thereby strangulated because of tight government control. Private enterprise deserves to be given a chance to perform well. However, NBFCs also show elements of elite continuity. Many NBFCs are rooted in the moneylending tradition that provided an avenue for the established business communities to put their money to work and generate large profits. New business start-ups in the small business sector offered opportunities to the capital-owning business community to enhance their profit. Moreover, the recruitment of business school graduates from an upper-middle-class background by aspiring NBFCs provided an avenue for an – as it turned out – unsuccessful career in the finance sector. Lastly, it should be admitted that the present study, based on a rather small sample, should be treated as an exploratory one. For an in-depth understanding, one needs to study the sector and its operation in more detail. One needs to explore the socioeconomic background of both the promoters of smaller and larger NBFCs and the clientele served by them in order to draw conclusions regarding the issue whether these producer services either generate new opportunities for new people or rather serve to strengthen the position of an established business community. It is hoped that a systematic enquiry into the emergence, growth and premature decay of nonbanking financial companies in Ahmedabad will shed light on these issues, which will be of interest to policy makers and academia alike.

Notes 1 An IPR is a policy statement of the Government of India on the strategy for industrial development. Since its first IPR in 1948, the Government of India has issued six IPRs, the latest being in 1998. 2 A small-scale industry in India is defined in terms of its investment in plant and machinery. Up to 1998, the upper ceiling of the investment was Rs.6.0 million. Now it has been revised to Rs.10.0 million (US$208,334 approx.). 3 Considering the initial constraints that a small entrepreneur is likely to face, the promotional policies of the Government attempt to provide a package of support measures consisting of financial assistance, incentives and tax breaks, infrastructure facilities, technical and managerial guidance, marketing support, etc. Under the protective policies, the government has reserved certain products exclusively for SSEs. No medium and large industry or multinational company can produce these reserved items. Beginning with 47 items in 1967, the government has increased the number to 832. However, like in many other developing countries, the small-industry sector in India finds it difficult to access timely support from these parastatal agencies, due to their bureaucratic approach and, to an extent, lack of professional competence (Levitsky, 1996; Awasthi, et al., 1993; Awasthi and Sebastian, 1994). 4 In 1990–1 the share of agriculture in India’s GDP was 28.7 per cent; manufacturing sector, 21.1 per cent; and service sector (including construction), 43.7 per cent. These sectors in 1997–8 were 24.4 per cent, 22.7 per cent and 48.7 per cent respectively. 5 Shroffs are indigenous (traditional) moneylenders in Gujarat. 6 The interest paid on loans in businesses is tax deductible while calculating the income. It is treated as a part of expenses. Since the corporates borrow from the NBFCs floated by them, the interest paid to such NBFCs is deducted from the corporate income whereas it accrues to the corporate, indirectly. NBFCs have become a conduit for such tax avoidance.

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7 Admissions in the IIMs are through a common admission test, which is heavily oriented towards English language, mathematics, and logic. It requires a good English-medium schooling, which is available mainly in cities and is quite expensive. Candidates from poor families and rural areas have no access to such elite education. It poses a handicap in their entry into IIMs, as they are not able to compete with their urban, better-educated counterparts.

4

Cyber gurus and social mobility in India’s ‘Silicon Valley’ Salim Lakha

The rapid growth of the Indian computer software industry from around the mid-1980s onwards is largely connected with the process of economic liberalization in India and the exigencies of the global information technology sector. The availability of a large pool of knowledge-based workers (engineers, scientists, and technicians) combined with government incentives have proved a major attraction for many international companies to either set up their own software development facilities in India or alternatively source software services from Indian companies. The development of the computer software industry has increased the investment opportunities for both established business groups and new entrants to the business sector. It has also substantially increased employment for many professionals, who are part of the Indian middle class that is closely linked to the global economy through the new international division of labour (NIDL), transnational migration, and the consumer revolution.1 At the spatial level, the growth of the Indian software industry and the influx of global information technology corporations have promoted the expansion of regional or provincial cities such as Pune, Hyderabad, and, especially, Bangalore (in the state of Karnataka), which is commonly referred to as India’s ‘Silicon Valley’. Through its articulation with the global information technology (IT) sector, Bangalore has emerged as ‘a new node in the world’s electronics industry’ (Castells, 1996: 113). This chapter will examine the growth of the computer software industry in India and the opportunities it has created for social mobility in centres such as Bangalore, and more generally, the rest of India. This chapter will argue that for IT professionals social mobility is not confined spatially within provincial and national boundaries, but occurs also at the transnational level through migration and it is, therefore, a globalized phenomenon. This discussion is divided into three sections: the first part deals with the growth of the computer software industry in India and its links with the global IT sector. Section two will consider the factors that have promoted Bangalore as a major site for the development of the software industry. The final section will examine social mobility generated by the Indian IT sector with reference to the ‘elite continuity’ hypothesis and the ‘new opportunities, new people’ hypothesis. A major question arising in connection with the ‘elite continuity’ hypothesis relates to the involvement of established business groups in the computer software industry. For example, is entry to this sector restricted largely to the already existing

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business groups that have substantial amounts of capital and other resources at their disposal? The ‘new opportunities, new people’ hypothesis raises the question whether individuals from non-business backgrounds have managed to establish successful software enterprises. Further, it is pertinent to consider what section of the population is benefiting from employment opportunities available in the rapidly expanding IT industry. For instance, are the more lucrative positions open to individuals from all socio-economic backgrounds or are they largely available to those who have attended more select educational institutions? These key questions will be examined with reference to computer professionals in India as well as those residing in the USA which has a major concentration of Indian IT workers who have migrated overseas. Finally, the question will be raised how the recent crisis has affected both the IT sector and the people who benefited from the opportunities it offered.

Growth of the computer software industry and the new international division of labour The growth of the computer software industry in India has been facilitated by ‘an interplay between both local and international forces’ (Lakha, 1994: 407). At the international level, labour constraints and escalating costs have prompted transnational corporations (TNCs) to locate offshore in order to overcome limits to expansion. India has proved an attractive location because of its comparatively low-cost professional labour, a large supply of English-speaking scientific and technical personnel, and a standard of ‘software quality control’ that is in some cases higher than in the USA (Jones, 1999: 60). In addition, Indian companies have proved willing joint venture partners and the state in India has offered significant incentives to foreign investors in the high-technology sector. The discussion on the NIDL has focused largely on the advantage of low labour costs in export-oriented manufacturing in developing countries. It is argued by some that the TNCs have either relocated their plants to these countries or subcontracted production to local manufacturers in order to gain the benefits of lower production costs compared to those in equivalent industries in the advanced capitalist nations (Frobel et al., 1980; Higgot et al., 1985). This literature, however, overlooks the broadening of the NIDL to include the services sector. The growth of the Indian computer software industry, which is substantially based upon exports, serves to highlight the widening of the NIDL. The state has played a major role in promoting computerization and the development of an indigenous computer industry from the 1970s onwards. In 1972, the Electronics Corporation of India Ltd., a government corporation, was asked to enter into computer manufacturing (Singhal and Rogers, 1989: 184). Another important development in the industry was the departure of IBM from India in 1978. When IBM refused to allow Indian equity participation in the face of Indian government pressure, it was compelled to leave. In IBM’s absence, the government appointed a state corporation, Computer Maintenance Corporation (CMC), to supply parts and carry out maintenance on IBM equipment (Grieco, 1984: 38). CMC, which was founded in 1975, has emerged as one of the most successful computer companies in

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India; in 1998–9 it ranked sixteenth amongst the top 20 IT companies in the country (Grieco, 1984: 80–1). The departure of IBM also led many of its ex-staff to set up their own enterprises in the computer industry and thus broaden the base of local entrepreneurs in the IT sector. However, the growth of an indigenous computer industry received a major boost when Rajiv Gandhi became the Prime Minister of India in 1984. He encouraged the development of the computer industry through economic liberalization that included lifting restrictive regulations (for example removing import controls and limits on plant capacity) and encouraging foreign investors. In the software sector, state initiative was articulated in a policy document of 1986 that set out the main objectives. These included the promotion of software exports with the aim of securing a sizeable segment of the international market in software, and an integrated development of the software industry to cater for the domestic and export markets (Lakha, 1994: 387). The software policy also provided guidelines on matters relating to imports of computer items, foreign collaboration, and foreign investment. A major initiative of the government in the infrastructure sector was the setting up of export-oriented Software Technology Parks (STPs) in cities such as Bangalore and Pune. The STPs, which provided satellite links and dedicated earth stations, increased productivity by raising the accuracy and the speed of data transmission. At the same time they also linked the Indian computer software industry to the worldwide IT sector and thus integrated the former into the NIDL. Another factor explaining the integration of India into the global IT industry and the NIDL is its export orientation and competitive labour costs. Relatively low labour costs together with the English proficiency of its large pool of professionals have proved major attractions for TNCs (including banks). Considering the labour-intensive character of software development, labour costs are an important consideration in the software industry worldwide. Whereas the average annual salary of an engineer in India is around US$10,000, the equivalent salary in the USA is US$60,000 (Chakravarty, 1998: 3). The export orientation of the Indian software industry through low labour costs has provided considerable benefits to the TNCs and the worldwide IT sector. The dominance of exports in the software industry has continued during the 1990s; in 1999 exports accounted for US$2.7 billion or 67.5 per cent of the total revenue which was estimated at US$4 billion (Bagchi, 1999: 63). In the early stages of the industry, the development of software was confined to the low end of the technological scale, and a large part of the work involved labour intensive tasks like coding and testing (Zielenziger, 1995: 65). Many software companies in India derived their income from ‘body-shopping’, that is, hiring out their employees to foreign corporations overseas where they worked on-site (on clients’ premises) (Kaye, 1997: 67). During the mid-1980s ‘on-site services’ comprised 95 per cent of the income from exports of software from India (Jayaraman, 1995: 45). According to Stremlau, in the 1980s, ‘Bangalore’s main software-industry exports were not products, but people: high-skill, low-wage software engineers and programmers who took jobs in the United States’ (1996: 153). Since then, however, the trend has shifted somewhat with greater emphasis upon greater value-added work

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undertaken off-shore, that is, within India (Jayaraman, 1995: 45), though ‘bodyshopping’ still continues. Whilst ‘body-shopping’ has generated some income for companies in India, it has at the same time contributed to both short- and long-term migration of Indian computer professionals. For example, it is not uncommon for those hired to work on short-term overseas assignments to later find longer-term employment and settle permanently in countries such as Canada, USA, Britain, and Australia (Lakha, 1992). This emigration of professionals provides another link in the chain that integrates various centres of software development like Bangalore into the global IT sector. It also offers an avenue for social mobility to many in India who aspire to a Western, consumer-oriented lifestyle, better living conditions, and the acquisition of greater wealth.

Bangalore: India’s ‘Silicon Valley’ Bangalore is one of the fastest growing cities in India with a diverse industrial base and a cosmopolitan business community and middle class drawn from different parts of the country. During the early 1980s it was estimated that two-thirds of the city’s industrialists originated from outside the state of Karnataka (Chengappa, 1983: 32). The advanced industrial base of Bangalore is reflected in its status as the hub of India’s aerospace and defence industries and the leading position it occupies in the country’s electronics industry (Maniketh, 1990: 45–7). By the end of the 1980s Bangalore accounted for over 22 per cent of the total electronics production in India and was an important exporter of computers and other electronics equipment (Maniketh, 1990: 45). Since the mid-1980s, Bangalore has emerged as a major centre for the software industry in India with international computer companies like Texas Instruments, Hewlett-Packard, IBM, Digital, and others conducting software development in and around the city (Purokayastha, 1993: 128). Some global IT corporations like Motorola have research facilities just outside Bangalore in the ‘Electronics City’ established by the state government of Karnataka (Stremlau, 1996: 160). Even Singapore has extended its links with Bangalore in the IT sector by establishing an ‘Information Technology Park’ there. The software industry in Bangalore generated 40 per cent of the country’s software exports in 1997–8 (Ramachandraiah and Bawa, 2000: 570) and the city was the second most important location for the head offices of the 200 largest software firms in India (NASSCOM, 1996: 12). Whereas Mumbai housed the headquarters of 68 software companies, Bangalore was a relatively close second with 56 companies. The growth of Bangalore is reflected in its rapid population expansion that began prior to the large-scale development of modern industry. The population expanded from 1911 onwards when it rose from just 189,485 to 778,977 persons in 1951 (Venkatarayappa, 1957: 28). However, in the 1970s Bangalore’s population growth rate was a massive 76 per cent which was above that of any other urban centre in India (Purokayastha, 1994: 163). From 1960 to 1990 the population of Bangalore

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expanded from 1.1 million to over 4 million, registering a growth of 242 per cent (Asiaweek, 1994: 18). Industrial development, which has been a major factor behind the city’s population expansion, occurred in two separate phases (Chengappa, 1983: 30). The first phase, prior to 1965, was marked by the setting up of public sector enterprises, whereas the second phase, which occurred after 1970, involved private investments from across India. Major public sector organizations like Bharat Electronics Limited, Indian Space Research Organization, Hindustan Aeronautics, and many others in advanced technology also established their headquarters in Bangalore which considerably extended the city’s technological base (Maniketh, 1990: 46–7). The decision of the Indian government to set up ‘key’ defence industries in Bangalore played a major role both in promoting defence-related industries within the city and lifting its technological status (Maniketh, 1990: 47). Another major factor aiding Bangalore’s rise as an advanced technological centre is the ‘concentration of scientific institutions’ in the city and in the state of Karnataka (Chengappa, 1983: 28). Prestigious educational institutions like the Indian Institute of Astrophysics, Indian Institute of Science (IISc), Indian Institute of Management (IIM), and various medical institutes are located there. The Indian Institute of Science was established in 1911 through the initiative of the Maharaja of Mysore and other prominent sponsors, and it was based on the model of Caltech in California which is committed to excellence in teaching and research in the fields of science and technology and the pursuit of innovation (The Economist, 1991: 71–2). A combination of state-sponsored industries, the influx of private investments from various parts of India, an educational infrastructure, and foreign capital have all aided the transformation of Bangalore. In addition, the lower labour costs combined with initially cheaper real estate have provided further incentives to investors both local and foreign.

Social mobility The software industry in India (and Bangalore) has contributed significantly to new entrepreneurial and employment opportunities which offer substantial remuneration and social mobility. The development of the IT sector is part of the broader process of economic liberalization since 1991, which has provided major benefits to the established business houses, new entrepreneurs2 of mainly middle-class origins, and middle-class professionals who have acquired education at leading schools and universities where the medium of instruction is English. In discussing social mobility in the above context it is useful to distinguish between the bourgeoisie or the capitalist class on the one hand and the middle class on the other. The former is characterized by the ownership of the means of production and control over property, whereas the latter is distinguished by its ‘possession of qualifications’ and specialist skills (see Robison and Goodman, 1996a: 8–9). Within the capitalist class, there is also a distinction between those who belong to the large established business groups and are part of the business elite and others who have more modest resources and are recent entrants to that class. As discussed below, in the IT sector there are two avenues of social mobility:

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one leading from the ranks of the middle class to that of the bourgeoisie (or capitalists) and the other within the ranks of the middle class itself. A prime example from Bangalore of someone whose social and economic origins are linked to the old-style capitalist industries and established business is India’s richest man, Azim Hasham Premji, who owns Wipro. Wipro’s information technology division ranks second in the list of top twenty IT companies in India. Similarly Tata Consultancy Services (India’s top IT company based in Mumbai), is part of a conglomerate (the Tata Group) whose origins date back to the older Indian capitalist enterprise of the nineteenth century. The example of Premji and Wipro confirms the ‘elite continuity thesis’. His family belongs to a minority Muslim sect that was traditionally connected with agriculture and trade, and the family is originally from Gujarat, which has been a major centre of trade, banking, and manufacturing for centuries. Like many other Gujaratis, the family resided in Bombay from where it conducted its business until it moved to Bangalore. The family business, which was established around the time of independence (1947), began as a cooking oil and soap manufacturing enterprise and thus represented the ‘old-world soap-and-ghee capitalism’ (Mitra, 1999: 12). On his father’s death, Premji returned home from Stanford University in the USA, where he was studying engineering, to take charge of Wipro in 1967. In 1980 Wipro entered the high-technology sector by manufacturing minicomputers under technological collaboration with an American company Sentinel Computer Corporation (Chakravarty, 1998: 2). Since then Wipro has entered into several collaborations with foreign corporations, including a joint venture with the world-renowned Taiwanese firm, Acer (Chakravarty, 1998: 2). Though the company has retained its old product lines and also diversified into new sectors, such as medical equipment, baby products, financial services, and lighting equipment, the major part of its revenue is derived from information technology products which accounted for over 56 per cent of the group’s turnover in the late 1990s. In software, Wipro is India’s second biggest exporter with its exports valued at over US$103 million (Chakravarty, 1998: 3). Software business is the driving force of the company and it accounts for over 66 per cent of Wipro’s profit before tax and interest (Mitra, 1999: 13). Over time Wipro’s software exports have evolved towards the higher technology end with a concentration on software for health care, telecommunications, enterprise resource planning, and data communications (Chakravarty, 1998: 3). Thus Wipro’s transformation ‘from cooking oil to computers … both exemplifies and leads India’s march to modernity’ (Chakravarty, 1998: 1). Through its concentration on high technology products and a phenomenal rise in its stock price, Wipro has experienced a meteoric rise in its financial status. Wipro’s chairman, Azim Premji, ranked sixth in the list of 100 wealthiest families in Asia with his wealth estimated at US $10 billion (Hiscock, 2000a: 18).3 Other high technology company owners from Bangalore included in the list of the top 100 Asian billionaires are Shiv Nadar of HCL group and N.R. Narayana Murthy of Infosys. Murthy and his company Infosys are a contrasting example to Premji and Wipro because Murthy is a new entrepreneur from a poor family background, who established Infosys Technologies in 1981 with a group of friends (Chanda, 2000:

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60). The company, which began with a small capital base of Rs.10,000 (US$1,000) received a significant boost with the economic liberalization programme in 1991 which facilitated global links through reduced bureaucratic obstacles and government initiated infrastructure and technological developments (Chanda, 2000: 60). The success of Infosys is attested by its market capitalization valued at over US$10 billion (Hiscock, 2000b: 30). The beneficiaries of this success are both the owners of Infosys and permanent company employees ranging from the ranks of the professionals to those in non-professional, menial occupations who are all offered company stock (Chanda, 2000: 61). Stock options to all staff regardless of rank, however, is not a common practice in the IT industry. Infosys is a rare exception. Individuals such as Nadar and Murthy are not isolated examples of successes as there is now a distinct group of software entrepreneurs in Bangalore who have turned into ‘instant multimillionaires’ (Stremlau, 1996: 155). The software industry in Bangalore has, therefore, provided a major avenue for social and economic mobility both at the national and international levels. Since the late 1980s the entrepreneurial base of the computer software industry in India has substantially broadened. Whereas in the late 1980s only three firms contributed to 60 per cent of software development, by 1995 there were 25 firms accounting for the same proportion (Jayaraman, 1995: 45). In addition, 75 firms accounted for another 30 per cent of the development and another 400 smaller ones contributed to 10 per cent of the development. More recently, the growth of the Internet4 has attracted many computer professionals to set up website development enterprises. Some of these ‘web boutiques’ have only a few employees, varying from five to fifteen people (Kumar, 1999: 113). In Hyderabad, the state capital of Andhra Pradesh, which is fast emerging as a competitor to Bangalore and other software centres in India, there were 75 companies engaged in website development in 1998–9 (Kumar, 1999: 113). Those benefiting from the development of the IT sector in India include people from established business families such as the Premjis, Tatas, and Birlas as well as those from outside the capitalist class as revealed by the example of Murthy and Infosys. The latter have experienced social mobility through their specialized knowledge and qualifications in computing, engineering, pure sciences, accounting, and business management. Some of them, like Murthy, are graduates of prestigious higher education institutions such as the Indian Institute of Technology (IIT), the IIM, and IISc. These individuals from across India have benefited either through increased employment opportunities, high salaries, and stock options,5 or through setting up their own enterprises as in the case of Murthy. Their experiences confirm the ‘new opportunities, new people’ hypothesis. A survey of ten executives who were labelled as ‘the prototypes’ to lead the future IT industry revealed that they were all highly educated with qualifications in either management or engineering or both (Raina, 1995: 82–9). Recruited through campus interviews, some of them had non-business family backgrounds. For example, Arvind Thakur, vice-president of the National Institute of Information Technology (NIIT) Ltd, attended prestigious schools such as the Delhi Public School and graduated from the IIT in Kharagpur. His father was an army officer and Arvind

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was expected to join the army like many of his relatives, but instead he went to work for a government corporation, Bharat Heavy Electricals Ltd., and later joined NIIT. Similarly, Nipun Mehrotra, a marketing manager with Tata Information Services Ltd, is a scion of an army officer. The father of Sudhir Sethi, a general manager with Wipro, was also in government employment, but he was with the Foreign Service. Though the survey does not reveal the family backgrounds of all the executives listed, it is evident that education and merit are significant conditions of social mobility rather than solely a family business background. The educational requirements for entry into good positions within the IT sector both in India and overseas are ones that favour those of bourgeois and middle-class backgrounds to a greater extent than the children of the lower classes. To begin with, entry to management, science, and technology colleges, especially the IIM, IISc and IIT respectively is based on nationwide competition. To succeed in this contest requires a sound educational grounding that is largely available at the good government and private schools in India, which are attended mainly by the children of the rich and the middle class. These are also schools where the medium of instruction is English, which is a prerequisite for access to lucrative positions within the industry. Entry to good private schools in India is based upon economic status since the fees charged at such schools are exorbitant and only affordable by the middle class and the rich. Acceptance at these schools also requires parents to make large financial donations to the schools’ funds. The scale of some of the financial donations would automatically exclude lower-class students from private schools. The education system and class background are therefore important determinants of social mobility. Some Indian computer professionals have achieved social mobility outside of India as in the case of those who have settled in North America. Many, for example, are employed in Silicon Valley in California and elsewhere where they either occupy senior executive posts or operate their own enterprises (Sundaram, 1993: 86–95). Umang Gupta established himself as a multi-millionaire entrepreneur with over 20 per cent stock ownership of a software ‘boutique’ called ‘Gupta Corporation’ in California, whereas another Indian, Vinod Khosla, set up jointly the worldrenowned Sun Microsystems which manufactures workstations (Business World, 1993: 108). Amongst those who have moved to the higher rungs of the executive ladder is Kanwal Rekhi who became vice-president and director of Novell, a leading American IT company. These three professionals have similar academic and professional trajectories since all of them are graduates of IIT and went to the USA for higher education. Those migrating to the USA experience differential social mobility depending upon their educational and employment backgrounds (Lakha, 1992; Mir et al., 2000). The graduates of the internationally renowned IIT and other leading Indian universities have the brightest career prospects in the IT industry in the USA as indicated by the above examples of Gupta, Khosla, and Rekhi. Graduates from these institutions also have the best chances of obtaining admission to postgraduate courses at recognized American universities, which allows them to subsequently seek employment in the US corporate sector. By attending the elite institutions of higher learning in

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India these graduates have acquired the contacts and information that are necessary to guide them through the application processes connected with entry to universities in the USA (Mir et al., 2000: 26). Those from India who go abroad to the USA or other western countries for higher education are generally from either middle-class families or the children of wealthy businessmen who can afford the cost of university education overseas. Alternatively, Indian students in the USA who are not privately funded will have gained a scholarship to study there which indicates that their educational training is of the highest standard by international comparison. Such educational attainment is mostly confined to middle- and upper-class children in India because they have attended the good English-medium schools and universities where entry is highly competitive. Admission to such schools is often based upon economic status and cultural capital6 that the lower classes do not possess. Indian computer professionals in the USA who do not hold qualifications from either the elite Indian educational institutions or American universities have fewer opportunities to gain access to lucrative positions in the USA. For example, a student who attended a school in a small town located in ‘a rural district’ in India, and then trained at minor institutes of technology, had almost no prospects to enter one of the elite Indian universities for further education or obtain employment with a top foreign company in India (Mir et al., 2000: 27). When he went to work in the USA he was sent there on a short-term contract basis by an Indian firm engaged in ‘body-shopping’ (Mir et al., 2000: 27). As a short-term contract worker in the USA he would earn a much lower income compared to Indian professionals with better qualifications and a permanent visa to stay in the country. The segmented labour market for computer professionals in the USA discriminates against such contract workers whose income and career prospects are comparatively limited, though some amongst them may eventually secure a permanent visa and a better position (Lakha, 1992).

Conclusion The growth of the IT industry, including software, has opened up substantial opportunities for both established business groups and those who are new entrants to the world of commerce and industry. In a knowledge-based industry such as software, scientific and technological expertise is the key requirement for tapping employment and entrepreneurial opportunities. Considering the wide range of software development activities and low set-up costs for small operators, the barriers to entry into the industry are not necessarily financial but a limited domestic market within the industry which is connected partly with the low level of computerization in India. To some extent the limits of the domestic market are mitigated for some developers by access to the global market through the Internet. The broadening of the entrepreneurial base indicates that entry into the industry is not restrictive in terms of the size of enterprise or the amount of investment. The state has played a major role in the development of the software industry and the IT sector in at least two ways. First, as discussed above it has provided the necessary policy framework and the technological infrastructure to support IT

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growth in India. Second, the state has also facilitated the growth of a professional middle class and new entrepreneurs through various economic and educational initiatives in the post-colonial period (Lakha, 1999: 253–6). For example, the state has made a central contribution to the setting up of an educational system, which has favoured higher education resulting in a huge supply of university graduates. The elite institutions such as the IIT, IIS, and IIM are all creations of the post-colonial state aiming to launch India as a major economic and technological power. Education is one of the main means of social mobility for many in the middle class aspiring to wealth and status. The strategies of social mobility include the pursuit of entrepreneurial activities in sunrise industries such as software, obtaining executive positions in the private and public sectors in India, and emigrating to western countries like the USA in search of lucrative professional positions and better living conditions. Employment-wise, before the economic downturn in the USA, there were ample opportunities in the IT sector in India, considering the expanding nature of the labour market and the gap between the supply of graduates and the demand for labour within this sector. Further, Indian computer professionals have not been confined to the Indian labour market in their search for lucrative positions. For some professionals the employment opportunities are transnational. In the past, IT companies in India, both local and foreign, have experienced difficulties retaining their labour because job-hopping was common. Those who are experienced or have received overseas training tend to seek positions abroad. However, recent events such as the collapse in the global technology sector dating from April 2000, the subsequent slowdown in the US economy, and the September 11 attacks on the USA, have combined to restrict the opportunities for social mobility in the hi-tech sector in India and overseas. Thus the previous high rates of labour turnover (job-hopping) in the software industry in India have declined as has the growth rate of the industry. The slowdown in the IT sector in the USA is reflected in the lower growth of software exports from India. Whereas the export growth in 2000–1 was 55 per cent, the growth in the first half of the financial year 2001–2 was only about 33 per cent (EAU, 2001: 102). In 2001 many of the Indian firms were scaling down the recruitment of staff at the same time as companies in the USA were retrenching Indian contract staff who were under pressure to return to India (The Economist, 2001: 18). According to one report, it was anticipated that around 50,000 Indians retrenched in the US would head back to India by July 2001 (Goyal, 2001: 46). Consequently, by the beginning of 2002 there was a surplus of software professionals in India with the influx of Indians who had lost their jobs in the USA (Kripalani, 2002). Also, Indian IT recruitment companies operating on the Internet have experienced a substantial rise in the number of professionals visiting their sites and submitting their résumés. Many of those enquiring were Indian professionals based in the USA where the severe decline in employment had adverse repercussions for those Indians hired on a contract basis, and whose temporary work visas did not permit them to reside in the USA without employment (Srivastava and Kamath, 2002).

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The impact of the US economic slowdown is not felt uniformly across the software sector in India, because some of the larger companies are involved in the development of complex software applications that are longer-term and crucial to the activities of their US clients, who would not desire to cancel their contracts (Kripalani, 2002). The leading Indian companies are also operating their own software units in the US and are therefore, to some extent, insulated from fluctuations in the US economy compared to those Indian companies that are totally reliant upon orders from US corporations. Ultimately, the downturn in the US market is more threatening for the smaller companies in India that have fewer resources and greater reliance on US corporations (Kripalani, 2002). Some in the software industry in India view the economic slowdown in the US as an opportunity because American companies in their search for greater competitiveness are reducing costs by relocating their software development offshore to cheaper production sites like India (Slater, 2001: 38; Goyal, 2001:43). For example, the potential for the outsourcing of back-office operations to India is considerable and offers a ‘bonanza’ for the Indian companies (Slater, 2001: 38). During the early part of 2001, some major Indian companies added more customers to their client base and their American counterparts operating in India were preparing for expansion as more assignments were shifted from their US offices to India (Goyal, 2001: 43). The longer-term prospects for Indian companies may not be altogether negative as a result of the economic slowdown in the USA and the opportunities for social mobility in the IT sector will remain, albeit on a reduced scale for some time. It is arguable whether the growth of the computer software industry and the IT sector in India have provided mobility for the lower classes who constitute a large proportion of India’s population and who lack the requisite education and expertise. According to Infosys’ chief Murthy, 85 per cent of the people in India who earn low incomes are bound by ‘intellectual slavery’ because of the hypocritical attitude of the establishment which ensures English-medium education for its scions but confines the majority of others to an education in the various regional languages (Chanda, 2000: 63). Considering the importance of English language-based education in obtaining employment in the IT industry, the opportunities for mobility are severely limited for the lower classes, especially those in rural areas where the majority of the Indian population resides. According to a senior bureaucrat, the ‘hierarchical caste system’ is also a contributory factor to illiteracy (or poor educational standards), and consequently an impediment to the development of high technology, because it prevents the spread of education to a large section of the population that is socially marginalized. Interclass mobility for the lower classes is therefore largely excluded. Social mobility occurs mainly at the levels of the middle class and the bourgeoisie who have either the necessary income or education or both. Even Murthy, whose origins are from a humble economic background, possessed the requisite education from one of the elite IIT. Others such as Premji have both the wealth and education to facilitate their mobility to a global scale. These experiences discussed above confirm the ‘elite continuity’ hypothesis as well as the ‘new opportunities, new people’

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hypothesis. But importantly, in the case of either hypothesis, the beneficiaries are mostly from the upper and middle classes; that is, either those belonging to the bourgeois class or those from the ranks of the educated, professional middle class. Globalization and global restructuring in this case are benefiting the already privileged to a greater extent than those less privileged. These involve both intraclass and interclass mobility. Interclass mobility occurs where individuals of middle-class professional background have set up software and other IT enterprises to become capitalist entrepreneurs. Intraclass mobility is based upon upward occupational or professional mobility as in the case of those individuals from relatively modest middle-class backgrounds who have managed to secure highly rewarding executive positions in IT companies. One pertinent example of intraclass mobility was offered by an Indian informant with reference to his cousin who is a senior executive with a major IT company in Bangalore. Though the cousin is now very affluent, his upper caste family had previously enjoyed a rather modest economic status since the father occupied a senior academic administrative post that carried a relatively high status but provided only limited income. The cousin’s social mobility was facilitated by his education and qualifications. He attended a good missionary school in Calcutta and obtained a degree in electronics engineering from a leading university. Subsequently he gained an MBA from an IIM which allowed him to secure a position with one of the top business houses in India. From there he later moved on to join an IT company in Bangalore with which he is now employed. As this example illustrates, the cousin’s caste and educational background equipped him with the means to attain an economic and social status well beyond that of his father and one that is not an exception to those of his ilk. In some cases occupational mobility may also involve spatial mobility through international migration which facilitates access to the global labour market. The articulation of the Indian computer software industry within the NIDL is creating ‘a new transnational elite of well-paid “infocrats”’ (Stremlau, 1996: 155) which is recruited largely from an already privileged middle class. In the case of India, this ‘transnational elite’ is mainly urban based, upper caste, well educated by international standards, and competent in the English language.

Notes 1 For an analytical discussion of middle class consumption and the construction of identity refer to Lakha (1999: 257–68). On the rise of consumerism amongst Indian youth, see Kripalani (1999: 79–80). 2 See Khanna (1987: 56–9) for a definition of the ‘new bourgeoisie’ or what are referred to as the new entrepreneurs in this chapter. 3 In 1999, Forbes magazine ranked Premji as the fourth richest person in the world; his net personal wealth was estimated at US$ 25.7 billion. 4 An indicator of the rapid growth of the Internet in India is the rise of Internet subscribers from zero in 1989 to 530,000 in 2000 (India Today International, 2000: 34). 5 Both Wipro and Infosys offer their staff stock that, with rising share prices of IT companies in India, has substantially enriched the executive staff of these companies. One report claimed that Wipro has the largest number of ‘millionaire employees’ in India and

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the company’s ‘employee stock option plan’ covered 2,300 staff (The Economic Times, 2000: 1). In the case of Infosys, even chauffeurs and catering staff who were offered stock have been substantially enriched (Kremmer, 2000: 7). 6 For a discussion of Bourdieu’s notion of cultural capital refer to Bourdieu (1984: 11–14, 53–4, 120 and 303) and DiMaggio (1991: 134–41).

5

Restructuring capitalist power in the Philippines Elite consolidation and upward mobility in producer services Michael Pinches1

Though it came somewhat belatedly, and was less spectacular than in several other countries in the region, substantial economic growth started in the Philippines in the early 1990s. It was most obvious in sprawling Manila: in the proliferation of new cars, expensive housing estates, inner city condominiums, gourmet restaurants, and massive shopping malls. It was similarly evident in Cebu City, and some of the smaller provincial cities like General Santos in southern Mindanao. While the regional financial crisis in the late 1990s took its toll, the economic, social, and cultural changes that had surfaced under the presidency of Fidel Ramos (1992–8) continue to reshape Philippine society, both internally, and in its regional and global relations. In broad political-economic terms, these changes feature heightened levels of local and foreign investment amidst a policy climate of deregulation and privatization. Their more tangible expressions have been seen not only in the changing landscapes of some Philippine cities, but also in the mood of renewed confidence and entrepreneurial enterprise found in the upper and upper-middle echelons of Philippine society, notwithstanding the regional financial crisis and the political turmoil surrounding the latter period of the Estrada presidency (1998–2001).2 As has been the case across the region as a whole (Robison and Goodman, 1996a; Pinches 1999a), economic growth in the Philippines has brought with it a substantial layer of people who can be described as new rich (Pinches, 1996; 1999b). In this chapter, I focus on the extent to which the expansion of producer services in the Philippines has facilitated the growth of a new rich, or consolidated the economic and social advantages of the established elite. Rapid industrialization in East and Southeast Asia over the past three decades has attracted much attention, most of it centred on the growth in urban manufacture. Interest focused, in particular, on the development of export manufacture associated with what some described as the ‘new international division of labour’, in recognition of the role that countries like the Philippines played as providers of cheap labour in processes of production and accumulation that were increasingly transnational (Frobel et al., 1980). Industrial manufacture continues to be crucial to most growing economies in the region, but what had not been anticipated in much of the early literature on this subject was, firstly, the extent to which capital and wealth accumulation occurred increasingly among privileged layers of people living within the region itself, and secondly, the extent to which growth in the services sector has

Restructuring capitalist power in the Philippines 65 became important, not as a drain on ‘productive’ enterprise, as once supposed, but as an integral part of national, regional, and global transformation in the ‘information age’. These two dimensions of contemporary change in Asia became especially evident during the 1990s, and constitute the focus of this chapter and book. While a substantial body of literature has been devoted to the increasingly pivotal role played by services in the organization and culture of classes, transnational corporations and major cities in industrialized societies (Castells, 1996; Sassen, 1991), only recently has the subject started to attract interest in industrializing Asia (O’Connor and Hutton, 1998). The economic restructuring currently taking place in Southeast Asia is partially reflected in the shifting patterns of employment shown in Table 5.1. Most noticeable here are the following points: 1 2

3 4

a decline everywhere in agricultural employment (most of the ‘extractive’ category); higher but declining levels of manufacturing employment in the United States, Japan and Singapore relative to lower but increasing levels in most Southeast Asian countries, with the Philippines registering the smallest increase; an increase in all categories of ‘services’ employment in all countries, both industrialized and industrializing; and an increase in ‘producer services’ employment in all countries, but with significantly higher rates in the established industrial countries of the United States and Japan than in Southeast Asia, the exception being Singapore (see also Daniels, 1998: 147–8).

While Table 5.1 is helpful in identifying the above patterns, it is also limited and, in some respects, misleading, particularly in relation to services which often defy easy categorization, whether into the divisions shown in Table 5.1, or into the alternative ‘producer’ and ‘consumer’ services.3 More importantly, as Sassen (1991: 90, 97–8) observes, it can be argued that producer services are to be found in all conventionally defined economic sectors, and alongside banking, accounting, and insurance, may include transport, storage, and distribution. Indeed, according to Sassen (1991), Castells (1996) and others, the growth of producer services reflects a qualitative structural shift in capitalist organization towards what Harvey (1990: 147–97) calls ‘flexible accumulation’, as all areas of economic enterprise become more complex and dynamic, giving increasing impetus to the use of information technology and the ‘knowledge workers’ associated with it. Sassen (1991: 102) also notes a tendency for producer services to concentrate in particular central places, most notably in large affluent cities like New York, London, and Tokyo. On a global scale this seems consistent with the apparently low levels of producer services in Southeast Asia relative to the United States and Japan, where many of the world’s transnational corporations have their headquarters. On a national scale it would suggest that producer services are likely to be concentrated in primate cities like Manila and Bangkok. But as Sassen (1991: 95) points out, late capitalism also provides a strong

7.3 34.1 24.1 0.5 9.4 28.6 22.6 6.0 8.3 21.3

5.4 32.9 22.0 0.5 10.4 28.8 22.5 6.3 8.8 23.5

0.5 36.1 29.0 0.5 6.6 32.7 22.8 9.9 9.8 20.8

0.3 30.2 22.6 0.7 6.9 33.3 21.8 11.5 14.9 21.3

1997

1989

1990

1997

Singapore3

Japan3 26.6 26.9 19.9 0.7 6.3 22.7 18.2 4.5 3.9 19.9

1990 17.9 33.3 23.4 0.6 9.3 23.3 18.4 4.9 5.2 20.5

1997

Malaysia3 50.4 19.5 12.9 0.5 6.1 16.9* 13.9* 3.0 13.1

9.9

1997

64.2 13.9 10.2 0.4 3.3 12.0* 9.6* 2.4

1990

Thailand3 56.6 13.0 10.1 0.2 2.7 17.6 14.6 3.0 0.6 12.0

1990

42.2 18.0 12.9 0.3 4.8 24.6 19.8 4.8 0.8 14.5

1997

Indonesia3

45.8 14.4 9.7 0.4 4.3 19.1 14.1 5.0 2.0 18.7

1990

40.8 16.3 9.9 0.5 5.9 21.4 15.1 6.3 2.4 19.0

1997

Philippines3

1 The categories below are adapted from Castells (1996: Table 4.1) and the International Standard Industrial Classification used by the ILO (1998: 1287–88, 1293). 2 Producer services are defined here as financing, insurance, real estate and business services (ILO 1998: 1287). 3 Calculated from ILO 1998: Table 2B, pp. 147–159. * Includes finance services

Extractive Transformation – Manufacturing – Utilities – Construction Distribution services – Trade – Transport Producer services2 Social/personal services

Industry1

Table 5.1 Percentage of employment by economic activity

Restructuring capitalist power in the Philippines 67 impetus for the proliferation of consumer services. These, she says (1991: 102) are more evenly distributed and most notable in peripheral regions. Though producer services employment is relatively low in most of contemporary Southeast Asia, it may still have become vital, both in a structural economic sense and as an arena or facilitator of upward social mobility. If capitalist development is to continue in the region, we would also expect both producer and consumer services to become more important. My research in the Philippines indicates that since the early 1990s, producer and consumer services have become more important than the figures in Table 5.1 might suggest, firstly as an arena of social change in the middle and upper echelons of Philippine society, and secondly as a focus of symbolic change that emphasizes an ethos of private enterprise, merit, and consumer affluence. While many service occupations in Manila, Cebu City, and many smaller provincial cities are poorly remunerated and seemingly marginal, it is clearly no longer acceptable to explore the services sector in countries like the Philippines as a residual, unproductive arena of ‘concealed unemployment’ (Amin, 1976: 245). In the remainder of this chapter I draw attention to the way in which producer services have become a focus of economic growth and private enrichment in the Philippines. In particular, I consider the extent to which the new opportunities associated with the expansion of producer services have been captured or generated by members of the old elite, or by others who come from more modest, less influential positions. In the next section I provide a general overview of the changing character of the Philippine business classes, the ways in which they have been affected by economic and political forces, particularly over the past decade, and the ways in which they have been conceptualized in relation to wider societal change. The following section examines the older forms of producer service in the Philippines – most notably banking, real estate and insurance – and the extent to which these represent sites of elite consolidation or upward mobility on the part of others outside the established elite. The final section examines the same question in reference to enterprises that have grown up around information technology. The chapter concludes by summarizing my main findings and arguments.

Classes, the state and economic growth in the Philippines The Philippines has long been typified as a society in which economic and political power is highly concentrated. The nation emerged from colonial rule in 1946 as an agrarian society controlled by a small landed oligarchy whose economic power was largely maintained through the exercise of patronage politics and privileged access to a patrimonial state (Anderson, 1988; Hutchcroft, 1991). It was also a society in which power and privilege were expressed in terms of ethnic identity and family name; virtually all elite families were identified as Spanish or mestizo and reproduced themselves through intermarriage or other close interpersonal ties. Today, most of those old elite families continue to enjoy inordinate power and social standing. While the influence of some has receded, others, like the Ayalas and Aboitizes, have expanded or consolidated their wealth, power and prestige by diversifying their economic interests through the establishment of large family conglomerates.4

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However, the growth of urban manufacture in the 1950s saw the rise of a number of other successful business families, most of them with modest origins in the Filipino-Chinese trading community. By the 1990s some of them, like the families of John Gokongwei, Henry Sy, and Lucio Tan, rivaled the older elite families both for their wealth and for the breadth of their business conglomerates. Some benefited substantially from their personal alliances with President Marcos during the period of authoritarian rule (1972–86), as did a few old elite families and a coterie of new crony capitalists, many of whose business interests rose and fell with the fortunes of the regime.5 Thus, as the Philippines entered the 1990s, capital and corporate power were concentrated in the hands of a small number of conglomerates, some of which were controlled by Spanish and mestizo families whose wealth and social standing were based in landed property during the colonial era, and others, mainly FilipinoChinese, whose advancement started in trading and manufacture in the early independence era. In both cases, family conglomerates typically diversified across real estate, banking, manufacture and agribusiness, though all tended to be best known through their interests in particular companies or sectors of the economy. Though some of these families rose to prominence in provincial cities, notably Cebu City and Bacolod, the interests of the great majority came to be focused in Manila. Notwithstanding this concentration of economic power, the four decades of independence leading into the 1990s had also seen the emergence of a substantial lower tier of moderately wealthy capitalists and a larger urban middle class, made up of public servants, educated salaried professionals, and technocrats. As the Philippines began to achieve sustained economic growth during the early to mid-1990s, these layers grew and became more socially and culturally prominent (Pinches, 1996). Indeed, in Manila and Cebu, in particular, much media celebration centred on the rise of countless new entrepreneurs who were making good in small-scale manufacture, the restaurant and food industry, retail trade and building construction, in many cases catering to the widening local consumer market, much of it fuelled by the repatriated earnings of millions of Filipino overseas workers. As political stability and economic optimism gained momentum during the 1990s, the Philippines not only attracted more foreign investment, but also the return of many Filipino professionals, managers, and entrepreneurs who had built successful careers overseas, many of them having departed during the Marcos dictatorship. Some established their own independent businesses, some assumed powerful managerial positions within large corporations, both local and foreign, and others took up influential positions within the state (cf. Manuzon, 2002). In stark contrast to the Marcos era, the policy platform that informed the state’s position on economic development during the 1990s was one of liberalization, deregulation, and privatization. In large part these policies were enforced on the Philippine Government by international lending agencies by virtue of the high level of foreign indebtedness inherited from the Marcos regime (Hutchison, 1997). There was also a strong ideological and moral impetus on post-Marcos politicians and governments to distinguish themselves from the images of authoritarian rule and economic plunder that had come to stigmatize the Philippines during the Marcos

Restructuring capitalist power in the Philippines 69 era. Drawing on the democratic ethos that came with the popular overthrow of the Marcos regime, and in an attempt for improved regional standing, powerful forces within the Filipino elite and intelligentsia have sought to reconstruct Philippine national development as distinctively democratic and liberal (Pinches, 1999b). To this end, and under pressure from international funding bodies, many former state enterprises and monopolies were dismantled and privatized, and, despite some resistance, liberal reforms increasingly opened up banking, retail trade, shipping, telecommunications and other industries to competition, while the Board of Investments and other state bodies sought to promote new sources of foreign and local investment through various tax and other incentives (Magno, 1996; NEDA, 1999; 2001; Hutchison, 2001: 60–3). While these moves on the part of the state have helped to foster a more open business environment conducive to greater competition and to the emergence of new capitalist entrepreneurs, they have not seriously challenged the corporate power of the established capitalist elite. Indeed, liberalization policies are not only supported by many of the country’s most powerful capitalists, but they appear to reflect their changing corporate interests which seem to be better served by a relatively open and predictable economic climate than by a shifting environment of particularistic political largesse. Liberalization has clearly not brought an end to corruption and particularistic political favour, as became abundantly clear during the truncated presidency of Joseph Estrada (1998–2001) (Coronel, 2000a). But clearly such behavior was no longer as acceptable as it once had been, at least in as much as its chief beneficiaries were from outside the established social and business elite.6 Thus the blatancy of corruption under President Estrada, and the extent to which it generated uncertainty among investors, provided leading sectors of the business community and urban intelligentsia with the principal rationale for driving him from office, in much the same way as Marcos had been removed, and well before his term was up.7 Although liberalization policies may favour those with established corporate empires, they have also complemented the broader forces of globalization, in prompting certain changes in the way in which many of the established Filipino business conglomerates operate. Increasingly companies within these conglomerates are linking up with foreign business partners, looking to overseas investment opportunities and professionalizing their management structures by bringing in highly credentialed outsiders. At the same time, many less powerful capitalists operating small and medium-sized enterprises (SMEs) within the Philippines have been forming business partnerships with large local and foreign businesses through outsourcing, subcontracting, or consulting arrangements. Economic expansion in the contemporary Philippines may well entail more competition, but it also entails more business partnerships as enterprises large and small, old and new, interconnect in more complex ways. These developments in the middle and upper echelons of Philippine society have found expression in a more fluid and complex social structure, expressed most publicly through different levels and styles of consumer identity, evident in such things as housing, clothing, and leisure activities. While such labels as rich (mayaman) and

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poor (mahirap) continue to be widely used, the English term ‘middle-class’ is invoked increasingly, and urban Filipinos, in particular, make reference to a more nuanced and uncertain hierarchy of social positions by employing the market research categories ABCDE to describe people, their activities, and the places they frequent (see Pinches, 1999b: 291–5). In keeping with the synthetic gradation models of ‘class’ distinction commonly used in Western sociology (Ossowski, 1963: 44–57), these categories variously combine such criteria as income level, lifestyle, housing, consumer status, occupational prestige, and even political disposition.8 In the contemporary Philippine context they evidence a public rethinking of social structure during a period of change, as the middle layers of society have opened up to greater levels of social mobility and differentiation. According to the sorts of criteria invoked in this popular model, there would appear to be a high level of social mobility as people’s incomes, housing, and consumer lifestyles change, bringing with them heightened levels of social prestige. However, there are serious analytical deficiencies in this sort of approach to social stratification, not least being the relative arbitrariness of the boundaries that are drawn between different strata. By contrast, Marxist or neoWeberian class models based on property and labour relations have proved more useful in identifying the structural shifts that are taking place in the Philippines and other societies in contemporary Asia (e.g. Robison and Goodman, 1996a; Pinches, 1999a). While acknowledging a wide range of differences in such things as income and consumer status, these models have been at pains to define classes in the region in terms of the changing organization of capital and labour, and, in particular, have drawn attention to the growth of a new middle class of salaried corporate professionals and managers alongside the older intermediate layers of state officials and petty capitalists.9 Seen in these terms, social mobility does not entail incremental changes along a particular axis of wealth or status, but a qualitative shift between structurally or relationally defined classes. Thus the question of social mobility in the contemporary Philippines, and the region more generally, is dependent upon the perspective one adopts. In this chapter I consider each to be important, but recognize the need to distinguish them conceptually: the first I consider status mobility and the second, class mobility.10

Elite consolidation and upward mobility in old economy producer services Producer services have long been central to the capital accumulation and corporate expansion of the Philippines’ most powerful business families. They have also become highly concentrated in Manila and to a lesser extent Cebu City.11 It is perhaps the Manila-based Ayala family that has most distinguished itself through producer services. The Ayalas first came to prominence as a Filipino-Spanish business family in the mid-nineteenth century. Since then, their business activities have come to include urban utilities, real estate, insurance, banking, and manufacture, but it was their conversion of hacienda Makati into urban real estate on the fringe of Manila during the 1930s and, more spectacularly, in the 1950s and 1960s, that generated most of their wealth, and allowed them to expand their other business interests.

Restructuring capitalist power in the Philippines 71 Developed as a new centre of luxury accommodation, shopping, and finance, Makati became metropolitan Manila’s new central business district attracting leading local and foreign business houses. By the end of the 1960s, the Ayalas converted their long-standing interests in the country’s oldest bank into full ownership, taking over from the Catholic Church. These investments – in banking and real estate – have remained at the heart of the Ayalas’ success. Unlike some of the old Manila-based family conglomerates, Ayala Corporation survived relatively unscathed the political depredations and, later, the financial crisis of Marcos’ authoritarian rule (1972–86), but expanded its empire substantially in the period after, significantly increasing its international business partnerships. Its affiliated companies and subsidiaries, now numbering over fifty, extend across real estate development, banking, insurance, food processing, microelectronics manufacture, telecommunications, and car dealerships. One feature of Ayala Corporation’s recent growth has been the leading role it has played in developing the Calabarzon industrial estates south of Manila in the early 1990s, as well as a similar estate in Cebu City. These projects follow Ayala’s entry into microelectronics manufacture in the 1980s, heralding also the company’s most recent expansion into telecommunications and information technology.12 The Ayala family is not alone among the old Filipino-Spanish oligarchs to expand its fortunes and corporate influence through producer services. Another prominent Filipino-Spanish family whose business empire had its origins in the nineteenth century, and who also has long-standing interests in service industries, is the Cebu-based Aboitiz family. The Aboitizes first established themselves in merchandising, shipping, warehousing, and real estate, later diversifying into banking, power generation, business management, construction, and manufacture. Like the Ayala Corporation, the Aboitiz conglomerate continues to be controlled and run by members of the family, which remains Cebu’s wealthiest (Say, 1989c; Nuqui and Perez, 1994; Nuqui, 1995). While some families like the Ayalas and the Aboitizes highlight important continuities in the long-term development and activities of some segments within the old Philippine oligarchy, the contemporary business elite was mainly shaped in the decades after independence in 1946. Much of this involved a growth in producer services, most notably banking. During the 1950s, many among the old landed oligarchy diversified their family interests into home market manufacture, commerce, and urban real estate, but in the 1960s it was banking that became the cornerstone of most of the country’s family conglomerates. Attracted by generous government incentives and ready access to banking licenses, large numbers of wealthy business families set up private banks, primarily as sources of capital for their own enterprises (Hutchcroft, 1998: 82–109). Shored up by public funding, and too powerful for Central Bank regulation, the dominant banks provided their owners with great wealth and influence, demonstrating, as Hutchcroft (1998) argues, the weakness of the Philippine state and the extent to which, since independence, it has been beholden to the private interests of the country’s elite. Thus, access to investment capital through the banking system has largely been exclusive to owning families, or to those with favourable connections with them. The proliferation of private banks

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in the 1960s not only benefited the old landed oligarchy, but also some newcomers – mainly Filipino-Chinese – who had prospered through home market manufacturing and urban service growth in the decade earlier. Later, banking was also a crucial ingredient to the upward mobility of several of the crony capitalists whose careers were either launched or assisted in the 1970s and early 1980s by the Marcos regime. Taking over many of the banks formerly owned by members of the old elite, Marcos and his cronies used them in much the same way as their predecessors. On a much smaller scale, but seemingly following the Marcos precedent, President Estrada (1998–2001) assisted some of his associates to prosper through the acquisition of banking interests, the most calamitous case being Equitable Bank’s takeover of the larger PCI Bank in 1999 (Lopez and Espinosa-Robles, 1999). Alongside banking, real estate development has been a mainstay for many business families within the old Philippine elite. As the biggest urban land developer in the country, the Ayalas remain the prime example. But real estate development has enriched a number of other old oligarchic families, such as the Ortigases and Aranetas, who have long owned extensive land holdings on what were once the fringes of Manila. Turning their efforts to real estate development on such land has proven most lucrative as Manila and provincial centres like Cebu City have grown rapidly since independence. However, since the mid-1980s many Filipino-Chinese corporate families, whose business successes started in the 1950s, have come to rival this earlier generation of real estate developers. A number of them, such as the Sys and Gokongweis have created real estate companies around the production of giant shopping malls. Another, Andrew Gotianun, rivals the Ayalas in the recent development of Alabang, a commercial, financial and exclusive residential centre in the tradition of Makati (deLeon, 1994; Anon, 1997a; 1997b). In an even bigger project along these lines – the redevelopment of Fort Bonifacio, Manila’s old military barracks – the Ayalas lost out to a consortium headed by First Pacific, a Hong Kongbased conglomerate controlled by the Indonesian Salim family.13 Also included in the consortium are companies owned by Gotianun and former Marcos crony, Lucio Tan (Tiglao, 1994; Bacani and Paras, 1996). The 1990s also saw a number of real estate companies controlled by established elite families rush to build vast industrial estates south of Manila to accommodate an influx of foreign investors in microelectronics manufacture (Tiglao, 1999b). Though the regional financial crisis in the late 1990s saw a slowing down of many real estate projects, and the collapse of some property developers, companies belonging to the elite family conglomerates survived relatively comfortably.14 Just as private banks have facilitated family investments in real estate, so for some established elite families have they served as an avenue into other financial services, notably insurance. However, only the Ayalas vie with the country’s top insurance brokers, most of them North American.15 At least one family conglomerate – that of the Yuchengcos – had its origins in the insurance business. Taking over an insurance company founded by his father in 1930, Alfonso Yuchengco not only expanded the company to a point where it now has a number of overseas branches, but he also used his success in insurance to diversify into banking, agribusiness, real estate, construction, manufacture, mining, and other areas, such that he and his children

Restructuring capitalist power in the Philippines 73 now command one of the country’s largest business empires (Say, 1989d; Francisco, 1994). While the large family conglomerate ranging across various industries has been the norm for wealth accumulation at the top of Philippines society, there are exceptions. One notable case in producer services is that of the Sycip family, the most prominent member of whom is Washington Sycip, Alfonso Yuchengco’s brother-inlaw (Francisco, 1994: 116), and founder of SGV, one of Asia’s largest accountancy and business service firms. Rather than join the China Bank founded in Manila by his father in the 1920s, Washington Sycip used his Commerce degrees from the Philippines and the United States to start his own accountancy firm at the end of World War II. This quickly expanded into a partnership, merged with a local British competitor in the 1950s and, in the 1960s, expanded into several other Southeast Asian countries. By the mid-1980s when it was affiliated with America’s Arthur Anderson, SGV had expanded into a range of business services and had the majority of the Philippines’ largest corporations as its clients. Sycip’s brothers founded separate businesses, while his children have similarly pursued independent careers, but each has had the decided advantage of a well-connected family, which has made it possible for offspring to obtain professional tertiary qualifications.16 Indeed, elite Philippine business families have placed an increasing premium on their children, particularly their sons, obtaining professional qualifications, preferably at American universities. But, as with the Ayala, Yuchengco and Aboitiz families, it is generally expected that these qualifications will be used to reproduce and advance the family corporation.17 The exception of Sycip’s SGV raises issues of elite participation in advanced producer services, a matter I return to below. The liberalization and deregulation policies that have been pursued since the overthrow of the Marcos regime have as their object the dismantling of old protected industries and monopolies, with the stated intention of preventing a recurrence of Marcos era excesses, cultivating Filipino entrepreneurship beyond the privileged elite and making Philippine enterprises more productive and competitive at home and abroad.18 Because of the highly concentrated nature of local corporate power in many of the services industries, a number of these have been singled out for liberalization. In 1989, and again in 1994, restrictions were lifted on obtaining bank licenses for the first time since the 1960s, resulting in the opening of a number of new local banks, as well as the entry of ten foreign banks, despite opposition from the Bankers Association of the Philippines and their supporters in Congress (Hutchcroft, 1998: 206–18; see also NEDA 1999: Chap. 4, pp. 6–8). These reforms, coupled with a healthier economic environment through most of the 1990s, brought about a more stable and professionalized banking system (Hutchcroft, 1998: 224). However, as Hutchcroft (1998: 225–30) argues, the Philippine state lacks the power to fully reform the banking system which continues to be dominated by the major banks, is still open to private family control, restricts its lending to a highly privileged clientele, and continues to drain public resources into private hands. The most celebrated case of liberalization has been in the telecommunications industry where a long-standing monopoly, the Philippine Long Distance Telephone Company (PLDT), controlled by the old oligarchic Cojuangco family, was forced in

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1995 to give way to competition. The immediate impact was a dramatic improvement in the service and efficiency of PLDT, and the entry of several competitors, chief among them being companies owned by the Ayalas, Gokongweis, and other established capitalist families (Coronel, 1998: 144; Lopez, 1999; Salazar, 2001). Though PLDT continues to assume a commanding position in the industry (Aldaba, 2001), control over it has passed from the Cojuangcos to the Indonesian Salim family conglomerate that heads the Fort Bonifacio development (Tiglao, 1998a; 1998b).19 As with banking, telecommunications continues to be dominated by established capitalists with a privileged access to capital. And as Hutchcroft (1998) argues with banking, so Coronel (1998: 144) and Serafica (2001) argue with telecommunications, this is in large part a consequence of inadequate state regulation. Government-led liberalization has created more competition and greater efficiencies in key producer service industries, but to the extent that it has created new opportunities, these have mainly been for those with established wealth and corporate power. Indeed, while there has been a decrying of past Government corruption and an undoubted ideological commitment to the ideas of free enterprise and entrepreneurship within the powerful Makati Business Club and among its member companies like the Ayala Corporation, it is clear in areas like banking, insurance, real estate, shipping, and telecommunications, that the established conglomerates exercise enormous market advantage. Much of this was created through particularistic connections to the state, but what the Marcos and Estrada regimes demonstrated to the capitalist elite was that particularistic favour could also be used against their interests. The apparent lack of opportunity available to SMEs, particularly in getting access to commercial bank loans, has long prompted governments to promise various sources of assistance in the way of training, marketing, infrastructure, and credit.20 In the Medium-Term Philippine Development Plans of both the Estrada and Arroyo governments it is announced that the development of SMEs will be promoted (NEDA, 1999: Chap. 4, p. 1; 2001: Overview, p. 3). Under President Arroyo, better SME access to capital is promised through the Investment Priorities Plan (Business World, 7–5–2001) and International Finance Corporation (Business World, 5–6–2002), as well as through new Central Bank regulatory pressure on commercial banks and the introduction of a SME Board on the Philippine Stock Exchange (NEDA, 2001: Chap. 3, pp. 3–4; Business World, 13–11–2001). In addition, loans earmarked for SMEs have been allocated through the Development Bank of the Philippines (Business World, 17–4–2002) and the National Economic Development Authority which distributes international loans for this purpose.21 Other official steps that are claimed to promote entrepreneurship and the development of SMEs include the introduction of the Local Government Code in 1991, and the build-operate-transfer law, through which new infrastructure is provided and operated through private enterprises which are offered tax and other incentives (Cancio, 1994). In addition, some SMEs have received tax and other incentives, as have many large companies, both local and foreign, through the government’s Board of Investment. Undoubtedly, producer service activities, like banking and real estate which tend to require access to large amounts of capital and labour, have been dominated by

Restructuring capitalist power in the Philippines 75 established family conglomerates. Moreover, the extent to which corporate power in the Philippines generally is maintained through family connections, interlocking company directorates, and privileged access to state resources, has made it difficult for new enterprises to expand and compete. Nevertheless, the rise of many family conglomerates from modest origins in the 1950s and 1960s indicates that substantial upward mobility can and does take place, and that banking, real estate, and other such producer services have played an important part in this mobility, even in cases not especially advantaged by the excesses of Marcos era cronyism. Furthermore, while corporate power and wealth at the top of Philippine society may be unattainable for those lacking adequate social and political resources, capitalist transformation over recent decades has generated many opportunities in the middle layers of the Philippine economy. And many of these are to be found in producer services, even in activities where it may be least expected. This is illustrated in the following examples.22 Case 1: banking – Arsenio Bartolome Arsenio Bartolome came from the working-class district of Tondo, Manila, born to a family that is said to have lost wealth in World War II. With a government school background he went on to one of Manila’s large second-tier universities to complete an Arts/Science degree. Through some basketball friends from Manila’s more elite universities, Arsenio got a job as a messenger with the Bank of America in 1962. After a few years, having risen to the positions of senior clerk and advisor, Arsenio left for the United States, where he got a position with the Wells Fargo Bank, at the same studying courses in banking. In 1969 he returned to the Philippines, married into a well-to-do family and took up middle management positions, first with a local investment bank, then with the Philippine’s largest foreign bank. He then joined some former banking friends who were setting up a small investment bank in which he stayed for a few years before accepting a position as senior vice president of one of Manila’s bigger commercial banks. By this stage Arsenio was moving in powerful circles and, in 1980, with the promise of sizable deposits from fellow members of Manila’s Rotary Club, he set up Urban Bank. He was then aged only 35. Though Arsenio was able to recruit some powerful directors, Urban Bank started out as a small one-shop development bank. Over the next decade it grew rapidly and, in the early 1990s, soon after the liberalization of banking licenses, became a commercial bank with branches spread across Manila and three other cities, with Arsenio as chairperson and chief executive officer. Arsenio was now living comfortably and all of his children, bar his youngest, were studying or working in the United States.23 During the early 1990s, while Urban Bank expanded, Arsenio’s career continued to prosper as he took up two powerful positions under the aegis of the Ramos government, first as the head of the Bases Conversion Development Authority, and next as president of the then state controlled Philippine National Bank. However, in the wake of the 1997 Asian financial crisis, Urban Bank ran into difficulty, and in 2000, after a rash of withdrawals, the now publicly listed bank collapsed amidst claims of corruption involving members of the Bartolome family and President Estrada.

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Shortly afterwards, economic sabotage suits were filed against Arsenio and Urban Bank executives. Though rehabilitation plans proceeded in the following year, the Bartolomes were forced out of Urban Bank, and after a brief stint back at university, Arsenio resumed his career as the chairperson of a non-life insurance company.24 Case 2: insurance – Bonjing Fajardo Bonjing Fajardo comes from a large moderately well-to-do provincial family. After completing a commerce degree in Manila, he embarked on a career in the insurance industry. After about fifteen years working for large international companies, he became a local partner in a smaller company then, in the early 1990s, after another ten years’ experience, and with the assistance of three friends, he started up his own insurance company affiliated with a multinational. In the mid-1990s his company had seven employees, one of them his daughter, all based in Manila. Though Bonjing said it was too early to judge this venture a success, he believed the business climate in the Philippines provided new opportunities that had not been there in his earlier days. Although he says that influential contacts are vital to business success, he believes that he has neither been advantaged nor disadvantaged by the Government, though he says he favours the more liberal economic policies that had been put in place under President Ramos. His main challenge, he says, comes from the big banks that have their own insurance companies. Along with his other business interests, including a continuing stake in other insurance companies, Bonjing estimates his annual income at about A$800,000. He has also been able to move to a new house in an exclusive, newly fashionable Manila subdivision. However, he says he regards himself as occupying a status position below those who, in popular parlance, are known as the ‘A crowd’. Case 3: shipping – Jojo Tan Jojo Tan is in his early 30s and married with two children. He is the marketing and sales manager for a large shipping company based in Cebu and has three small businesses of his own, selling food and chemicals. He says he earns at least A$200,000 yearly, about a quarter of it from his salaried position, though he says it is to this that he devotes nearly all of his time. Born in Cebu into a Filipino-Chinese family, Jojo studied mechanical engineering, but upon graduation worked in his family’s trading business. Saying he wanted independence and a more professional working environment, he left after two years for a job as a salesperson in the shipping company. As the company’s haulage business expanded in the early 1990s, and after only three years’ employment, Jojo was promoted to nationwide marketing manager in Manila. As his salary rose and his own businesses prospered, Jojo invested in stocks and property. But he says he was also able to buy an expensive house and car, take his family on holidays to Europe, and in other ways enjoy a life of material comfort well beyond that of his parents. Though Jojo earns more from his own businesses than from his salary, he says he intends to stay with the shipping company because he continues to gain valuable knowledge and contacts from the experience, and believes he is

Restructuring capitalist power in the Philippines 77 playing a key role in the company’s ongoing expansion. Yet he also has plans within the next few years to establish a number of other small businesses of his own which he can pass on to his children. Case 4: advertising – Manuel Santos Manuel Santos is also from Cebu, but now lives in Manila. He comes from a moderately comfortable Filipino family and both parents are tertiary-educated professionals employed in state institutions. Manuel has a Bachelor of Arts degree from a prestigious national university and completed a number of years towards a law degree. Immediately upon leaving university in the early 1990s, and with the aid of some books on marketing and a small amount of capital, Manuel began soliciting advertisements for a magazine he planned to produce. After publishing and circulating the first issue himself, Manuel continued with the help of a younger brother and a loan from his grandmother. So successful was this venture, that four years later, and still only in his late 20s, Manuel owned an advertising business publishing two consumer magazines, and had also set up his own marketing company with over 30 branches across the country. He says he has about 200 regular employees and others acting as sales agents. When he first became wealthy, Manuel says he became ostentatious, spending much of his money on luxury cars and other expensive consumer items. Now, he says, he invests more in the expansion of his business. While he lives comfortably with his wife and child in a fashionable part of Manila, he says he still only regards himself as ‘a small-time businessman’. One day, he says, he may go back to law. These cases of upward mobility in service enterprises are indicative of a broader pattern of entrepreneurial success in other sectors of the Philippine economy celebrated in a range of journals, newspapers, and books published in the Philippines since the late 1980s.25 None of the four cases sustain the popular mythological ‘rags to riches’ story and Arsenio Bartolome’s partial fall from grace is also a reminder of the not uncommon experience in the Philippines of downward mobility. Nevertheless, all four men have improved their socio-economic positions over those of their parents, and also in relation to the circumstances they lived under when they first started working. In each case their careers had benefited significantly from their tertiary education, but none attributed any of their success to government assistance, except to say that they had been advantaged by the political and economic stability that prevailed under the Ramos administration, when the interviews were conducted. Bonjing and Jojo said they strongly favoured state liberalization policies, but Manuel said the government needed to do more to protect private business from foreign competition and militant workers. Nor did Bonjing, Manuel, or Jojo say they had been adversely affected by political favouritism; rather they saw the government as quite remote from their business activities and they took little interest in politics. They did however see personal connections as an important ingredient in advancing their careers and it is noticeable that Arsenio, Bonjing, and Manuel relied on such connections, rather than bank credit, in acquiring capital to start their first businesses. Yet more than anything else, Bonjing, Jojo, and Manuel attribute their successes

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to their powers of foresight, drive and determination, long hours of work, leadership skills and preparedness to learn, take risks, and make changes. They also see themselves as belonging to a new layer of budding entrepreneurs and newly rich in the Philippines, though they say they identify as ‘middle class’ rather than members of the elite. Jojo sees himself departing from the old style Chinese business family in his pursuit of professionalism and bureaucratic management, though he is also keen to build up a small group of companies from which his children would benefit. Manuel says he sees himself as one among a growing minority of Filipinos who, for the first time, rank alongside the Filipino-Chinese as good business entrepreneurs. Though Manuel started his advertising business straight after finishing university, it is noticeable that each of the others spent a good time in salaried employment before starting their own businesses, and that Jojo combined his own business interests with his salaried position which continued to provide him with valuable contacts. These cases are thus indicative, not only of the way in which new entrepreneurs have been able to establish their own businesses through producer services, but also of the fact that much upward mobility within producer services takes place among those in salaried positions.26 This is an aspect of Philippine social life that has been seriously overlooked. Indeed, while it is necessary to recognize the continued power wielded by the established family conglomerates, it is also important to consider the extent to which they have become increasingly professionalized by tertiary educated managers and technical specialists who come from outside the capitalist elite. The incomes and social standing of corporate professionals rest heavily on their educational credentials and the prestige of the universities they have attended. Those who have studied overseas, or in one of the select local universities, gravitate much more easily to the most senior, well-remunerated positions (Galindo, 1991). Although relatively low salaries in the Philippines see large numbers of tertiary educated professionals leave for overseas employment, there are a growing number of highly lucrative senior positions in local and foreign companies. While many professionals do not move beyond middle management positions, some rise to executive positions and assume similar influence over corporate decisions as do the majority shareholders, though the pattern here is clearly uneven, ranging from the Aboitiz group of companies, where family members are prominent throughout the conglomerate, to the SGV accounting firm founded by Washington Sycip, which appears always to have maintained a position of professional recruitment. And while the Ayala corporation is headed by Jaime Zobel de Ayala and his brother, it relies heavily on senior professional managers like Francisco Licuanan, president of the conglomerate’s principal company Ayala Land. Similarly, there has been a growing trend among multinational corporations, like business management specialists PriceWaterhouseCoopers, to appoint Filipinos instead of foreigners to executive and senior management positions (Manuzon, 2001). One of the most powerful corporate figures in the Philippines today is Manuel Pangilinan, Managing Director of First Pacific, the Indonesian family conglomerate that took over the Philippine Long Distance Telephone Company and heads the consortium responsible for the Philippines’ largest urban development project at Manila’s former Fort Bonifacio. Educated at the Wharton Business School in the United States, Pangilinan has

Restructuring capitalist power in the Philippines 79 risen to assume executive control over the conglomerate’s growth and investment strategies. He is assisted by another salaried professional, Ricardo Pascua, who directs the conglomerate’s Philippine operations (Tiglao, 1998b).

Elite consolidation and upward mobility in new economy producer services The development of producer services and the increasing professionalization of large corporations in the Philippines are strongly associated with the exponential growth in the development and use of information technology (IT).27 As with a number of countries in Asia, the Government of the Philippines, along with some of the nation’s leading capitalists, has sought to reposition the Philippines as an IT regional hub (see NEDA, 2001: Chap. 4; MBC, 2002). Since the mid-1990s, microelectronics manufacture has attracted a huge increase in foreign investment and has been the country’s main source of export earnings (Tiglao, 1999a, 1999b), but significant effort has also been directed at moving Philippine production towards the knowledge end of the New Economy.28 In addition, more and more companies operating within the Philippines are requiring specialist IT-based business services in order to remain competitive. These moves have come not only from the governmental and corporate end of Philippine society, but, in recognition of the increasing job opportunities in this area, they are also evident in the huge demand for IT education among the general populace. Though the government had little to do with the initial growth of IT enterprises in the Philippines, it began to adopt a more proactive position under the Ramos presidency (de Vera and Lee, 2001a). Not only has it sought to attract investment into microelectronics manufacture through its promotion of ‘cyberparks’ and the incentives offered by its Board of Investments and Economic Zone Authority (Tiglao, 1999a: 37; Lopez and Shameen, 2001; Business World, 29–7–2002), but it has also used these and other methods to promote the growth of IT services and more complex forms of IT production (Sheehan, 2000: 43; Oliva, 2002).29 Beyond the assistance the government has provided to particular enterprises, official sources claim they are creating an environment broadly conducive to IT development through such measures as the liberalization and associated improvement of telecommunications and power supply, the passing of new legislation on intellectual property rights and e-commerce, and the advancement of IT education through various co-operative private/public sector programmes, as well as the introduction of new teaching standards (Sheehan, 2000: 44; de Pano, 2001a; MBC, 2001b; NEDA, 2001: Chap. 4). Despite these efforts, the prospect of the Philippines becoming a regional IT hub remains uncertain as there continue to be significant infrastructural and other problems limiting the sector’s development (Cabagnot, 2000; de Vera and Lee, 2001a; 2001b). As with most economic activities, the old established capitalists and capitalist families in the Philippines have been well placed to develop and take advantage of the growth of IT. Washington Sycip, founder of the Philippines-based transnational accounting firm SGV, presided over the establishment of SGV’s Institute of Advanced Computer Technology, the country’s first IT educational institution (SGV,

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2001), and today many of the family conglomerates, such as those of the Ayalas, Lopezes, Gokongweis, and Cojuangcos, have their own IT service arms and internet service providers.30 Six of the country’s largest conglomerates have set up the shared e-commerce platform, BayanTrade (Bacani, 2000a: 42–3), while a similar body is being established by a consortium of ten large real estate developers (Oliva, 2001a). The Ayala Corporation has been particularly active in promoting IT-based development in the Philippines, beginning with its microelectronics manufacturing company and its real estate forays into the construction of technoparks. Expansion beyond these activities has been especially evident under the leadership of Jaime Augusto Zobel de Ayala who took over the leadership of the Corporation from his father in 1995 (Marasigan, 1995).31 Under his leadership, Ayala Corporation has created a specialist IT branch, iAyala, to cater for the internal activities of the corporation, as well as to provide an IT resource centre for business partners, and outside entrepreneurs.32 More recently, with government assistance under the Investment Priorities Plan and in partnership with leading overseas companies, Ayala has established the internet data and services centre, Ayalaport (Oliva, 2001c).33 Jaime Zobel de Ayala has also taken a prominent public profile in advocating the same stance as the government on the Philippines’ future as a regional IT-hub; he was IT advisor to former president Estrada and co-chair of the Government’s Information Technology and Electronic Commerce Council (Selerio, 2000; Silva, 2001; MBC, 2002). While Zobel de Ayala has been a strident advocate of IT development, more direct involvement in this development on the part of established capitalist families has come from a younger generation. The most outstanding case is that of the new IT-based family conglomerate, Yapster, run by seven newly graduated cousins, aged in their twenties.34 Yapster was set up in 2000 by the father of two of the cousins, Felipe Yap, who has long-standing interests in mining and insurance and is chair of the Philippine Stock Exchange. The Yapster conglomerate comprises five companies variously involved in e-commerce, office merchandise and stocks, e-travel, e-insurance, on-line business management and on-line learning, geared to conventional teaching institutions as well as private corporations.35 Each of the five companies is headed by a particular cousin, and each has benefited from government incentives through the Board of Investments. Although all of the cousins have recently graduated from North American universities, their degrees have been in economics, marketing, and business administration rather than information technology. Rather, like the Ayalas, and many other members of old business families, their specialist IT expertise comes from the salaried professionals they employ. Notwithstanding continued problems facing the development of IT in the Philippines, and the prominent role some established elite families have played in its development, it has proven a highly significant arena of upward social mobility for Filipinos with IT credentials as skilled workers, salaried technicians and professionals, and entrepreneurial capitalists, though the extent of this mobility has varied markedly. Behind this lies a major upsurge in IT education. Since the first two computer studies programmes in the Philippines were established privately over two decades ago (SGV, 2001; Rosales, 1991: 9), the number of private and public institutions providing IT training has increased to about 600, including the country’s

Restructuring capitalist power in the Philippines 81 leading universities and management schools (NEDA, 2001: Chap. 4, p. 7; MBC, 2001b), and over the course of the 1990s the number of IT graduates increased fivefold to about 30,000 annually (NEDA, 2002). However, not all IT teaching institutions are officially accredited and the quality of training is highly uneven (MBC, 2001b). Thus many companies employing IT graduates have set up their own training programmes, and some have established their own tailor-made colleges (MBC, 2001b). The best opportunities for upward mobility for large numbers of IT graduates and professionals has been to find work overseas, either in other parts of Asia or in countries like the United States and Australia where salaries are up to ten times those available in the Philippines, though this brain drain has also created severe problems for local IT companies recruiting and maintaining their staff (Tiglao, 1996; Cabagnot, 2000; Bacani, 2001: 28–9; Montelibano, 2001; Robles and Kapoor, 2001: 44).36 Many of the opportunities for IT-trained workers and professionals in the Philippines have come from foreign investors attracted not only to their large numbers, but also to the fact that they are generally more proficient in English than their counterparts elsewhere in the region, and that they are relatively cheap to employ or subcontract to.37 Indeed, this has been the major selling point for the government and others advocating IT development in the country. The demand for more skilled and well-credentialed IT workers first occurred in manufacture, as production moved beyond simple assembly to more complex electronic products, and as testing and even design started to be done locally (Tiglao, 1999a). But more significant than this has been the establishment of various IT-based business and consumer service firms. While many of the enterprises providing these services are subsidiaries of foreign companies, others involve local firms as partners, and still others are independent local firms with various corporate clients, an increasing number of them also local. The fastest growing have been call or contact centres set up by foreign companies like America Online and Sykes to provide sales assistance, customer service, technical support and research, catering mainly to an American and British clientele (MBC, 2001a; Oliva, 2002). Some twenty-eight firms now operate such centres in the Philippines (Business World, 29–7–2002).38 In addition, the Philippines has seen the establishment of a growing number of data transcription centres, catering mainly to a US market (Business World, 29–7–2002). While call and transcription centres generally require relatively limited IT skills, the Philippines is also gaining a reputation for software development. The country now has about two hundred software firms and ranks second behind India as the region’s software specialist (Andrade, 1998; Sheehan, 2000: 43).39 Another growing area is business process outsourcing, which variously entails accounting, bookkeeping, payroll administration, and tax reporting, mainly carried out by small local firms contracted by such multinationals as Caltex, Proctor and Gamble, Citibank, and Alitalia (Lopez, 2000; Business World, 29–7–2002). The Philippines is said to be particularly attractive as a locale for these back office tasks because of the familiarity with the American legal and accounting environment (CITEM, 2002). Other local IT enterprises catering to foreign companies range from

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specializing in animation to electronic publishing (Sheehan, 2000: 44; Business World, 29–7–2002). Finally, there are a growing number of IT consultants or ‘enablers’ who provide a range of services to both local and foreign companies that may require new or updated hardware and software systems, website designs, security provisions, and suchlike. These enablers range from small local enterprises to large foreign companies like PriceWaterhouseCoopers (Bacani, 2000b). The opportunities available to new IT-trained entrepreneurs arise in large part because of the low start-up costs of new enterprises in this area. Indeed, notwithstanding the presence of large local Filipino-owned companies, like Yapster, and the software firm, SoftTech (Andrade, 1998), the great majority of IT-based service companies in the Philippines are SMEs (NEDA, 2001: Chap. 4, p. 9).40 Many of these companies have been set up by young, tertiary educated technicians and professionals formerly employed by large IT companies, often drawing on the industry contacts and specialist knowledge they had acquired with them.41 As with new entrepreneurs in older producer service enterprises, few say they have benefited from government assistance. While many have done well, others have struggled or been forced back into paid employment as has happened to their counterparts elsewhere. For those knowledge workers who remain in paid employment, experiences also vary markedly. Because of the brain drain and the common practice among local and foreign companies within the Philippines of pirating highly qualified IT professionals, salaries at the top end of this labour market have increased significantly (Yoon, 2001). On the other hand, many with limited IT training have few prospects beyond the routine work and moderate wages available at call centres or data transcription centres. Again, as is the case in the older producer services, these conflicting fortunes also reflect the social standing of the institutions at which individuals acquired their training, and the social capital they are able to mobilize. While the successful may not come from elite families, it is a distinct advantage if their backgrounds are respectable middle class. However, the following two cases demonstrate the degree of social mobility that for some has been possible in the new economy. Case 5: engineer, inventor and venture capitalist – Diosdado Banatao42 The most famous and influential Filipino exponent of the new economy is Diosdado Banatao who made his name designing microchips and other components that are now standard to most personal computers. For many, what is most remarkable about the Diosdado Banatao story is that he came from a peasant household in a remote village in the northern Philippines. By taking contract work as a butcher in Guam, his father was able both to acquire the land the family tilled and to support his children’s higher education. It was at a Jesuit boarding school in his family’s province that Banatao was inspired to pursue an education in engineering, which he did in Manila at the Mapua Institute of Technology, well known for the quality of its engineering graduates but not as an institution with the high status of the city’s most elite universities. Upon graduation, Banatao became a trainee pilot with Philippine Airlines, but he then joined Boeing which sent him to the United States where, in

Restructuring capitalist power in the Philippines 83 1972, he completed a Masters degree in electrical engineering and computer science at Stanford University. Banatao then proceeded on to a highly successful career in Silicon Valley, first as a salaried engineer and inventor, then as a technology company entrepreneur. With the financial assistance of a few friends, he founded his first IT company in 1985. Eleven years later he sold his second to Intel for US$300 million, while his third, S3, is reputed to be the world’s third most profitable technology company. He is currently the chairperson of the Marvell Technology Group and several other similar companies, is the managing partner of Tallwood Venture Capital Inc., and has a stake in eighteen other companies. He owns a private jet and at least three houses in the United States where he continues to be based. All three of his children have followed him into higher education, two of them taking doctorates, one in bioinformatics, the other in electrical engineering. Like many successful expatriate Filipinos, Diosdado revitalized his business, social, and patriotic interests in the Philippines in the early 1990s, after the overthrow of the Marcos regime and the years of political instability that followed. He joined forces with the Ayalas as a director to their microelectronics manufacturing company, as a general advisor on IT matters and, most recently, as a venture partner in iAyala, the family conglomerate’s internet enterprise. For their part, the Ayalas have invested in two companies in which Banatao owns majority shares. Banatao has also taken up the position of chairperson of the Government’s Science and Technology Advisory Council, and addresses Filipino business groups and students on the importance of science and technology to the nation’s future development, urging them to follow the example of Silicon Valley. To this end, Banatao sponsors the establishment of computer laboratories in Philippine schools, and funds Philippine-based science and technology academics to undergo training in the United States. Case Study 6: engineer and enabler – Vicente Marquez43 Like Diosdado, Vicente Marquez comes from a remote part of the Philippines where he grew up in a family of nine children supported by his mother, a widowed school teacher. Through hard work and the benefit of scholarships, Vicente was able to travel to Germany where he completed a doctorate in electrical engineering. He subsequently worked as a university researcher and was then employed by a German computer company, before returning to the Philippines, some seventeen years after leaving. Since returning, Vicente has founded several small companies, all bar one involved in IT, including a joint venture with a Singaporean partner. The number of companies, he said, reflected the need to move with the rapid changes that were taking place in this industry. Describing himself as an entrepreneur, Vicente still spends lengthy periods of time overseas developing business contacts, acquiring new technical knowledge, and seeking out new options in computer software and hardware. His greatest success came in the period after the overthrow of the Marcos regime, an event in which he takes much pride in having participated, and his most recent company, Megabytes, has also been his most successful, a fact he attributes in part to the reforms of the Ramos government, particularly in banking and

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telecommunications. While he and his technical staff once had to struggle with two phone lines, he was now able to get access to ten. As the Philippines banking sector became more competitive there was a stronger impetus to computerize banking functions. This was achieved by outsourcing to companies like Vicente’s. Vicente’s employees were mainly local graduates in electrical engineering, but he says that he provided most of their IT training, both personally and by sending them to take short courses in Japan or the United States. As the demand for computerized banking grew and as he won more contracts with the country’s major banks, Megabytes expanded to about forty employees, but Vicente also encountered problems of high turnover as many of his workers left for higher salaries in North America and Australia. Vicente recently sold the services arm of Megabytes to a large multinational corporation that is expanding its IT interests in the Philippines. Like Diosdado Banatao, he says that it is important for people like him to contribute their technical knowledge, innovative skills, and business acumen to Philippine economic development, in part by founding and building up companies like Megabytes. Though not as spectacularly wealthy as Banatao, Vicente has achieved much success since leaving his hometown in the southern Philippines. He now lives with his family in a comfortable upper-middle-class suburb not far from his office; his eldest children are studying in Europe and the others are expected to follow. Notwithstanding the exceptional individual talents of Diosdado and Vicente, three key factors unite them in their success: firstly, they earned high educational qualifications at highly regarded institutions in the West; secondly, they spent long periods of time working outside the Philippines at centres that were at the cutting edge of global IT; and thirdly, they fortuitously embarked on their careers when IT was in its infancy. For most Filipinos with IT training, despite the currently popular meritbased ideology of success, these possibilities are not replicable. However, Diosdado and Vicente do embody qualities that are becoming an increasingly common feature of leading entrepreneurs in the Philippines: they both declare a deep commitment to the country’s national development, yet in their personal experiences, attachments and outlooks they are profoundly cosmopolitan. Vicente, like Manuel, Jojo and Bonjing, is also committed to a life of family privacy, away from the public glare of politics which has been so much a part of the life of most established capitalists within the Philippine business elite.

Conclusion Global, regional, and national economic restructuring has seen a significant expansion of producer and consumer services in the Philippines. This has occurred in a national context of accelerated capitalist growth and liberal economic reform, prompted in part by a concerted shift away from the centralized corruption of the authoritarian Marcos era and the national crisis it precipitated. Though these developments have been felt throughout the country, it has been the major cities, principally Manila and Cebu City, in which they have been most concentrated. To a large extent, the opportunities thrown up by this new era of growth have been seized

Restructuring capitalist power in the Philippines 85 upon by the established elite and their family conglomerates. In producer services, this is particularly evident in banking, real estate and insurance, in which many among the elite have been able to entrench themselves over a number of decades. With relatively ready access to capital and powerful social networks extending into the state, members of this elite have been able to use the 1990s, and the period since, to consolidate their interests in these areas. Notwithstanding the oligarchic continuity evident here, those elite families who have prevailed in the current era have done so through their preparedness to move strategically within the changing economic and political environment. Many among their younger generation have done this through their choices in formal education. However, a substantial segment within the contemporary elite – most notably members of the Filipino-Chinese community – do not come from the landed oligarchy of the colonial era, but established themselves as successful capitalists during the 1960s and have been building up their conglomerates since then, often through banking, real estate, and insurance. For the most part, their trajectory of upward mobility into the national business elite has unfolded over decades, the main exception being those few who not only rose through the Marcos regime, but survived its fall. It has also been shown in this chapter that recent growth in producer services has seen the emergence of new upwardly mobile entrepreneurs and salaried professionals. They may not yet vie with the established elite for wealth and corporate power, but collectively they have substantially expanded and reshaped the middle layers of Philippine society. The most dynamic area of recent producer services expansion in the Philippines has entailed the so-called ‘knowledge workers’ of information technology. Here again, members of the established capitalist elite, spurred by state liberalization policies, have generally proved themselves adaptable, both in adopting this technology into existing business interests, and in creating new enterprises around this technology. Yet it has been the increased influence of the new economy that has created most opportunity for upward mobility in producer services. In contrast to companies performing many of the older producer services, those that have their origins in IT are mainly small or medium-sized enterprises, dependent on the technical expertise of their personnel. For many who have acquired this expertise, the path of upward mobility takes them overseas into higher paying occupations than are available locally and often into further training and education. However, large numbers of those who stay, or return home, find themselves with a variety of opportunities for self-advancement by setting up their own specialist outsourcing or consultancy businesses, or by taking up salaried professional positions within larger enterprises. Depending mainly on their social backgrounds, and the source and extent of their tertiary education, others with IT training have been much less successful. In large part, the Philippines case supports the conclusion advanced in a North American context that established elites tend to consolidate their wealth in the older forms of producer service – notably finance, insurance, and property development – while opportunities for upward mobility are more likely to be found in the advanced producer services which are more heavily dependent on educational credentials (see Dahles, this volume). But it is also clear in this case that the distinction has to be qualified. Firstly, foreign multinational corporations and powerful family

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conglomerates have assumed control over much of the new economy, and many of the leading IT-based business services associated with its development. Secondly, the professionalization of large corporations in the producer services area in general has created significant new opportunities in salaried employment for upward mobility on the part of segments of the educated middle class, not otherwise connected to corporate power brokers. To the extent that the ‘managerial revolution’ is relatively new to the established family conglomerates, and that this has been hastened by the new economy, growing numbers of corporate leaders today are not owners but professional managers whose pathways to success have largely been formal education and entrepreneurial skill. These developments have been prompted by broad global trends, but they also reflect the liberalization policies of the post-Marcos state. While there remain serious doubts about the Philippine state’s capacity to restructure and regulate the national economy, and, in particular, to re-direct investment capital into the hands of small independent enterprises, the push behind liberalization also comes from established big business wishing to defend itself from the vagaries of political favouritism, and a broader political constituency firmly disaffected with the economic failings of regimes like that of the Marcoses. To the degree that the post-Marcos state, with the partial exception of the Estrada era, has promoted national development through liberalization policies and, more recently, through an emphasis on promoting the new economy, it has strong corporate and popular backing. The extent of social mobility generated through producer services in the Philippines is debatable, and it is certainly much less spectacular than increasingly popular rags-to-riches stories would suggest. To a large extent it is limited to the educated middle class, and though it has entailed substantial increases in private earnings, consumer spending, and social status, it has generally not challenged the economic or corporate power of the nation’s capitalist elite. Nonetheless, there are exceptional cases and arguably, social mobility into the established elite is a largely mediumterm, intergenerational process, much as it has been for those powerful FilipinoChinese capitalist families who started their corporate journeys over four decades ago. For the most part though, what we are witnessing is an increasingly broad and more variegated middle class and, at the same time, a mode of development that is seeing growing social polarization as those at the bottom of Philippine society fall further behind in their relative earnings (NEDA, 1999: Chap. 1, p. 2). Finally, the restructuring that has been taking place within Philippine society over the past decade and a half is as much cultural as it is political-economic, and this has conditioned the way in which upward mobility and elite consolidation are locally understood. While the newly rich have generally been kept outside the powerful circles of the established capitalist elite, the latter’s reputations have been increasingly challenged by the meritocratic ideology that favours the new entrepreneurs and educated professionals who have emerged through producer services and other sectors of the economy. Case studies of upward mobility, such as the ones presented in this chapter, are widely celebrated in the Philippines. Represented as the embodiments of individual talent, initiative, and diligence, they are viewed not simply as the private experiences of increased income, improved consumer lifestyles, and

Restructuring capitalist power in the Philippines 87 elevated occupational status. More than this, they are seen as carrying the fortunes of a country intent on national prosperity, and overturning old reputations for backwardness and corruption. This has important consequences for the cultural construction of success and social standing. While the upwardly mobile entrepreneurs and salaried professionals discussed here are seen as deserving of success because of their diligence and entrepreneurial acumen, so are they contrasted to the widely perceived complacency, indolence and conservatism of the old elite. In this sense, upward mobility is commonly as much about the acquisition of a newly prestigious source of status based on the idea of merit as it is about material advancement. Whatever the accuracy of the negative stereotypes frequently leveled at the old elite, the response of many among them, in particular their younger generation, has been to reinvent themselves according to the same idea of merit as is used to praise newly successful entrepreneurs and professionals. Thus, not only have individuals like Jaime Zobel de Ayala and the Yap cousins consolidated their family wealth through producer services; in doing so they have also sought to demonstrate themselves as well-credentialed, talented, frugal, and hard working. That they have done this is as much a reflection on the continuities in their families’ corporate power as it is on the changes that are taking place in Philippine society (see Pinches, 1999b).

Notes 1 Most of the field research for this chapter was carried out in Metro Manila and Cebu City in 1994–5, and was funded by the Asia Research Centre, Murdoch University, Perth, Australia. My thanks to the many people who generously assisted during my fieldwork, in particular Lorraine Salazar, Chuchi Aguba and Manuel Velmonte. I also wish to thank Rosanne Rutten for her instructive comments on an early draft of this chapter. 2 While the incidence of poverty is reported to have declined over the same period, this was mainly felt in urban areas and income distribution deteriorated (NEDA, 1999: Chap. 1, p. 2). 3 For instance, much banking and insurance activity is geared towards both consumer and producer needs, though both are conventionally defined as producer services. 4 However, some argue that family conglomerates have become increasingly cumbersome in the contemporary global economy, and are thus likely to falter, an argument that has been used to account for recent difficulties facing the group of companies run by the Lopezes. 5 For a fuller treatment of this history account see Pinches 1996. 6 The major exception here being former Marcos crony Lucio Tan (see Coronel, 2000b). 7 The leading business group that played a key role in both rebellions was the Makati Business Club. For its stance on the overthrow of the Estrada government see the statement by MBC Executive Director Guillermo Luz (2001). The important qualification to be added here is that while the ‘people power’ rebellion that brought about Marcos’s demise had broad support among the urban working class, this was not the case with Estrada, who continues to enjoy much popular support while he languishes in jail. 8 This is evident, for example, in the widely quoted popular opinion surveys of the Philippine Social Weather Stations. 9 Though there is no clear consensus as to how these layers might be theorized in these terms (see Abercrombie and Urry, 1983; Robison and Goodman, 1996b).

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10 Distinguished in these broad terms, most studies of social mobility are about status not class mobility (for example, the seminal Lipset and Zetterberg, 1968). The relationship I see between class and status is further explored in Pinches (1999a). 11 Say Magazine’s accounts of the richest people in several provincial cities a decade ago indicated that while shipping, insurance, banking, and real estate development featured among the interests of local business elites, these were easily outshone by agribusiness and marketing (Adriatico, 1989; Fernandez, 1990; Lopez, 1989; Say, 1989a, 1989b, 1990a, 1990b). 12 This summary of the Ayala family’s corporate development has been drawn from Koike, 1993; Marasigan, 1994, 1995; Tiglao, 1998c; and the Ayala website at http://www.ayalagroup.com/. 13 Though in late 2002, following difficulties with the project, Ayala Land acquired First Pacific’s controlling shares. 14 Centennial City, a planned project for Manila’s foreshore in the mid-1990s was to dwarf anything ever attempted in a Philippine urban development. However, it floundered amid accusations of bribery and with the coming of the regional economic crisis (Tiglao, 1997). 15 The oldest and largest Filipino-owned insurance company transferred its ownership to policyholders in the mid-1980s after buying out the Ayalas and other shareholders (Tang, 1993: 27). 16 For more on SGV and Washington Sycip, see Bernal, 1990; Cruz-Reyes, 1994; Anonymous, 1996; Ghahremani and Robles, 1999, and the SGV website at http:// www.sgv.com.ph/index.html 17 The Aboitiz conglomerate, perhaps more than any other, relies on family personnel to fill its managerial positions (see Nuqui and Perez, 1994). 18 This position was enunciated most forcefully under the Ramos administration, but is now entrenched in the development rhetoric and policy statements of most national political leaders. 19 Some claim unfair influence from then President Estrada on this change of hands (Tiglao, 1998a), but see Salazar (2001: 6). This takeover has effectively re-concentrated corporate power in PLDT whose new owners already owned one of the leading mobile phone companies (Salazar, 2001: 6). 20 For example, under the Ramos administration, through programmes run by the Department of Science and Technology and the Institute of Small-Scale Industries at the University of the Philippines (de la Pena and Floro, 1998). 21 My thanks to Jose Monterro at NEDA for providing details on this. 22 Only in the first of the following examples, which is drawn from written sources, is the entrepreneur’s name real. In the other three I have used pseudonyms; these case studies are drawn from fieldwork interviews. 23 The above account is drawn from Bernal (1991a) and Samar (1992). 24 From Business World reports: 26–4–2000; 16–8–2000; 12–9–2000; 7–2–2001; 8–2–2001; 27–3–2001; 1–6–2001; and Agustin, 2002. 25 Examples include Filipino Entrepreneur, Say, Philippine Business, Manila Inc., Young Taipan, Business World, the book publications by Vinuya (1991), Lee-Chua (1997) and Rodriguez-Co and Recio (1998) and the annual catalogues by Say et al. (1991, 1994). 26 Bernal (1991b) describes the case of a former auditor turned banking executive who later founded his own management and real estate companies in the early 1970s, while Rojo (1991) documents the story of a Filipino who rose to become a bank manager in the United States before returning to the Philippines to establish a family yoghurt business. 27 Here I adopt the conventional abbreviation IT, but note that the preferred expression in the Philippines is now ICT (information and communication technology). 28 Since the mid-1990s, the number of workers employed in electronics manufacture has almost tripled to 250,000 (Tiglao, 1999a).

Restructuring capitalist power in the Philippines 89 29 For example, in 2001, 20 new IT companies were offered tax holidays and other incentives under the government’s Investment Priorities Plan. About half the companies were Filipino owned; the other half joint ventures (Oliva, 2001c). 30 My thanks to Lorraine Salazar and Boying Lallana for this information. 31 Though several other initiatives were already in train in the late 1980s and early 1990s (Marasigan, 1994: 25). 32 For details see the iAyala website at http://www.iayala.com/profile.htm. 33 For details see the Ayalaport website at http://www.ayalaport.com/home.php. 34 My thanks to Boying Lallana, Executive Director of Digital Philippines, for drawing my attention to this group. The account presented here draws on the following sources: Arroyo, 2000; Philippine Star, 2001; de Pano, 2001b; Lopez, 2002; and the Yapster website at http://www.yapster.com/. 35 Yapster e-Learning appears to have been particularly successful with subscribers including the Aboitiz group of companies and the Technological Institute of the Philippines. 36 Indeed, a recent Japanese grant of US$15 billion for IT training and scholarships across Asia has been queried because of its apparent links to future expectations of professional recruitment from the region (Murakami, 2001). 37 According to one index, the Philippines rank first in the availability of qualified engineers and IT workers, even above the United States and India (Sheehan, 2000: 44). 38 Apart from the appeal of IT workers who are relatively cheap, educated and Englishspeaking, one industry source says that they have the added appeal of an American accent and cultural familiarity (MBC, 2001a). 39 One British company, with about 250 workers specializing in the production of banking software, has been in the Philippines for over a decade (Oliva, 2001b). 40 For example, about 80 per cent of the hundred-odd Filipino companies exhibiting at the government-sponsored IT Outsourcing Expo in Manila in early 2002 were listed as SMEs (CITEM, 2002). 41 My thanks to Lorraine Salazar and Boying Lallana for this information. 42 This case study is drawn from the following sources: Crisp and Lopez, 2000; Banatao, 2000; 2001; 2002; Nemenzo, 2001; Tobias, 2001; Sio, 2002. 43 Vicente Marquez and Megabytes are both pseudonyms.

6

Land investors during the property boom of the 1990s and the elite of Metro Cebu Edsel E. Sajor

Particularly during a property boom, the real estate sector may be the most important producer service industry serving as a mechanism for accumulation by the local elite. Through market mechanisms, a boom triggers a major reallocation of finance capital and land resources, enabling certain fractions of the elite, active in property investment, to lay new claims. However, these new claims and reallocations are not confined to the border of the booming city or the metropolitan area. In a free market and liberalized global and national economy, capital and profits flow across local and national boundaries involving various actors and their resources at other levels. Understanding these processes, the key actors, and the outcomes, acquires significance in the context of the unprecedented level of investments in the real estate sector and property booms experienced by various localities in a number of countries in Asia-Pacific in the decades of the 1980s and 1990s. The real estate industry is categorized among the producer services because it provides an intermediate output, an important defining characteristic of producer services (Greenfield, 1966: 8–11; Sassen, 1991: 91). In the context of the capitalist system, the output of the real estate industry in terms of land property and buildings generates income in the form of rent.1 Thus, purchase of real estate commodities is an investment activity that includes an interest on the part of the buyer for possible future earnings on the property. This expectation for a future value return is important since members of the elite commonly invest in land property precisely for this reason. This aspect lies at the heart of dramatic accumulation of some members of the elite during a property boom. While it may be argued that many real estate clients do buy property to satisfy their need as an end-consumer (for example, to build a house for one’s own family’s occupancy), this apparent end-use purpose does not in any way diminish the fact that property may be offered by the buyer in the market for other uses. A curious aspect of the real estate market is that it is essentially ‘second-hand’ in nature. Land parcels and buildings are sold and resold, rented and re-rented (Logan and Molotch, 1987: 25). It is easy to shift them to other uses for a profit. Thus, despite fluctuations in returns on real estate, there is a deep and strong notion sustained by society and the state in the context of capitalist social relations that gives property

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a potentiality of an ever-profitable investment (Gottdiener, 1985: 184, 188; see also Haila, 1991). This makes real property a very attractive intermediate commodity or asset for investors who assume that its price or rent-income generating capacity in the future will be greater than the present one. In times of a property boom, enormous accumulation can be gained by investors as their ownership of real estate allows them under the existing institutional arrangement to lay claim on a big part of social surplus produced in other productive sectors of the society’s economy. Gottdiener (1985: 190) broadly classifies users of land who are involved in turnover of land for a profit into at least five types: rural owners of undeveloped land, land speculators, developers, builders, and owners of developed land. The same individual can assume more than one role or could specialize in one category. Users of land can also differ in their time frames in realizing profit from their investments. Some, like the builders and developers, would want an immediate return, while others are content to wait for a decade or more. Sources of capital for real estate ventures of investors also differ. Some may use their personal savings accumulated over decades from fixed salary incomes to buy a housing lot, for example. By contrast, big developers finance their property development through the use of other people’s money – using various loan instruments from finance institutions such as banks, trust companies, pension funds, and insurance houses (e.g. Adair, 1993; Short, 1996: 161). Other investors draw from their accumulated surplus from long activity in commercial or manufacturing businesses. The latter characterizes an important aspect in real estate speculative venture, i.e. the shifting of capital not only within real estate but also to ‘bank’ capital from commercial or industrial sources in the form of land holdings. This ‘banked wealth’ is sometimes returned to commercial or industrial activities when future profitability favours that shift (Feagin, 1998: 141). Property investors’ decisions are intimately bound to and influenced by state policies, plans and actions at the local and national levels. The state is unavoidably a critical actor in the development process (Healey and Barret, 1990). Real estate is one of the most regulated commodities, subjected to numerous direct and indirect regulations at various levels of government (Weimer, Hoyt and Bloom, 1972: 83, 107). Through government zoning, for instance, land can become cheaper (or made more expensive) for specific development uses (e.g. for high-end residential subdivisions or for low-income socialized housing purposes) (Goldberg and Chinloy, 1984: 331). Different outcomes in property development are determined by variations in public policy context such as, for example, being pro-active, facilitating or restricting within an existing legal framework and city planning (D’Arcy and Keogh, 1997). It has been argued that in the process of the restructuring of space wherein real estate plays the leading edge, the state acts as a subsidizer of capital accumulation (Gottdiener and Feagin, 1988: 77). In many cases, at the local level, government has acted to subsidize growth through a variety of interventions, including zoning concessions, tax abatements, public service provisions, and infrastructure projects (Gottdiener, 1985: 247). Behaviour, strategies, and accumulation of property inves-

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tors, therefore, can only be understood by looking into the overall policy context of the state at different levels that favours or disfavours them, and their actual position of influence or co-operations vis-à-vis public officials in charge of promoting or regulating development. This chapter explores the dynamics of a property boom in the case of Metro Cebu (the Philippines) in the 1990s. Metro Cebu is a conglomeration of three adjacent cities (Cebu City, Mandaue City, and Lapu-Lapu City) and seven municipalities (Compostela, Liloan, Consolacion, Cordoba, Talisay, Minglanilla, and Naga) located on the eastern side of Cebu Island. The central area of Metro Cebu is Cebu City, which comprises nearly half of its total land area and is the most densely populated among its cities and towns. Metro Cebu’s present population is 1.6 million (2000 Census). Metro Cebu’s total land area of 36,240 hectares is comprised mainly of mountainous and forested terrain. Being situated on Cebu’s eastern coast and bordered in the interior by central and north-central portions of the island’s mountain range, the directional growth pattern of Metro Cebu is basically bi-directional, in the narrow strip of coastal flat lands and hilly lands of manageable slope along the eastern half of Cebu (Econotech, Inc., 1993: 1). Real estate property development in Metro Cebu has had to rely therefore on massive conversion of upland agricultural lands for residential subdivision projects. The real estate industry in Metro Cebu picked up in the late 1980s with an increase in land property development projects. Throughout the 1990s with a dramatic peak in 1997, many new projects were started and offered for sale in the market. Increasingly, hilly lands immediately adjacent to the built-up lowland areas of Cebu City have been bulldozed to make room for residential subdivisions, damaging the ecological balance of the mountainous terrain, affecting water supply and creating flooding for the low-lying areas (cf. Flieger and Cusi, 1998: 27; Sun Star Daily, 9–11–96). Projects have become increasingly contentious and ‘politicized’ since a big number of them are actually located in the 4,400 km2 area (47 per cent of the island’s total size) hitherto classified as ‘not alienable and disposable’ or ‘protected area’ due to its specific topographic attributes as watersheds or virgin forests or due to the presence of areas containing habitats for rare and endangered species. As such, these involved a high degree of state intervention. In the light of the central hypotheses of this volume regarding the relationship between producer services and social mobility, the question will be raised to what extent the close relationship between the developers and the state facilitated the real estate boom in Metro Cebu. After all, it is widely acknowledged that the Philippine state bestows favours upon established elites in many realms of the economy, including real estate transactions. This chapter proceeds with an empirical-descriptive account of the property boom in Metro Cebu, its main actors, processes, and context. In the concluding part, the implication of these processes will be discussed for the continuity of dominance of the elite active in land investment in Metro Cebu.

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Property boom of the 1990s The most important highlight of the property boom in Metro Cebu is the rapid increase of land property development projects. Development projects started to pick up in 1988, reached a first peak in 1992, and soared dramatically in 1997 before falling in 1999–2000. In this 13-year period, a total of 251 projects were started and offered for sale in the market (see Table 6.1 below). At the height of the property boom in 1997, there were 48 development projects for Metro Cebu. The number declined radically in the following year of 1998 primarily due to the impact of the Asian financial crisis. Faced with the double whammy of peso devaluation and high interest rates, many developers, especially the smaller ones, suspended their projects due to financing problems.2 Property investors also became timid in buying during the crisis period, weakening the demand for developed properties. These land property projects in Metro Cebu involved a redevelopment or conversion of a total of 1,030 hectares of mostly raw lands. Out of this total, the bulk went into residential subdivision projects, 84 per cent (864.6 ha). The rest of the land, comprising 16 per cent of the total, was divided among the following land-use types of projects: industrial park, 6 per cent (63.0 ha); commercial park, 4 per cent (37.3 ha); memorial park, 3 per cent (34.7 ha); and condominium, 3 per cent (30.6 ha). During the property boom, land prices rose rapidly. From 1989 to 1992, for instance, prices of residential lots in Metro Cebu had already risen at a yearly average of 52.1 per cent while in the National Capital Region prices actually decreased by an average of 0.4 per cent annually. During the same period, prices of commercial lots also increased by an average of 33.2 per cent in Metro Cebu; compared to a mean price change of only 13 per cent in the National Capital Region (Econotech, 1993: 3–4; see also Vano, 1994; Manila Times, 17–3–90). Spiralling land prices were matched by

Table 6.1 Number of annual land development projects in Metro Cebu, 1988–2000 Year

Number

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

5 9 9 13 23 16 25 35 34 48 14 18 2

N=251 projects Source: HLRUB (1999, 2000); Housing Land Use Regulatory Board (HLRUB), Region VII, listing of development projects.

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brisk real estate transactions.3 The job of a licensed real estate agent became a very attractive profession at the height of the property boom. For example, based on the author’s study of records of Department of Trade and Industry (Central Visayas Region), the number of licensing examinees for real estate agents in Cebu reached a peak of 528 in 1997, compared to 40 which was the average number of annual examinees in the period 1980–1986 for the province. Real estate marketing offices also sprouted in uptown commercial areas of Cebu City due to flourishing business. The burst of property development in Metro Cebu in the late 1980s to the 1990s occurred in the global context of the liberalization and deregulation of finance capital flows and a market that stimulated foreign investments in real estate across national borders. Property financing since the 1980s has drawn from an increasingly globalized international capital market, producing a wider range of innovative debt and equity finance instruments for property companies (Adair, 1993). Inflow of massive international capital for the built environment in a number of countries since the 1980s has been managed by increasing sophistication of financial instruments as well as the growth of institutional investors such as insurance companies, pension funds, investment managers, and banks, especially in property development (Berry and Huxley, 1992; Sassen, 1991: 76–8). Countries in the Asia-Pacific region have been a hot area of property development for these international investors since the 1980s, also partly due to a shift in the manufacturing investments to these countries (Firman, 1997: 1034–5; Thrift, 1986). Particularly in the Philippines, the boom in the real estate sector that swept Metro Cebu in the 1990s is closely associated with a surge in foreign direct investment. The magnitude of foreign direct investment between 1986 and 1997 was a quantum leap from those in the early years of the past century. In 1986, these investments amounted to 2 per cent of the GNP, compared to only one percent in the 1970s. By 1996 this peaked to more than 20 per cent of the GNP (Magno-Ballesteros, 2000: 117). Since 1991, an increasing chunk of these financial inflows comprise private direct and portfolio investments that were channelled into real estate companies as loans, equities, and project ventures. This period saw the steep rise in composite indices of real property stocks in the Philippines, from 3,305 to 18,457 in 1996 (ibid.).

Major supply-side actors While the changing global-regional context is important in explaining the availability of finance capital stimulating property investments in Metro Cebu, the real estate boom should first and foremost be analysed and understood as ‘outcomes of actions taken by economic and political actors operating within a complex and changing matrix of global and national economic and political forces’ (Feagin, 1998: 42). On the supply-side, major actors that shaped in a major way the real estate development in Metro Cebu are the Manila-based national big developers, Cebuano land dealers, and the state at national and local levels. Big property firms with central headquarters in Metro Manila dominated real estate development during the boom. They were the early starters in purchasing

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vast parcels of land or consolidating smaller ones for subdivision projects, in buying prime properties in the central business district of Cebu City for the construction of commercial malls, condominiums, and business office buildings, and in their actual development. Four of the biggest national property firms that entered Cebu are the Ayala Land Incorporation, Fil-Estate Land Incorporation, Fil-Invest Land Incorporation, and Santa Lucia Realty & Development Corporation. These four ranked among the top 1,000 corporations of the Philippines.4 These companies have many other residential, commercial, industrial, and leisure development projects in other regions of the country. Most of them have subsidiaries specializing in other real estate activities such as property marketing, technical planning and property management, and related ventures such as construction materials manufacturing, and real estate building.5 Some of them, such as the Ayala Land Incorporation and Fil-Invest are also into banking and finance.6 The big property corporations have substantial tie-ups with international sources of capital and technology. Ayala Land Incorporation has partnerships with Hongkong Land (PPI) BV, Rodamco Asia Management Limited (a Dutch investment company), Gammon Construction Limited of the Jardine Group (the largest construction company in Hong Kong), and the Maison Individuelles S.A. (the largest housing supplier in France and Europe). On the other hand, Santa Lucia Realty & Development Corporation, which operated 14 projects in its 11 years of operations in Metro Cebu and which is one of the biggest developers of high-end and upper middle-level residential subdivision in Metro Cebu, has various joint ventures with foreign investors, although the company is entirely Filipino-owned.7 Manila-based big property companies focused on developing high-end or prestigious housing and up-end housing subdivisions.8 In the author’s study of the official listings of the residential subdivision projects from 1988 to 2000 of the Housing Land Use and Regulatory Board (HLURB), Region VII, virtually half (49 per cent) of the total area devoted to residential subdivision projects in Metro Cebu can be classified under ‘prestigious housing project’. The average cost of lots in this project class is US$60,000 or higher. Further, the next lower bracket of up-end housing projects comprises 18 per cent of the total land projects’ area. Lots in this class of subdivision typically costs from US$20,000 to just below US$60,000. Together, these two upper class types of subdivision, therefore, involved 67 per cent of the total lands developed for residential purposes during the property boom in Metro Cebu. Property development in Metro Cebu was strongly dominated by the aforementioned four Manila-based developers. Moreover, Manila-based big property developers created a distinctive pattern of development of the built environment in Metro Cebu during the boom wherein they had tremendous advantage. As in the trend in the urban geography of Southeast Asian cities starting in the 1980s, in Metro Cebu, these firms bundled as many possible discrete facilities into integrated complexes comprised of hotels, restaurants, shopping malls, and office towers. Such complexes required huge capital outlay and large tracts of land (Dick and Rimmer, 1998: 2312). A case in point is the Cebu Business Park, a project started in the early 1990s, the developer of which, Ayala

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Land Incorporation (in partnership with other big Filipino and foreign companies and financing institutions), acquired a 49-hectare provincial government property at the heart of Cebu City through a joint-venture scheme.9 Big Manila-based property companies purchased or entered into joint ventures with a number of big landowners belonging to the local business elite. These Cebuano land dealers saw the profitability of disposing with their vast raw lands for a high profit. A common characteristic of these big land dealers has been their acquisition and expansion of raw lands in the 1950s and 1960s through surplus accumulated from service and trading enterprises and, in some cases, in combination with the use of privileged positions in government land agencies.10 Being long-time service and trading entrepreneurs themselves, these people have regarded their raw lands as investment assets, which they managed and sold, based on their entrepreneurial calculus of seeking high returns to investments. A couple of them became developers themselves, just a few years before the sharp decline in property development in 1999. Their behaviour vis-à-vis land assets contrasts sharply with some traditional big land-owning families who were uninterested in parting with their properties and dealing them out to interested property developers. Development of prestigious housing subdivision projects requires sizeable contiguous raw lands11 which are hard to find because there are only few Cebuano landowning families willing to sell or enter into a joint-venture, and Cebu does not really have any sizeable landed gentry (Churchill, 1993: 5). Thus, Manila property firms have had to employ reputable Cebu real estate agents as consolidators of smaller properties in order to augment one major parcel in building large prestigious subdivisions. According to informants, local real estate agents usually have had higher successes in consolidating these smaller properties. Generally speaking, Cebuano developers only became active after 1995, in the last years of the property boom and a few years before the slump. While there were a bigger number of local developer firms and families compared to the big Manila property firms, these small local entrepreneurs only had the capacity to develop lowend and low-cost residential subdivisions, usually utilizing less than three hectares of raw land. These two lower classes of subdivisions only covered about 33 per cent of the total aggregate of raw land developed for residential subdivisions during the property boom. Only two Cebuano traditional elite families were able to clearly match the scale of high-end subdivision development of the big property companies: siblings Lito and Annie Osmeña who own the MRO Development Corporation and the Aboitiz family who control the Aboitiz Group of Companies, and its property firm, the Acoland. To start with, both these families had vast raw lands accumulated since the first half of the past century. They did not have to buy and consolidate land, nor enter into joint ventures with Cebuano big land dealers to start their own projects. Further, the Osmeñas in particular have long been in real estate in Metro Cebu. Sergio Osmeña Sr., the grandfather of Lito and Annie Osmeña and former president of the Philippine Republic in the 1930s, was himself an active real estate speculator. It is widely believed that he expanded the family’s landholdings and enhanced their

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values by using his position during his term in the national and provincial governments. Emilio ‘Lito’ Osmeña Jr., the grandson, has been likewise accused by his own critics of using his government position and taking advantage of its infrastructure projects to promote his real estate interests when he was provincial governor of Cebu from 1988 to 1992 (Sidel, 1999: 130–1).12 The siblings Lito and Annie Osmeña had already built the prestigious housing subdivision of Maria Luisa in the 1960s, a project that was further expanded during the property boom of the 1990s. They also have their own construction company engaged in various government infrastructure projects. On the other hand, what the Aboitizes lacked in direct participation in high government offices and experience in real estate, they more than made up for with the capital resources at their disposal. Aboitiz and Company Inc. in 1996 was ranked 305th in the Philippines in terms of gross revenues, outranking even property companies active in Metro Cebu such as Santa Lucia Realty & Development Corporation and Fil-Invest. The Aboitizes are also the dominant holder of Union Bank. They are also in shipping, shipbuilding, and ship metal recycling (with substantial partnerships with Japanese corporations) and into flour, food, and consumer products manufacturing, and a range of agri-industrial businesses. Like the Osmeñas, they are in construction business, and in power generation – historically proven to be important collateral lines of business in successful real estate development (e.g. Friedricks, 1989). When property development and real estate values picked up dramatically in Metro Cebu in the early 1990s, the Aboitizes took a stock of the potentials of all their raw lands and decided, though quite belatedly, to become developers themselves instead of being raw land sellers or joint venture partners of Manila developers.13 Except for the Osmeñas and Aboitizes, the local developers were relegated to minor residential subdivision projects. At the discursive level, local developers would often remark that their failure to compete with Manila-based developers is due to their ‘conservatism’ or being ‘risk-averse’ in business. However, they face very real constraints that shape their ‘conservatism’. These constraints are the following. First, high-end and large-scale property development needs enormous outlay of capital that the local developer does not have any access to. Aside from having foreign equity investors, the big Manila-based companies enjoyed listing in the Philippine Stock Exchange, an important source of foreign and domestic capital. Further, apart from having their own national banks, some of these Manila companies have direct access to pension funds and insurance firms (some through syndicated loan arrangements) that generally are the providers of less expensive long-term funding. These companies also have the financial muscle to raise corporate finance in contrast to smaller firms who can just raise capital from more expensive and less dependable project-specific finance (Adair, 1993). The local developers in Metro Cebu have had to rely on such project-specific loans. These are usually processed in the local branches of the national banks that are only authorized to lend up to a certain ceiling.14 Second, real estate investment is a highly speculative activity wherein, for the buyer-investor, reputation of the builder or developer of the property counts.

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Unfinished condominiums or subdivisions mean enormous losses for the property buyers, while completed built structures or developed lands secure the value of their investments. The developer’s corporate image, especially its financial muscle, is thus important in the buyers’ judgement. Being perceived as a small, start-up, single-project developer is an extreme disadvantage – conjuring a picture of highrisk investment that wise lot buyers would not likely gamble their money on. On the other hand, having an image of a top national developer corporation – especially with foreign partnership – like Ayala Land, Inc. is enough to attract buyers in anticipation of future generous returns on property. There is a strong positive link between a developer company’s image on the one hand and the potential buyers’ judgement of developed land on the other.15 The local small subdivision developer is obviously grossly disadvantaged in this business highly favouring a firmly established corporate reputation that national property companies enjoy. Third, Manila-based big development corporations have had the advantage of knowledge and information on global-regional and national economic, financial, and market trends relevant to real estate market projection. According to informant local developers, Manila-based firms framed their investment decisions in Metro Cebu on a broader context, factoring in national and global-regional trends. Thus they are relatively well-informed in taking decisions on when to go into high-gear construction, to slow down, or put a break on development projects. In their central headquarters in Manila, these corporations employ full-time professional economic, finance, and political analysts. In contrast, the local developers have a very limited base of relevant knowledge. Their market analysis only revolves around the immediate milieu of Metro Cebu. Although this is important, it does not help much in deciding, for example, how to generate the necessary capital funding and when to launch the projects and pace them appropriately. In the late 1980s and early 1990s, the local government of Metro Cebu as well as national state agencies strongly engaged in pro-growth boosterism.16 To attract foreign investors in manufacturing and property development, provincial and city government officials personally led overseas trade missions to promote Cebu as an investment area. Local officials also strongly lobbied with the national government for subsidies to upgrade existing telephone lines, electric power facilities, transport terminals, traffic management, garbage collection, police force, and the airport terminal to enhance Metro Cebu’s competitive edge to attract investors. They also simplified business permit application procedures to expedite the processing of papers of outside investors. Moreover, Metro Cebu’s local governments adopted important measures to stimulate fast track property development such as selling of government property through joint-venture schemes with big developers, reclassifying protected areas to pave the way for private development projects, and resorted more and more to the practice of lenient spot zoning in order to free property developers from the encumbrances of existing zoning ordinances. During this period urban planning, historically already a weak area of local government work in Metro Cebu, became planning to promote growth and not to regulate growth, and planners were more focused on deal-making and negotiation with

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private business interests rather than in land use designation to preserve public interest (Fainstein, 1991). National property companies operating in Metro Cebu were the main beneficiaries of pro-growth boosterism of local governments. Offhand, it may seem that local developers might have a decisive edge over the outsider big developer in currying favours from local government since they themselves or their kin are likely to occupy official positions. But such would not be the case for Metro Cebu. According to the growth ideology, which has been very dominant among key officials,17 business leaders, particularly big property developers, need not get directly involved to ensure their interests. The latter have become part of the taken-for-granted view of what was the ‘general interest’ – or, the politically acceptable form of business interests (Short, 1996: 275). Local officials knew exactly which development corporation and which project would give the highest aggregate tax revenues for their city or municipality. Nevertheless, despite the pervasiveness of pro-growth ideology in government itself, big developers also employed Cebuano lawyers, accountants, and land surveyors who did the dirty job and who, because of their local knowledge and connections, navigated very effectively through the idiosyncratic culture of permit and approval acquisitions in the lower-level bureaucracies. Thus, even in the real estate private-public transactions at the local government level, the local developers never outplayed the big outsiders.

Land speculators and serendipitous property entrepreneurs To understand the phenomenal rise of real estate investment in Metro Cebu that led to the boom it is not enough to focus on the resources and behaviour of the national property developers and their land dealer partners, and the aggressive supportive role played by the national and local governments. Though these were the main actors that shaped the big supply of property commodities, they were deliberately aligning their investment decisions and pitching the quality of their property products to certain sets of potential buyers in Metro Cebu. In an interview with the author, a ranking official of the Santa Lucia Realty & Development Corporation expressed this awareness of the national property developers in the following terms: When the company made a decision to come and operate in Cebu in 1989, we knew that there was a potential market for developed properties in the business community here – especially among the local Filipino-Chinese merchants and the local manufacturers (27–2–01). That there was indeed a strong market in Metro Cebu for the high-end residential subdivisions was proven as soon as several of these projects by Manila-based developers were offered for sale early in 1990s. Lots in prestigious housing and in upperend subdivisions as well as in flush condominiums sold briskly. For example, 70 per cent of the lots in Santa Lucia’s first Class A residential subdivision project in Metro Cebu, the Royal Cebu Estates launched in September 1990, were sold out within

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12 months.18 Sales of these types of high-end properties were highest from 1990 to 1996. Manila-based big property companies launched such new projects one after another and tried to outdo each other in aggressive advertising and sophisticated marketing of these prime properties. While there was an effective demand for high-end and up-end properties in Metro Cebu, it became evident right away that the market was largely comprised of real estate speculators. These are entrepreneurs who purchase (or purchase and develop) real estate, usually in large amounts, with the hope of a profit from rising land and property values (Feagin, 1998: 141). They are calculating entrepreneurs of the real estate sector who assume that the future price of the property they buy will be greater than the present one (Haila, 1991: 352; Logan and Molotch, 1987: 26–7). Several real estate agent informants confirmed to the author that it was not uncommon for them to have clients of these high-end residential subdivisions who bought five to ten lots during the dizzying pace of appreciation of property values in Metro Cebu between 1990 and 1995. Such a pattern was also noted by a leading property broker in Cebu (quoted by the local press) stating that while lower cost and affordable house and subdivision lots with usual sizes of 120–200 m2 have attracted 90 per cent of end-user buyers, high-end subdivisions have drawn largely speculative buyers (Sun Star Daily, 1–11–96). The most concrete trace of this spate of speculative buying during this period however is the unmistakable landscape today of idle lots that obviously far outnumber those with built structures in almost all of high-end and up-end residential subdivisions opened during the property boom in Metro Cebu.19 In the author’s initial round of surveys among 24 real estate agents in Metro Cebu, two groups of the local economic elite of Cebu stand out as the principal buyers and speculators of high-end and up-end subdivision lots during the property boom: rich Filipino-Chinese merchants and furniture manufacturer exporters of Cebu.20 The rich Filipino-Chinese merchants who became land speculators have roots in Cebu City’s long mercantile history dominated by an elite of ethnic Chinese descent who have been deeply assimilated into the local indigenous community. Much unlike the other regions in Luzon in the nineteenth century, Cebu had a merchant elite. Though it had very wealthy large families who were also landowners, it was these families’ connections with the city’s port-centred commerce that gave them social and economic prominence (Mojares, 1997: 42). This merchant character of a fraction of Cebu’s economic elite has continued up to the present. Churchill (1993: 6–7) describes Cebu’s commercial sector, to the present day dominated by families of Chinese decent, as ‘businessmen who search the Visayas and Mindanao for raw materials to be processed in Cebu or Manila, or who warehouse Manila-made goods for southern distribution’. These Filipino-Chinese families have accumulated large surpluses during their long pre-war and post-war dominance in copra trading, coconut oil processing, wholesale/retail general merchandising, and in more recent decades, in construction and hardware. As earlier discussed, many of these families also steadily accumulated raw land in the 1950s and 1960s and became big land dealers at the onset of the property boom.

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But at the same time, many of them would also become speculators of developed high-end subdivision lots. An expectation of an ever rising rate of return on investment seems to be their guide in easily alternating from raw land dealing to speculative buying of developed properties. The two profit-seeking roles in investment are conflated, of course, when the land dealer enters into joint-venture agreements with developers.21 The other set of rich families of Metro Cebu who became large buyerspeculators of high-end and up-end residential lots came from the manufacturing exporters, particularly those long engaged in furniture industry. During the property boom surplus accumulated in this specific manufacturing activity switched to investment in the property sector in the form of speculative buying. As a major industry Cebu’s furniture manufacturing dates back to the early 1960s, when the national government provided capital for this fledgling sector through the cottage industry guarantee fund and the creation of the National Cottage Industry Development Authority. Soon the Cebuano producers took advantage of Cebu City’s traditional access to world markets and were soon producing for export. Furniture manufacturing grew rapidly and, by 1980, rattan furniture already ranked third in Cebu’s major export products, second only to copper concentrates and coconut oil (Bernaldez, 1997: 70–1). For a short period in the late 1980s, Cebu furniture production suffered from the exhaustion of raw rattan supply in the country. But the industry immediately diversified its designs and raw materials such as iron, marble, and stones and quickly rebounded. Diversification and upgrading of quality were boosted by American companies who came in and introduced new techniques and designs. Thus, on the whole, the furniture industry has sustained the longest and highest growth dating back from the 1970s up to the present. Based on the official statistics of the Provincial Planning and Development Office of Cebu, from 1988 to 1997, the period of the property boom, Cebu’s furniture industry posted an annual average of US$196 million in export value, ranking second only to the electronics industry sector dominated by transnational firms in the Mactan Export Processing Zone. Based on my interviews with some furniture manufacturing entrepreneurs, aside from an expectation of high future returns on purchased properties that is a general characteristic of land speculators, there are two important specific reasons why furniture exporters are most inclined to switch their accumulated surplus from manufacturing to property investment. First, property investment is regarded by many furniture exporters as a hedge against uncertainties of a volatile furniture export market. With stiffer competition in the last decade from the expanding furniture exports of countries with richer raw materials and lower labour costs, such as Vietnam, Indonesia, and China, Cebuano furniture entrepreneurs are increasingly threatened with possible loss of foreign buyers and eventual closure of their shops. Second, real estate have been utilized by them as highly dependable bank collateral for acquiring quick loans to finance manufacturing and exporting operations during unexpected financial gaps in their operations.22 Logan and Molotch (1987: 29–31) highlight a distinction between the active place entrepreneurs and the serendipitous place entrepreneurs that is useful in understanding the

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behaviour of local property owners in Cebu. Two important criteria defining the difference between these two sociological types are the degree of intentionality and institutional control related to land ownership. The active place entrepreneurs are individuals who seek out the right place to be in the future, gaining control over locations likely to become more strategic over time and striving to capture differential rent by investing in real properties which, because they lie in the path of development process, are likely to command higher values in the future. On the other hand, the serendipitous place entrepreneurs are essentially passive, having become rent collectors by inheriting property or by some other fortuitous event impacting on their properties. When they acquire their land usually by force of family entitlement they are ignorant of its eventual use and their habits and fortunes are most closely tied to a specific local parcel (see also Haila, 1991: 349–51). In Metro Cebu’s case, the big land dealers discussed earlier, who purposely accumulated land early on in the 1950s and 1960s by shifting their surpluses from service and commercial businesses, would easily fit the typology of active entrepreneurs. So are the principal buyers of high-end residential subdivision lots developed by big property firms. Both these sets of land investors are active speculators of land properties. The only significant difference between the two in Metro Cebu’s case is the moment in time they practised their speculation. The big land dealers speculated on land early on in the 1950s and 1960s, while the main buyers of developed lands are present-day speculators. However, there is a set of traditionally land-owning elite families whose behaviour during the property boom was more like the serendipitous place entrepreneurs. They acquired their lands through generations of inheritance within the family. When the land values were soaring during the property boom they were passive players and were most conservative in selling their lands to developers. These families such as, for example, the Villalons, Pelaezes, Quijanos, and certain members of the Borromeo family saw their property values rise in the market, but never converted these into cash or other forms of assets or investment in commercial, manufacturing, service, or real estate sectors. Some of them asked for unrealistic and unreasonably high prices for their parcels of land – a level that real estate agents commonly regard as ‘the asking price of an uninterested seller’, and which betrays their very strong attachment to their parcels of land.

Conclusions Returning to the question raised at the beginning of this article about the consequences of the property boom of the 1990s for the economic elite of Metro Cebu, it has become clear that the biggest beneficiaries of windfall capital gains in the Metro Cebu property boom are the Manila-based national property developers. By the scale of their real estate business and the early timing of their operations in the market, they were able to capture the premium profits.23 Their high profit levels were also partly ensured by the pro-growth boosterism of the local and national

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governments. Among others, various state policies and measures reduced these companies’ transaction costs and provided them with relatively inexpensive lands for development. Two traditional elite families of Metro Cebu were able to match the scale of real estate operations of the national property companies: the Osmeñas and the Aboitizes. These families also profited much from their property development projects in Metro Cebu during the boom and thus further strengthened their business elite status. On the other hand, the local small developers were generally fenced off from high profit-making due to smallness of scale and late timing of their projects. The big land dealers who speculated in and accumulated raw lands in the 1950s and 1960s and sold them to (or entered into joint ventures with) the big property companies of Manila have also been the biggest capital gainers during the boom. These families comprise a fraction of the elite of Metro Cebu, whose accumulation in commercial, trading, and service enterprises has been switched into land properties over time (some of them also amassed lands through the use of their jobs in government land agencies before). Through the sales of vast raw lands they were able to realize enormous profits overnight that, in turn, were reinvested to expand their various business enterprises and/or engage in a new round of speculative buying of developed properties. Some of them became medium-sized developers themselves during the latter part of the property boom. Their behaviour exemplifies how switched investment into real estate from other productive sectors at an earlier time can pay off generously in a later time of property boom, further entrenching the elite’s economic position in the process. For some traditional land owning elite families of Cebu, the property boom came as a fortuitous event, dramatically raising the appraised values of their real estate properties overnight. Though these families have not realized profits from the sales nor improvement of these properties during the boom, they continue to hold in possession vast parcels of land whose values have multiplied today. For these serendipitous property entrepreneurs, new potential levels of income gains in the future in the form of rent or sale of these properties have enhanced further their social standing and economic prestige as members of the elite of Metro Cebu. On the other hand, it is still unclear to date whether the new buyer-speculators during the property boom, mostly comprised of Filipino-Chinese merchant families and furniture export manufacturers, would probably earn enormous financial gains in ‘banking’ their commercial and manufacturing profits in high-end subdivision lots. While market demand for expensive real estate properties in Cebu has slumped and while their price level has ceased to spiral since 1999, neither have their market values crashed. Another upturn of the real estate cycle in an unforeseeable future might enable them to reap enormous profits from their current property investments. Though their surplus has been ‘frozen’ in unsold, idle subdivision lots, it cannot be said that in terms of asset values they are worse off today than they were prior to their speculative buying. These premium subdivision properties remain as viable ‘financial assets’ (Harvey, 1982).

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The outcome of the property boom of the 1990s in Metro Cebu thus presents a picture that is complex and differentiated. It reflects how powerful national (or outsider) property companies, through their capacity for large-scale capital concentration and sophisticated operations, have made claims on the surplus in the local economy, impacting on the fortunes of the elite of Metro Cebu active in land investment and how they have also in effect marginalized local developer-investors. It also shows how enormous capital gains arising during the boom have been unevenly distributed between fractions of the local elite. But on the whole, the boom and phenomenal rise in property values has developed in a way that has provided continuity to the economic dominance of members of the elite of Metro engaged in land investment.

Notes 1 I am using the term ‘rent’ here in its broad meaning, ‘to include outright purchase expenditures as well as payments that home buyers or tenants make to landlords, realtors, mortgage lenders, real estate lawyers, title companies, and so forth’ (Logan and Molotch, 1987: 23). 2 The exchange value of the Philippine peso currency fell from P36:US$1 in 1997 to P48: US$1 the following year; the local interest rate was up, from 13–14 per cent before the financial crisis to 32 per cent during the crisis in 1998. 3 In the author’s interview with a vice president of a real estate marketing firm who has been in full-time real estate brokering since 1988, he said that in the first half of 1995 at the height of marketing frenzy in Cebu, he was able to personally close deals on 80 sales of residential lots in a span of just five months, a sales performance that he did not experience before nor would experience again in the years following. 4 At the height of property development in Metro Cebu in 1996, Ayala Land Incorporation was ranked 26th in the 1,000 top corporations in the Philippines based on gross revenues; Fil-Estate Land Incorporation, 46th; Fil-Invest Land Incorporation, 228th; Santa Lucia Realty and Development Corporation, 538th (Philippine Business Profiles and Perspectives Incorporation, 1998). 5 Fil-Invest Development Corporation, for instance, has H.B. Fuller Incorporation as an affiliate company whose principal activity is construction materials manufacturing, and also Hocheng Philippines, another affiliate that specializes in the manufacturing of sanitary wares. Fil-Estate Land Incorporation, on the other hand, has a subsidiary, FilEstate Builders Corporation, whose principal activity is real estate construction (MagnoBallesteros, 2000: 180). 6 Ayala Land Incorporation is the Philippines’ largest real estate developer managing a vast range of real estate interests: residential subdivisions, high-end housing projects, hotels, industrial estates, theatres, and other mixed-use development projects. The company’s controlling stock holder is the family of Zobel de Ayalas who is also the principal owner of the Bank of Philippine Islands, the second largest universal bank in the Philippines. Ayala group of companies has also major interests in insurance, and in agriculture, food processing, telecommunications and electronics. On the other hand, Fil-Invest controls the East West Bank. 7 Interview by the author with a top-ranking officer of the company. 8 I have classified a total of 139 residential subdivision development projects in Metro Cebu from 1988 to 2000 in the open-market sector (i.e. outside of the socialized or government-subsidized socialized housing sector) into four project class categories: (a) high-end/‘prestigious housing’ projects (with mean lot size >450 m2); (b) up-end housing

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projects (with mean lot size of 281–450 m ); (c) low-end housing projects (with mean lot size of 111–280 m2); and (d) low-cost housing projects (with mean lot size of 38–100 m2). Criteria for ranking and categories are based on my survey interviews with real estate agents in Metro Cebu and ocular inspections of subdivisions. In constructing them, I correlated mean lot sizes of each subdivision with other important criteria such as: residential subdivision amenities (e.g. covered or uncovered tennis or basketball courts, swimming pools for communal use, etc.); income-level group of typical buyers; common price per m2 in each subdivision; and social-symbolic elements that matter in a consensus in the hierarchical ranking of residential subdivisions in Metro Cebu (e.g. the degree of a subdivision’s attraction as the traditional residence of recognized elite families of Cebu). The Cebu Business Park was a major development project involving the construction of a complex with a shopping mall, five-star hotels, and office towers in a prime lot area of Cebu City. The project’s incorporators included five prestigious companies, namely: Andres Soriano Corporation; Santiago Land Development Corporation of the Bank of the Philippine Islands; Kuok Properties Philippines Inc., Philippine Long Term Equity, and the Ayala Group of companies. One good example is the Asnar brothers who sold their 400-hectare raw land property to Santa Lucia Realty & Development Corporation for the development of Alta Vista Subdivision, a complex of prestigious housing and a golf course. Their late father initially accumulated land working as a surveyor in the local government land agency. Over the years, the family expanded into the business of private university and hospital and then further invested their profits in these service businesses into raw land buying. The sons decided to enter into a 60–40 joint-venture scheme with the Santa Lucia Realty. They got 40 per cent of the developed lots and also 40 per cent of the total golf shares which they themselves marketed (author’s interviews with real estate agents of Santa Lucia Realty & Development Corporation). Other examples of elite Cebuano families who accumulated raw lands and sold them to Manila-based big real estate developers are the Lhuilliers, a family dominant in pawning and jewelry business which has roots in the prominent merchant family of the Escanos (Mojares, 1997: 42), and the Go Chans who entered into a joint-venture with a Manila-based property firm. The latter currently own one of the biggest coastline properties in Lapu-Lapu City. This family has been buying lands and accumulating low-cost lands since the 1960s. The Go Chans were also lessors of commercial spaces in the central business district of Cebu City long before the property boom and the proprietors of the University of Cebu. An official of a Manila-based big property firm told the author, for example, that their own Class A subdivisions require no less than 30 hectares of contiguous raw lands. Later in mid-1992, Lito Osmeña became a special cabinet secretary in the Ramos government in charge of the country’s flagship economic projects. This put him in a strategic position to have direct access to vital information on business opportunities and access to national government-mediated foreign and domestic credit sources. Based on the author’s interview of an informant close to the inner circle of the Aboitiz family. According to Cebuano developer informants, Metro Cebu branches of national banks generally grant loans of only 10 million pesos (US$200,000). Beyond this amount, approval has to be sought from their respective central office in Metro Manila. Uncertainty of loan approval and longer processing time to secure loans are often fatal to small developers especially during the initial construction period of a development project which has to be as short as possible. This link is also valid in the transaction between developers and potential land dealers. Confidence of the latter in the potential developer-buyer/partner is important in clinching land deals. For example, Santa Lucia Realty & Development Corporation prides itself

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in having drawn into a partnership agreement one of the most conservative landowning elite families in Cebu, the Go Chans, commonly known to be a family averse to any selling of its accumulated raw lands. It was the company’s solid reputation that won the confidence of the landowner to sell (interview with a ranking officer of Santa Lucia Realty & Development Corporation). I am adopting here the definition of John Short (1996: 210) of contemporary progrowth boosterism as the aggressive promotion of pro-business agenda for a particular city against the background of competing cities and alternative investment opportunities. Its leading players – usually influential politicians and local government leaders, corporate chairpersons, realtors, local banks, and chambers of commerce – all seek to define the city as an economic growth machine. These players have a strong consensus on stimulating investment and economic growth while limiting the redistributional function of the state (see also Gordon, 1999; Logan and Molotch, 1987; Feagin, 1983; Eichler, 1982). The Osmeña cousins who were key officials of Cebu in the take-off years of 1986–1992, personify this pro-growth ideological predisposition. Lito Osmeña’s (the governor of Cebu during these years) ‘no-nonsense, pro-business administration reduced bureaucratic intervention in business, laid down much needed infrastructure, attracted critical outside investment’ (Churchill, 1993: 8). On the other hand, Tomas Osmeña (Lito’s cousin) who was the mayor of Cebu during the same period, was educated in US and a business person by training, working as a financial analyst before entering politics (ibid.: 9). Interview with a real estate agent of the marketing agency of Santa Lucia Realty & Development Corporation (25–1–00). In the case, for example, of a high-end subdivision, Royal Cebu Estate, until today only 25 lots have visible housing structures out of the 1,000 lots which have been virtually all sold out since about ten years ago. This statement is not to suggest that there were no other types of buyer-speculators or direct-user buyers of these properties of significant number. Some speculator-buyers, for instance, were Mindanao-based businessmen with family roots in Cebu. Some buyers were also high-grade professionals of Cebu, highly successful lawyers or doctors who bought lands for immediate use for their families. The point of this statement is to identify who were the main socio-economic groups most aggressive in buying these higher categories of residential properties. Joint venture agreements vary depending on the slope and potentials of the raw land for development. They also depend on the type of structure or development to be shouldered by the property developer. In residential subdivision development of raw lands, the usual sharing in a joint venture is 60–40, where the developer gets the 60 per cent of developed lots. Sometimes, if the raw land is ideally flat, and therefore development cost cheaper, the arrangement is 50–50 sharing of developed lots. In high-rise residential building or vertical development projects, the sharing of marketable residential units is 70–30, in favour of the developer. This is due to the much bigger capital outlay that the developer provides in these types of projects. Cebuano manufacturing exporters have a hard time in securing loans from banks if they only show a letter of credit (i.e. an import order from foreign buyer). Banks still normally ask for real estate property titles as collateral to back up the letter of credit (interview with a furniture manufacturing entrepreneur). Although there is no existing systematic study of the profitability of the projects and operations of Manila-based corporations in Metro Cebu, there are some indications of high returns during the property boom. For example, according to Ayala Land Incorporation’s 1993 Annual Report, its 44 per cent-owned affiliate, Cebu Holdings Inc. (CHI) earned some 117.7 million pesos, a very high 50 per cent income growth from the previous year, due to increased sales of lots and office condominiums. In another case,

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a ranking official of Santa Lucia Realty & Development Corporation for the Visayas informed the author that the company’s operations in Metro Cebu have on average accomplished 90 per cent of their expected return on investment in their projects. Thus, Santa Lucia-Cebu is the most important branch of the company and its profits have actually been long subsidizing the firm’s projects and operations in other regions of the country.

Part II

Engineering a new middle class Singapore and Malaysia

7

Brokering change, changing brokers The Chinese business elite and decolonization politics in Singapore, 1945–65 Sikko Visscher

In the course of history, large transformations of power present us with an opportunity to study societies under changing circumstances. For Singapore, as for many countries in Asia and Africa, one such transformation came during the years after World War II in the form of ‘decolonization’. This chapter will address the question how decolonization influenced and changed the opportunities of one specific group in Singapore society, the local Chinese business elite. The British founded Singapore in 1819 as a mercantile stronghold in its Asian empire. Both colonizers and colonized were primarily interested in and engaged in trade, and as a result merchants held prominent social and political positions in Singapore society. The British choice of a system of laissez-faire and indirect administration of and control over the population legitimized existing power hierarchies dominated by businessmen. In the case of the Chinese, this meant that the leading merchants were also the leaders of the religious, social and economic associations through which immigrant society was organized. Power, status and influence of the Chinese merchant elite were based on communal, essentially apolitical, hierarchies in which primordial loyalties were strong. These leaders were co-opted by the British to represent the Chinese community within the colonial system. Singapore became a fully independent state in 1965 and the period of decolonization from 1945 until 1965 is chosen because it encapsulates a number of political, social, and economic changes central to the questions addressed in this chapter. The ethnic composition of the population of Singapore is relevant in this context, as the distinction between national and ethnic brokerage will feature prominently. From the mid-1850s, the Chinese comprised the majority of around 75 per cent of Singapore’s inhabitants. Since the early twentieth century, Malays of local and regional background make up the second largest ethnic group at around 12 per cent. Indians comprise a further 7 per cent of the population while 3 per cent are of various other extractions, including Western expatriates. The chief economic activities in Singapore during its history up until and including the period under scrutiny were trade, shipping, and financial services, activities in which the Chinese business elite was heavily and crucially involved. In this chapter, I will explore the role of this elite as socio-political brokers during the decolonization process. The term broker is defined here as a political actor in-

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volved in a constant renegotiation of power relations in which support bases – status, money, and access to power – are crucial in determining who gets what and who can rise to the top. I will argue that the role of the socio-political broker in this process of politics is greatly determined by the ability of the broker to ‘sell’ skill, information and access to power, as well as by the ‘demand’ of other social groups or actors for the services of brokers to attain otherwise unreachable goals. A number of questions will be raised to develop this theme. What was the role of the Chinese business elite in the decolonization process? Which changes and transformations took place in the socio-political arena and civil society of Singapore and what repercussions and effects did these have on Chinese elite formation and renewal? What did it mean and what did it take to be a successful Chinese power broker in Singapore during decolonization? As the focus of my analysis, I have chosen the Singapore Chinese Chamber of Commerce (SCCC) and, more specifically, the group of individuals that made up the leadership of this organization.1 The SCCC was the most important organization of Chinese business in Singapore and could claim, certainly until 1955, to be the penultimate Chinese socio-political organization as well. Therefore, for the period addressed in this paper, good grounds exist to equate the Chinese business elite with the Chamber leadership. Representing established social groups, operating in long-standing networks and possessing economic capital, the leaders of the Chamber may be expected to quickly respond to new opportunities and consolidate their position by combining both their traditional and newly arising sources of power. In this vein, one may theorize that the Chamber represents another case that affirms the elite continuity thesis. On the other hand, Singapore witnessed far-reaching socio-economic transformations after World War II, which changed traditional power structures. This process may have resulted in ‘new opportunities for new people’ threatening the position of the Chamber and curtailing its power. Besides discussing the two hypotheses of elite continuity or elite change that are central to this volume, this chapter aims at gaining understanding of the dynamics of the broker role in an ever-changing political, social, and economic context. This means that the focus is on the behaviour of a business elite beyond the direct activities of their individual businesses or their sectoral economic representation.2

Post-war return of colonialism? 1945–50 Before, and shortly after the war, formal political parties did not exist, and there were no elections. Local influence on and participation in Singapore politics was organized through informal and formal consultation as well as government appointed advisors. As the pinnacle organization of the business elite of the largest ethnic group of residents of Singapore, the SCCC played an important role in this colonial system of governing. Its leaders were therefore also well positioned to take the forefront in the first phase of decolonization. Still, changes in the ability of the Chinese business elite to offer skills and services, and changes in the wants and needs of the potential ‘brokerees’, led to changes in the brokering potential of the elite. During the process of decolonization, the rules of the political game

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and the characteristics of the political arena were altered. In the end, the Chinese business elite proved to be incapable at dealing with the situation and lost out to a new political, bureaucratic elite. While it was clear that the colonial system could never be the same as before the war, the British, in the early years after returning to Singapore, did plan to control and lead the process of increased local involvement in governing. As a result, the Chamber, a proven broker of pre-war times, was well positioned to increase its importance and influence. Its skills were desired and necessary for post-war political, social, and economic reconstruction and there was a general lack of alternative brokers or other representational organizations. Apart from brokering between a feeble state and a chaotic post-war society, the Chinese business elite was also important as a broker between the needs of state and society on the one hand, and an imperfect, disturbed market on the other.

The British military administration and the local elite The Japanese occupation essentially set in motion the process of decolonization in Singapore and British Malaya. Although the allied forces defeated them in 1945, the way an Asian power had managed to blow away the Western colonial nations fundamentally changed the power relations between the Western colonial rulers and the Asian subjects they ruled after World War II. The British realized this and started a period, initially of undetermined length, of transition towards increased local involvement in government; a rather vague and cautious approach. More importantly, Singaporeans and British Malayans in general realized the changes that were imminent. To the local elites the question of who would eventually take over from the British was central. Although left-wing guerrilla fighting led to a prolonged period of a state of emergency, for many complex reasons, an anti-colonial revolution or a large-scale violent insurrection did not dominate decolonization in British Malaya. The transition took the form of a gradual process in the socio-political arena. Since the British orchestrated many of the rules by, and arenas in which, this process was played out, access to the colonial power structure remained important throughout. As the power balance slowly shifted away from the British to the various local elites, channels of communication with and access to other power bases became increasingly important. Upon liberation, the British decided that their colonial territories in Asia would, for the time being, be governed by a British Military Administration (BMA) under the Supreme Commander of the British forces, Lord Louis Mountbatten. In these first few months, post-war Singapore started to take shape and a number of trends became visible. Firstly, the colonial government started working towards increased local participation in governing. Secondly, the Chinese business elite underwent a process of localization, shifting its attention from China to Singapore and British Malaya. The Singapore Chinese Chamber of Commerce (SCCC or the Chamber hereafter), as the highest representative of Chinese business,3 took an active stance in

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assessing the needs of society and economy, and in proposing temporary measures and BMA policies. The return of the free market was high on the Chamber’s list. Apart from wanting the price of land to be fixed, Chinese businessmen advocated the competitive selling of all other commodities. Also, the SCCC urged the Civil Affairs section of the BMA to continue to give free rations of rice, sugar, and salt to the population in October as it had done in September (The Straits Times, 27–9–45). The livelihood of the Chinese community (as the constituency of the Chamber leaders), and the circumstances for the successful running of their businesses were the two main points on the reconstruction agenda of the SCCC. Chamber involvement in the politics of reconstruction was taken to an even higher level with the return of its president, Lien Ying Chow. This brings us to the question of who the dominant members of the Chinese business elite were directly after World War II. As no new entrants became active in the elite during the war, one may assume that the pre-war business elite returned. However, the power balance did change. Some individual members of the pre-war elite stepped back, mostly because their businesses and finances were either completely gone or in great disarray. One rubber baron, Tan Lark Sye is a good example of this. He was vice-president before the war and returned to that post until 1946. At that time he withdrew for a few years to rebuild his business only to resurface at the top as the Chamber’s president in 1950. A few other leaders did not re-enter the limelight because they were more focused on events in China than on political developments in Singapore. The best example of this category is the well-known tycoon Tan Kah Kee who, after having played a central role in the colonial government-endorsed Singapore Chinese civil defence movement before the war, now took sides in the Chinese civil war and directed his attention eastward. The individual leaders who came out on top after the war shared three characteristics. Firstly, their businesses were relatively unscathed, or they had even improved their position in their respective markets or sectors. Secondly, they felt they had a stake in Singapore’s future and were therefore willing, and sometimes eager, to enter Singapore politics. Thirdly, because of their pre-war and wartime activities they had access to, and were respected by, the colonial government. I will briefly introduce the three most prominent Chinese leaders of the period 1945–50. Lien Ying Chow, who had been elected as the youngest Chamber president ever in 1941 at the age of 37, returned to Singapore with greatly increased status. During the war he spent some time in Chungking, where he set up a bank with other overseas Chinese who had fled their respective homes in Southeast Asia, and also served on Chiang Kai-shek’s wartime financial committee. Towards the end of the war, the Generalissimo appointed Lien as special representative of the Republic of China in London. Lien became acquainted with a number of senior British politicians and improved his already considerable contacts with the British Armed Forces. Before the war his ship chandlery business had contracts with the Royal Navy and he also supplied the army bases in Singapore. When the BMA took power in 1945 some of the officers with whom he had had business dealings before were now in charge of running the city. Lien’s success is confirmed by the fact that in 1946 he could open

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the Overseas Union Bank in Singapore with S$10 million in start-up capital and the broad backing of Singapore and Malayan Chinese business circles (Archive of the Secretariat of Chinese Affairs, National Archive of Singapore, reel 6 folio 0102). The two others, Lee Kong Chian and Tan Chin Tuan, were both closely connected to the conglomerate around the Oversea-Chinese Banking Corporation (OCBC), the former as one of its founders and substantial shareholder and the latter as its war-time special managing director in charge of re-registering the bank in non-occupied British India. The bank, established in 1932 through the amalgamation of three Hokkien banks, survived the war well and posted significant profits in 1947. It was rumoured that, because of the excellent connections of Lee and Tan with the British, they ensured that the OCBC could exchange its deposits in Japanese wartime currency before it was declared worthless. Both men were greatly concerned about the future of Singapore, and Tan had already joined a number of other exiled Chinese while in Calcutta to write and submit a memorandum on the future of British Malaya to the British authorities. It is not surprising, therefore, to find these three men featuring prominently among the members of the BMA appointed Advisory Committee established in 1945. In addition they served in other advisory functions pertaining to the economy and education as well as taking personal initiatives, especially to rekindle the market economy (The Straits Times, 13–11–45). Getting trade moving again to ensure the food supply was indeed a key point to both the Chinese business community and the BMA. In the first months after the war, those Chinese businessmen who had their own companies and finances in order were in a perfect position to become indispensable as political and economic brokers. Interestingly, the Chinese Advisory Board, the prime official body of colonial indirect rule over the Chinese before the war, was not reinstated until 1949. It did not play a role of any significance anymore! (Minutes of meetings of the Chinese Advisory Board of 15 July, 5 September and 9 December 1949, Enclosures 8, 25 and 39 to the file of the Secretary of Chinese Affairs No. 163–49).4 Immediately after the war, there seems, therefore, to be a case supporting the elite continuity hypothesis. Although not all individuals of the pre-war elite returned to positions of prominence, the ones who were influential had all been elite members in the 1930s. In contrast to the flailing Chinese Advisory Board, the Singapore Advisory Council took an active and critical stance towards the BMA, signifying the empowerment of the local elites vis-à-vis the colonial government. Sir Ralph Hone, Chief Civil Affairs Officer for Malaya, presided over the first meeting of the Singapore Advisory Council, which comprised 17 members. The meeting was said to be amicable and constructive but the council soon became critical of the slow pace of reconstruction, trade restrictions, shortages, and hardships. Actually, some authoritative accounts claim that the BMA, dubbed the Black Market Administration, destroyed in seven months the goodwill which existed at the time of liberation and brought British prestige in Singapore to a lower point even than in February 1942 (Turnbull, 1977: 220–1).

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First steps towards elected local representation The Advisory Council remained in place even after the ‘normal’ colonial representational organs, such as the Municipal Council, the Legislative Council and the Executive Council were reactivated under civilian rule. All these bodies were made up of ‘official’, ex-officio members (i.e. colonial officials) and ‘unofficial’ members (representatives of the local elites). Up to this time, the governor had always appointed the latter. Now, as the number of ‘unofficials’ on the various councils was increased, they were also selected through elections. In 1948, the ‘unofficials’ for the Legislative Council were elected for the first time, even though a number of appointed members from the business world remained. In 1949, elections for the Municipal Council selected the ‘unofficials’ who, for the first time, formed the majority. However, when the various councils were first reintroduced, elections were not an issue yet. Lien Ying Chow and Tan Chin Tuan served as appointed members on the Municipal and Legislative council respectively, while Yap Pheng Geck, a trusted friend and associate of Lee Kong Chian, also served on the Municipal council. An important restraint on the representative character of the elections was the composition of the electorate and the restrictions that applied to running as a candidate. To be eligible to vote or stand at the election one had to be a British subject by birth or naturalization. For the Legislative Council election of 1948, six unofficial members would be elected by ballot while four would be appointed by the Governor, and three would be chosen by the Chambers of Commerce (Turnbull, 1977: 230).5 The potential electorate was 200,000 but only 23,000 registered and cast their vote, an indication that electoral politics had not yet come alive in Singapore. The Chamber did not really mind at this point because its representation was guaranteed through its appointed member, Tan Chin Tuan. Appointment of Tan, who was a naturalized British subject, was not a problem but the reappointment of Lien on the Municipal Council did prove impossible because he was a Chinese subject. While Lien was affronted at being turned down after all he had done for the reconstruction of Singapore, the fact of the matter was that at this stage, the British still made the rules and were in a commanding position to enforce them. In Lien’s place, Yap Pheng Geck now took up the seat in the Municipal Council (Singapore Chinese Chamber of Commerce, 1964: 115–19). An important development was, however, taking place among the Chinese of Singapore, whether they could vote or not. As the composition of the Chinese community changed from a transitory immigrant community to a localized, sedentary part of Singapore society, the Chinese became more interested in the future of the island. This process of localization was further strengthened among the elite because of the plans the British unfolded for the future of Singapore and British Malaya. To the shock of the business elite, the British enacted the Malayan Union as the constitutional form for the Malay Peninsula while Singapore became a separate entity as a Crown Colony. A separate future of the two territories raised the frightful prospect of Singapore being cut off from its principal hinterland for trade and raw materials. Lee Kong Chian, by this time the president of the Malaya-wide

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Association of Chinese Chambers of Commerce of Malaya, joined a number of prominent Malayan Chinese in protests which culminated in October 1947 in a hartal, a one-day strike of workers and businesses. The SCCC supported this event but, soon after co-operation with peninsular Chinese, labour unions and communist organizations proved untenable and the Chamber concentrated on Singapore politics (Drysdale, 1984: 24–5). Whereas the goals of the Chamber in the 1948 Legislative Council elections had still been restricted to increasing the number of default seats allotted to the commercial sector, the localization process and the fight for more political rights was starting to become visible in the attitudes of Chinese leaders towards suffrage. Ng Aik Huan, a leading man in insurance and banking, was the first to show awareness in public of the power the Chinese could wield at the ballot box. At an SCCC Management Council meeting in May 1949, he urged strongly that the Singapore Chinese should register to vote and that ‘the apathy hitherto shown … was to be deprecated’. His argument was that: ‘… Singapore has embarked upon the road of democratic selfgovernment and the Chinese community cannot afford to ignore future election campaigns’ (Singapore Free Press, 17–5–49). Although Ng received unanimous support for his views, little action was taken on the issue for the next year and a half.

Brokering change: 1951–9 In this period we see the Chamber and its leaders actively brokering between the receding colonial administration and the residents of Singapore. It spoke for all people of Singapore in demanding political rights and judicial safeguards for the late-colonial and post-colonial period and was acknowledged by the British as one of the paramount local organizations.6 It managed to do so, on the one hand, from within the system in the existing representative bodies, as it had done in the first five years after the war. The Chamber representatives in these bodies were Tan Chin Tuan, who eventually rose to being the highest non-official representative as Deputy Speaker of the Executive Council, Yap Pheng Geck, and Tan Siak Kew, a Teochew rice merchant. The latter was one of those businessmen who, during the shortage of staple goods in the years immediately after the war, seized the great opportunities for fast-acting merchants, whose networks included both access to producers of scarce goods, and the capital to finance trade deals. Tan’s connections to the Teochew rice millers in Thailand and his access to the Sze Hai Tong Bank stood him in good stead in this period. On the other hand, in a new development, the Chamber profiled itself as a society-wide representative, which assertively appropriated political issues as well as the moral right to set the terms for resolving them. Especially in the period from late 1950 to 1955 this aggressive strategy met with increasing popular support. This second avenue saw the rise of a new type of Chinese leader. In the continued process of localization of China-born immigrants into Singapore politics, a group of wealthy merchants who had their riches fuelled by the rubber boom asserted themselves in an anti-colonial stance. Two characteristic representatives of this group are Tan

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Lark Sye and Ko Teck Kin. They were backed considerably by Lien Ying Chow who provided them with access to London political circles. So far, a young generation of political leaders seemed to emerge with support from established power holders. Both Tan and Ko made fortunes in the early 1950s when a great opportunity presented itself in the rubber sector at the start of the Cold War in Asia with the outbreak of the Korean War. The enormous increase in demand for natural rubber for tyres drove prices up on the world market. Singapore was an important centre for the rubber trade as it lay right in between the major rubber producing areas of peninsular Malaya and Indonesia. Those entrepreneurs who had made sure that they had stakes in, and control of, the whole production process, from the plantation to the export shipping, were the ones who made the largest profits in the rubber boom. Ko Teck Kin was one of the new entrants in the rubber sector and rose to the top quickly. He came to Singapore from Palembang in 1948 with little else than one of his father’s ships and a cargo of rubber. He managed to expand the shipping business and, through some intricate machinations, acquired a number of rubber plantations (National Archives of Singapore, 1981: 166–8).

Three campaigns The Chamber was the driving force behind the three campaigns that made the issue of decolonization come alive for the population at large. These three campaigns – for a local citizenship detached from British naturalization, for the use of multiple, local languages in the representative political bodies, and for education in the vernaculars – were no doubt fuelled by the personal concerns for the political and economic welfare of the Chinese business elite, which was largely not in possession of British citizenship and had one of the Chinese languages as their first language. The Chinese business elite was ultimately successful in this battle and thereby profoundly changed the political playing field through the expansion of the electorate. The first of the three campaigns started late in 1950. From a newspaper report, we know that the Chamber’s management council decided to establish a 9-man special committee which was asked to prepare a recommendation to the government on voting rights for long-term resident China-born Chinese. The argument of the meeting was that this group contributed to the colony and paid taxes and should therefore be allowed to vote (The Straits Times, 30–11–50). Tan Siak Kew made a statement indicating the shifts taking place: ‘Times have changed and our hearts are no longer with a China dominated by Chinese communists. We have made our homes and our fortunes here and we want to stay here’ (The Straits Times, 6–1–51). Basically, the argument in all three campaigns was that, if the British were on the way out, why should possession of their citizenship and ability to speak their language be prescribed for local residents as a prerequisite for participation in the present and future politics of the society they lived in. The first two campaigns, regarding local citizenship and the use of local languages, soon became integrated as an anti-colonial strategy. I will shortly address the Chamber’s role in this integrated

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struggle, before analysing why the issue of education was fundamentally different and had different results. The Chamber’s approach, on the one hand, was to popularize the issues in a general way, not as a political party would but more as a catalyst for information dispersal and, on the other hand, to lobby the various levels of colonial political decision-making. Popularizing was done both through the traditional channels of the Chinese clan and trade organizations as well as through the print media the Chamber leaders controlled. Interestingly, the influencing of colonial decision-making was not, at least until 1954, done through the Chamber’s various official representatives in the colonial legislative bodies, but rather through petitioning and memorializing the various power holders in the British colonial hierarchy (see, for instance, Colonial Office, 1952). Delegations of the Chamber met the Colonial Secretary and the Governor many times, but when those local colonial representatives did not prove receptive, the delegations and letters were steered towards ever higher levels of power, such as the Secretary of State for the Colonies, members of the House of Lords and even the Queen. Apart from managing to continuously generate local media and popular attention through these actions, the Chamber was victorious to the extent that it influenced higher levels in London to instruct local colonial officers that these were issues to be decided by the local population. To summarize events, it can be said that this Chamber’s success greatly aided the development of a local political sphere and arena. In both the Legislative Council elections of 1951 and those held in 1955, which led for the first time to local executive power, local involvement in government gradually increased. This process culminated in 1957 when the Singapore Legislative Council passed a law both on the use of local languages in the assembly and on local Singaporean citizenship. This last bill especially meant that the eligible voter base increased drastically, which led to increased popular involvement in politics. This would, however, prove to be a mixed blessing for the Chamber.

Education: the pitfalls of association with left-wing politics The Chamber’s attempts to secure a more prominent position for Chinese education proved to be a dangerous activity for two reasons. Firstly, unlike citizenship and use of local languages, which were issues of Singapore-wide importance and relevance, Chinese education was ethnically based. As a result, the Chamber was not a societal leader on this point but an ethnic representative that could conceivably be charged with particularistic interests. Secondly, and most importantly, the issue of education was strongly associated with student organizations and Chinese school teachers’ unions which were controlled by the Malayan Communist Party or one of its front organizations. These organizations staged examination strikes, school boycotts, and other campaigns fuelled by the alleged inequality of Chinese and English education. By making moral claims pertaining to the right to Chinese culture and identity they could make the Chinese business leaders support their cause. In the

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flowery prose of contemporary journalist Dennis Bloodworth, the dilemma for the tycoons was the following: … since their [the students’] popular rallying cry was no seditious Maoist slogan, but an appeal to all patriotic Chinese to resist the ‘barbarous destruction’ of Chinese education by the brick-faced British, the tycoons of the Chinese Chamber could not gainsay them without appearing traitors to their own culture. The millionaires were thus shamed into playing into the hands of the communists, having been adroitly ‘hooked on culture’. (Bloodworth, 1986: 61) Indeed, on a number of occasions in the tumultuous years from 1953 to 1955, the Chamber and its leaders were implicated because they supported students who had rioted and closed down schools, and had been arrested and put on trial for communist activities (cf. Yeo and Lau, 1996: 129–30; Bloodworth, 1986: 63). In two cases, the Chamber or its leaders financed the legal defence for students in such trials. At the same time, the Chamber hardened its stance on Chinese education, making more and more financial and policy demands of the government. The Chamber tried to be the leader of the Chinese community on this issue but found itself outmanoeuvred. A meeting of representatives of 600 Chinese organizations, called by the Chamber to discuss Chinese education, was quickly taken over by union and student representatives so the business leaders completely lost control of it. In a further development, in 1955, a group of Chamber leaders, with Tan Lark Sye as the most prominent, established a Chinese-language university, Nanyang Daxue (or ‘Nanda’ for short), much against the liking of the British. The Student Union of Nanda and, later, its alumni organization, quickly became the dominant Communist front organization in Singapore, further strengthening the association between the Chamber and radical ethnic and left-wing forces. This further shows that in the process of politicization of Singapore society, the broker role that the Chamber continued to see for itself was actually appropriated and distorted by other political forces, jeopardizing the continuity of the established elite represented by the Chamber. A short analysis of the development of the wider political landscape in Singapore and the Chamber’s activities in it will reinforce this observation.

Politics or not? In designing the post-colonial political landscape, the British wanted to bring to power the candidates of their own preference. Their chosen successors were organized in the Progressive Party, headed by local lawyer C.C. Tan, which had dominated local elections since 1948 and was actively groomed by the British to take over the limited powers granted to local government under the new constitution. It was precisely this late-colonial favouritism, which was based on a very limited definition of the local eligible electorate, which had rubbed the Chamber the wrong way in 1950. Now, with so much at stake in the 1955 election, a major regrouping

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of political forces started to take place from 1954 onwards as numerous parties and political alliances were established.7 The Chamber entered the fray as well. The two main strategies laid out by newly elected president Ko Teck Kin were, firstly, to ensure a high Chinese participation rate in the elections by making the voters aware of their rights, of the main issues, and by giving information on how to register to vote. Secondly, to continue lobbying for the retainment of the appointed chamber of commerce seats in the Legislative Assembly (The Straits Times, 16–3–54). As awareness of the upcoming election rose, no doubt aided by all the political attention to the Chinese education issue, the Chamber stepped up a gear in its involvement in politics. In November 1954, an election and electoral registration committee was formed to come up with a strategy. The committee chose to stage a voter information campaign to explain the issues in mass rallies across the island. A group of Chamber leaders, including Ko Teck Kin and Tan Lark Sye decided to take political involvement one step further and, in that same month, they established the Democratic Party (DP). The Chamber as an organization did not formally support this party but because its leadership was made up of Chamber top brass and because it promoted the same political points of view, the Democratic Party was widely seen as a SCCC party. Tan and Ko thought they had a legitimate role in politics as societal leaders, and by bankrolling a party they hoped to secure a place in the post-colonial power structure. The DP held a large-scale campaign which drew large, multi-ethnic crowds. In rallies its candidates explained the essence of the three issues mentioned earlier and received a very positive response. It fielded candidates in all constituencies but at the polls only saw a mere two of them returned. Why had the DP been unable to convert popular support for its platform into votes? Direct and indirect image problems with the DP, and extensive overlap with the Chamber’s broker role were to blame. Indirectly, due in great part to the Chamber’s activities, the majority of the already increased electorate in 1955 was blue collar. The unions had been, and still were, extremely active in organizing, informing and rounding up this large voter group. The unions thereby became an important and indispensable ally for any party that hoped to do well in the election. With politics now a populist endeavour, the Labour Front and the People’s Action Party, two democratic socialist parties, managed to incorporate union structures into their party organization and thereby reach the electorate. Therefore, as the general characteristics of politics in Singapore had changed from elitist to populist, the DP, although running on a very similar policy platform as the Labour Front, failed to make a good showing at the polls. It was labelled ‘elitist’ and was seen as a ‘millionaires’ party’ (Bellows, 1973: 128). In essence, the electorate did not see the DP and Chamber leaders as credible socio-political brokers (interviews by the author with Tan Eng Joo, Singapore, August 1996 and Lim Cher Keng, Singapore, July 1996). This negative experience led to internal competition in the Chamber between alternative factions over its political activity. In 1956, a year after the DP defeat, the Chamber elected the conservative Tan Siak Kew as president. He selected a vicepresident from the Hokkien camp who was firmly against the Chamber playing an active role in politics. In the following Chamber election in 1958, a power struggle

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between those who favoured an active political role and those opposed to it, escalated into a public brawl. Allegations of bribery, forgery, and the smearing of reputations were employed to the point that some Chamber members filed a civil suit. In the end, Ko Teck Kin won the election and therefore, the pro-politics approach won (for a more elaborate account see Visscher (2002) and Anonymous (1969)). However, this was not in touch with the realistic constraints and demands of the socio-political market place. Their continued involvement in politics and their claims to broker/ representative positions would cost them dearly in the next period.

Changing brokers: 1959–65 In the next period of Singapore history, some fundamental changes took place, both to the political system as a whole and to the roles of various actors within that system. In the Singapore election of 1959, the self-government arrangement was extended and pointed firmly to the goal of independence within Malaysia. That independence came in 1963 but after two years, in August 1965, Singapore was expelled from the Federation of Malaysia and faced independence on its own. The People’s Action Party (PAP), which won the 1959 election8 and has been in power ever since, had even stronger union connections than the Labour Front, but proved to be less loyal to them. After ‘riding the tiger’ to power, they quickly purged the union-dominated left wing. They brought the unions as well as the local employer organizations to heel and laid down the rules for the all-important master plan for economic development from the early 1960s onward. In the process, the PAP sidetracked, or just crushed, the alternative political elites. This had grave repercussions for these alternative elites, with union and left-wing leaders thrown out of the country or, alternatively, jailed without being charged or tried. In the following section, I will focus on how the Chamber and its leaders were disciplined by the PAP into accepting the new power reality. Again, I will read these developments in terms of claims to broker roles, of the inability to ‘sell’ those claims to the general public, and of a forceful discrediting of those claims by a dominant party-state. I will focus on three high-profile cases of PAP disciplining of the Chamber, but first want to make a quick remark about the significance of macroeconomics. It is important to realize how far PAP dominance of Singapore went and how quickly it managed, despite some dogged political opposition until 1963, to secure legitimacy for its rule. PAP power was based on stability and performance. With Singapore having been plagued in the 1950s by great labour unrest and low productivity, unemployment, and bleak general prospects, performance meant job creation and stable economic growth. To this end, the PAP, after advice by a UN/World Bank team, implemented a long-term economic development programme based on foreign direct investment in the manufacturing industry.9 A by-product of this strategy was that the local economic elite was removed from centre stage as foreign money started to drive the economy. Therefore, apart, as we shall see shortly, from being challenged as the socio-political elite, local businessmen were now also being deprived of their broker role in economics.10

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Disciplined three times The first disciplining centred on skills and competency issues. The government criticized Ko Teck Kin, the SCCC president at the time, because he was meddling in affairs in which they claimed he had no competence. In essence they said that he could not claim (or ‘sell’) being a broker on cultural policy issues because he lacked the relevant skills and that he proved to be a ‘bad broker’ because he let himself be used in communist attempts to harm national interests. The very fact that he was chastised makes clear that he had lost access to, and credibility with, the state as both broker and representative. The actual event triggering PAP action against Ko was an examination boycott organized by Chinese middle school unions in 1961 to protest against the forced conformation of Chinese schools to the forms and schedules of the English-language stream. Ko and the Chamber endorsed the protest, although not the boycott itself, and negotiated with the Ministry of Education to safeguard the Chinese system. The government saw a Communist plot behind the whole action and implemented a commission of inquiry into the incident. The testimonies before the commission, among them those of Ko Teck Kin and two other Chamber leaders, were widely publicised and even printed in the papers. Francis Seow, later to become a wellknown Lee Kuan Yew adversary and dissident, was then still in the employment of the state and had the role of ‘prosecutor’ in the proceedings. The manner in which he publicly humiliated and discredited Ko Teck Kin is revealing. Without going into the details of the case, I will here quote from the official proceedings. Seow: Ko Teck Kin:

‘Would it be fair to say that you are familiar with the education ordinance and the regulations made thereunder?’ ‘Not very much.’

Seow mentions that the Singapore Chinese School Staff Committee Association did not object to the 4/2 system for two years.11 Ko Teck Kin: Seow: Seow: Ko Teck Kin: Seow: Ko Teck Kin: Seow: Ko Teck Kin: Seow:

‘That is so, because if you add two to four you get six, and similarly if you add 3 and 3. There is not much reason for any objection.’ ‘That is a very peculiar way of reasoning, if I may say so Mr. Ko.’ ‘Let us get it straight on record. Mr. Ko, you do not set yourself up as an educationalist?’ ‘I am a businessman.’ ‘You are not an educationalist?’ ‘No.’ ‘You don’t pretend to be one?’ ‘No.’ ‘So that whether the 4/2 or the 3/3 is better, one or the other is better, for Chinese education, you would not be in a position to say so?’ (Commission of Inquiry 2, 1962a).

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Seow continues to infer that Ko Teck Kin was a mouthpiece for the Nanyang University Students’ Union, a communist front organization, referring to a Nanyang Siangpau report of 2 August 1961. Ko states in defence of the speech that many rumours existed in those days that the government eventually wanted to abolish the two years of senior middle school for Chinese schools altogether. When Seow once more says that Ko does not know what he is talking about, Ko Teck Kin snaps. Furiously he cries out: Ko Teck Kin: Seow:

‘That is an insult to my character. Don’t you know that I am the president of the SCCC?’ ‘I think I have had evidence on that earlier, but you don’t have to tell me. We don’t wish to engage in these fruitless exchanges.’ (Commission of Inquiry 2, 1962b).

The positions are clear here. The government discredits the Chamber’s role in culture and education, while Ko Teck Kin, and the Chamber leadership were still convinced that by the mere virtue of leading the SCCC, they were entitled to a role as broker and also the respect that should accompany that role. The second instance of PAP disciplining of the Chinese elite goes further than the first. Tan Lark Sye, by now Honorary President of the SCCC, was portrayed and chastised as an anti-establishment threat to Singapore society because he was allegedly a communist sympathizer. The Government game here was to scare away other middle-class leaders from seeking positions of status and influence through alliances with left-wing forces. Tan Lark Sye was not just attacked as a broker but was stripped of his right to even play the political game as a citizen of Singapore: he was effectively expelled from the system. As he was involved in both Chung Cheng High School and Nanda, Tan was accused by the government of allowing left-wing student organizations, and through them the communists, a stage and vehicle to further their cause (Nanyang Siangpau, 12–1–60). Lee Kuan Yew held Tan Lark Sye personally responsible and wrote, ‘I made a mental note to deal with Tan at a later date’ (Lee Kuan Yew, 1998: 332). Three years later, in the election campaign of September 1963, the Barisan Sosialis, the main left-wing opposition,12 tried to capitalize on Tan Lark Sye’s status, his activism in the struggle for Chinese education and his antagonistic relation with the PAP leadership. They asked Tan for financial support and later for a public endorsement of the Barisan candidates who were Nanda graduates or students. Tan did both, donating S$20,000 toward the campaign cost of the ten Nanda candidates and he publicly urged Chinese voters to support them in the elections (Nanyang Siangpau, 14–9–63, 15–9–63). On 22 September 1963, a day after the elections in which the PAP scored a resounding victory, the PAP government began legal proceedings to revoke Tan Lark Sye’s citizenship on the grounds that he had collaborated with communists at Nanda. Lee Kuan Yew wrote in his memoirs that, ‘… we had decided to make an example of prominent figures who had acted as front men for the communists,

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believing that their wealth and standing in the Chinese-speaking community gave them immunity. Number one on the list was Tan Lark Sye, then honorary president of the Chinese Chamber of Commerce and the founder of Nanyang University’ (Lee Kuan Yew, 1998: 511). The official statement from the Prime Minister’s office read: The government has decided that no man, whatever his wealth, status and standing, shall with impunity play stooge to the communists and jeopardize the peace and prosperity of Singapore and the amity and unity of the races of Malaysia. … He [Tan Lark Sye] had openly and blatantly intervened in these elections by signing statements drafted by these communists standing as Barisan Sosialis candidates denouncing the government, using as cover his so-called protection of Chinese language, culture and education. (Lee Kuan Yew, 1998: 511) The message was very clear. Chinese merchants who had ambitions to play the political game of education, Chinese culture and identity could expect harsh treatment from the government. Although certainly no avid communists or communist supporters, Ko and Tan naively thought that they could align themselves with the broader populist base of Singapore politics by entering the arenas of education and ethnicity. The Chinese business elite engaged in a most volatile relationship with the Chinese student organizations. After earlier rejection by the unions and the working class as credible representatives because its riches made it a class enemy, the elite was now used by the communist front organizations at great cost. Its image and status were permanently damaged and the liaison with the students gave the new political bureaucratic elite of the PAP the weapons it needed to sideline the Chinese business elite as a credible alternative to its own rule. The third case of disciplining reinforced and echoed the first two. Through it the government reconfirmed, in no mean terms, its dominance under the new circumstances of a fully independent Singapore. In the new state, despite the fact that Singapore had been expelled from the Malaysian Federation in 1965, making ethnic policy claims through brokers was still out of the question. This diminished even further the Chamber’s self-proclaimed role as a representative because the constituency it claimed to broker for (i.e. the Chinese community) was actively being defined away by the government who based its governing claims on meritocracy, devoid of racial bias, and representation of all Singaporeans as citizens, not as hyphenated ethnic categories. Amidst the changes following separation from Malaysia, the SCCC saw opportunities to shape or change policies. One of the most controversial of these attempts was the issue of Mandarin Chinese as a national language. To understand the background of these developments, one has to bear in mind the connection of language and education. Of course, the Chamber leadership was still reeling from the two beatings it had received in the persons of Ko Teck Kin and Tan Lark Sye over the combustible combination of education and politics. Still, to a new generation of

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Chamber leaders, including in 1965 the serving president, Soon Peng Yam, and some of his closest allies such as Kheng Chin Hock,13 language was a marker of Chinese identity, dignity, and pride. Now that the Malay majority in Kuala Lumpur was no longer calling the shots, and the Singapore government would therefore not feel inhibited by the ethno-political power balance, Chamber leaders felt that the pendulum could swing back in favour of, as they considered, a logical and just place for Chinese language and education in Singapore. In early October 1965, the Chamber publicly requested the government to make Mandarin Chinese one of the official languages and state this in the new national constitution.14 Kheng Chin Hock was the prime mover behind the proposal and, in a Chamber monthly meeting, he pointed out that Mandarin was mentioned in the constitution as one of the four languages that could be used in parliament but that it was not officially stipulated as an official language as such. Unanimously, those present adopted Kheng’s motion and appointed a 12-man committee of prominent leaders to take up the matter (SCCC, Minutes of monthly meetings, 30–9–65). A memorandum was submitted to the government stating that ‘for more effective government, and for the sake of promoting greater goodwill and harmony between the Chinese community and the other communities, the Chinese language as one of the official languages must be written into the new constitution of our nation’ (Nanyang Siangpau, 1–10–65). Lee Kuan Yew reacted immediately and the Prime Minister’s office released a statement the next day. In it, it was stated that Malay, Mandarin, Tamil and English were all equal official languages in Singapore, and that Malay would be the national language. Lee Kuan Yew accused the Chamber of cowardice because it had remained quiet on this issue when Singapore was part of Malaysia and the central government was in charge of internal security and the police (Nanyang Siangpau, 2–10–65). Just days after, on 5 October, Lee Kuan Yew met with the leaders of the four chambers of commerce.15 He made his point in no mean terms: ‘I would like to hear the end of all this. Language, culture, religion: They are not political issues.’ He admonished the Chamber for this dangerous talk saying, ‘I had expected the old boys’ associations – all these little boys who went to primary school and never went on to secondary school – to say this because they are of that kind of intellectual level.’ Even more scathingly and with more than a touch of sarcasm, he added, ‘I was deeply grieved when I saw that it was the intellectuals [my italics, SV] of the Chinese Chamber of Commerce – men responsible for the commerce and industry of our country, our nation – who have said these very unwise things.’ Singling out Soon Peng Yam in particular, Lee Kuan Yew called him a ‘cowardly opportunist’ (The Straits Times, 6–10–65). Lee’s attacks on the Chamber weren’t over. Later in the same month he summoned the commercial leaders to the Prime Minister’s office for an even more public lesson. Under the bright television lights in front of the cameras recording for a national broadcast the next day, he gave these powerful and rich men a lesson in politics they were sure to remember. The report mentions him targeting Kheng Chin Hock for what amounted to nothing less than humiliation: ‘I am told the abacus is quite good … Mr Kheng Chin Hock probably practises every day. So he can count.’ Lee called Soon Peng Yam and Kheng ‘Chinese chauvinists’ who were a

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danger for the future of multi-racial Singapore. He also targeted Tan Lark Sye once more. Lee called him ‘a mere tool of the communists’ who ‘ate his own spittle’ and ‘a creeper and a crawler’. The Sunday Times which printed this report opined that ‘it was all tough talk. Unpleasant. But necessary’ (The Sunday Times, 24–10–65). Again the government portrayed the Chamber leadership as out of its depth, illinformed about the actual facts, and driven by dangerous motives which countered national interests. The government had made it quite clear that broker roles that were executed in such a fashion would not be tolerated. Clearly unwanted by the government on the demand side of brokerage, the Chamber was also at a loss on the supply side. Its association by implication with the Barisan Sosialis and communist activism pertaining to education reinforced its undesirable status for the government because the SCCC threatened to strengthen the left. On the other hand, the Chamber was also not acceptable to the left and its constituency of blue-collar workers because it remained an economic elite organization first and foremost. As a result, we see that in this period, new leadership blood was not eager to enter the Chamber because of its bad reputation. The Chamber leadership simply did not have the necessary skills to play the new political game with a dominant local state.

Conclusions The process of decolonization in Singapore entailed a development from a nonpolitical (in the narrow sense) system of late-colonial petitioning and informal influence, via a highly politicized period of populist politics to an authoritarian depoliticization by a dominant, governing party. Of course, it is to be expected that during this process elite composition and elite behaviour underwent changes. Briefly summarizing the dynamic, we can see a development from established prewar leaders who took up new roles after the war, to a group of new players backed by the fortunes they made in the rubber boom of the late 1940s and early 1950s. This group was bullish about the possibilities of political leadership participation by the Chamber and made it a direct competitor of the populist political parties. As a result, the Chamber and its leaders were singled out for ‘disciplining’ after the PAP came to power.16 As politics and governing in Singapore were formalized, the rules of politics and the characteristics of the political arena changed. From being an elite endeavour of informal co-option, the basis of mobilization and power quickly became rooted in ideologically informed, class-based populist electoral politics. Within this transformation, the aspirations of the Chinese business elite showed ambivalence. On the one hand, most Chinese elite members wanted to be modern, democratic and enlightened, causing them to reject communally based vote buying and money politics as a course of action. On the other hand, these men still depended for their status and power on a paternalistic, hierarchically based communal structure in which ethnicity and tradition were key elements. With a keen awareness of the change in social and political capital necessary to prevail in politics, the Chinese business leaders tried to adapt. But, when they strayed from their background and attempted

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to link up with the new left-wing populist base of electoral politics through their involvement with Chinese student organizations, their strategy backfired. In fact, the students used them more effectively than they did the students. The Chinese gentleman of late colonial days was not the social democrat populist intellectual who could speechify from the barricades. The broker is the pivotal link in a communication process and is dependent on the supply and demand sides of this communication equation. The skills and services the broker can offer have to match the societal demand. If the other societal groups and actors do not feel the need for communication, have other channels or do not trust the broker, the middleman role can suddenly disappear. Within the Singapore context, changes in the nature of politics meant that the existing Chinese business elite that had seemed so well placed to take over power after the war, found itself ill equipped in dealing with the new rules of the game. Rather than accepting the limits imposed by the emerging situation, a new generation of Chinese leaders overreached themselves and lost out to the new elite of the social democrats: technocrat intellectuals. It was this latter group of PAP politicians that provided the new leadership that responded most efficiently to the new opportunities. The emergence of the multi-ethnic nation state of Singapore accentuated the discontinuity of established elites rooted in the colonial past and accelerated the rise of a new power elite of a meritocratic stance.

Notes 1 The case material presented in this paper is derived from chapters 1, 2, and 3 of my dissertation titled ‘Business, Ethnicity and State; the Representational Relationship of the Singapore Chinese Chamber of Commerce and the State, 1945–1997’, Amsterdam: Vrije Universiteit Amsterdam, 2002. 2 Of course, as we will see below, the individual economic success of a businessman is extremely important in enabling him or her to rightfully claim a place among the business elite. I argue, however, that non-company or -business-related activities also play an important role both before and after an individual reaches the top. 3 The SCCC, established in 1906, had been the penultimate Chinese representative in the pre-war colonial structure. Its members and leaders, the richest and most influential among their peers, also sat on government advisory boards and committees concerning both business and wider socio-political matters, and had also displayed an active stance in organizing the Southeast Asian protest against Japan’s invasion of China as well as in the civil defence of Singapore in 1941 and 1942. 4 The Chinese Advisory Board (CAB) had been established in 1889 at the order of Governor Clementi Smith. It was meant to formalize representation of the Chinese community, which had formerly been achieved through a system of personal responsibility of community leaders known as the Kapitan system. Leaders of the various Chinese dialect groups were appointed to the CAB which was consulted by the colonial government on issues concerning the Chinese community. 5 The three Chambers were the foreign-dominated Singapore Chamber of Commerce (est. 1837), which primarily represented the large colonial British and other foreign trading houses, the Singapore Indian Chamber of Commerce (est. 1924), and the Singapore Chinese Chamber of Commerce (est. 1906).

Brokering change, changing brokers 129 6 ‘The chamber of commerce is important as the major organization in the Chinese community; it is a charitable, cultural and political body as well as a commercial one, and chamber of commerce is really a misnomer’ (Singapore political report for February 1952 by Local Intelligence Committee, Colonial Office file CO1022/206). 7 By this time there was no shortage of other parties with alternative power bases and policy platforms. Encouraged by the Alliance movement in mainland British Malaya, three parties, the United Malay National Organization, the Singapore Malay Union and the Malayan Chinese Association, prepared an alliance. The Singapore Labor Party of Francis Thomas and Lim Yew Hock attracted David Marshall and formed the Singapore Labour Front. 8 Ironically, the victory of the PAP, led by Lee Kuan Yew, was in a way the final success of the Chamber campaigns of the 1950s. The citizenship law of 1957, for which the Chamber had fought so hard, resulted in another great increase of the electorate. The PAP managed to capture the majority of this group of first-time voters because of the appeal they had through their trade union partners to the Chinese-speaking working class which had traditionally been represented by the pyramid of Chinese clan and trade organizations of which the Chamber was the apex. 9 Interview with Dr A. Winsemius (UN mission leader), The Hague, Spring 1995, and interview with Dr Goh Keng Swee (former minister responsible for economic development), Singapore, July, 1997. 10 The PAP logic for this strategy was that the Chinese-dominated trade, banking and finance sectors could never generate the amount of jobs necessary to give blue collar workers a stake in the new Singapore, while doing so was precisely what was necessary to prevent great social unrest as the PAP annihilated the previously dominant position of the unions. 11 The whole issue focused on whether the six years of secondary schooling would be divided into four years of lower middle school followed by two years of upper middle school as it was done in Chinese schools, or if Chinese schools would have to comply with the English stream which was divided into two parts of three years. The sticking point was who was allowed to sit for which entrance exams and who would get which concluding diplomas. 12 The Barisan Sosialis had been formed by the unions that had formed the left wing of the PAP until 1961, when they were purged from that party. 13 Soon started out in the building and contracting sector and had quite a lot of involvement with the colonial authorities through timber supplies for building projects on the military bases. In the early years after the war, he was closely linked with the circles around Tan Kah Kee. Kheng was not a big business tycoon in his own right. He was involved in regional shipping but was never a big player in that sector. He had been the right-hand man of Ko Teck Kin in the late 1940s and early 1950s, and helped him build a power base in the Hokkien speech group and the SCCC. After a falling out with Ko, he sided with Soon in the Chamber election of 1965. 14 Actually, various Chinese languages and dialects such as Hokkien, Teochew, Cantonese, Hakka, and Hainanese, etc., comprised the mother tongues of the Chinese of Singapore. During the 1940s and 1950s, first under impulse of the colonial government and later endorsed by the local government, Mandarin was chosen as the language of instruction in Chinese schools. Thereby, Mandarin became the effective common language of the Chinese community, at least in theory. In practice it would take until the 1980s, as more and more children grew up with Mandarin, before the balance fully swung away from the other regional languages and dialects. 15 By this time, next to the three chambers mentioned above in note 5, the Singapore Malay Chamber of Commerce (est. 1956) had also been given a more prominent place in the representational structure. Business reasons apart, the Government’s motives for this move were also connected to national ethnic politics and to the regional ethnic balance

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in which Singapore had to negotiate its position between two large Malay countries: Indonesia and Malaysia. 16 At this time we start seeing the rise of a younger group of leaders in the Chamber who would dominate the late 1960s and 1970s and would attempt to compromise with the PAP state while retaining the Chamber’s identity as an economic pressure group.

8

Social networks and modern management style Pawnbroking business in Singapore Selina Ching Chan1

Kinship and personalistic networks have long been important capital in the operation of many Chinese businesses. Paternalism and personalism have always been identified as main features in Chinese family business (Wong, 1985, 1996a, 1996b; Redding, 1995; Tong and Yong, 1998). They are especially significant in societies with high political uncertainty and incomprehensive legal systems (Redding, 1995; Tong and Yong, 1998). Entrepreneurial familism found in businesses in Taiwan, Hong Kong, and Southeast Asia emphasized the personal trust within the kinship network (Wong, 1996a: 139–40; Wong, 1996b). Both kinship ties and personalistic networks form trust and are the key to success of the Chinese family business (Barton, 1983; Landa, 1983; Wong, 1985; 1996a; Menkhoff, 1998). In fact, the Chinese also find it hard to extend their trust to people who are not connected by kin ties and personalistic ties (Redding, 1990: 143). This chapter investigates the importance of kinship and personalistic ties in modern society by examining the case of the pawnbroking business in Singapore. It covers an exploration of the traditional means of entering the profession as well as an understanding of how this largely family-based business develops and grows in modern Singapore. I argue that personalistic networks are significant guanxi, i.e. reciprocal relationships between individuals (Bjorkman and Kock, 1995; Bruce, 1979), generating trust in the management of the pawnbroking business and becoming an important social capital for one to enter and to manage the business. My findings show how the family networks, being bolstered by trust and interdependence, result in the continuous dominance of the old elite families in the pawnbroking business. I also consider how a general rise in the reliance on market openness and a reduced emphasis on personalistic networks in modern society have also provided opportunities for individuals without connections to join the pawnbroking business in Singapore. This chapter examines whether political stability, meritocracy, professionalism, the knowledge-based economy, and globalization in Singapore have changed the reliance on paternalism, guanxi, and trust in the operation of the pawnbroking business. This in-depth study of pawnbrokers also intends to throw light on global processes and their effects on the operation and management of this family business. By examining pawnshops at the operational level, one is able to examine how local forces are shaped by global developments. In addition, the notion of paternalism and networks will be examined, as will be the participation and role of women.

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In addition, this chapter also questions whether social networks are important in obtaining specialized knowledge in the twenty-first century. I examine how high technology and professionalism have created ‘new opportunities’ for ‘new people’ from ‘old elite families’ to join the business. The leading theoretical question in this chapter is not whether either processes of ‘elite continuity’ or ‘elite change’ characterize the pawnbrokers of Singapore. Instead, the dynamic interrelationship of continuity and change throws light on the pawnbroking business as established pawnbroking families maintain and strengthen their position. Their successors become brokers of modern technology and advanced management techniques while attempting to ‘modernize’ and ‘professionalize’ their pawnshops. In particular, international educational institutions have, to an increasing extent, replaced the role of networks as sources of specialized knowledge, opening career opportunities for members of the pawnbroking families who did not play prominent roles in this business before, i.e. women. Previous research done on the pawnbroking businesses is largely obsolete and fragmented. A general historical account on Chinese pawnshops is given by Pan (1985), who examines the changing ways of operating the pawnbroking business in China during the period 1644–1937. Mohamed (1986) explores the differing sizes of loans acquired by pledges of different backgrounds in Malaysia. A brief historical account of pawnbroking businesses in Singapore is provided by Au (1989) and Chng (1991, 1993) in three papers. Elsewhere, I have also examined the socio-economic significance of pawnshops in Singapore (Chan 2001). The analysis conducted in this chapter is based mainly on information collected through in-depth interviews. Free sampling was done with the majority of the pawnshops in Singapore in the first round of interviews in 1997. The interviewees included managing directors, valuers, clerical staff, and key shareholders. For this first round, only brief interviews were conducted. The majority of the pawnshops were approached for brief interviews in this first round. At a second stage, those who are more established in the industry and enthusiastic in discussing their profession were interviewed further. Archival records retrieved from the National Archives in Singapore and details of shareholders from the Registrar of Companies were also analysed for further information.

Providing consumer and producer services Before 1959, when Singapore was still under the colonial government, there was a fixed quota for the number of pawnshops. Anyone who was interested in opening a pawnshop had to submit a tender and then bid for the license. The license had to be renewed by bidding once every three years. Thus, pawnshops in those days opened and closed rapidly. Since 1959, the quota of the number of pawnshops was removed and the tender system was abolished. In 1977, the Pawnbrokers Amendment Act was established by the Singapore government, and regulations on interest rates and procedures of pledging were introduced. Ever since, all individuals who pawn or redeem articles must submit their identity cards for record purposes. Articles pawned are allowed for redemption within a period of six months and interest is charged on a monthly basis of 1.5 per cent

Pawnbroking business in Singapore 133 per month. Unredeemed articles are put up for sale at a monthly auction. The basic price of each article is the total of the pawned price and the interest for six months. The surplus earned from the auction has to be returned to the customers who pawned the items. Items not sold at the auction would be retained by the respective pawnbrokers. These are then displayed in their second-hand jewellery counters for sale. For the gold items, they may alternatively be melted down and subsequently sold to goldsmiths. In addition, a Registry of Pawnbroking Business was established to monitor the pawnbroking business closely. The Registry is responsible for approving the entry of new pawnshops by examining whether the minimum capital of S$2 million is obtained, as well as checking the background of the pawnbrokers. It also monitors the business of each pawnshop by examining the monthly business reports submitted by the pawnbrokers. In late 1998, there were 66 pawnshops in Singapore, which is significantly more than the twenty pawnshops that existed four decades ago. For the whole of 1996, the amount pledged was about S$1.1 billion while the amount redeemed was S$1.04 billion (Monthly Digest of Statistics, 1997). Pawnshops are like banks, which provide credit services to customers. In Singapore, banks mainly provide credit or loans to people who have a minimum monthly salary of S$2000, while pawnshops provide cash to any individual as long as they pledge their gold, watches, and jewellery. In fact, the possessions that customers bring to pawnshops are mainly gold jewellery although gem stones, diamonds, branded watches and fountain pens were found, too. Customers are from a wide range of social classes although they all have liquidity problems. In fact, the majority are regular customers who pledge and redeem frequently.2 Some of the customers are housewives who try to obtain cash to pay for their children’s school fees at the beginning of the academic year. Others include young people who come to obtain cash to buy consumer goods. Nevertheless, not all customers pawn their possessions for cash to satisfy consumption needs. Businessmen such as contractors of construction, electrical and water works are also regular customers who seek help from pawnshops to get easy cash. According to the pawnbrokers, it is not unusual to see these contractors come to pledge their branded watches in order to get some cash to pay the salary of their employees. These contractors would often redeem their pledges once they receive the sales proceeds from their business activities. A large number of these businessmen are those who have difficulty in getting loans from banks. As noted by Chan (2001), customers in pawnshops are indifferent to the interest rate on bank loans as they are not more inclined towards borrowing from banks when its interest rate falls and vice versa.3 In other words, these small businessmen are most probably from the lower income group, being unable to meet the minimum income requirement for obtaining unsecured credit from banks.4 Because they are relatively poor, they also do not have the collateral − such as private properties and stock market shares − that are required by banks for secured loans. For those who are eligible for bank loans, they may still prefer the pawnshops because of their faster service, particularly since pledgers often include those who

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desperately need money at short notice. They cannot afford to wait for bank loans since such loans require a processing period of at least several days before any money is released. Hence, they often turn to pawnshops for the quicker service and the added convenience. The producer service provided by pawnshops to small businessmen is particularly significant when the economy weakens suddenly. This was particularly true during the Asian currency crisis as banks restricted credit in order to reduce bad loans. In fact, at that time there were also wealthy businessmen who went to pawnshops for cash to solve liquidity problems in their business. An owner of a pawnshop recalled that a Singaporean businessman came to pledge several branded watches and pens shortly after the currency crisis began. The total amount pledged was as high as S$100,000. The value of these watches and pens shows that these pledgers were not poor, but definitely suffering from some serious liquidity problems. The chairman of the pawnbrokers’ association recounted another incident in early 1998, when a man attempted to pledge a 40-carat diamond ring to help solve problems in his business. In yet another case, a customer attempted to pledge a certified sapphire of 20 carats in size. Not only do these incidents show that significantly more people were hit by the currency crisis, they also reveal that pawnshops provide not only a producer service for customers to meet business needs but also a consumer service to meet private consumption needs.

Social capital and the entry of the pawnbroking business In general, the pawnbroking business is a male-dominated profession. The community of pawnbrokers is also fairly ‘closed’ and small, and many of them are acquainted with one another. These close relations arise in four major forms, which are also important means for entering the profession. Firstly, patrilineal kin ties are significant. It is not uncommon to have members in the same extended family jointly own several pawnshops. This is well observed from the case of Lam H.A.’s family, one of the oldest participants in Singapore’s pawnbroking history (see Table 8.1). In addition, some of Lam H.A.’s distant kin were also participants in the profession although their pawnshops are no longer operating (see Table 8.2). Table 8.1 Pawnshops owned by Lam H.A.’s descendants Descendants of Lam H.A. (20th generation ancestor) Name Relationships (25th generation) Pawnshops

Lam Q.S.’s segment (22nd generation) First cousin

Lam Q.C.’s segment (22nd generation) First cousin First cousin

Yong Teck Wing Teck

Ban Foh Thai Chong

Sembawang Teck Hing Teck Hing (Ngee Kee)

Pawnbroking business in Singapore 135 Table 8.2 Pawnshops of Lam H.A.’s descendants that were closed down Descendants of Lam H.A. (20th generation ancestor) Name Pawnshops

Lam Q.S.’s segment (22nd generation) Seng He Rong Tai/Sen Tai Rong Sheng Sen He Wan Lu

Lam Q.S.’s brother’s segment (22nd generation) Rong He

Lam Q.C.’s segment (22nd generation) Wing Joo Yu Tong

Table 8.3 Clansmen whose ancestors previously worked in pawnshops owned by Lam H.A.’s family Relationship

Cousins

Cousins

Individual Lam clansmen

Pawnshops

Loong Chong Loon Shing

Heng Heng Min Tai Lianhe

Fook Soon Fook Lian Wan Onn Ban Soon Thai Chong Ban Foh

Secondly, many pawnbrokers in different pawnshops are clansmen (see Table 8.3). Clansmen are people who share the same surname and claim that they are members of the same family up to several thousand years ago (Fried, 1970). In 1998, there were at least 11 pawnshops owned by the Lam clansmen, not to mention those belonging to Lam H.A.’s descendants. Thirdly, the majority of the pawnbrokers in the past were Hakka, which reveals the importance of dialect and ethnic ties. Clansmen associations and ethnic-based voluntary organizations were prominent social organizations at the beginning of the twentieth century. They were, in particular, important places to meet friends. According to my informant, Lam Y.J. owned a pawnshop in those days, and clansmen from his hometown in China were free to stay there until they had found jobs. Lam provided food and lodging for them on this temporary basis, and even recruited some of these fellow clansmen to work in his pawnshop. In fact, it was common for the pawnbrokers to absorb friends and relatives into their ranks. Fourthly, professional ties within the pawnbroking circle are also important. Many pawnshop owners started off as valuers in other people’s pawnshops, setting up their own pawnshops only later when they had enough financial capital (Table 8.3). Interestingly, many other pawnbrokers also started off as goldsmiths in jewellery shops, where they learnt how to identify and value gold. The case of the Lam family sheds light on this aspect. The pioneer ancestor who came to Singapore was Lam Q.S. He was a Hakka who arrived in Singapore in 1865, coming from Huliao town in Dapu county, which is located in the Guangdong province of China (Lam, 1989: Reel 1). Although Q.S. was a Hakka, he was under the employment of a wealthy Hokkien business – Mr Liu (Lam, 1989: Reel 1). At Liu’s jewellery shop, he learned and acquired the skills to identify and evaluate jewellery. After working for about 15

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years with Liu, Lam started his first pawnshop – Seng He Dang. In fact, a substantial amount of investment in this pawnshop was from his former boss – Liu – who was then a rich and influential person. Indeed, Liu also used his influence to help Lam Q.S. to obtain a license to open a pawnshop. In sum, the successful entry to the pawnbroking business did not only rely on the possession of economic capital, but also on social capital. According to Bourdieu (1986: 249), social capital is ‘the aggregate of the actual or potential resources which are linked to a possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition …’. In the context of the pawnbroking business, connections acquired through kin, clan, ethnic and professional association are important social capital that is critical for entering the profession. The possession of social capital grants the actor a distinctive kind of power, which involves a set of different claims that can be made on the actions of others (Smart 1993: 394). In the case of Lam Q.S., his possession of social capital did not only help him to obtain the license to run the pawnshop, but also helped him to obtain economic capital through the contribution of his former boss. Apart from the Lams, the Lees are another established family in the pawnbroking business. They, too, had broadly similar experiences. Lee Y.Z. was a sojourner to Southeast Asia and settled in Malaysia, originally being from Dapu. Unlike the Lams who originate from Huliao in Dapu, the Lees’ hometown is Tangxi, in Dapu. K.K., Q.J., and W.K. are second generation migrants. They were active in jewellery and pawnbroking businesses in Malaysia. Q.J. was first in the goldsmith business in Penang, Malaysia, before moving to Perak to set up a pawnshop. K.K. also worked in a goldsmith shop and later opened a pawnshop in Malaysia before moving to Singapore after World War II. During the post-war period, the Lee family, however, decided to move to Singapore and be involved in the pawnbroking business there. K.K. was the first who moved to Singapore, while his paternal second cousin Q.J. came over later to help him. K.K.’s other paternal second cousin, W.K., remained in Malaysia although he invested heavily in K.K’s pawnshop. In 1954, K.K. began business at Min Seng Pawnshop. It is noteworthy that a quarter of the shares of Min Seng, the first pawnshop in Singapore owned by the Lee family, was in the hands of non-Hakka and non-kin. In 1956, a second pawnshop named Min Hin was officially opened, with a non-kin and non-Hakka shareholder even becoming its first managing director. In the next few years, the Lee family opened other pawnshops, namely Min Lian and Lian Thye. In Min Lian and Lian Thye, only a small fraction of about 10 per cent of the shares belonged to individuals who were non-kin and non-Hakka. Thus, the contribution of economic capital from outside the family was much smaller in pawnshops that were founded earlier. In both cases of the Lee family and the Lam family, both kin and non-kin ties were utilized in the founding of the family business when the amount of capital from kin groups was limited. Interestingly, members of these families only turned to the kin group for capital when they expanded the business. In addition, ethnic ties are of particular importance in the pawnbroking business because they generate

Pawnbroking business in Singapore 137 trust, which is an important element in handling valuables pledged and redeemed. As trust is easily developed and maintained within family networks, it is therefore not surprising to observe the continuous dominance of the family business in the pawnbroking business. Indeed, the intricate ethnic and kinship ties that exist among pawnbrokers imply that the pawnbroking activities have been largely kept within the community. In addition, there is also mutual co-operation among pawnbrokers. On a daily basis, there is information exchange on clients who bring in suspicious items that may have been stolen or obtained illegally. Pawnbrokers meet one another regularly at the monthly auction, where they inform each other of such developments to protect their collective interests.

Trust and the personalistic ties In each pawnshop, there are three or four valuers, one salesperson at the secondhand jewellery counter, one or two clerks and one accountant. In the past, all these employees were recruited through personal networks. Today, the sales persons and the clerks are usually sought through advertisements in major newspapers, while the rest of the employees are still recruited through personal networks. In present-day Singapore, clan and ethnic ties have become less important because clansmen associations and ethnic-based organizations are no longer as significant as they were in the past. However, kin ties and professional connections remain the key avenue for entering the pawnbroking business. The managing director and the accountant are often the boss or his close kin. Valuers are recruited through either kin ties or personal networks as they are important persons in the business transactions. They play a significant role in pawnshops because they decide the prices of pledged items. Not only do they have to have knowledge in the evaluation of the pawned items, they also have to be honest enough not to swindle their employers. In other words, the owners of pawnshops have to be very sure that their valuers are trustworthy, and this trust is often established through personalistic connections. The fact that valuers are exclusively recruited from personalistic networks and not through open advertisements shows that trust is not extended to outsiders. This is similar to other Chinese businesses, in which trust is also mainly confined to kin and personal ties (cf. Tong and Yong, 1998; Wong, 1996b). Indeed, trustworthy employees are intangible assets extended from social capital. In the old days, employees were often treated as family members. Some employees even lived in the pawnshops. According to Lam J.V. (1989: Reel 5), most pawnshops had their own chefs to cook for the pawnbrokers. Chefs had to make elaborate meals on the second and the sixteenth of each month of the lunar calendar. On these designated days, the valuers could often order the chefs to cook their own favourite dishes. Through the act of eating together, the mutual ties were reinforced and a sense of ‘family’ was created. Indeed, through eating and living together, the non-kin ties were symbolically transformed into kin ties and thus generated a further trust between the owners and the employees.

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Unlike most other employees in the typical Chinese family business, those in pawnshops, especially the valuers, are often not entirely powerless and submissive to the employers. Valuers are extremely powerful because they have specialized knowledge in valuing pledged items and thus can control the business indirectly. In some ways, the special knowledge and position that the valuers possess may even reverse the existing hierarchy between the employees and employers. This may be observed in the process of apprenticeship, in which valuers often attempt to ‘monopolize’ their knowledge and are reluctant to teach young entrants. This is particularly true when those young apprentices are the sons of the owners. In these cases, the young successors have to be subservient to senior valuers. This is very different from the situation of most other Chinese business firms in which information and knowledge are monopolized by the boss and close family members. In the case of the pawnbroking business, it is not the boss but the valuers who attempt to ‘monopolize’ their specialized knowledge. Valuers are also powerful because they know that they are trusted by the employers for their honesty, and are thus not easily replaceable. In fact, it is easy to cheat by giving a higher valuation to a pledged item. This is because it is actually impossible to standardize the valuation process because every single pledged item is different. It is this relatively subjective valuation process, which marks the pawnbroking business different from other businesses. Indeed, the importance of trust in this profession has made the personalistic ties ‘irreplaceable’. The difficulty in extending trust beyond people connected by kinship and other personalized social ties becomes an obstacle for business expansion. This is well observed from what Mr Lam lamented: ‘History has more or less proven to us that, the greater the number of shareholders, the more opinions there will be, and you can’t trust all of them. It would therefore be good to keep it within your own family.’ In other words, the importance of trust also forms an entry barrier for new entrants, thus maintaining a certain degree of ‘monopoly’ in the business. As many pawnbrokers told me, the Singapore government was actually interested in joining the pawnbroking business. It had once seriously studied the profession but had to give up finally because of the need for personalistic networks in running the business. In other words, if one does not have social capital, it would be difficult to enter the pawnbroking profession even if one has enough financial capital.

Challenging the paternalistic model? The above mentioned networks – kin ties, clan ties, ethnic ties – reveal a paternal bias, as is usually observed in family businesses. Men are perceived as the major participants in creating and reinforcing the networks. Indeed, scholars who examine family business mainly focus on the discussion of paternal authority. Whyte (1996: 11) argues that women’s primary contribution is not in business, but rather in demonstrating the loyalty through reproduction and bringing up children. Wong (1996b: 9), however, points out that daughters and daughters-in-law participate in firms as managers or accountants. I argue that women contribute to their family

Pawnbroking business in Singapore 139 businesses not solely through their formal roles as accountants or managers, but also through utilizing their social networks. An interesting case is the Lam family, especially in its establishment of Teck Hing (Ngee Kee) Pawnshop. This pawnshop is called the ‘Pawnshop King’ by the people in the profession because it has the best business in the field. The managing director’s mother – Madam Ho – married Lam T.N., the son of R.Y., who opened a couple of pawnshops in his life. After marriage, Madam Ho became an active participant in her father-in-law’s pawnshops. She only retired when her grandson was born in 1986. According to Madam Ho, R.Y. had two wives and his first wife died at a young age, leaving behind her children who were still small then. L.X. was the favourite son of R.Y and his first wife. Subsequently, Madam Ho persuaded her father-in-law R.Y. to open a pawnshop – Sembawang Teck Hing – for L.X. The shop was established on 3 January 1968 together with Ho J.Z., an affinal kin of the Lam family. It was managed by L.X.’s brothers, including Madam Ho’s husband. Madam Ho herself was in charge of the renovation and security of the shop. Knowing that the pawnbroking industry was booming then, Madam Ho further persuaded her father-in-law to open another pawnshop for his favourite son – L.X. Indeed, Madam Ho was a bit desperate because her father-in-law was getting old. She admitted, ‘R.Y. is an established figure in the business, and he has the essential connections. It is thus easier for him to get the licence.’5 The location of the pawnshop was also recommended by Madam Ho. It was in fact Madam Ho who brought her fatherin-law to examine the particular shop-house where the pawnshop currently stands. The shop-house previously belonged to Madam Ho’s friend, who sold electrical appliances there. A year after Teck Hing Pawnshop (Ngee Kee) was opened in 1971, R.Y. passed away. The above information was mainly provided by Madam Ho and confirmed by her sons on different occasions. During the interview, Madam Ho was outspoken about her contribution, although not in the boastful way commonly shown by the senior male informants. Interestingly, she hardly mentioned her husband’s contribution. Instead, she mainly discussed what she knew about the pawnshop business in her days and ‘her own’ (Lam’s Teck Hing Ngee Kee) pawnshop. Obviously, she was aware of the importance of her father-in-law’s position and connections in setting up this pawnshop. In addition, she also made use of her affinal links to set up Teck Hing Sembawang. Cleverly, she capitalized on her father-in-law’s fondness for his favourite son to establish two pawnshops. Furthermore, it was she who recommended the location of Teck Hing (Ngee Kee) pawnshop. Indeed, she had contributed significantly to the establishment and expansion of the family business. The interesting point here is that although she had the knowledge and judgement for the business, she neither had the financial resources nor the necessary connections to do it on her own. She had to obtain support and approval from the male head of the family. No matter how talented she is, she cannot request the male head of the family to open a pawnshop in her ‘name’. Instead, she had to borrow the name of another male member in the extended family to justify the establishment of new pawnshops. In other words, although women are not powerless, their ‘marginal’ position only allows them to fight in the name of the male members of the family.

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The above case also shows that affinal links are fairly useful in family business activities in Madam Ho’s era. Nevertheless, affinal network is utilized not to form an alliance between the two families. It is mainly used to gather human resources to reinforce the business of Madam Ho’s husband’s family. This conforms to the patrilineal family ideology, in which a married-out daughter is on the husband’s family side, and the ties derived from her natal family are used to reinforce the power of the paternal family, which contrasts with Tong and Yong (1998: 78), who argue that connections obtained through marriage are often ‘used to bind two families together, or to tie a capable employee to oneself ’. Indeed, affinal ties and maternal links are utilized not to bind two families together, although they do create useful resources for the family business. This is further shown in the following case. One former newcomer to the pawnbroking business, who is now the owner of United Pawnshop, Hua Lian Pawnshop, and Da Li Pawnshop, is from the Koh family. The Kohs, who are Teochews, only started their pawnbroking business in 1987 when United Pawnshop was first founded. It was Koh W.M. who set up this first pawnshop after having 12 years’ experience in the goldsmith business that was owned by his mother’s paternal family.6 In fact, his maternal aunt supported him by taking up 35 per cent of the shares in the pawnshop. Koh’s father-in-law is the managing director of the pawnshop. Koh’s sister-in-law was later recruited to help run the pawnshop as well. In 1996, another maternal aunt of Koh established Hua Lian pawnshop. Da Li was opened by a maternal uncle of Koh in 1988. The exchange of information and knowledge among these three pawnshops occurs on a frequent basis. The relationship between Hua Lian and United is particularly close; for instance, United actually helped to train new staff in Hua Lian when it was first opened. The above case shows that Koh’s paternal family remained silent while Koh’s maternal family played an important role in supporting the pawnshop financially. The fact that Koh’s mother’s natal family provides substantial support to Koh’s pawnshop constitutes a deviation from patrilineal ideology. Married-out daughters continue to be involved in the business of the natal family and more importantly, their children are also supported indirectly by their natal family. Although affinal ties are utilized, they mainly serve to foster reliable and loyal employees and there is no evidence of alliance between two families. This case shows that the maternal link is an important resource in setting up the business and gaining knowledge of the industry. Meanwhile, affinal ties are important in the daily management of the pawnshop. There are more and more women joining the pawnbroking business. Today, nearly all the clerical staff in pawnshops are women, mostly recruited through posting advertisements in newspapers. The salesperson at the second-hand jewellery counter is usually also a woman. Although the majority of the valuers are men, there are more and more women who are becoming valuers. In United Pawnshop and Hua Lian Pawnshop, all the valuers are actually female. The wife of the famous ‘Pawnshop King’ is also learning valuation and she started taking care of the management and finance in their shop in 1984.

Pawnbroking business in Singapore 141 The above phenomenon is different from the situation in the old days when all workers in pawnshops were exclusively men. According to my informants, many of their customers at their pawnshops in the past were gamblers and people without much education. If these customers were not satisfied with the prices offered for their items, they could turn nasty. Female valuers were believed to be incapable of handling these customers and hence were rarely employed in those days.

Young successors as brokers of modern technology: professionalizing the pawnbroking business As most pawnshops are family businesses, the managing directors are mostly the fathers. If the father is deceased, then their sons assume the position. As successors, sons are expected to have the knowledge and skills required in valuation. These young entrants are therefore apprenticed to be valuers and finally become senior valuers. As noted earlier, no formal training is provided and the apprenticeship is based on a personal relationship between the apprentice and a senior valuer. As recalled by Lam J.V. (1989: Reel 2), the senior valuer should not be meek or be subservient to the master’s son when he is the apprentice. Ke Xuan, the managing director of the Lee family’s four pawnshops, recalled that he first started off by making coffee, writing pawn tickets, cleaning toilets, and sweeping floors. The case of S. Lam, who manages the busiest pawnshop – the ‘King of Pawnshops’ – is largely similar. He started to work full-time in the family pawnshop in 1977 when he was 20 years old, although he helped in the shop before that. Being the only son in the family, he felt that it was his responsibility to take over the family business. He learnt to write pawn tickets by calligraphy in his father’s pawnshop.7 It took him four years before he had the chance to go up to the valuation counter and to examine items brought in by the customers. Before reaching that stage, his job was mainly to help tie price tags to the jewellery items. According to him, the chief valuer was not keen to teach him. That was because the valuer thought that his position would be threatened if the boss’s son mastered his techniques. Lam was, however, persistent in learning valuation, often by examining the pawned items and the prices offered to these items. He said, ‘I went through the entire stock every day after the shop had closed.’ It took him six years before he was finally confident with the valuation techniques. Unlike previous valuers, S. Lam went a step further by attending internationally recognized courses to learn how to grade and identify precious stones and diamonds. In fact, he got a diploma in diamond grading and identification from the HRD Institute of Gemmology in Antwerp, which he has proudly hung in his office. By gathering knowledge from internationally accredited institutions, S. Lam has subjected the traditional family business to the influence of globalization. Similarly, many other young successors of the pawnshops also enrolled in these courses, attempting to gain access to specialized knowledge in order to legitimize their power and dominance in their own pawnshop. The case of the ex-chairman of the pawnbroking association, I. Ho, is also worth noting. Like S. Lam, I. Ho did not solely rely on the valuers to teach him valuation, but he also went for courses in gemmology granted by international institutions. In fact, S. Lam and I. Ho, both

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in their forties, are considered as two ‘relatively’ young men in the profession. They started a new trend of gaining professional expertise, a practice which was subsequently followed by some other young successors. Indeed, it was through their personalistic networks with other pawnbrokers that this practice became widespread. The above discussion shows that individuals no longer need to be subjected to the traditional apprenticeship system of learning in today’s world. Specialized knowledge has become commercialized and is thus much more easily available in this new economy. These opportunities granted the old elites – successors of family businesses – more advanced techniques to run their businesses. This has perpetuated the monopoly of these families in the pawnbroking industry. The pawnbroking profession has also undergone tremendous changes in the last two decades. This is very much due to the efforts of Mr Ho, the managing director of a well-established pawnshop. Mr Ho holds a degree in engineering from a university in England. It was his training in an international educational institution, and his experience abroad, marks him as different from other pawnbrokers. After being exposed to modern technology and Western education, the return of Mr Ho to the family business further contributed to the changing dynamics of the pawnbroking business as a whole. His training in England had led him to professionalize the management and business practices in his family pawnshop. Meanwhile, being a member of a respected family in the pawnbroking business has also plugged Mr Ho into a large network of pawnbrokers. Indeed, as the young and educated successor of his family business, Mr Ho has become a broker in the globalization process, bringing business knowledge and modern technology into the pawnbroking profession in Singapore. This is well demonstrated in his suggestion to computerize all pawnshops in 1985 when he had just joined the profession. He contacted other pawnshops and discovered that ten of them were interested in the idea. Mr Ho spoke with a computer company and tried to bargain for an attractive package. However, eight pawnshops backed out, leaving him and S. Lam as the only two who were willing to have their pawnshops computerized. The staff in his pawnshop also objected to computerization fiercely. With much persuasion and help, he eventually convinced his staff, who later on appreciated the move. Indeed, the ‘Western-trained’ Mr Ho greatly trusts modern technology, and believes that computerization is a means to shorten the processing time. Three years later, other pawnshops gradually went into computerization voluntarily. In 1996, computerization was subsequently made compulsory by the government. In 1997, Mr Ho made a further step forward by using a ‘bar-code’ system. He believed that he had significantly shortened the time taken up in transactions and accounting. The speed of the pledging and redemption process has also been vastly improved. Not only have the transaction procedures in pawnshops become professionalized, the qualifications of the successors in pawnshops are gradually being raised as well. For instance, one pawnbroker picked his daughter over his sons as his ‘successor’ largely because of her professional training in accountancy and specialized knowledge in computers. More importantly, the management style used in a pawnbroking business is also becoming more professional in the new management style. Mr Ho also paid a lot of attention to the morale of his staff. Bonuses are now granted to the

Pawnbroking business in Singapore 143 staff on an annual basis, depending on the performance of the pawnshop for each year. In addition, Mr Ho is also one of the first employers in the pawnbroking business who allows the staff to buy shares of the pawnshops in which they are working. A few other pawnshops also started this trend by allowing their staff to own shares. The value of the shares owned by each member of staff usually ranges from S$20,000 to S$30,000. Like other big companies, Mr Ho also pays attention to staff welfare by buying medical insurance for them. Meanwhile, new strategies in the pawnbroking business, such as advertising, are becoming more widely adopted. It is not uncommon to see pawnshop advertisements in newspapers as well as on local buses. The typical one says, ‘efficient service, good pricing, near centre, ample parking lot’. The emphasis on ‘ample parking lot’ is interesting because it shows that a significant number of clients may actually be those with cars. In Singapore, cars are extremely expensive, which implies that clients are not necessarily poor. While they may be those who may not be poor, they are definitely liquidity-constrained, perhaps due to their free spending. As informed by many pawnbrokers, it is not unusual to see young people pawning their items as well. In fact, with the popularization of consumerism and pleasure-seeking lifestyles through ‘postmodern values’, more and more people may have become ‘liquidityconstrained’ in financing these lavish lifestyles. While some are lucky to have banks to provide credit facilities for them, some others may not have access to bank services and therefore have to turn to pawnshops. In response to the changing environment, which places a greater emphasis on consumerism, the pawnbroking business has been ‘re-packaged’ as a ‘servicing industry’ and is now constructing a new, positive middle-class image. In the old days, pawnshops and pawnbrokers were often perceived as bloodsuckers. A pawnbroker told me that his friend even remarked that ‘there are two professions that my father told me that I should not go into – prostitution and pawnbroking’. Mr. Ho attempted to wipe out the old appearance of pawnshops and to create a new image by reiterating that pawnshops are part of a servicing industry such as banks. He abandoned the traditional shop-house image of pawnshops which is characterized by their simple decoration, which includes ceiling fans together with dim lighting. Old pawnshops often have heavy metal grilles from the counter to the ceiling. Mr Ho however renovated his pawnshop and gave it a new look. The changed look for pawnshops sets them more favourably with others in the service industry such as banks. In fact, the appearance of Mr Ho’s pawnshop is much like the finance company that is situated next to it. The indoor setting of his pawnshops is clean, cool, and bright. They are fully air-conditioned and also have closed-circuit television. The doors at the entrance are made of translucent glass, which I. Ho proudly claimed to be bulletproof. He believed that the use of glass projects the image of ‘transparency’ in the business. The counter, which is also in transparent glass, is about four feet high, which is half to one foot lower than the counters that may be found in old pawnshops. The reduced height of the counter and the use of glass also project a friendly image to customers. In other words, there has been a conscious effort to ‘demolish’ the hierarchy between the customers and pawnbrokers.

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Many other pawnbrokers have also started to give their pawnshops a new style and appearance. Those pawnshops with the new setting tend to create a rather ‘friendly and egalitarian’ atmosphere for the customers. This is very different from pawnshops with the old setting, which portrays a rather distant and hierarchical relationship between customers and pawnbrokers. The change in the setting not only reveals a conscious attempt to ‘upgrade’ the image of pawnshops, but also shows how new value orientations based on postmodernism and consumerism might have effects on the operations of the pawnbroking business.

Conclusion: new opportunities, young successors of old elite families Pawnshops continue to play an important role in alleviating the liquidity constraints of customers in modern society. Pawnshops provide consumer services to individuals as well as producer services to small businessmen. The role of the pawnshops is particularly significant when the economy is weak because a larger group of businessmen will turn to them for help while the banking sector restricts lending. In addition, my findings show that specialized knowledge is now easily available through professional sources. Knowledge in valuation, for instance, may now be gained through internationally accredited training institutions based overseas. Indeed, the globalization of professional knowledge is linked to the emergence of these international organizations. This is very different from the situation in the past when specialized skills were mainly acquired through apprenticeship. Thus, young successors from the old elite families are now able to continue the dominance of these family businesses by obtaining knowledge through different channels in an open environment. Indeed, kin and personal ties continue to be important resources in recruiting valuers, as trust remains important among members of a personalistic relationship. With new opportunities to acquire advanced knowledge and techniques from overseas, young successors, therefore, also respond quickly to the globalization process, in which service and consumerism are important features. Pawnshops have attempted to portray a middle-class image while abolishing the traditional stereotypes. The middle-class image of pawnshops is constructed through different means, such as the computerization of the pawnbroking business, the more open and professional management style, and the new appearance of pawnshops. This new appearance alludes to the polished image of the financial sector in Singapore, and reflects an attempt to put the pawnbroking business on an equal footing with banking and other financial services. It is the personalistic network of this broker of modern technology including other pawnbrokers, which has caused the computerization process to spread so quickly in the pawnbroking business. Although the old-established groups have benefited greatly from the new opportunities brought about by globalization, new players, such as women, have also benefited from the new opportunities. The positions of clerical staff and valuers are now open to women. This is significantly different from the situation in the past where women were excluded from taking any formal position in the pawnshops.

Pawnbroking business in Singapore 145 Today, more women are joining the profession at the managerial level as affinal and maternal links become an increasingly important social capital in the pawnbroking business. Their entry may be interpreted in terms of the elite continuity thesis suggesting that established groups strategically use another resource, i.e. women, to optimize their business opportunities in pawnbroking. On the other hand, it can also be claimed that the elite change thesis applies here as new opportunities in the pawnbroking business offer new opportunities for social categories that were not active players in this field before. Seen from this angle, the ‘new opportunities, new people’ thesis should include, besides a class perspective, also a gender perspective.

Notes 1 Financial assistance from the National University of Singapore (Grant #RP3960049) is gratefully acknowledged. An earlier version of this chapter was presented at ESF Workshop Brokers of Capital and Knowledge in the University of Amsterdam. Special thanks go to Chiang Wai Fong and Ng Siang Ping for their research assistance. Last but not least, I am grateful to the pawnbrokers who kindly agreed to my interviews. 2 Others may possibly just want to rid themselves of valuables which they no longer need or want. 3 As noted earlier, the interest rate charged at pawnshops is at 1.5 per cent per month (or 18 per cent per annum). 4 Unsecured borrowing refers to that without any collateral, such as through credit cards. Creditworthiness is therefore an important prerequisite. 5 R.Y. is a wealthy person. According to Madam Ho, the inheritance tax was around S$7 million in 1972. 6 His mother’s paternal family owns a famous local chain of goldsmith shops, which has more than ten outlets on the island. 7 In fact, many pawnshops still used calligraphy in the early 1980s.

9

Establishing an enduring business The Great Eastern–OCBC group Lee Kam Hing

Banking and insurance were financial institutions that the Chinese in Malaya and Singapore came to be involved in only at the end of the nineteenth century. These institutions were also new to the Chinese in China (Chan, 1977). The first Chinese bank in China, the Commercial Bank of China, was established in Shanghai in 1897. The first Chinese insurance company, the Shanghai Yihe Gongsi Baoxian Hang, was established in Shanghai in 1886 (Lee Pui Tak, 1995). In Malaya and Singapore, a group of Chinese starting from 1908 established insurance companies and banks that developed steadily to become important institutions in the local business scene. Of the companies started, the most important are the Great Eastern Life Assurance and the Oversea-Chinese Banking Corporation (OCBC). These Chinese succeeded in breaking into the financial sector early in the twentieth century at a time when there was already a strong Western presence in this sector. They are also remarkable in that they have endured up to the present time. They exhibited qualities that placed them above ventures started by other Chinese in Malaya and Singapore during that period. The Great Eastern–OCBC group adopted organizational forms and operational business methods that were largely Western. The Chinese who were behind this financial group were largely Straits Chinese. The Great Eastern was initially a Sino-British operation. The OCBC is currently among the top four banks in Singapore in terms of assets and, with a capitalization of S$1.3 billion (US$722 million) in the year 2000, is currently the third largest company there. It is the second largest foreign bank in Malaysia with over 25 branches and net assets worth RM20 billion (US$5.26 billion). It is also the oldest and probably most diversified of all companies with stakes in banking, insurance, tin-mining and -smelting, rubber plantation, trading, hotels, properties, manufacturing, and investment. The OCBC group has controlling stakes in Great Eastern Life Assurance (GE) which, with total assets in 1999 of S$9,807 million (US$5,448 million), is the largest life insurance company in Singapore and the second in Malaysia. GE ranks 13th among the 100 largest Singapore companies. The OCBC also has controlling stakes in Overseas Assurance Corporation, which is one of the biggest general insurance companies in Singapore, and in Wing On Insurance. Recently, OCBC acquired the Sze Hai Tong Bank, the oldest surviving bank in Singapore. Over the years, the OCBC had been associated with various other sectors of the economy including plantation and trading. It once held

The Great Eastern–OCBC group 147 significant holdings in Sime Darby, which is among the largest plantation companies in Malaysia (Lim Mah Hui, 1981). This study focuses on how the Straits Chinese succeeded in establishing themselves in the modern financial sector in the face of Western competition. In the process, these Chinese helped to create a larger class of Chinese in banking and insurance. It seems that we are dealing with a new elite grasping the new opportunities that emerge in a thriving colonial economy. The question to be raised is how the Straits Chinese managed to turn these opportunities to their favour, more successfully than other groups participating in the colonial economy. After all, there were other Chinese groups that similarly tried to break into the modern industries. The most important was the Koe Guan, led by the Khaw family. The Koe Guan group in Penang set up the Khean Guan Insurance. Just like the Straits Chinese, the Koe Guan went into shipping, insurance, and tin-smelting. However, the Koe Guan group, starting almost at the same time as the Straits Chinese group, declined by the first decade of the twentieth century and soon afterwards disappeared. In banking, an attempt was made by a group of Cantonese in Singapore, the Kwong Yik Bank. This bank also collapsed not long afterwards. The Great Eastern–OCBC group tells the story of the successful evolution of large-scale Chinese business in Malaysia. Within it can be traced the major phases of Chinese business with the merchants progressing from early planting and trade through to tin-mining, revenue farming, shipping, rubber and, eventually, to insurance and banking. However, the involvement of the Straits Chinese in shipping, banking and insurance perhaps marks a distinct phase, as this created a new class of Chinese businessmen. Entry into the financial service sector granted these Chinese social status both within the Chinese community and the broader society. More importantly, Great Eastern–OCBC was the most enduring of all the Chinese business groups that started in the period.

Early business role of Straits Chinese The Straits Chinese were but one group of new Chinese entrepreneurs that emerged in the late nineteenth century. They were the first to progress successfully in banking and insurance. Their enterprises proved durable. Several of their notable features helped in the emergence of the Straits Chinese OCBC Group. First, the key individuals in the creation of the OCBC come from a new generation of largely Western-educated Straits Chinese. They were admirers of Western science and technology. Innovative in business, they sought diversification into new ventures. Second, these Straits Chinese, in seeking modernization in business, also advocated reforms within the Chinese community. They had retained their Chinese identities and held leadership positions in many Chinese organizations. Third, these Westerneducated Chinese were mostly acceptable to the state. British merchants and officials had more contact with this group than with new arrivals, most of whom had little education or just basic Chinese schooling. In political outlook, the Straits Chinese were already seeing their future in Malaya and Singapore while the new immigrants

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were still China-oriented. It was also these Straits Chinese that represented the Chinese community in the Municipal Commission and Legislative Council. The Straits Chinese played economic and political mediating roles between the larger Chinese community and Western capital. In this sense they may be considered as brokers within a particular period between the new Chinese immigrants and British capital, and between the Chinese and the state. British capital was then expanding into the different economic sectors of Malaya. The Straits Chinese were spearheading the development of new areas. By 1906, European mining companies, using heavily-capitalized dredges, were producing more tin than Chinese using traditional methods. In rubber, European acreage grew from 168,000 in 1907 to 1,050,000 in 1918 while in that year Asian acreage was only 836,000. British dominance in tin and rubber has been attributed to their accessibility to larger capital, superior technology, and the support of the colonial state. These factors also ensured their strong position in banking and finances. It was British companies that introduced banking and insurance into Malaya and Singapore in the early nineteenth century. British banking and insurers, through agencies and later establishment of branches, dominated the two industries right up to the post-independence period in Malaysia and Singapore. The mediating role of the Great Eastern–OCBC group rested on a Hokkien commercial network developed by the Straits Chinese who mainly originated from the Fujien region of south China. It came at a time when they were beginning to lose out to British capital elsewhere in industries they pioneered, such as tin-mining. It was Chinese capital and labour that had opened up large-scale mining during the mid-nineteenth century. Likewise, in rubber, the British outstripped the Chinese who had undertaken the first plantations. Through this Hokkien network, the Straits Chinese developed trading links with those of the same dialect group throughout Southeast Asia and southern China (see Table 9.1). This trade link was based on a commercial connection built by traders from Amoy in Fujien with indigenous producers and traders throughout the Malay Archipelago and the Southeast Asian region that goes back several hundred years. Later, Chinese traders from Singapore further developed the trade so that the Hokkiens conducted the predominant volume of regional trade in the pre-World War II period. Necessities such as rice and sugar circulated within this regional trade. But it also included the shipping of export commodities such as rubber, copra, and tin from the regions to the major ports. The strength of the Straits Chinese was their willingness and ability, after integrating their Hokkien network, to link up with other dialect networks such as the Cantonese and the Teochews. These commercial networks of the Straits Chinese were important to British capital seeking investment opportunities and markets for Western products. A pattern of commercial collaboration developed such as in shipping where the coastal trade of the region dominated by the Chinese fed into the larger international trade centred in Singapore. Chinese coastal shippers linked up with the ocean-going British shipping lines. Increasingly, British merchants worked with Straits Chinese and employed English-educated Chinese.

Wee Bin Lim (senior) Tan Kim Seng Lee Cheng Yan Lim Ho Puah Dr. Lim Boon Keng Dr. S.C. Yin Lim Peng Siang and Lim Peng Mau Tan Jiak Kim Tan Cheng Lock Tan Kah Kee Lee Choon Guan Oei Tiong Ham Lee Kong Chian Lim Kho Leng Tan Chin Tuan Tan Siew Sin Tan Ean Kian Lee Seng Wee

1870s–1900s Mostly from Malacca or Java and expanded to Singapore

CCB, OCBC, Lee Rubber OCBC CCB, OCBC, Straits Trading Co. OCBC, Sime Darby OCBC OCBC, Lee Rubber

Wee Bin & Co. Wee Bin & Co. Kim Seng & Co. SSC (Straits Steamship Co.) Wee Bin & Co. CCB, HHB, OCB CCB, OCB CCB, HHB, Ho Hong Group SSC, CCB HHB, OCBC HHB, OCBC CCB Khean Guan, OCB, OCBC

Company name

Sources: Tan Ee Leong and The Singapore and FMS Directory. Key to the family networks: 1 Wee Bin: father-in-law of Lim Ho Puah, and father of Lim Peng Siang and Lim Peng Mau. 2 Tan Kim Seng: uncle of Tan Jiak Kim. 3 Lee Cheng Yan: father of Lee Choon Guan. 4 Tan Kah Kee: father-in-law of Lee Kong Chian and father of Lee Seng Wee. 5 Dr. Lim Boon Keng: father of Lim Kho Leng and brother-in-law of S.C. Yin. 6 Tan Cheng Lock: father of Tan Siew Sin.

1970s–present Based in Singapore

1930s –1970s Continuing and expanding the business. Firmly in Singapore or Malaya

1910s–1930s Singapore-based though business range in the above mentioned trade triangle

Entrepreneurs/directors

Era/evolution of the bank’s network of directors

Table 9.1 Hokkien family networks in the Malacca–Singapore–Java section

Rubber, banking Banking Rubber, shipping, smelting, banking Rubber, banking Rubber, banking Rubber, banking

Shipping and coolie trade Shipping and coolie trade Shipping and merchants Shipping and merchants Shipping and coolie trade Rubber, manufacturing, banking Banking Banking, manufacturing, shipping Rubber, manufacturing, shipping Rubber, landowning, banking Rubber, manufacturing, banking Banking Sugar, shipping, landowning

Business sectors

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For the Straits Chinese, business ventures with Western merchants were set up for more than just profits and market share in new industries. Through these joint ventures the Straits Chinese gained expertise and management skills in Western-type industries, with which they were relatively unfamiliar. This was particularly the case in modern shipping, banking, and insurance where Western companies were more established.

The introduction of financial services Banking and insurance were introduced into Malaya and Singapore in the early nineteenth century. They assumed greater importance with the opening up of the economy. Banks provided necessary capital to start or to expand business. Insurance was important especially in the late eighteenth century when Western enterprises ventured into business and to regions they were largely unfamiliar with. More specifically, insurance offered protection against risks in early trade and shipping. Then too, the insurance industry was an important means of capital accumulation. Premiums collected served as capital that could be gainfully invested. By the time banking and insurance arrived in Southeast Asia, they had acquired very developed methods and organization forms. As an example, long experience in tariff calculation and access to records of claims became necessary to identify bad risks. Insurance, in particular, utilized actuarial science to calculate premiums. British insurers had, by 1860, formed Fire Offices Committees (FOCs) to share market information and to agree on tariff rates for the different classes of risks. Furthermore, British companies shared risks by re-insuring with one another. These developments helped British companies to lead in world insurance. British agency houses were important in early banking and insurance in Malaya and Singapore. Indeed, British agency houses represented the pivot of Western capital in Malaya and Singapore as they came to hold commanding stakes in the tin, rubber, banking, insurance, and trading sectors. Agency houses specialized in imports or exports, managed enterprises belonging to foreign investors, or they combined all these functions. The agency houses looked after diverse Western investments such as the floating of tin and rubber companies in London, opening of estates, and acting as agents for insurers and trading companies. While no agency house was directly involved in banking or insurance, there were nevertheless very close links. The Borneo Company, one of Malaya’s largest agency houses, was among the founders of the Hong Kong and Shanghai Bank. The company also helped start the Straits Insurance, the first locally incorporated insurance company in Singapore. The Chartered Bank itself was linked to some agency houses. A study of the lists of directors of various banks, insurance companies, and agency houses reveals that many of these organizations had shared interests. About half a dozen agency houses dominated the modern sectors of the economy and these included Boustead and Company, Sime Darby, Harrison and Crosfield, and Borneo Company. The agency houses were familiar with local conditions and had established a network of commercial connections into which the insurance business could tap. In addition, expenses, such as rental of premises or staff salaries were borne by these

The Great Eastern–OCBC group 151 trading houses. In turn, the agency arrangement proved convenient and beneficial to trading houses. The agencies retained 15 per cent of the premium, and in many cases, were paid a share of the profits calculated over a period of three years. In any case, these agency houses needed insurance coverage for most of their other business. Buildings as well as goods, machinery and equipment had to be insured. Marine insurance was bought for goods shipped out and life insurance policies taken out for their expatriate staff. Retaining the 15 per cent commission on the premium reduced the cost of insurance to these trading houses. The Chinese, on the other hand, relied on traditional organizations such as those based on dialect and district ties for sources of capital or to cover risks. Resources were pooled together for new ventures so that no single individual risked total loss. The traditional associations also provided welfare support. For financing, there were the pawnshops where loans were secured against assets. But such loans were usually for consumption rather than investment purposes. Many merchants or small businessmen turned to the hui (rotating credit associations). These were associations of mutual assistance where resources were pooled. Then there were the Chinese moneylenders and the Indian chettiars. But the amount that could be borrowed was small, the interest rates high and the loan period usually short. Remittance houses, which mobilized and despatched savings of the Chinese in Southeast Asia was another source of funding and loans. These houses handled remittance flows from Southeast Asia to China, and the accounts were used by Chinese merchants for their own trading and investment needs. Finally, a few Chinese businessmen turned to Western banks if they obtained an introduction from a comprador who stood also as guarantor of the loan. But, as economic functions became more complex, these traditional forms of insurance and financing proved inadequate. In Malaya and Singapore during the late eighteenth and early nineteenth centuries, an important source of funding came from revenue farms. The revenue farm was a system of monopoly leased out by the government, usually to wealthy Chinese merchants, to operate gambling or to sell opium and spirits. In the early years of British rule when the administration of tax had not been regularized, the rents from these farms were the main source of revenue to the government. The revenue farms created possibilities for capital accumulation through the huge profits that could be made by Chinese leaseholders. Large syndicates made up of wealthy merchants were formed to bid for the farm leases. As rents increased and also to avoid bidding against one another, the Chinese formed syndicates to pool their financial resources. As Western insurance companies sought to expand business, there appeared a growing potential market among the Chinese. Towards the end of the nineteenth century there was a sharp rise in regional and international trade in Malaya and Singapore. The export trade grew with the development of the tin and rubber industries. This growing commerce benefited the Straits Chinese who were involved in the regional trade. In turn, growing trade led to a demand for shipping, for funding and better credit facilities, and for new insurance services. It was also a time of social change. The population grew and new urban centres sprang up. As the population became settled and there was the rise of a middle class, life insurance was sought.

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There was also a changing lifestyle with the coming of the automobile. In 1937, compulsory third-party insurance for all motor vehicles was gazetted. Earlier in 1933, Workmen’s Compensation was introduced and this scheme was underwritten by insurance companies. Thus, the Chinese community had emerged to be a significant market, however small, for insurance. Several developments towards the end of the nineteenth century also influenced the Chinese to move into the modern financial sectors. One of these was the continuing prejudice of Western insurers against Chinese business. The bias ranged from a reluctance to extend cover to Chinese risks, to that of the appointment of Chinese as agents. This attitude appears in the tone of various reports submitted by inspectors of insurance companies. Where insurance was extended to the Chinese, the limit of coverage was set lower than that for Europeans. In Singapore at the beginning of the twentieth century, limits for retail shops owned by Europeans were placed at S$30,000 (US$16,500) by Sun Insurance Company. But Chinese shops in the same district were covered up to S$15,000. Sun Insurance instructed their agent, Brinkmann and Company, to only accept Chinese risks in commercial districts of business people of ‘some position’. Presumably this referred to Chinese known to Europeans or to those who held representative positions in government. Western insurers were, for most of the period, wary about offering insurance to the Chinese. They knew very little about the community and less about its business forms. They considered dealing with the local merchants a hazard that far outweighed whatever profits could be made. Even the early banks in Malaya and Singapore that were largely British served mainly European interests. The Mercantile Bank, the Hong Kong and Shanghai Bank, and the Chartered Bank provided financing to Western mines, plantations, and trading houses. The most immediate factor that led the Chinese to enter the financial services was the decision by the colonial authorities to phase out the revenue farm system. The lease of the last opium revenue farm ended in 1913. Chinese merchants were, by then, already diversifying into other economic activities. The revenue farm system had been phased out earlier in the Netherlands East Indies, and several Chinese revenue farmers from there had shifted to Malaya. Of the new business, insurance and banking were two new possibilities. Insurance was attractive because, unlike the revenue farm system where large sums of money had first to be put up as rent, premium collected at the start of issuing policies provided capital for investment. Not only was it an alternative source of capital accumulation, the business also provided risk coverage for their other investments. It was a group of local British merchants who in 1882 established the first insurance company in Singapore. This was the Straits Insurance Company, which was incorporated under the Indian Companies Act of 1866. It had a paid-up capital of S$3 million (US$1.65 million), and several British trading houses were listed as major shareholders. One of these was the Borneo Company. Straits Insurance offered insurance for marine risks to all parts of the world. But its business was mainly in the Straits Settlements, the Malay states, and Sumatra. There was regular trade at this time between Singapore, Penang, and Sumatra. In 1886, the same shareholders formed a second company, the Straits Fire Insurance Company, with a paid-up

The Great Eastern–OCBC group 153 capital of S$2 million (US$1.1 million). The Straits Insurance, which provided cover for fire and general risks, performed well in the first few years. In 1892 it announced the setting up of a branch office in London and it purchased its own building in the Cornhill district of London.1 In February 1885, yet another insurance company, the Singapore Insurance Company with British and some Chinese equity participation, was established. Among the British investors were the shipping agent Mansfield and Company and the trading houses of Borneo Company, Sarkie and Moses, and Gilfillan, Wood, and Company. The most prominent of the Chinese in the company was Lim Eng Keng who was one of the shareholders and directors.2 Lim, Straits-born, took over his father’s firm, the well-known Lim Lan and Company in 1875. He later became a director of Singapore Land Company and was a business partner of Syed Mohamed Alsagoff. Lim was a leader of the Singapore Hokkiens and, besides being involved in the Singapore branch of the Straits Settlements Association, also served on the Municipal Board and the Chinese Advisory Board. Lim was the first Straits Chinese involved in insurance. It was also in 1885 that the first effort by the Chinese to enter into the insurance industry was made. Formed in July of that year in Penang, the Khean Guan Insurance Company Limited was largely Hokkien, but could be distinguished from the Straits Chinese in Singapore. The Khean Guan relied on traditional links to modernize Chinese business (Cushman, 1991: 79–80). Largely Penang Hokkiens, the early directors of the Khean Guan were all connected with one another through trade. There were also marriage ties among families of the principal directors. The previous revenue syndicates now became a focus of growing business networks in the region. They adopted the limited company form and subsequently opened share subscription to the public (Cushman, 1991: 56–87). The early directors all had revenue farm background. Cheah Choo Yew was an opium farmer in Deli, Sumatra, for about 17 years, and later managed gambling farms in Siam, Hong Kong, and Singapore (Malay Mail, 10–2–31). Likewise, Ho Tiang Wan, Khaw Sim Bee, Khoo Thean Teik, and Yeo Wee Gark were part of large revenue opium and gambling syndicates in Penang, Singapore, and the Malay states (Trocki, 1990). The timing of Khean Guan’s forming is of some significance. Many of the early Khean Guan directors also owned shipping companies and as they expanded they needed insurance support. Cheah Choo Yew owned the Eastern Shipping and Khaw Sim Bee headed Koe Guan Shipping. Koe Guan had extensive links with other Chinese shipping such as Wee Bin, then Singapore’s largest local shipping line, Guan Lee Hin of Quah Beng Kee, and the Ban Joo Hin owned by Chang Pi-shih. Khaw Sim Bee also helped set up Eastern Shipping, which was important in the tin trade and as a major carrier of migrant labour from China to Southeast Asia. Another early director was Chuah Yu Kay of the Kong Hock Shipping Company. These Chinese shipping companies were, at this time, beginning to face serious competition from large British-owned companies. More serious was the merger of a number of Singapore Chinese and British shipping lines to form the Straits Steamship. The challenge was formidable, especially as Straits Steamship was linked to the

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Straits Trading, the largest tin-smelting company, as well as an increasing number of Chinese mines. The Straits Steamship further enjoyed insurance facilities from British companies. The first three local insurance companies did not, however, last long. Both the Straits Insurance Company and the Singapore Insurance experienced difficulties and were eventually bought out by the Commercial Union Insurance of London in June 1894. The Khean Guan survived until 1914. It may be argued that the failure of Khean Guan was because it operated in Penang where the volume of international trade was small, and in fact was declining when compared to Singapore. Jennifer Cushman’s study identified other factors as to why the business enterprise of the Khaw family went into decline. One was the unavailability of an institution within the group of companies to generate regular financing. Khean Guan was a general insurance company and the Khaw business enterprise did not have a life insurance company or a bank. Secondly, the death of Khaw Sim Bee deprived the Khaw business conglomerate of strong leadership and management direction. The decline of the Koe Guan group should also be seen in terms of its failure to establish links beyond the Chinese community. Koe Guan recruited some Europeans as managers and engineers. But it did not develop ties with Western business groups. Indeed, its Eastern Shipping group and Eastern Trading were formed to rival the Straits Steamship and Straits Trading. And while the Khaw family enjoyed the trust of the Siamese court, it could not quite gain the acceptance of the colonial state. Eastern Shipping also refused to allow its ships to be used by the British during World War I. The men who were involved with Koe Guan were largely new immigrants and successful businessmen who were still drawn toward developments in China, which they still regarded as their homeland. It was this political orientation and the absence of connections with the colonial state and Western capital, which may explain why the Koe Guan group could not build a durable financial conglomerate.

The Straits Chinese business families At a time of growing difficulties of the Khean Guan, some Chinese merchants in Singapore decided to set up insurance companies and banks. The initiative came from a group of largely Straits Chinese from Malacca and Singapore who developed what may be described as the OCBC conglomerate. The early core enterprise of this Straits Chinese undertaking was trade and shipping. Through the process of modernising their shipping business, the group greatly expanded and diversified into other sectors. They helped found the Great Eastern Life Assurance, the Eastern United Assurance, and the Overseas Assurance Corporation as well as banks. The men and early wealth that helped start the Straits Chinese OCBC group of companies were traders, planters, tin miners, and shipowners. The first members of this group were Hokkien. They were born locally, Malay-speaking, and Westerneducated. There was also intermarriage among the Straits Chinese families, which provided a further bond to the group. Many of them had work experience in Western firms. An important feature was their close links with the colonial authorities. Many

The Great Eastern–OCBC group 155 were involved in the Straits Settlements Association as well as the Straits Chinese British Association (SCBA).3 They were considered politically acceptable to the colonial state and a number of them were appointed to representative bodies such as the Municipal Commission, Legislative Council, or the Chinese Advisory Board. But these Straits Chinese did not lose their links with traditional Chinese groups, and were active in, for instance, the Chinese Chambers of Commerce, Chinese school boards, and the guilds and associations. Subsequently, the group expanded to include other dialect groups, principally the Cantonese and the Teochew. Above all, they skilfully combined their knowledge, connections, and resources to modernize the management and technology of an increasingly diversified set of business ventures. The Straits Chinese merchants’ first involvement with modern business could be traced to a much earlier start. There were several key families and individuals who played a role in building up the OCBC. The most influential was Dr Lim Boon Keng. Lim Boon Keng is today better remembered as a social reformer in his campaign against opium-smoking, queue cutting, and for his involvement in the Confucianist movement in Singapore (Wilson, 1972; The Straits Times, 7–1–57). Dr Lim Boon Keng was the founder-President of the SCBA. But he probably played just as important a role in encouraging Straits Chinese into modern commerce and industry. Lim Boon Keng won the highly competitive and prestigious Queen’s Scholarship to study medicine in Edinburgh University. He graduated in 1887 and after a period of research in Cambridge, he returned to Singapore in 1893 to set up his own medical practice. One of his partners was Dr S.C. Yin who, besides supporting Lim’s social causes, also joined him in his business interests. Lim helped set up the SCBA and together with Song Ong Siang, edited the Straits Chinese Magazine, which promoted the association’s ideas. In a period when there was political ferment in China, Lim, although a Straits Chinese, came to be drawn to developments there. Lim first supported reformist Kang Yu-wei and came to accept the revival of Confucianism as a way to bring change to China. However, Lim also considered Western science and technology as essential if the Chinese and China were to modernize and to strengthen themselves. He, like other Straits Chinese, advocated modern education. Lim together with Khoo Seok Wan, opened the Singapore Chinese Girls’ School. When Khoo started the Thien Nan Shin Pao in 1898, Lim was in charge of editorial work in English. Lim published a Chinese newspaper, Jit Sin Pau in 1899 as part of his reform efforts. In calling for social reforms, Lim and his colleagues distanced themselves from the older and more conservative Straits Chinese. Lim was to distinguish himself in Singapore’s expanding modern economy. He was one of the first Chinese to venture into industries which were just beginning to open up in the region. He bought shares in Straits Trading that became the largest tin-smelting company and a very large, diversified company in the region. Then when the new and commercially untested cultivation of rubber was introduced into the region, Lim encouraged Tan Chay Yan, another Straits Chinese, to start a plantation. In 1895 he himself risked his own money in a joint venture in Malacca with Tan. The venture was successful. Lim later became a director of Singapore Rubber Limited.

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It was in the finance sector that Lim was most influential. In 1912 he helped establish the Chinese Commercial Bank, the first Hokkien bank in Singapore, becoming its founding chairman. He played a part in setting up two more Hokkien banks. Lim also saw the need for Chinese involvement in insurance. In 1914 he helped start the Eastern United Assurance Company. Tan Chay Yan, his rubber-business partner, was the first chairman. Then in 1920, Lim was among those who formed the Overseas Assurance Corporation and became its founding chairman. In creating the beginnings of the OCBC conglomerate Lim drew upon his links with the Straits Chinese, the Hokkiens including those from Java, Chinese of other dialect groups, and British merchants and officials. He was one of the founders of the Singapore Chinese Chamber of Commerce and served as its president. One of those Straits Chinese who was linked to Lim, both in social affairs and in business, was Tan Cheng Lock. The great great grandfather of Tan Cheng Lock, Tan Hay Kwan, arrived in Malacca from China around 1771 and founded a flourishing junk trade that was plied between Malacca, Riau, Banjermasin, and Makassar. Tan Hay Kwan died in 1801, and his grandson Tan Choon Bock expanded the junk trade. This was despite Malacca’s declining position as a trading port. Choon Bock modernized his fleet by replacing his junks with steamers. He moved into agriculture and started the first tapioca plantation in the state. As in shipping, he introduced modern machinery into his tapioca estate at Pankalan Minyak, Jasin. Later, using his growing wealth, Choon Bock diversified into properties in Malacca and Singapore. Tan Cheng Lock’s uncle, Tan Keong Saik, took over the family business and, in 1890, merged his modernized shipping company with several others to form the Straits Steamship Company. He and his son-in-law, Lee Choon Chuan, sat on the board of Straits Steamship. This company became the leading shipping company in the region. Just as significant, it was an enterprise where local Chinese successfully joined with British business. Keong Saik, with his English-language education and job experience in the Borneo Company, ably worked out such a joint venture. Four years before taking his company into Straits Steamship, he served as one of five Municipal Commissioners. For several years, he was director of Straits Steamship and subsequently became a director of the Singapore Slipway Company and the Tanjong Pagar Dock Company. It was Tan Cheng Lock, who, of all the Straits Chinese, emerged to be the most prominent in the rubber industry. When his grandfather Tan Choon Bok died, his father inherited nothing. Cheng Lock thereupon took up a teaching job after completing his studies at the Raffles Institution in Singapore. In his six years there, he established contact with other Straits Chinese leaders. Tan Cheng Lock was active in the Malacca SCBA. In 1908, he returned to Malacca and worked for a while on the estate of his mother’s cousin, Lee Chim Tuan, and later for Nyalas Rubber Estates Limited. In 1910, with the backing of Chan Kang Swi, a prominent businessman, and Lee Chim Tuan, he floated the Malacca Pinda Rubber Estate, the Ayer Molek Rubber Company, and the United Malacca Rubber Estate. He built his wealth through the years of the rubber boom. In the years since then, he added Bukit Jelutong Estate, Bukit Katil Rubber Estate, Punggor Rubber Estates, Cathay

The Great Eastern–OCBC group 157 Rubber Estate, Kew Rubber Estate, and Tong Watt Rubber Estate. He also became chairman of the Nyalas Rubber Estate with whom he had worked. Tan joined Lim Boon Keng and Lim Peng Siang in forming the Ho Hong Bank. In 1932 he agreed to merge the three Hokkien banks to form OCBC of which he was director. Earlier, in 1920, he had helped form the Overseas Assurance Company. Over the years, Tan Cheng Lock shrewdly invested in several other companies, many of which had substantial British interests. Tan Cheng Lock was also director of Straits Albion Press, British Malaya Trustee and Executor Company, and chairman of Chenglock Soohock and Company (Lim Pui Huen, 1989). While Tan Cheng Lock sat on many boards of directors, he did not engage directly in the management. This allowed him time to take an active part in public affairs through which he came to be better known. It was Tan’s rubber involvement that later helped create a link between OCBC and Sime Darby. Tan held shares in Sime Darby, an agency house involved in early rubber plantations in Malacca. OCBC and Great Eastern together held the largest block of shares in Sime Darby. Tan and other OCBC directors sat on the board of Sime Darby. Another key Straits Chinese family was that of Lee Cheng Yan. The firm of Lee Cheng Yan and Company dealt with financing and property development. His son Lee Choon Guan became a founding director of Eastern United Assurance. A Hokkien leader, Lee Choon Guan initially helped in his father’s business of Lee Cheng Yan and Co (Song Ong Siang, 1967: 111). Lee married the daughter of Tan Keong Saik and served for many years as a director of the Straits Steamship Company, probably representing the interests of the Tan family. But he was also a director of South British Insurance Company, a New Zealand firm, and was involved in several rubber, tin, and industrial companies. He represented the Hokkiens on the Chinese Advisory Board. The Tan Cheng Lock family was also close to another prominent Straits Chinese who joined the Straits Steamship. Tan Keong Saik was a good friend of Tan Jiak Kim of Kim Seng and Company. Tan Kim Seng was from Malacca and was one of the first Chinese settlers in Singapore. His company was an import and export firm and, over the years, built business relations with agency houses among which were Borneo Company and Boustead and Company. Tan Jiak Kim saw strategic reasons in participating in shipping and he became director of Straits Steamship where he served for over 25 years. Tan was an established leader of the Straits Chinese and was appointed to the Legislative Council at the age of 30 (Tregonning, 1967: 8–9). He was an influential member of the OCBC group. There were several other prominent Straits Chinese and among them were Lim Peng Sian, Tan Chay Yan, Tan Kheam Hock, Khoo Sian Tan, and Ong Soon Tee. Lim Peng Siang owned the Ho Hong Steamship Company. It had a fleet of eight ocean-going liners and 22 smaller steamers. Lim Peng Siang floated a jointstock banking company, the Ho Hong Bank to which Lim Boon Keng became a shareholder and director. Tan Chay Yan was a third-generation Malacca Chinese educated at the Malacca High School. In 1892, at the age of 21, he was appointed to the Malacca Municipal Council. He also became active in the Straits Chinese British Association, and, through this, built a close relationship with Dr Lim Boon

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Keng. In 1895, in partnership with Lim Boon Keng, he planted a 43-acre estate at Bukit Lintang with rubber seedlings from the Singapore Botanical Garden. Later, he helped float a Chinese syndicate called the Malacca Rubber and Tapioca Company to plant rubber on a 4,300-acre estate at Bukit Asahan, Malacca, thus becoming the first Asian to be involved in the industry (Drabble, 1973: 21; Coates, 1987: 102–3). Tan Kheam Hock studied at the Penang Free School and, after working at the Mercantile Bank, was involved in a syndicate for the Opium and Spirit Farms until 1906. He was active in the Straits Chinese British Association and on the Chinese Advisory Board. He succeeded Tan Chay Yan as chairman of Eastern United Assurance and was director of a host of rubber, tin, and industrial companies. Ong Soon Tee was one of the first pupils of the missionary teacher W. Oldham and was later active in the SCBA. He was also a director of Eastern United Assurance. Khoo Sian Tan was a Hai Cheng Hokkien educated at the Penang Free School. He was involved in a Singapore revenue farm syndicate and held interests in various companies including the Sarawak Shipping Company and Thailand Mining Company. A founding director of Great Eastern was See Teong Wah who was educated at Singapore’s St Joseph’s Institution. He joined the Hong Kong and Shanghai Banking Corporation (HSBC) as his father’s assistant and then later took over as comprador of the bank. See Teong Wah was made a Justice of the Peace and served as Municipal Commissioner as well as President both of the Chinese Chamber of Commerce and the Hokkien Association.

The insurance companies of the Straits Chinese It was through two largely British companies, the Straits Steamship and Straits Trading, started in the late nineteenth century, that early business ties between the Straits Chinese and British merchants were forged. The Straits Trading Company, founded in 1887, was the largest tin-smelting and tin-trading company in the region. The Chinese presence was less evident in the early years. But even at its inception, shareholders of Straits Trading included well-known Chinese such as Dr Lim Boon Keng, Loke Yew, Tan Jiak Kim, and Looi Hoi Choon. In 1906, Loke Yew became a member of the board of directors. Later his son, Loke Wan Tho, and Tan Chin Tuan were appointed to the board. A significant part of Straits Trading’s dealings was with Chinese mining companies in the peninsula. Chinese miners supplied tin ore to be processed in the Company’s smelting works (Tregonning, 1963). It was in Straits Steamship that the Chinese part in developing Sino-British business collaboration was most visible. Straits Steamship was formed in 1890 following the merger of several local shipping companies of which three were well-established Chinese firms. These included the shipping company of Tan Choon Bok of Malacca, which was represented in Straits Steamship’s directors’ board by Tan Keong Saik and later by Lee Choon Chuan. Straits Trading was closely linked to Straits Steamship, relying on the latter’s ships for the transportation of tin ore (Tregonning, 1965). The British and Chinese directors of Straits Trading and Straits Steamship started the Great Eastern Life Assurance. The founding chairman of Great Eastern was G.A. Derrick who had served as accountant in the Straits Trading Company.

The Great Eastern–OCBC group 159 Earlier, he acted as liquidator for the Singapore Insurance Company. G.A. Derrick must have been a key British businessman in this link to the Chinese merchants. His early interaction with the Chinese must have been through the Straits Trading. Derrick was also a commanding officer of the Singapore Volunteers. Many members of the Singapore Volunteers were from the SCBA. Another director, F.M. Elliot, was a member of the Singapore Legislative Council and senior partner of a wellknown law firm. He was also president of the exclusive Tanglin Club. A.D. Allan, another board member, was managing director of MacAlister and Company. The Europeans associated with the Great Eastern–OCBC group were thus among the most influential members of the colonial society.4 Five of the first ten directors of Great Eastern were Straits Chinese linked to the Straits Steamship group. Four of them later helped found Eastern United Assurance. They and others in the Eastern United Assurance also had stakes in the important Straits Trading Company (Annual Report, 1913). Great Eastern differed from earlier local insurers by being essentially a life insurer. The Straits Chinese brought with them the experience in Great Eastern to start, in 1913, the Eastern United Assurance. Its founding chairman was Tan Chay Yan who served until his death in March 1916 (Young, 1964: 476–84; Wright and Cartwright, 1912: 842). Others involved in Eastern United Assurance were Tan Khean Hock, Quah Beng Kee, and Ee Yew Kim. Lim Boon Keng was listed as a member of the Singapore Chinese Advisory Board. Eastern United included the important Teochew and Cantonese dialect groups. In the early years Seah Eng Lim, who was director of the Teochew corporation, the Sze Hai Tong Banking and Insurance Company, and later the Overseas Assurance Corporation, sat on the board of Eastern United Assurance. Its bankers included the Teochew’s Sze Hai Tong Bank. The two Cantonese who served on the advisory board were Eu Tong Sen and Cheong Yoke Choy. Eu Tong Sen was a successful tin-miner from Perak and was educated in China and later in Penang. He was the first Chinese on the Federal Council. Besides tin-mining, he helped found the Lee Wah Bank. Cheong Yoke Choy worked with Loke Yew in Selangor and became a wealthy tin-miner and property-owner. He co-founded the Kwong Yik Bank in Kuala Lumpur. It is likely that Cheong not only represented Cantonese interests but also Loke Yew’s investment in the Eastern United Assurance. Perhaps the most important Cantonese was Wong Siew Qui, popularly referred to as S.Q. Wong. He was a son of Wong Ah Fook, a successful entrepreneur from Johor and founder of the Singapore Kwong Yik Bank. Wong Ah Fook held shares in Great Eastern and Eastern United. While he took no active part in either, his son, S.Q. Wong, a lawyer trained in Middle Temple, an Inn of Court, and member of the Johor State Council, became important within Eastern United Assurance and was appointed its chairman later (Song Ong Siang, 1967: 354–55). The founding of Eastern United suggests the growing need for insurance by sections of Chinese business, especially those in the rubber industry. Rubber factories were beginning to be set up by Chinese, and risks were much higher in the smokehouses and the storage places than in the estates. Accidental fires could swiftly destroy whole consignments of sheet rubber while awaiting shipment. Indeed, one

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founder director of Eastern United Assurance was Chan Ngo Bee who owned the Victoria Sawmill and Chop Seng Chiang Company. His company was also involved in an ice factory, and at one time, a shipping fleet. On one occasion, a major fire almost gutted his sawmill and certainly underlined to him the need for insurance services. There was collaboration with Western groups. Two of its banks were the Chartered Bank and the Hong Kong and Shanghai Bank. In 1920, Eastern United sold a stake to the South British Insurance Company, a New Zealand-incorporated company. With that, the New Zealand company had a representative in the Eastern United board of directors. The Eastern United also employed European managers. They included H.J. Fougere and J.W. Harris. In 1920, the Straits Chinese group set up a third insurance company. This was the Overseas Assurance Corporation, started with a paid-up capital of S$650,000 (US$357,500) by Tan Cheng Lock, Dr Yin Suat Chuan, and S.Q. Wong. Dr Lim Boon Keng was the OAC’s first chairman. S.Q. Wong, by this time, was also a director of Great Eastern and Eastern United. He and Dr Yin brought their insurance experience into the OAC. The OAC was a move backed by three Hokkien banks with which the OAC directors were associated (The Overseas Assurance Corporation Limited, 1980). The role played by Song Ong Siang, a Straits Chinese and friend of Lim Boon Keng, is little noted. A Queen’s Scholar, Song completed his law studies in Britain and returned to set up a practice with James Aitken. Song did not appear to have been involved in any of the business ventures of the Straits Chinese. But his firm was recorded as being the lawyers for Eastern United Assurance (Annual Report, 1914). Song and other Straits Chinese professionals must have been important in advising the Straits Chinese merchants as they negotiated deals with British merchants or when they set up banks and insurance companies. The Straits Chinese were able to refer to Song when referring to a legal system which had served to advance their commercial interests.

The banks of the Straits Chinese The Straits Chinese started banking at about the time they moved into insurance. In 1912, Dr Lim Boon Keng led a group to establish the Chinese Commercial Bank (CCB). He was its first chairman. He was joined by Lim Peng Siang of Ho Hong company. All the directors of the CCB were Hokkien and in the early years the bank mainly served the banking needs of that dialect group. It was also said that the CCB was among the first Chinese banks to popularize the use of current accounts among the Chinese. Lim Peng Siang together with Lim Boon Keng then established a second Hokkien bank, the Ho Hong Bank, in 1917. Among the founder shareholders of Ho Hong Bank were Lee Choon Chuan from the Straits Steamship and Tan Cheng Lock. The Ho Hong Bank took the lead in opening branches all over Malaya. It even had branches in Burma and China. Lim Peng Siang relied on the bank to raise capital for

The Great Eastern–OCBC group 161 his Ho Hong Company. The Ho Hong, at that time, was the largest local shipping concern in Singapore. A third Hokkien bank was founded in 1919. On this occasion, Lim Boon Keng persuaded Oei Tiong Ham, the well-known Hokkien businessman from Java, to take up shares in setting up the Overseas Chinese Bank (OCB). Lim became the first chairman of the OCB. Thus in all three banks, Lim played an influential role (Wilson, 1972). The banks flourished in the 1920s, especially in a period of rubber boom. But they ran into great difficulties during the Great Depression. The severe fall in rubber price resulted in depressed economic conditions. But it was also the sudden removal of sterling from the gold standard which led to serious losses in foreign exchange, in which the banks were said to have speculated. The banks also suffered losses because of political uncertainties in China at this time. A considerable amount of the banks’ business had been the remittance of money from Southeast Asia to the various home provinces. To overcome the crisis, the three banks merged in 1932 to form the OverseaChinese Banking Corporation (OCBC). Control of the bank was handed over to a new set of directors. Lim was, by this time, too preoccupied with social issues and was not involved in the OCBC. But Dr Yin, his medical partner, and Tan Cheng Lock were in the founding board of directors. Although it was an amalgamation of the three banks, most of the directors came from CCB. A continuing strength of the OCBC group was its family and dialect ties. The new directors and those of the succeeding generation such as Lee Kong Chian, Tan Cheng Lock, Tan Siew Sin, Lim Kho Leng and Tan Ean Kian were all from founding families of the bank. With the new generation, the bank embarked on a programme of modernization. Records were written and kept in English, and its exchange operations and control systems of branches modernized. It expanded regionally by opening branches in Bangkok and Jambi as well as in all the towns in Malaya. Less than a decade after its establishment, OCBC became the largest Chinese bank outside China and owned almost three-quarters of the total assets of all Chinese banks in Malaya and Singapore. The merger of the three banks thus greatly strengthened the banking position of the Straits Chinese business group. Since 1932 the OCBC has spearheaded the expansion and diversification of the Straits Chinese business conglomerate. It has continued to draw support from the three insurance companies of Great Eastern, Eastern United, and OAC. With this development, the Straits Chinese business network was firmly in place. In this expansion and development, the Straits Chinese were helped by the fact that regulatory rules governing banking and insurance in Malaya and Singapore during the early years were few. In banking there were no regulations on minimum liquidity ratios, on suspension of credit policies, and on periodic examination of accounts to prevent fraud. Neither was there a rule on the fixing of interest rates. It was not until the post-war period that there were central banks that had supervisory roles. There was, likewise, in insurance a generally laissez-faire approach by the colonial state. Over the years, however, some regulations on life and general

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insurance companies were introduced. But there was no provision in the laws for the authorities to refuse permission to a company to commence insurance business. In Singapore, especially, the colonial state placed few hindrances on banking and insurance as these were services seen as essential to commerce upon which the island’s economy depended. Furthermore, given the dominant position of British banks and insurers, the few Chinese banks and insurers could easily be tolerated. The OCBC group did well in the early years because of business support from member companies within an emerging conglomerate and within the loose network of Chinese enterprises. The growing trade of the Straits Chinese and the expanding loan business of their banks generated business for the Straits Chinese insurance companies. Traders and shippers, for instance, required marine and fire insurance. And in a growing population, demand for business and personal loans rose. Bank loans required from customers coverage of insurance as security. The OAC was, as an example, the official insurer of OCBC. In turn, funds accumulated from savings and insurance premium in Straits Chinese banks and insurers were invested in the growing business environment in Singapore and Malaya. Over the years, these funds bought into blue-chip companies. These not only brought good returns to the banks and the insurance companies, but also offered further business opportunities. The banking and insurance requirements of affiliated companies such as Straits Trading, Sime Darby Plantations, Fraser and Neave Ltd were passed on to OCBC and its group of insurers. Through this was created a conglomerate, which the Koe Guan group had not been able to establish and which few other Chinese were able to match even in the later period.

Other Chinese insurance companies and banks It could be argued that the Great Eastern–OCBC helped consolidate the groundwork for other Chinese groups to enter the financial sector of the economy. Several other Chinese banks were also set up around the time of the creation of the three Hokkien banks. As with the OCBC group, these were dialect-based and serving the respective dialect communities. The Cantonese started banking even before the Hokkiens when they opened the Kwong Yik Bank in 1903. However, the bank failed in 1913. Despite this, a Cantonese bank, with the name of Kwong Yik Bank, was opened in Kuala Lumpur in that same year by prominent Cantonese, led by Loke Yew and Cheong Yoke Choy. The Teochews also had a bank earlier than the Straits Chinese. In 1907 they formed the Sze Hai Tong Bank and Insurance. Banking was the main business. At this time many Teochews were engaged in the growing trade, particularly in rice, between southern China and Thailand. The Sze Hai Tong Bank (SHT) survived the depression and continued to enjoy steady growth. It had branches in Bangkok and Hong Kong. The largest shareholder at the time of SHT’s founding was Seah Eng Lim. Seah was a director of Eastern United Assurance, and this linked him to the Straits Chinese. Also linked to OCBC were founders of other new banks. Yeap Chor Ee, who founded the Ban Hin Lee Bank in Penang in 1918 (although the bank was incorporated only

The Great Eastern–OCBC group 163 in 1935), was an original shareholder of OCBC. In 1920, a Cantonese bank, the Lee Wah Bank, was opened in Singapore; its founders were associated with the Straits Chinese. They were Cheong Yoke Choy, Eu Tong Sen, and Lee Leung Ki. Cheong and Eu were associated with the Straits Chinese in the Eastern United Assurance. An important part of Lee Wah Bank’s business was the remittance of funds from Southeast Asia to southern China. The banks were also a response during this period of the growing trade between Singapore and Hong Kong. The last bank to be established in Singapore in the pre-war years was the United Chinese Bank (UCB). Set up in October 1935 it had a paid-up capital of S$1 million. Its founding directors were Hokkiens. UCB was to tap substantially into the experience of the OCBC. One of the founders of UCB, Ong Piah Teng, had served as general manager of OCBC. Ong became UCB’s first managing director. Tan Lark Sye, also a founding director of UCB, was on the directors’ board of OCBC. Many of the early senior staff of UCB, such as accountants and managers, were recruited from the OCBC. In the post-war period UCB changed its name to United Overseas Bank (UOB). An insurance company linked to the Cantonese was established in 1923. This was the Asia Insurance Company headed by Lee Leung Ki and several Cantonese. Lee took a leading role in the setting up of Lee Wah Bank. Asia Insurance’s paid-up capital of only S$160,000 (US$88,000) was small. Despite this, it survived the early difficult years as well as the 1932 depression. It was able to do this through an alliance with three Hong Kong insurance companies. These were the Shanghai Fire and Marine Insurance Company Ltd, Lun Tai Mutual Fire and Marine Insurance Co. Ltd, and Hong Nin Fire and Marine Insurance Co. Ltd. In 1948 Asia Insurance also went into life insurance with the establishment of the Asia Union Life and Accident Assurance Society Ltd. Clearly then, the beginning of the OCBC group helped set the course for the Chinese in Malaya and Singapore into banking and insurance.

Surviving against British enterprises These new Chinese companies operated in a business environment where British banks and insurers were already well established. Nevertheless, these Chinese companies managed to sustain early growth by concentrating on fellow dialect members as well as those of the community. Dialect ties and personal links were still relevant in business during this early period. In most cases, Chinese having difficulties or being uncomfortable with foreign banks or insurers turned to the Chinese companies. It was in insurance that local companies felt the competitive presence of foreign insurers most. The large British insurers had agencies or branches in Malaya and Singapore, as did European and American insurers. British companies, by their size and worldwide branches, remained dominant. With a relatively bigger capital base, they were able to take up large risks. British insurance companies enjoyed a better reputation of being secure and reliable. Indeed, the ability of British insurance companies to pay up all claims following the 1906 San Francisco earthquake, when so many others could not, greatly enhanced their reputation, both in the United States and elsewhere. And because of their worldwide branches, losses made in one

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region were covered by profits in others. Secondly, with the backing of larger assets, British companies could enter new areas through buying out existing small, local companies. The incorporation of local insurance companies in Malaya and Singapore and the entry of European insurance companies, nonetheless, led British firms to seek a stronger presence in Malaya. German and Dutch insurance companies were expanding in Penang and Singapore towards the end of the nineteenth century through compatriot agency houses. Behn, Meyer and Company represented the North German Fire Insurance Company while Katz Brother Limited was the agent for Hamburg–Bremen Fire Insurance Company and Aachen–Munich Fire Insurance Company. Martijn and Company was acting on behalf of the Java Sea and Fire Insurance Company while G.H. Slot and Company represented the Netherlands Fire Insurance Company. Likewise, the Japanese Meiji Insurance Company had appointed Mitsui Bussan Kaisha as agents in Singapore. The threat of the European companies was not only that they underwrote much of the insurance needs of compatriot companies but that they allegedly offered lower premium rates and higher coverage limits. Large insurance companies in Britain belonging to the tariff cartel dealt with premium undercutting by buying up non-tariff companies where possible. This appears to have happened in Malaya. In June 1894, Commercial Union of London took over the Straits Fire Insurance Company. Started only in 1861, Commercial Union had expanded its overseas operations very rapidly, so that by the 1890s it drew three-quarters of its premiums from abroad. Its total worldwide fire insurance income ranked second only to the Royal Insurance of Britain. After taking over Straits Fire Insurance, Commercial Union reorganized its business in Malaya. It registered a branch in Singapore, which took over policies previously issued by Straits Insurance. Given the complexities of modern insurance as well as the dominance of British insurers, how did the Chinese companies compete? British companies, given their long years of experience, had accumulated data on all classes of risk and had worked out appropriate tariffs. This gave them tremendous advantage. Premiums based on claim experience had been set so that they would not be too excessive so as to invite undercutting, nor too low so as to incur losses. Hence, the claim ratio to premiums collected by the British companies in their overseas operations had always been favourable. The large insurance companies in Britain had formed the Fire Offices Association to set tariff rates, by which all member companies had to abide, in order to avoid premium undercutting (Cockerell and Green, 1976). One way in which local Chinese insurers gained access to expertise, both in management as well as in tariff information, was by recruiting personnel from the large Western corporations or agency houses. Managers and officials, both expatriate and Chinese, who had gained experience and information, were taken into Khean Guan, Great Eastern, and Eastern United. Thus, one of the first directors of Khean Guan was Goh Boon Keng. Born in Penang in 1872, Goh was educated at the Penang Free School. He was with the Mercantile Bank for three years before joining Behn, Meyer and Company. Behn, Meyer and Company was a trading

The Great Eastern–OCBC group 165 house representing a number of European insurance companies, mainly German.5 Goh left to help establish the Khean Guan Insurance Company. Another director of Khean Guan was Quah Beng Kee, who was also from the Penang Free School. He, too, joined Behn, Meyer and Company. Another director, Tan Khean Hock, had worked in the Chartered Mercantile Bank of India, London, and China for eight years before moving into Khean Guan. Local companies, even when they could get tariff information, sometimes offered lower rates in order to win business. But this simply exposed them to greater risks and to possible heavy losses. This, indeed, might have been a reason why some early local insurance firms encountered difficulties.6 The subsequent Chinese insurance companies dealt with this problem by recruiting Western staff. Eastern United appointed a European, H.J. Fougere as its first general manager, and a few years later, J.W. Harris as its manager. Then, in 1920, Eastern United sold a substantial block of shares to South British Insurance Company and offered it a place on its board. For Eastern United, offering a stake to the South British not only broadened its capital base but also added corporate value and international insurance connections.7 Another major difficulty faced by local insurance companies when competing against large foreign ones was reinsurance facility. Through reinsurance, companies are able to hedge against a major risk. Without reinsurance facilities, small local companies would either have to turn down large but hazardous risks or be exposed to ruinous claims. In Britain, members of the FOC were able to force out some small non-tariff companies by denying them reinsurance. In 1890 non-tariff companies managed to get reinsurance through Lloyd’s and later from non-British insurance companies. Likewise, Chinese companies in Malaya and Singapore were able to obtain reinsurance facilities from larger non-tariff members or from overseas companies, or, as did small non-tariff insurers elsewhere, they combined to accept large risks.

After independence In the post-war period and during the gathering pace of decolonization, the OCBC group came to take on an even larger corporate role and image. The Straits Chinese character, however, became less distinctive even as it drew in other Chinese, particularly at management level. But the people who held controlling interests were still from families that started the group. Also significant was the expansion of other Chinese financial groups, although the OCBC remained ahead of them and its influence continued to be evident. In the first few months of the Japanese occupation, all foreign insurance companies were placed under Japanese insurers designated by the military authorities. All local and foreign banks in Malaya and Singapore were ordered closed. Liquidation proceedings were taken against the major foreign banks and these included the Chartered Bank, the Hong Kong and Shanghai Bank, and Mercantile Bank. In April 1942, the OCBC and four other Chinese banks were allowed to reopen. But officers from the Japanese Military Administration closely supervised them (Kratoska, 1998: 207–22). A number of Chinese associated with the OCBC retreated

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to Bombay together with, it is said, important account books and records. Tan Chin Tuan registered the OCBC in India and maintained operations there as joint managing director. In London, colonial planners and business groups discussed post-war recovery programmes. British planners realized that banking and insurance were essential to the reconstruction of the economy and that these two services had to be restored very quickly when the war ended. British planners expected the resumption of financial services to be difficult. One reason was that British agency houses, which had in the past handled much of the insurance services, would lack staff because of the war. Many staff members had evacuated before the war, while a large number was believed to be interned by the Japanese. More pressing to the business community, which had suffered heavy losses during the war, were funds to restart their operations. It was estimated that some S$475 million (US$261 million) was needed to help in the recovery of the economy. It was in such circumstances that banks, including local ones such as OCBC, resumed business in Malaya and Singapore. With the end of the war, the OCBC and its group of insurance companies were well placed to resume operations. The colonial authorities released all of OCBC’s pre-war assets so that it could resume early operations. Tan Chin Tuan, a member of the SCBA, headed the recovery of OCBC and it expanded its diversified operations and assets. A non-Straits Chinese who soon came to play a major role in OCBC was Lee Kong Chian. A first-generation immigrant from China, he studied civil engineering. He first worked for Tan Kah Kee, a CCB director, and eventually married Tan’s daughter. Lee was involved in the Chinese Commercial Bank. He built up his rubber business, and the Lee Rubber Company came to own a significant share of OCBC. In the OCBC he rose to become its chairman until 1966. Together with Tan Chin Tuan, he built OCBC into the conglomerate it is today. Over the years, the OCBC increased its equity holdings in insurance and in other sectors of the economy. There were considerable cross-holdings of shares within all the companies held by the Straits Chinese. Thus, while the OCBC had controlling stakes in three insurance companies, all three, in turn, held sizeable blocks of shares in one another’s companies as well as in OCBC. The Overseas Assurance Corporation and Great Eastern Life Assurance, with steady growth in assets and business turnover soon became the largest general and life insurers in the region. OCBC also bought into a small bank, Batu Pahat Bank, established in 1919. S.Q. Wong became a director of the Batu Pahat Bank in 1923. The Batu Pahat Bank was later restructured to become the Pacific Bank. Great Eastern separately gained substantial stakes in several other large blue-chip companies both in Singapore and in Malaya. Many of these such as Wearnes, Fraser and Neave, and United Engineers had started as British companies (Facts and Figures of Malaysian Companies, 1952). The connection between the Straits Chinese group and Western entrepreneurs lasted well up to the post-war period. The most significant of the Europeans was E.M.F. Fergusson who was director of Straits Trading, Straits Steamship, and Great Eastern. Others such as J. Ford and F.M. Edmonds served in Great Eastern Life.

The Great Eastern–OCBC group 167 N.J. Davis was involved as director in five of the companies where OCBC had bought stakes. The others who were associated with this group of companies were T. Aiken, H.W. Moxon, and H.B. Roper Calbeck. Of the OCBC group of Chinese, S.Q.Wong, Lee Chim Tuan, and Lee Kong Chian sat in boards where Europeans such as Fergusson, Ford, and Edmonds were members. But the most important of OCBC’s links were with the old agency houses. Right at the start when the agency houses were just beginning to establish themselves in Malaya, the Straits Chinese decided to work with them. It was a connection built by Tan Jiak Kim and Tan Cheng Lock with Borneo Company, Boustead and Company, and Sime Darby. Through Sime Darby and Straits Trading, as well as equities it held in the Tronoh Mines Limited, OCBC was connected to London Tin–Charter Consolidated. London Tin, with eight Malaysian tin companies, was one of the world’s largest tin concerns. In the post-independence period as the old Western capital withdrew, the OCBC group gained the largest stake in Sime Darby. This agency house started in 1910 when Sime, a rubber planter, got together with Darby from the Hong Kong and Shanghai Bank to form the company. By the 1930s its issued capital was S$1.8 million (US$1 million) and its financial position was regarded as one of the soundest by banks in England. By the 1950s it was managing and owning a large number of rubber estates. It extended its activities to shipping, insurance, general trading, manufacturing, and processing. In 1958, Sime Darby Holdings Ltd was incorporated in London but was managed from Singapore. From its profits it built up portfolio investments in Britain, Australia, and the United States. During the 1960s, large-scale transfer of shares from Britain to Singapore and Malaysia occurred. In the 1980s Sime Darby controlled over forty companies, making it the largest conglomerate in Malaysia. These included companies in the tin, rubber, finance, and management sectors. OCBC directors such as Tan Chin Tuan and Tan Cheng Lock sat on the board of Sime Darby. Following his retirement as Finance Minister, Tan Siew Sin, the son of Tan Cheng Lock, became its chairman. It was through links with agency houses and through its own acquisitions that the OCBC group gradually gained major and significant stakes in finance, insurance, plantation, tin, trading, and the shipping sectors of the Malaysian and Singapore economy. Finally, the OCBC’s part in the emergence of Chinese participation in the financial sector continued and may be seen in the background of those who started new banks in Malaya. This was clear in the pre-war period when the founders of all the Chinese banks – Ban Hin Lee, Lee Wah, and United Chinese banks – had links with OCBC. In the post-war period, the men behind three major Malaysian banks were also from the OCBC. Khoo Teck Puat who founded Malayan Banking, Malaysia’s largest bank, was the son of Khoo Yang Tin, a founding shareholder of OCBC. The younger Khoo joined OCBC in 1933 as a clerk and rose to be deputy general manager in 1959. He left and founded Malayan Banking in 1960. The founding chairman of Malayan Banking, Oei Tjong Ie, was the son of Oei Tiong Ham of Indonesia and also a founding shareholder of OCBC. Two of Khoo Teck Puat’s protégés in OCBC, Khoo Kay Peng and Teh Hong Piow, also left to set up

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their own banks. Khoo Kay Peng set up the Malayan United Industries Bank in the 1970s. Teh Hong Piow set up the Public Bank in 1965, which today is regarded as the best-managed bank in Malaysia.

Conclusion Chinese entrepreneurs in nineteenth-century Southeast Asia were likely to have been among the first Chinese to take on capitalist roles and of these, the Straits Chinese were in the forefront. Even as China was seeking political and economic reforms in efforts to modernize itself, there were groups of Chinese in Malaya and Singapore who had already successfully moved into modern commerce and industries. Immigrants who left China freed themselves from cultural and bureaucratic constraints that were said to have hindered the development of Chinese entrepreneurs in their homeland. In Malaya and Singapore, the extension of British rule opened up economic opportunities for the Chinese. By the 1880s, the Chinese shipping groups felt the urgency to diversify and to modernize their enterprises. First, the Chinese saw serious competition with the entry of British capital into the region. British enterprises drew upon larger sources of capital and technology as well as modern management to provide a powerful competitive edge over the Chinese in tin and rubber. With the advent of Western shipping companies, in particular the introduction of new steamships, the Chinese had also to replace the sailing junks. Marine insurance and banking were important, as ships became expensive to modernize and to maintain. Increased trade required insurance protection. Second, the revenue farm system, which was a useful source of capital accumulation, was being phased out at this juncture. The colonial state had begun to expand its administrative apparatus to collect revenue. Finally, the traditional dialect and district associations of the Chinese that provided support, mutual help, and control to their members could no longer cope with new and more complex economic and social demands, even as these ties were beginning to be loosened. A key group in this transition to modern business were the Straits Chinese from Malacca and Singapore. It was a community that had a long tradition of trade in the region. They owned shipping companies that transported commodities from all over the Southeast Asian region. They were linked to the early and large Hokkien trading community centred in Amoy that had been trading with Southeast Asia since early times. Both the Koe Guan group and the OCBC Group followed a similar course in diversifying and modernizing their business. They progressed from the key activities of trading, tin-mining, tin-smelting, revenue farming, shipping, and then insurance. Both used family ties and dialect networks to combine and to diversify their resources. Theirs were networks of businessmen shaped by shared social interests and linked through common dialect and educational background. It was also strengthened by marriage among the prominent families. Some rivalry, nevertheless, appeared to have existed between the Koe Guan and the Great Eastern–OCBC groups.

The Great Eastern–OCBC group 169 Whereas the Koe Guan consisted largely of new immigrants, the Straits Chinese were the older community. However, it was a younger generation of Straits Chinese from within this community which emerged at the end of the nineteenth century who played a key part in successfully leading the community into the modern sectors of banking and insurance. The Straits Chinese consolidated themselves within the Hokkien dialect group, connected the Hokkiens with other dialect communities, and linked themselves with the colonial state and Western capital. These new Chinese entrepreneurs were largely Western-educated. They sought social reforms within their own society even as they showed concern with what was happening in China. They admired Western science and technology. The Straits Chinese were accepted by the colonial state and appointed to represent the Chinese in consultative bodies. Through such bodies, they came into contact with British officials and merchants. S.Q. Wong, associated with the Straits Chinese, was also close to the Johor aristocracy, being a member of the state council. The Straits Chinese, more than any other Chinese group, were able to establish early links with British merchants. They connected to the increasingly dominant agency houses and they bought shares in emerging British companies. These connections with colonial power thus provided new opportunities for ‘new’ people from an ‘old’ elite. Finally, the Straits Chinese possessed a longer-term and more local business outlook as compared to the Koe Guan group. This may be explained by the political orientation they held, which was distinguishable from some of their contemporaries who came as recent immigrants. Some merchants from the latter group regarded themselves as transient. But men such as Tan Chay Yan and Tan Cheng Lock were from families who had settled for generations in this region. They were among the first therefore to invest in rubber plantations, which required a longer timeframe for profitable returns. Likewise, they were prepared to have their assets tied up as they diversified into insurance companies and banks. Not surprisingly, it was men from this group such as Tan Cheng Lock and Tan Chin Tuan, the dominant figures in post-war OCBC, who were beginning to articulate their vision of a political role for the Chinese in an independent Malaya. While in India during World War II, the two of them set up the Overseas Chinese Association. This became the precursor of the Malaysian Chinese Association (Chinese Leader, 1990; Lee Su Yin, 1995). The MCA became a member of the ruling coalition of Malaysia and for most of its early years was seen as representing Chinese business groups.

Notes 1 ‘Statement of accounts for year ending 1892, Straits Fire Insurance’, Post Magazine and Insurance Monitor, 54 (36), 9 September 1893. 2 ‘Report of Sixth Ordinary General Meeting of the Singapore Insurance Company, Ltd, April, 1890, Singapore.’ 3 Memorandum and Articles of Association of the Eastern United Assurance Corporation Limited, 1913. 4 Walter Makepeace (et al.) (1991, vol. 1: 155, 200, 404; vol 2: 206, 226, 575); Report submitted to the 6th Ordinary General Meeting of the Great Eastern Life Assurance Company, Ltd, 31 March 1913, Singapore.

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5 Report of Campbell Davidson, October 1904, Guardian Assurance, Guildhall Library, London, Ms.16, 209/22. 6 Marine Department, Loss report book giving names of vessels, details of insurance effected (interest and sum incurred, re-insurance if any) circumstances of loss, and details of final settlements of claim, 1881–1961, Commercial Union Assurance, Guildhall Library, London, Ms 23,710, 9 volumes; E. Mensah (1979: 62–70). 7 Report submitted to the 8th Annual General Meeting of the Eastern United Assurance Corporation, Ltd, 27 October, 1921, Singapore.

10 Local merchant shipping companies in Malaysia Expansion and diversification Loh Wei Leng

This chapter seeks to examine the role of merchant shipping companies as producer services enterprises meeting prevailing market demand and moving into new business areas as conditions change. It compares the pre- and post-independence experiences, to ascertain the similarities and differences in the processes of transformation of the companies in particular, and of the Malaysian economy in general. Shipping is a fine example of a category of more ‘traditional’ producer services (i.e. transport) which, unlike the more glamorous new economy activities, do not provide the avenue to glittering success and big money that is often associated with the new opportunities in the economy due to globalization. Nonetheless, insofar as countries continue to trade and move goods across national borders, transport and a subset of it, shipping, also continue to be in demand. And, in spite of it being usually described as supplementing production in the carriage of products to their foreign markets, it can be argued that shipping is integral to production. It is the shipping component which ensures that the fruits of production reach their buyers. Notwithstanding the fact that shipping as a transport service is both a consumer and producer service, this chapter focuses on the transportation of goods and not of passengers. As the Malaysian economy in both pre- and post-independence times has been, and still is, very oriented to trade, producer services continue to remain important. Hence the question to be addressed is to what extent this pivotal role of producer services (such as shipping) either provided established business groups with monopolistic sources of power or, instead, benefited relatively unconnected newcomers who surfed the waves of changing economic and political power relations. Initially, the focus is on selected local merchant shipping companies in colonial Malaya to establish their modus operandi and their reaction to given and changing conditions in order to enable a comparison with the later, post-colonial period. The business experience of a major shipping firm in Penang illustrates one form of business strategy, i.e. the strategic alliance which contributed, in part, to their dominance of local shipping in the late nineteenth century. The Melaka shipping companies demonstrate yet another instance of strategic alliances which, in turn, accounted for their control of regional shipping from the early twentieth century. Another dimension (i.e. the state/business relationship) will be explored, for this was found to be an important factor which contributed to the success of private

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enterprise. The impact of the role that the state chose for itself can be substantial, as is evident in both the colonial era as well as in the post-independence period. Chinese shipping companies flourished in the laissez-faire environment provided by the colonial state. After decolonization, protectionism of national shipping lines (which were non-Chinese) resulted in the loss of market shares for existing companies, both within and outside the country. The state’s support of the newly established national shipping lines, on the other hand, facilitated the rise of Malay business enterprise in shipping. The next section examines the developments of the 1950s and the 1960s, the post-World War II environment when a different scenario arose. This was the period when Malaysia, along with other former European colonies, acquired its independence, thereafter proceeding to adopt nationalist agendas. In the final section, the transformation of the private shipping firms, and of the national lines, is traced in the context of the accelerated globalization of the world economy of the 1970s, 1980s, and 1990s.

Local merchant shipping companies in colonial Malaya British entry into present-day Peninsula Malaysia began with a foothold in Penang in 1786, thereafter the acquisition of Singapore in 1819 and, in 1826, the establishment of the Straits Settlements comprising Penang, Singapore, and Melaka, the latter ceded to the British by the Dutch in 1824. Trade centred in the ports was the main market-oriented activity with small forays into the hinterland of the ports in various commercial agricultural ventures. Later, with discoveries of significant amounts of tin, interest in the peninsula increased so that in 1874 a ‘forward movement’ saw the beginning of British Residential Rule in the Federated Malay States, eventually expanding political control to the remaining states by 1914. Asian traders in Southeast Asia are hardly a recent phenomenon, with evidence of commercial activity stretching back to pre-historic times, through to the wellknown maritime kingdoms of the classical era to their successors, both local and European, in the Early Modern period. In other words, Asian mercantile communities have long been components of the Southeast Asian scene, and alongside them, European commercial enterprises from the fifteenth century, way before the British colonial rule (Reid, 1992: 481, 493). However, the population figures of the pre-colonial port cities, as well as their trade volumes at their peak, do not compare with those of the colonial era. The imperial age was very much an integral part of the phenomenal growth of the world economy in the nineteenth century, consequent to the industrial revolution in Europe. British Malaya shared in this global economic transformation, responding to the stimulus of the requirements of industrial Europe with the rapid growth of primary commodity production, paralleled by the expansion of ancillary services, among them shipping, banking, and insurance. The advent of steamships replacing sailing ships from the 1840s and 1850s greatly assisted in the development of global commerce, as previously far-off

Local merchant shipping companies in Malaysia 173 markets became more accessible (Hyde, 1973: 21). Freda Harcourt, tracing the ‘seventy years that the P&O was the world’s most famous shipping company’ (Harcourt, 1994: 1), recorded how steam quickened trade, very clear from the example of Indian opium, deemed ‘the world’s most valuable article of trade’ (Harcourt, 1994: 1) at the time. Opium exports escalated from 29,594 chests in 1844–5 to 68,004 chests in 1857–8 (Harcourt, 1994: 12), an increase of 129 per cent in just 12 years. In addition, Harcourt found that the ‘safety, speed and reliability of P&O’s steamships reduced insurance costs and interest on loans … [so that] under steam, seaborne trade moved into a much higher gear’ (Harcourt, 1994: 13). The inauguration of long-haul routes became more profitable for the British, dubbed ‘The First Industrial Nation’, especially for those with an eye to the China trade or other hitherto distant destinations, such as those in Australia and New Zealand (Hyde, 1964: 27–8), so that the last quarter of the nineteenth century has been viewed as a golden age for British trade and shipping where ‘the carriage of the world’s sea-borne trade was developed under British commercial leadership’ (Jamieson, 1995: 135). In the context of the Southeast Asian region, it would not come as a surprise to find British shipping companies among the major international lines, the other players being the Dutch, particularly in the Netherlands East Indies, the French in Indochina, and also the Germans who were given substantial governmental support in the heyday of the imperial race and scramble for power (Tregonning, 1967: 11). These, then, were the ‘giants’, the internationals, that Asian shipping had to contend with during the colonial era (see Table 10.1). However, as the preferred strategy of international ocean lines, in particular British lines, appeared to be more oriented to worldwide services, less interested in vying to transport the commerce of the archipelagic region of Southeast Asia, this provided space for the growth of local shipping. This is not to say that the international lines were completely disinterested in regional shipping, but their strategies in this segment of the transport market involved the use of Asian shipping, especially ‘locally domiciled Chinese’ shipping companies, increasingly active in the region from the seventeenth century (Reid, 1992: 494, 501; Hyde, 1973: xii). Taking the cue from Jennifer Cushman’s study of the Khaw family business, alternatively termed a ‘tin-mining dynasty’, and an entity with hints of a corporate nature; halfway ‘between narrow, lineage-based enterprise and the modern corporation’ (Cushman, 1991: viii), what might be deemed a proto-corporation, she identifies the following elements as accounting for the success of the Khaw business, namely, ethnicity (in the form of ‘access to Chinese networks’), flexible response to opportunity, the mutually rewarding relationship between state and business, and the security of ‘British legal guarantees’ (Cushman, 1991: xxvi-viii). For the purposes of this study, I am recasting Cushman’s success factors into the following, to establish what appears to have contributed to the early development of local merchant shipping in provincial ports like Penang, and later to ascertain whether similar factors come into play for local merchant shipping in Melaka and Singapore.

Sources: Singapore and Straits Directory (1882 and 1890). Note: Names of companies are as they appear in primary sources.

Nederland Lloyd (Dutch) Rotterdam Lloyd (Dutch)

North German Lloyd (German)

Bordeaux, Rio De Janeiro, Singapore, Saigon, Batavia Bremen, Antwerp, Southampton, Genoa, Singapore, Deli Behn Meyer Brindisi, Port Said, Suez, Aden, Colombo, Singapore, Hong Kong, Shanghai, Yokohama, Nagasaki, New York , South America Koninklijke Paketvaart n.a. Maatschappij (KPM) (1890) feeder to the Nederland and Rotterdam Lloyd

Messageries Maritime (French)

(Through SSC: Penang, Deli, Padang, Bangkok, Singapore) Djakarta, Ternate Singapore, Saigon, Batavia

Liverpool, Singapore, Hankow, Foochow, Shanghai, Japan, Manila

Ocean Steamship Co. (British) (also known as Blue Funnel Line)

Mansfield, Bogaardt and Co. Own office

Own office

London, Suez, Singapore

n.a.

Behn Meyer

n.a.

Gilfillan, Wood and Co. Mansfield and Co.

Agent in Singapore Agent in Penang

Peninsular and Oriental (British)

Regional (Southeast Asia) routes

International routes

Company

Table 10.1 Selected merchant shipping companies of the nineteenth century

Local merchant shipping companies in Malaysia 175 They include: 1 2

3 4

business acumen, the ability to seize the opportunity to build close relationships with the state as well as with other entrepreneurs; the requirements of the state in need of economic managers and agents in remote regions of the kingdom (using the device of revenue farming to police foreign communities and collect revenue); the British incursion, bringing with them law and order; and the market demand of the global economy for various primary products, in this case, tin.

The ethnicity feature, the fifth ingredient for success, was probably important in the case of the Penang shipping company and, although no longer of such import in the second example, nonetheless cannot be discounted. The story of the Eastern Shipping Company (ESC) has to be told in the context of the Khaw ‘group’ and its beginnings in trade and primary commodity production, thereafter the accretion of other complementary businesses such as revenue farming, shipping, insurance, and smelting. The Khaw family enterprise was founded by immigrant Khaw Soo Cheang who had come to Penang, in about 1822, where he ‘worked as a labourer’ and then ‘engaged in various kinds of business’, before moving on to Ranong in South Siam where he settled and proceeded to build up his business empire (Cushman, 1991: 10–11). ‘From produce merchant to tax farmer, from prosperous trader to minor nobleman, Khaw Soo Cheang’s rise to acceptance by the court followed a path well trodden by other Chinese immigrants of the nineteenth century’ (Cushman, 1991: 11; see also Chapter 9 by Lee Kam Hing in this volume). The Koe Guan Steamship Company was probably founded in the 1870s at the same time as the Koe Guan & Co. of Penang. As Sim Bee & Co. (named after his son, Khaw Sim Bee) was also known to have owned vessels, it is probably more appropriate to view the family’s shipping business in a holistic sense and refer to the ‘Khaw fleet’, following Cushman (1991: 59–60). Although as many as 13 vessels have been cited as being part of the Khaw fleet from the 1890s, it was not till 1902 that Koe Guan became the largest shipping firm in Penang with 14 steamers (Cushman, 1991: 66). In the final years of the nineteenth century, faced with rising competition from British companies, the Khaw group’s response was to establish new companies in partnership with both Chinese and European businessmen – Tongkah Harbour Tin Dredging, Eastern Shipping, Eastern Smelting, and Khean Guan Insurance (Cushman, 1991: 63–4). In the 15 years of its existence (1907–22), ESC grew substantially, from six vessels in 1907 (the Khaw fleet having more than six) to 40 in 1922, to provide regular coastal services in the northern region of the peninsula (Tregonning, 1967: 56–7), with routes to Burma, Siam, Sumatra, and Singapore, even venturing as far as South China, as the major carrier of coolie labour to Penang (Cushman, 1991: 66) (see Table 10.2). However, political and economic conditions began to change. As capital-intensive mining by Western firms increased, there was a reduced dependence on Chinese labour for tin-mining. There was also the rise of Western business and

International routes Penang, Tongkah, Mergui, Tavoy and Moulmein, Copah and Rangoon Labuan, Sandakan, Menado, Ternate and Gorontolo; Singapore, Bali Makasaar; Singapore, Klang; Teluk Anson; Singapore, Port Dickson Penang, Deli; Penang, Tongkah: Penang, Rangoon Penang, Perak; Penang, Klang; Penang, Malacca; Penang, Singapore Penang, Larut; Penang, Quedah Penang, Langat; Penang, Perak Penang, Rangoon; Penang, Achean Penang, Tongkah, Kopah, Posom, Tharnoon, Ghirbi, Ranong, Mergui, Tavoy and Mulmien Penang, Teluk Anson and Port Swettenham (Klang) Penang, Belawan (Sumatra)

Regional (Southeast Asia) routes

Sources: Singapore and Straits Directory (1882, 1890); Tregonning (1967).

Kang Soon Khoo Oon Keong Leng Cheak and Co. Eastern Shipping Co.

Burmah, Penang, Singapore, Thailand and Southern China

Penang–China

Chong Moh and Co.

Ban Joo Moh and Co.

Singapore, Hongkong, Amoy and Swatow

Wee Bin and Co.

Koe Guan Shipping Co. (Feeder to Wee Bin)

Company

Table 10.2 Selected shipping companies active in the northern region of Malaya (1890–1922)

—— —— —— ——

——

——

Own office

Own office Own office Own office Own office Own office

Own office

Koe Guan Shipping Co.

Agent in Singapore Agent in Penang

n.a. n.a. n.a. 1907

n.a

n.a.

1856

1870s

Year of establishment

Local merchant shipping companies in Malaysia 177 administration which resulted in the end of revenue farming, an important source of capital accumulation for both state and business. Yet a third crucial development, the successful introduction of an alternative revenue source, the rubber industry, with Western firms rushing in (unlike their reluctance in the early days of tin mining), meant that Chinese business was no longer deemed a valuable partner in the economic development of British Malaya. All of this contributed to the decline of the Khaw family enterprise which in turn determined the demise of ESC. When the ESC was unwilling to accept requisition of nine ships for the war effort and entered into litigation, earning disfavour with the British, it was another nail in its coffin. With the deterioration of the fleet due to poor management and probably lack of capital for the crucial technical upgrading, so necessary in shipping, the Khaw family recognized that the ESC was no longer competitive and sold it to its major rival in British Malaya, the Straits Steamship Company (SSC). As the factors which operated in the case of ESC also came into play for the SSC, the SSC’s edge over ESC in later years had its roots in the close collaboration between Western and Chinese business which worked in its favour when the tide turned in the twentieth century with the growing strength of Western enterprise. The nineteenth-century liberal economic policy of the British was still in place, hence the state continued to rely on private enterprise to fuel the growth process with minimal state intervention in the economy. The difference in the twentieth century is the replacement of the commanding role of Chinese firms by European companies, mainly British firms, coming to the forefront. Besides their links to overseas markets, their better access to capital, both from Europe and from the banks in Malaya, meant the use of superior technology, enabling them to dominate the key economic sectors. However, there was still business to be conducted with the non-European population and a continuing role for Chinese business. The SSC supplied that link in shipping. The SSC’s role as a feeder service for the British Blue Funnel Line provided both with assured cargoes, assisting both lines to consolidate their control over the seaborne trade of the region. SSC’s lineage goes further back than that of ESC’s parent company, Koe Guan. One of the three founder Chinese firms (which came together with a Dutchman, T.C. Bogaardt of the Agency House, Mansfield & Company, to start the SSC in 1890), Tan Hay Kwan had established a shipping service between Melaka and Macassar in the late eighteenth century, adding on Penang when the British port was opened (Tregonning, 1967: 7). Tan Kim Seng had migrated to Singapore from Melaka soon after its foundation and began an import-export business as Kim Seng & Company, trading with other European firms such as Boustead and Company, and Borneo Company (Tregonning, 1967: 8–9). The third Melaka Chinese entrepreneur was Lim Cheng Yan, who had also moved to Singapore to establish his firm Chin Joo, which had dealings with Western firms (Tregonning, 1967: 9–10). Bogaardt had vastly expanded Mansfield’s agency with the Blue Funnel Line, acquired in 1868, by persuading ship-owning brothers Alfred and Philip Holt to participate in three regional routes: Penang–Sumatra, Singapore–Sandakan, Bangkok–Singapore (Tregonning, 1967: 13–15). This joint Western and local enterprise was able to tap the strengths of both communities which ‘preferred the convenience of working,

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if possible, through those who spoke the same language’ which, in Tregonning’s view, may have been the basis for its success (Tregonning, 1967: 6). Two other firms, Wee Bin & Company, with the largest fleet in Singapore in the 1880s, and Ho Hong Steamship Company which acquired Wee Bin in 1911, also merit a mention as they were among the bigger purchases of SSC. SSC’s other acquisitions ranged from Sabah Steamship Company in 1926, to much smaller companies, Soon Keck, Hua Khiow, Malayan Water Transport, Kelantan Lighterage Syndicate, as well as majority shares in Sarawak Steamship Company in 1931 and Kheng Seng Steamship Company in 1934 (Fraser’s Facts and Figures, 1949: 58). After the SSC’s takeover of ESC in 1922, it ruled the coastal waters of Peninsula Malaysia, accounting for 55 of the 81 steamers based in Singapore, with services to Siam, Burma, Borneo, and Sumatra (Tregonning, 1967: 140) (see Table 10.3). This almost complete domination of local shipping was soon to change with the outbreak of World War II, when the SSC lost as many as 38 of its ships in the Pacific War (Tregonning, 1967: 228).

The emergence of national shipping lines Prevailing thinking among the newly independent nations of the 1950s and 1960s was quite naturally inclined towards an affirmation of that status so recently acquired. Shipping was not exempt from that sentiment, with an orientation towards the formation of national lines ‘as an outward symbol of their new nationhood’ (Jamieson, 1995: 136–7). And there were other more pressing reasons to decrease dependence on foreign shipping, so as not be subjected to their oligopolistic freight charges which would save on the use of scarce foreign exchange (Jamieson, 1995: 136). Malaysia was by no means the only ‘New Nation’ to take that route. As early as the late 1940s, Israel, India, and Pakistan showed the way, followed by Ghana and Nigeria in the 1950s. Nearer home, in the first half of the 1960s, Burma, the Philippines, Indonesia, and Thailand preceded Malaysia, which followed suit only in 1968 with the establishment of the Malaysian International Shipping Corporation (MISC). MISC was placed directly under the Prime Minister’s Department rather than under the Transport Ministry, a reflection of the importance accorded to it. Under the Third Malaysia Plan (1976–80), MISC’s founding and the legislative changes that followed were aimed at making Malaysia a maritime nation. The various measures used to promote the newly formed national lines were basically protectionist. Like the other ASEAN countries, Malaysia adopted a closed register to prevent foreign-owned companies from infringing on local trade (Brooks, 1985: 7). It also imposed cabotage, limiting intra-national shipping to local firms, again to ensure that local shippers would use local shipping companies. The MISC unequivocally represented national interests; thus a wide range of legislative and governmental incentives were passed to assist the corporation to become Malaysia’s number one shipping company. Besides the cabotage and closed register policies, cargo reservation and provision of labour of nationals were imposed and tax benefits provided (Brooks, 1985: 9–11). The effect of this policy of privileging MISC is reflected in the number of Malaysian shipowners dropping drastically in 1970 (The Straits Times Directory of Malaysia).

Southern China, Singapore, Rangoon

Ho Hong Steamship Co. (acquired Wee Bin in 1911; it became a subsidiary of SSC in 1932) * Siam Navigation Co. (subsidiary of SSC in 1912, initially established by East Asiatic Co. and Siamese Government)*

Sources: Hyde (1957); Singapore and Straits Directory (1882, 1890); Tregonning (1967). * Companies with headquarters in Singapore.

Heap Eng Moh Steamship Co. (incorporated into KPM in 1932)* Koninklijke Pakketvaart Maatschappij (KPM)

Singapore, Southern China, Batavia

SSC was the feeder for Holt’s Blue Funnel (Ocean Steamship Co.)

Straits Steamship Co. *

Sabah Steamship Co. (subsidiary of SSC in 1926, first formed in 1894 by a former employee of Alfred Holt) * Sarawak Steamship Co. (subsidiary of SSC in 1931)*

International routes

Company

Year of establishment

Singapore, Kuching, Rajang; Singapore, Rajang, Kuching, Bintulu, Miri, Brunei, Labuan, Pending, Rajang Batavia, Bali, Spice Islands, Kelantan (east coast of Malaya) Penang, Singapore, Batavia, Spice Islands, Palembang

1888

1912

1875

Singapore, Bangkok; Singapore, Bangkok (via Pontian, 1905 Kretay, Bang-Nara, Panarai, Singora, Lacon, K.Samui, Bandon, Langsuen, M. Chum Pon); Bangkok, Hatien (via Chantaboen, Krat, Ream, Kep) Labuan, Tawau (via Jesselton, Kudat, Sandakan, 1894 Semporna); Sandakan, Zamboanga (via P. Jolo)

1890 Singapore, Miri; Singapore, Pontianak; Singapore, Bangkok; Singapore, Port Swettenham (via Batu Pahat, Muar, Malacca, Port Dickson); Port Swettenham, Penang (via Bagan Datoh, Lumut, Port Weld); Penang, Tongkah (servicing Kedah, Perlis and Southern Thailand); Tongkah, Mergui (Thailand–Burma); Mergui, Moulmein (Burma); Penang, Pangkalan Brandan (Sumatra); Penang, Langat (Sumatra); Penang, Belawan (Sumatra); Port Weld, Batu Bahra (Sumatra); Port Weld, Tanjung Balai (Sumatra); Port Weld, S. Berombang (Sumatra) Singapore, Riau Archipelago; Singapore, Southern 1904 Sumatra; Singapore, South Malaya

Regional (Southeast Asia) routes

Table 10.3 Selected shipping companies active in Singapore and Southeast Asia (1880–1939)

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From the colonial economy based on two main primary commodities, rubber and tin, the Malaysian economy has diversified tremendously in the last 30 years. The discovery of petroleum in the east coast of the Peninsula and in East Malaysia has greatly expanded the role of MISC. MISC’s fleet expansion from 1970 to 1983 is noteworthy. Its growth is astounding, expanding from 11,094 tonnes to 1,057,447 tonnes within 13 years (see Table 10.4). A second national line was established in 1982 to facilitate the growing export economy. The Perbadanan Nasional Shipping Line Bhd. (PNSL) is exclusively dedicated to national interests (Brooks, 1985: 52). While MISC enjoys the exemption of being a ‘state-controlled carrier’ (with the emphasis on ‘controlled’, although having autonomous decision-making powers), PNSL, which is wholly owned by the Malaysian government, does not enjoy this status and is deemed state-controlled by countries like the US (Brooks, 1985: 51). As a consequence, PNSL is ‘subject to strict rate-review standards to ensure that they do not unjustly take advantage of their government-supported position in the market place’ (http://www.fmc.gov/About the Commission.htm). PNSL’s activities have ‘been in the bulk sector and supported by charters, joint ventures, and shikumisen-style financing (where the owner provides financing for the vessel, given as a long-term charter to a shipping firm such as PSNL)’ (Brooks, 1985: 51). The only ASEAN nation which did not adopt protectionist policies is Singapore. Dependent on merchant shipping for its survival, Singapore has reconstructed its port into a ‘high-tech’ entrepôt capable of serving the container and tanker trade. It practises an open registry to allow others to adopt it as a flag of convenience. Singapore established the Neptune Orient Line with the express purpose of competing internationally (Brooks, 1985: 2–3). The island state realized that its destiny was bound up with British international trade policy and, more specifically, its conference policy (Brooks, 1985: 2). Singapore thus proceeded to break that link by establishing an open registry, providing tax benefits to foreign companies, giving financial assistance to shipowners (not confined to nationals) to develop Singapore’s shipyards (Brooks, 1985: 3) and, most importantly, the Marine Department began Table 10.4 Fleet development in Malaysia: the Malaysian International Shipping Corporation Bhd. (selected years) Year

No. of ships (total)

Ship type (added to the fleet for the year)

1970 1973 1975

1 (1) 4 (14) 5 (19)

1977

3 (30)

1979 1981

4 (34) 7 (41)

1983

1 (48)

General cargo 11,094 Bulk and tanker (coastal) 120,343 Chemical tanker and 60,685 general cargo (coastal) Bulk (heavy cargo) and 37,057 general cargo (coastal) Container 94,796 Combi (bulk and container), 323,037 LNG, tanker (clean) Oil tanker 44,552

Source: Adapted from Brooks (1985: 49–50).

Gross Registered Tonnage (GRT )

Fleet size (yearly GRT cumulative total) 11,094 261,089 321,774 463, 903 556,722 879,759 1,057,447

Local merchant shipping companies in Malaysia 181 training Singaporeans as professional mariners for its expanding ‘fleet’ due to its open registry (Brooks, 1985: 4). What did all this mean to the international shipping companies which had ruled the seas in the pre-World War II period? In the first place, they had to contend with a worldwide shipping depression from 1958 which eroded their previous hegemony. British shipowners, in particular, attributed their decline to the new nationalist policies (Jamieson, 1995: 135). Concomitantly, new entrants from non-traditional maritime nations had emerged to challenge their pre-eminence. Containerization and the end of the conference system in the 1970s and 1980s were to revolutionize the global shipping scene.

Transformation of the shipping industry in the age of globalization Initially, to cope with the stiffer competition due to their shrinking shares of a shrinking market, international lines, especially British lines, had to resort to new strategies to meet the challenge of nationalization (Brooks, 1985: 98–106). Many colonial lines had to employ flags of convenience, adopting flags from Panama, Liberia and Singapore to avoid the high labour costs from the use of national crews (Brooks, 1985: 99). The West Germans have been reported as having shifted as much as 12 per cent of their tonnage to ‘flags of convenience’ (Brooks 1985: 99). In Japan, mergers and acquisitions have resulted in six big shipping corporations. Japan and Germany were the two most aggressive nations in the shipbuilding industry during the post-independence period (Jamieson, 1995: 141). But the most tumultuous development was containerization (Brooks, 1985: 104). The 1970s must have changed how business was done, since containerization not only meant the decline of bulk shipping, but also signalled the arrival of postindependence nation-states becoming active in shipping. Israel’s Zim Line, Taiwan’s Evergreen, and Singapore’s Neptune Orient Line began to seriously challenge the dominance of the older companies. Taiwan and Korea eventually emerged as the biggest producers of ships and their more modern ports have been rendered more suitable to the container and tanker trade. Containerization is a more economical means of shipping freight. While traditionally freight was loaded either in bulk or crated and boxed, containers allows the shippers to secure their merchandise at the factories before shipping it overseas (Sturmey, 1975: 124–5). This means greater speed and lower handling charges. Sturmey informs us that a ‘container port needs to be able to rethink the whole problem of labour organizations, port charges and all other aspects of port operations’ (Sturmey, 1975: 126). Indeed, newer shipping nations like Taiwan, Korea, Singapore, and also the defeated and war-torn nations of Germany and Japan, were in a better position to embrace this change. The second aspect that defines the 1970s and early 80s is the failure of the conference system. The conference system has its roots in colonial India (the Bombay–Calcutta Conference of 1879) and China (first China Conference also

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in 1879) and worked well because the colonial system afforded ‘empire lines’ more clout in negotiation over territory dominated by the motherland. Thus, British lines were able to establish a virtual monopoly over empire trade while France enjoyed similar control over French territory. A conference is basically an organization of shipping lines which agrees that there should be only one freight rate (Sturmey, 1975: 37). Although it does not really exist in the legal sense, nor does it have the power to enforce the rates that it has fixed, the conference system has built-in mechanisms which guarantee its failure. This is due to the fact that freight rates agreed upon are aimed not at maximizing profit but at maximizing sales of space on ships, giving rise to waste and low margins of profit (Sturmey, 1975: 37). Attacked by a change in political boundaries and faced with the rise of national carriers, the conference system began to disintegrate into mere formality, marking the relative decline of the former principal European shipping lines. Turning to the local merchant shipping industry, certainly not immune from the developments in the field of global shipping, what became of them? Their links to British shipping, the new competition from the recently established national carriers and the policies surrounding the official support for MISC and, later, PNSL meant that they had to reassess their situation. In addition, improvement in road and rail transport rendered coastal trade unremunerative. Their reduced role, measured in terms of the increasing export tonnage captured by MISC (77 per cent by 1980) and MISC’s ownership of the Malaysian fleet (87 per cent by 1980), gave them few options: to merge or sell-out, to move into related and alternative activities or to completely diversify from their core business. Initial research reveals that some have become agents of international lines, retaining their comparative advantage of specialist knowledge and familiarity with a field of enterprise with which they have long been associated. Others have gone into new but related lines, such as the travel business, namely, Sime Darby Shipping & Travel, Mansfield Travel. Some established merchant firms chose to merge their shipping agencies, for example, Guthries–Boustead Shipping Agencies. And SSC, the leading pre-war firm, reacting to altered conditions, formed Sharikat Perkapalan Kris Tanah Melayu Ltd., incorporated in 1961 in Penang, as a wholly-owned subsidiary, but reduced its services in Malaysia, while beginning services to Indonesia which grew to over 21 per cent of total earnings in 1962, nearly 27 per cent in 1961 (Fraser’s Facts and Figures, 1965: 139). As to the pervasiveness in the selection of the various options, further research is being conducted.

Conclusion Changes in the political landscape brought about dramatic consequences for the various key players in shipping. In the pre-independence era, the opportunities made available by the British presence provided openings to ESC and later SSC. Subsequently, the switch from the colonial order to the post-independence setting also spelt great changes. It dealt almost fatal blows to local as well as international shipping lines – witness the turnaround for SSC, the biggest and most

Local merchant shipping companies in Malaysia 183 powerful of the nine coastal lines operating out of Singapore in the 1930s (Tregonning, 1967: 138), vastly overshadowed by MISC by the late 1970s; the virtual disappearance of coastal shipping companies by the 1970s; and the eclipse of formerly prominent international lines by those from the non-traditional maritime nations. This initial look at the pre- and post-independence merchant shipping companies in Malaysia indicates that the incentive presented by opportunities and the imperative of survival have dictated the selection of business strategies, expansion and/or diversification. In more specific terms, with regard to the fallout from the accelerated pace of globalization, merchant shipping in Malaysia experienced the downside of the booming business in the producer services sector. In contrast to the national carrier, which reaped most of the opportunities from globalization due to state backing for the national line, it was to the detriment of the rest of the shipping industry, existing companies in the post-independence period had to change tack in order to continue in business. Some diversified, continuing in the transport sector, moving into related lines such as the travel business and logistics. Others chose the merger route – very much in line with a growing global trend, both within and outside national borders. Yet others became agents of foreign companies. This has to be understood in the context of the role of the state in the promotion of Malay business. There is a significant ethnic dimension in post-World War II Malaysia, particularly since the Second Malaysia Plan (1970–5). Consequent to the racial riots of 1969, in order to address racial imbalances in the economy, the New Economic Policy was promulgated. The previous ethnic economic divisions, with Malays concentrated in the agricultural sector and the non-Malays (Chinese and Indians) in the urban sector, a legacy from the colonial economy, could no longer be tolerated and was due for a programmed restructuring. Malay businesses began to be promoted; concomitantly, Chinese businesses did not receive state support. In these less favourable conditions, Chinese shipping companies had to look into alternative options (such as those just mentioned) if they intended to remain in business. State-favoured companies (MISC and PNSL in the shipping sector) served as proxies for Malay enterprises, at the fledging stage, entering new fields of endeavour. Finally, with regard to the two hypotheses which this book proposes to address, the Malaysian experience provides the following findings. With reference to the first, i.e. the ‘polarization’ or ‘elite continuity’ hypothesis, this is not applicable to the Malaysian example as ‘old’ elites increasingly have had to diversify, unable to hold their own against the favoured national shipping company. The second hypothesis, with its focus on an ‘open economy’ and ‘declining emphasis on political patronage’, fails to capture the dynamics of the shipping industry in Malaysia in the last quarter of the twentieth century. On the contrary, ‘new opportunities emerged for new people under state orchestration’ where the establishment of the national shipping line, MISC, enabled the rise of Malay business enterprise in shipping. The state facilitated the emergence of a new elite in a traditional producer service and the relative demise of existing ones. Thus, the rubric, ‘Engineering a New Middle

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Class’ is apt in describing the state’s role in post-independence Malaysia, with its political patronage a major contributing factor. Malaysian merchant shipping is a clear illustration of the state as facilitator, both in the colonial and post-independence eras; at the same time, there is also present a state that operates through patronage which it bestows on new (and not established) elites, a twist on the last central theme of this book which, with some modification, may make for a more superior explanatory model.

Part III

Producer services in transitional economies

11 New entrepreneurs in reform China Economic growth and social change in Taiyuan, Shanxi David S.G. Goodman The People’s Republic of China (PRC) is currently on the very borders of social and economic change as new technologies, economic integration with external markets, and politically motivated drives for openness combine to transform its political economy. However, within China, the impact of these changes is by no means uniform or homogeneous because of its size and varied social ecology. Indeed, much of northern and inland China is unlike those few areas in the south and east where producer services have begun to have a substantial impact. Shanxi Province in China’s northern interior has more in common with most of China than Beijing, Shanghai, Guangzhou, and even Fujian Province. In Shanxi, producer services only just began to emerge during the mid-1990s, and their development, like much of that generally to be found in China’s reform era, emphasized the links with the establishment. This chapter explores the emergence of producer services linked with the heavy industry sector of Taiyuan, the provincial capital of Shanxi Province. In particular, the question will be raised whether the new professions provide an avenue for social mobility to people unconnected to the party-state or, instead, benefit established party cadres. There are new opportunities, and even new economy opportunities. Where the former lead to new enterprises, the latter result in new professions, more properly the focus of this volume. The centrality of the party-state being a key characteristic, one may expect that both new entrepreneurs and new economic activities emerge from within the party-state or are absorbed by it.

The Taiyuan economy Taiyuan has been a centre of heavy industries since the 1920s, as well as a resourcerich area of China’s interior centred on coal. The city had a population at the end of 1998 that was 2.96 million out of a provincial total of 31.72 million people. At that time, its GDP per capita was 10,971 yuan, over twice the provincial average of 5,072 yuan (Shanxi wushi nian 1949–1999,1999: 700, 155).1 Shanxi’s role in China’s political economy is determined not only by its dominance of the coal, coke, aluminium and specialist steels industries, but also by the Chinese Communist Party’s (CCP) deep social roots in the province, that resulted from its mobilization there during the SinoJapanese War of 1937–45 (Breslin, 1989; Gillin, 1967; Goodman, 2000a).

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The dual traditions of producer industries and a well-established social and political elite make Taiyuan a particularly apposite focus for an investigation of the impact of global economic integration, especially on China’s interior which has been necessarily slower to embrace the agenda of ‘reform and openness’ adopted nationally by the Chinese Communist Party at the end of 1978. Nonetheless, in 1992, Shanxi adopted economic and social restructuring in earnest with dramatic effect: during 1995–8 Shanxi’s annual rate of GDP growth consistently outperformed the national average (Zhongguo tongji nianjian 1999, 1999: 57, 62). Moreover, these developments have been led by well-above average expansion of the private sector of the economy which on a provincial basis is second only to Zhejiang Province in its share of GDP (‘The Statistical Yearbook 1997’ in Provincial Perspective, 1998: 85–6). Indeed, within Shanxi itself there has been suspicion that the real figure for the size of the private sector is considerably higher, with many private entrepreneurs masquerading for political reasons as part of the local government economy (Jia Lijun, 1998: 2). A survey of entrepreneurs in Taiyuan reveals the complexities of the relationships between economic and social change as a state socialist system attempts to restructure.2 Taiyuan’s pre-reform local power elite with its foundations in both heavy industry and earlier communist traditions has certainly been a major source for the city’s ‘new rich’. At the same time, it has also been possible for previously less politically privileged entrepreneurs to be socially mobile, especially within the services sector. However, these are not two economically or socially distinct groups. Economic and social change has been driven by a series of strategic alliances – between capital and knowledge, between the local power elite and the previously politically excluded, between the private and the public, and between the manufacturing and producer services sectors. Shanxi’s reform strategy was to build away from the previously dominant state sector, with its concentration on extraction and the export of raw materials. The state sector, and particularly the coal industry, still continued to play a central role. However, the new approach focused on the local processing of raw materials – coal into electricity and coke, bauxite into aluminium, as well as the production of high tensile steels. Emphasis was now placed on the development of locally-based industry, particularly light industry, with the collective (or local government) and private sectors of the economy engaged in coal industry support activities and by-products, the new technology industries (especially biotechnology,) foodstuffs, and textiles (Touzi daokan, 1996: 9). Foreign investment has been low, and the province has (successfully) concentrated on attracting considerable domestic investment from, and trade with, those parts of China already well integrated into the global economy (notably Guangdong, Jiangsu, and Zhejiang,) particularly in the development of the collective and private sectors of the economy. Partly to this end it also adopted a major infrastructural development program building major roads and airports to connect Shanxi with the rest of the country, as well as the outside world (previously almost non-existent) and to ensure better internal communications (Goodman, 1999a).

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Enterprise and reform By 1998 there were estimated to be about 51,813 enterprises in Taiyuan, whose metropolitan area includes a sizeable rural hinterland. According to official statistics, there were 5,306 state sector enterprises; 7,270 collective sector enterprises; 16,287 private enterprises; 1,039 share-based companies; and 101 enterprises financed either in whole or in part by investors from Hong Kong, Taiwan, or elsewhere in the world outside China. In addition, there were 21,810 enterprises in the service sector not differentiated by the ownership system (Zhongguo tongji nianjian 1998, 1998: 419; Shanxi tongji nianjian 1998, 1998: 26, 211; Shanxi wushi nian 1949–1999, 1999: 465ff, 482ff). Taiyuan’s entrepreneurs in the late 1990s came from a bewildering array of different types of company whose official designation often effectively masked their status as either owners or managers. Not all managers were managers, particularly in the collective local government sector where some were owners; and ownership was usually more mixed than the official categorization of the economy into state, collective, private, and foreign-funded sectors implies. Ownership in the collective sector – seemingly a contradiction in terms – marks the impact of the reform era in the Chinese economy, as does the newly emerged emphasis on entrepreneurship. Indeed, ownership and management were probably less important signifiers of activity than entrepreneurship, especially as the latter was now required even of state sector enterprise managers. Formally, the state sector is the planned part of the economy; the collective sector is the unplanned part of the state economy, with enterprises owned by the employees in the company (mainly in urban areas) or by a locality (mainly in rural areas); and the private sector that of owner-operators. However, in practice with reform, these distinctions have become increasingly less meaningful as explanations of economic structures and activities. The biggest change has been that with the introduction of market practices and influences, it has become possible to identify the emergence of a public sector which has grown out of the collective sector often through co-operation with local government, between the state and private sectors. It includes a range of companies with a variety of ownership structures and management systems, as well as registration and method of incorporation, and significant differences in scope and scale of operation. These public sector enterprises all compete in the market sector of the economy and all involve an element of public as opposed to state sector ownership. They include companies owned by other, often state sector or collective enterprises; by social units (such as schools and trade unions); by units of local government; by townships and villages; and by individuals in co-operation with collectives, state sector enterprises, villages, townships, local governments, and social units. It includes urban and rural collectives, shared-based companies and equity-based enterprises; and may include investors from elsewhere in China as well as from Hong Kong, Taiwan, and beyond (Goodman, 1995; Nee, 1992: 237).

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Entrepreneurs and managers Within this more complex economic structure of state, public and private sectors, it is possible to identify seven broad categories of enterprise and entrepreneur, differentiated by organizational context, the major source or sources of investment, and by the scale of activity: state sector managers, public sector urban enterprise managers, public sector rural entrepreneurs, public sector private entrepreneurs, joint venture managers, private enterprise managers, and owner-operators.3 Table 11.1 provides information on the scale and size of the different kinds of enterprise (as indicated by the size of average fixed assets and net profits) which were identified in interviews with entrepreneurs in the state, public, and private sectors. Managers of state sector enterprises were the most easily identified category. Typically of very large scale, as Table 11.1 indicates, state sector enterprises often had a large management leadership team. Though in some senses they cannot be considered ‘new’ entrepreneurs since they owed their later position to pre-reform politics, they were all then required to exercise entrepreneurial skills, and present a useful control sample. State sector enterprises were and remain an essential part of the party-state, and its managers were similar in many ways to state officials. They were recruited on merit, through high educational achievement, largely from peasant backgrounds and often appointed to the company on graduation, working their way up to positions of leadership. State sector managers were more likely than other categories to be from other provinces, and neither they nor their parents were likely to have held a position in the party-state. The public sector’s urban enterprises included collectives and share-based companies established by state sector enterprises and social units, as well as urban collectives of more pre-reform types. In general, urban enterprise managers came from the same broad employment pool as managers in state sector enterprises and social units, with high levels of educational achievement and of social mobility. However, one of the more noticeable features of reform in Taiyuan during the 1990s was the way in which opportunities have been presented to those who, though well-educated before the Cultural Revolution, had previously been excluded from political or economic advance because of their parents’ social background which during the Mao-dominated era of China’s politics became an Table 11.1 Average fixed assets and profits after tax for different categories of enterprise by sector, million yuan per annum, Taiyuan 1997 Sector

Fixed assets

Net profits

State sector enterprises Public sector Urban enterprises Rural enterprises Private enterprises Foreign-funded joint ventures Private sector enterprises

1,583.91

22.29

Source: Interviews, Shanxi, 1996–1999.

119.23 26.54 42.31 52.23 6.77

32.27 4.10 7.52 3.22 0.317

New entrepreneurs in reform China 191 issue for discrimination (White, 1976). A significant number of such people, many of whom were technocrats, were recruited both to administrative positions in the party-state in Taiyuan, and to management positions in state sector enterprises and newly established urban enterprises with the changed political environment. The rural enterprises of the public sector included collectives and stock companies established by townships, villages, and districts in Taiyuan’s rural and suburban areas. Although originally fairly small-scale and village-based, often growing out of former agricultural machinery workshops, shops, and restaurants, many took advantage of the rural sector’s preferential economic regulation to develop sizeable industrial concerns, especially in mining and associated activities. The growth of rural enterprises was particularly spectacular in suburban areas where villages have been able to benefit from their rural status as well as access to markets and technical inputs. In Taiyuan for example, one former suburban village no longer farmed, having sold its land to the municipality and invested the returns in building one of the city’s biggest department stores which it operated. Rural entrepreneurs were most likely to be local residents, and frequently former local officials, who had mobilized the locality behind the particular idea that led to the development of the enterprise. Many had been the village head in name or in fact, and were members of the CCP, if not branch officials. The term private enterprise, as opposed to that of private sector enterprise, is reserved for those enterprises which either became designated as collective enterprises through co-operation with local government or which became share-based public companies, but where the original individual entrepreneur remained in the senior management position. The identification of public-sector private enterprises may seem like an oxymoron but is a consequence of the political determination of economic development that occurred during the 1990s. Private enterprise was initially sanctioned by the CCP during the 1980s as small-scale economic activities – such as retail and service provision – which were more efficiently provided in this way according to market needs. There was virtually no thought given to individual enterprise development and indeed when small-scale private entrepreneurs started to accumulate and wanted to reinvest in new areas, and especially wanted to become small-scale industrialists, they found themselves without access to bank loans, or the additional labour, machinery, and land that they required (Young, 1989). In consequence, private entrepreneurs wanting to expand or to develop into new areas usually co-operated with local government, villages, townships, or occasionally with state sector enterprises to form new companies. In contrast, as Table 11.1 indicates, private sector enterprises, still subject exclusively to the economic direction of their owner-operators, remained fairly small-scale. The owner-operators of the private sector were those more obviously regarded as private entrepreneurs under other circumstances. They owned and ran the entire economic infrastructure of a private sector enterprise; or ran businesses based on village, local government, state, or collective sector ownership of capital where the operation of the enterprise was then contracted out. In Taiyuan, the retail and other service sectors were dominated by owner-operators. Elsewhere in China, owner-operators were frequently characterized as young, poorly educated, and

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were previously economically and politically excluded (White, 1998: 127; Young, 1991). In Taiyuan this was certainly somewhat the case during the 1980s. However, during the 1990s, whilst many owner-operators remained young, private enterprise also began to attract considerable numbers of university graduates whose parents were more from the establishment – either as state officials or members of the CCP – than from the previous socio-economic periphery.

Producer services Clearly, part of the nascent public sector and its components – some owneroperators and private entrepreneurs as designated here – were involved in the developing knowledge economy in Shanxi. In addition, joint venture and private enterprise managers were also centrally involved in producer services. While there may be a case in a transitional economy like China for regarding all the new rich entrepreneurs to emerge with reform as a kind of middle class – the equivalent of middle class as bourgeoisie rather than middle class as servants of either the state or capital (Goodman, 1996: 225; 1998: 39; 1999b: 241; Robison and Goodman, 1996a: 1) – in comparative terms synchronicity is misleading. Despite an earlier period of modernization before the start of the reform era in the PRC, not all new entrepreneurs could be regarded as having been involved in new economy activities or even new professions of any kind. The managers of the larger private enterprises were very definitely in a new profession and one which drew heavily on knowledge economy activities. To some extent the emergence of this category of professional is a function of size. In the private sector there are some extremely large-scale enterprises, for example, restaurants and luxury hotels; whilst the public-sector private enterprises include a number which are the size of large-scale state sector enterprises. All require managers in order to operate. The Antai International Enterprise Group Company, led by Li Anmin, which is based in and dominates Jiexiu County to the south of Taiyuan, is one of those. Founded originally on coke production in the 1980s it has now expanded into a range of coal industry by-products, fashion, and textiles, and owns its own trains. It has also built its headquarters in Taiyuan: an enormous skyscraper which is the city’s second tallest building, after the People’s Bank of China. On the other hand, size is by no means a sufficient explanation for the emergence of these new managerial and professional classes. Even fairly middle-scale enterprises need skilled new technology professionals, trained publicists, and marketers, as well as specialist managers. For the most part, even in functional terms, these are the professions which only emerged with reform, the introduction of market principles, and integration with the wider world. Education is the key to specialization here. All the private enterprise managers were graduates of higher education, and most had higher degrees. While they were remarkably young in comparison to the other categories of entrepreneurs and managers being considered (most were unmarried for example, in a culture where marriage remained virtually compulsory), they had for the most part had a spell of employment in the party-state and tended to be members of the CCP themselves. Notably, the producer services activities in

New entrepreneurs in reform China 193 large as well as middle-scale enterprises are an integral part of the managers’ task of a production enterprise and, therefore, they do not generate an independent ‘new professional’ class, yet. It will be interesting to see whether large- and middle-scale enterprises will engage in outsourcing and will facilitate producer services to develop into independent businesses in the future. These social and demographic characteristics are with one exception shared by the category of joint venture managers, who were also almost totally engaged in producer services. The exception is age. Joint venture managers tended to be older, and often to have experienced the Cultural Revolution, as well as to have returned after those years to higher education. Technically, the designation of a foreign-funded joint venture could apply to any other kind of enterprise that brought in investment from outside the PRC, including Hong Kong. There were about a hundred of these in Taiyuan, with half sourced from Taiwan or through Hong Kong. Most were larger and developing versions of private or state sector enterprise, though there were also a few rural collectives and social unit owned companies that had transformed themselves into joint ventures. Joint venture managers in Taiyuan anecdotally were seen to be rather ostentatious. Certainly they came overwhelmingly from ‘good’ political backgrounds with parents who have worked at a high level in the party-state, had often been state officials themselves, had a high level of education, and were usually members of the CCP. One of the largest producer service operations in Taiyuan was Taiyuan Stone. Taiyuan Stone was originally established during the 1980s by the Beijing-based Stone Company, and like Stone it was initially a major supplier of business machinery, especially computers. However, during the 1990s, Taiyuan Stone became a cross between a merchant bank and a management consultant. They undertook research for a wide range of units within the party-state, especially on organizational issues, as well as for enterprises in the public and private sectors. A key feature of Taiyuan Stone was its strong networks of influence with different arms of the party-state. All its senior leaders were not simply CCP members, but often had careers within the party-state. Similar relationships characterized other nascent producer services in Taiyuan, especially those concerned with finance, insurance, real estate, and legal services. In the case of legal services there was an even clearer institutional as well as an associational relationship. All the legal firms established in Taiyuan during the 1990s were as much within the party-state as outside it, and were very closely supervised. In theory, lawyers could exist outside the party-state. In practice, all the operational law firms had lawyers who had major positions either in the legal system of the provincial people’s government, under the provincial CCP, or in a Faculty of Law at Shanxi University or one of the other colleges of higher education in Taiyuan.

Elite continuity As these comments suggest, the CCP remained central to the processes of social and economic change in Taiyuan during the 1990s. However, in keeping with changed national priorities, the CCP’s processes and techniques of mobilization to ensure

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centrality were inclusionary and accommodative rather than ideologically driven. The social role of the CCP in the formation of new enterprises was perhaps the most dramatic: state sector managers, like state officials, were recruited largely from the non-party peasantry, but the children of state officials and state sector managers moved on in disproportionate numbers to become entrepreneurs in the public and private sectors of the economy during the 1990s (Goodman, 2000b: 159). They almost certainly in most cases built on their parents’ associations within the party-state to the extent that those who were small-scale owner-operators often did not see an immediate need to become members of the CCP themselves. Table 11.2 summarizes information about the social and political relationships between entrepreneurs, their parents, and the party-state. There would appear to have been two predominant career paths for Taiyuan’s new entrepreneurs in the public and private sectors: they were either members of the party-state at local levels who had taken the lead in developing economic initiatives and enterprises; or they were individuals who, having become successful entrepreneurs, were then recruited to the CCP. The relatively high proportion of owner-operators outside the CCP, though still not large, reflects the process of incorporation. Owner-operators were generally younger entrepreneurs with small-scale operations who, as they became more successful, would become private entrepreneurs, at which stage if they were not already CCP members it would be more likely for them to be invited to join, particularly where they were children of CCP members themselves. The CCP clearly sought to incorporate most of the more successful owneroperators and private entrepreneurs into the activities of the party-state. Often this was through recruitment into the CCP, as Table 11.2 indicates, though this technique was not used exclusively. A number of high-profile, successful private entrepreneurs (most usually responsible for fairly large-scale enterprises) were quite explicitly not permitted to join the CCP, even though party branches had been established in their enterprises. Instead they were publicized as ‘model entrepreneurs’ and became delegates to the Provincial and National People’s Congresses which could certainly be regarded as another form of membership in the partystate.4

Table 11.2 Entrepreneurs and the party-state, percentage in each category of entrepreneur, Taiyuan 1996–99 Category of entrepreneur

Parent in party-state Entrepreneur worked elsewhere Member CCP

State sector manager Urban enterprise manager Rural entrepreneur Private entrepreneur Joint venture manager Private enterprise manager Owner-operator

17 20 45 51 43 52 47

Source: Interviews, Shanxi, 1996–1999.

35 23 59 61 76 76 22

100 78 82 68 80 87 41

New entrepreneurs in reform China 195 Two anecdotes of interviews in the survey are particularly illustrative of the processes involved in the development of new enterprises and the centrality of the party-state. Comrade A was introduced as both manager of a major economic enterprise in the collective sector, and the secretary of his locality’s CCP branch. The formal interview, in his office, went well and Comrade A was a mine of information about his company’s activities. He had revolutionized the economy of his home village by bringing in new technology and foreign investment. However, in the informality of lunch he presented another story. He had left his home village as a young man and with the start of reform had become a one-man transport company. The high-risk, high-return transport activities were in the coal industry and since, as he said, he had no family he took the risk, worked very hard, survived and prospered. When he had saved enough money he moved first into a small private restaurant, and then into running a textile sweatshop as well. At no time had he even thought of joining the CCP, nor had he been invited. One day he met a visitor from Taiwan in his restaurant who had an excellent idea for a factory, and Comrade A thought that his home village would be the obvious location. He approached the county authorities with the idea, and under certain conditions they agreed. The conditions included that the new company should become a collective sector enterprise with the county holding part of the equity; that Comrade A should become manager of the new enterprise, whilst also holding another part of the equity; and that Comrade A should become the secretary of his village branch of the CCP. Comrade B was introduced as an owner-operator, though his factory was fairly large-scale. Comrade B, too, had earned his wealth and success the hard way, and his factory was also based in his home locality. He had been a minor state official but had retired through ill-health in his thirties. He had established a small-scale factory with some friends in the mid-1980s and that had been relatively successful. They then proceeded to establish a new plant in the same industry on a greenfield site. This was not so successful and his friends sold out their interests to Comrade B at a very low price which he was able to meet with a bank loan. (At the time of the interview this seemed out of the ordinary since in general, owner-operators then, and even later, had difficulties in obtaining such financial support. The interviewer resolved to ask later about the loan, but in the event no question was necessary.) Comrade B restructured his factory, reorganized its production schedule and after a few years it became highly productive and profitable. As is always the way in these interviews Comrade B was asked if he was a member of the CCP. No, he said, he was a member of one of the other ‘democratic’ parties that exists alongside the CCP. Had he ever thought of joining the CCP, the interviewer asked. ‘No,’ replied Comrade B, ‘I don’t need to. My father was the CCP secretary of this area for twenty years.’

The party-state and knowledge-based industries One of the central concerns of this volume is the extent to which people who are outside the social or political elite may achieve advancement through their involvement

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in newly-emerging knowledge-based industries. In the case of Shanxi during the 1990s it would seem quite clear that the party-state was a very important gate-keeper that had tight control of access to the resources necessary to the development of knowledge-based industries. The organization of new economy activities, and the development of the local infrastructure – physical and educational – to support those activities was part of the provincial leadership’s strategic plan for Shanxi in and after 1992.5 The party-state took the lead in this area and though there was no evidence of its long-term desire to maintain a monopoly, the generally low level of provincial development, and the high costs for local people to enter the new economy, militated against alternatives. Those who came to staff Shanxi’s emerging producer service industries had almost always had a social or political base in the party-state; there were few evident cases of people with no direct connections to the party-state becoming involved. Both are relatively easily understood phenomena. From a social perspective, knowledge-based industries require a high level of education. Access to higher education may not have gone exclusively to the children of those who staffed the party-state, but it was clear that their children had a head start when it came to entering the educational system and particularly university and equivalent institutions (Goodman: 2000b: 167). Politically, the development of financial, insurance and legal services in Taiyuan had all grown more or less directly out of the activities of the party-state. Legal services emerged from the judicial system, several new financial institutions from the banking system. The city’s largest and most popular insurance company emerged from the provincial CCP committee’s judicial work department, and was even headquartered in its premises.

Notes 1 The currency of the People’s Republic of China is the yuan (dollar): approximately 8 yuan = 1 US$. 2 Interviews were conducted in Taiyuan during 1996–9 as part of a project to investigate the emergence of new political communities. This project is supported by the Australian Research Council and colleagues in Shanxi. In particular, Professor Tian Youru of the Modern Shanxi Research Institute, and Li Xueqian of Shanxi University provided help and assistance without which this project would not have taken place. Neither they nor indeed anyone else in Shanxi who has contributed to this project, including those interviewed, is in any way responsible for the interpretation or views expressed here. 3 197 interviews were conducted with 25 state sector enterprise managers; 29 public sector urban enterprise managers; 33 public sector rural entrepreneurs; 35 public sector private entrepreneurs; 10 managers of joint venture enterprises; 23 managers of private enterprises; and 42 owner-operators. 4 For example: Li Anmin, Antai International Enterprise Group Company, Jiexiu; Liang Wenhai, Shanxi Huanhai Group Company, Yuci; and Han Changan, Lubao Coking Group Company, Lucheng, all of whom have been national model entrepreneurs of various kinds. Li and Liang have been delegates to the Provincial People’s Congress, Han was elected to the National People’s Congress in 1998 (Liu Liping et al., 1989: 302; Shanxi Ribao, 22–9–96, p. 4). Additional information derived in discussions with Li Anmin, inter-

New entrepreneurs in reform China 197 viewed in Yi’an Township, Jiexiu City, 1 June 1996; Liang Wenhai, interviewed in Yuci, 29 October 1996; and Han Changan, interviewed in Dianshang, Lucheng, 14 October 1998. 5 Li Zhenxi (ed.) (1994), especially Chapter 4, ‘Shanxisheng gaixin jishu chanye fazhan yanjiu’ [Research on the development of the new economy in Shanxi], pp. 244 ff.

12 Business services in transitional economies The case of Russia Olga Gritsai

The rise of business services – this concept is preferred here to producer services1 – is an essential part of the post-industrial transition. Therefore, most of the theories regarding the role of business services in the economy, their impacts on social structures and spatial patterns are biased to the advanced Western economies. The question is how (and if) these theories can be applied to societies where post-industrial processes are at a much earlier stage, and which adjustments these theories require when applied to a historically and socially different context under the impact of different political factors. From this perspective, the experience of the transitional economies of Eastern Europe is an interesting case. In its most pronounced form the impact of socio-cultural and political factors on economic trends is represented by Russia, a country where Europe meets Asia in all sorts of ways. The development of capitalism in Russia has been interrupted for more than 70 years. Business services did not exist in Russia’s planned economy. Their quick growth in the 1990s, after the beginning of the market reforms, is one of the attributes of the post-socialist change. Nevertheless, even in Moscow its share (7–10 per cent of the total employment in 1993 and 11–14 per cent in 1998)2 is still much lower than in the advanced Western economies. Being one of the booming sectors, business services play a major role in shaping the Russian new middle classes and promoting social mobility in its different forms. This chapter examines the impact of business services development on social transformations in Russia, and on the forms of social mobility under the transition from a state-led to a liberal market economy. The study focuses on the different opportunities emerging for the big urban cores vis-à-vis the provinces in benefiting from the business services’ propulsive effects, and for the old and the new elite for upward mobility. It explores to what extent patterns of business services development in transitional economies can be explained by Western theories and in which ways these findings can be put to use in Asian economies.

Concentration and de-concentration of business services: capital cities versus the provinces A high concentration of business services in the major cities, especially in their central districts, is one of the key points of the existing theories of business services

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development. Linked with the location of corporate headquarters and requiring a high quality of urban environment, business services strongly contributed to the post-industrial transformation and radical restructuring of the urban cores in the 1970s and 1980s (Sassen, 1991, 1995). In the 1990s the trend changed. Many of the headquarters and business services companies moved from the central districts to the periphery of metropolitan areas, although this concerns mostly companies or units with routine functions and activities or with standardized types of services. This process may be interpreted as a reproduction of the concentration of the elite functions of the most important metropolitan areas, though at a new qualitative level. This re-concentration is followed by a general spatial diffusion of business services and other post-industrial activities. Sassen (1995) argues that the emerging new geography of the centre with a kind of decentralized re-concentration of economic activities in a number of clusters, linked via digital highways and intense economic transactions, undermines the traditional understanding of the centre associated with the downtown area or the central business district. Such a trajectory, from concentration to de-concentration and again re-concentration in a new form, seems to be universal for the spatial diffusion of any basic innovation, as in this case the diffusion of activities driving post-industrial transformations. If this is true, the less developed countries could also be expected to follow this trajectory with some time lag, adopting new developments in their non-Western cultural and political domains. At first sight, the spatial patterns of business services in Russia look similar to those of Western countries in the 1970–80s. Both business services and major centres of decision-making are strongly concentrated in Moscow, providing about 30–45 per cent of the national employment in this sector (Gritsai, 1997b). The decentralization of business services is going very slowly, even in the financial sphere. Within Moscow, the new business activities are also strongly concentrated in the city centre with very few signs of decentralization. The question is, if and when this trend is going to change and whether this change will happen as it did recently in the West. Our earlier research (Gritsai, 1997a, 1997b; Gritsai and van der Wusten, 1999) shows that in Russia the strong centralization of decision-making and innovation, with its roots deep in the national history, is a much more persistent phenomenon than it is in Western countries. This centralization was even more reinforced by the socialist planned economy. Since the pro-European reforms of Peter I, Russia has been a kind of a dualist society with sharp social contrasts between the capital cities (St Petersburg and Moscow alternately) and the provinces. By their socio-economic structure and lifestyles these two cities have always been absorbing Western influences while the provinces remained to a large extent traditionalistic. The theme of the capital city (whichever it was) exploiting the provinces and being not ‘truly’ Russian has been on the agenda for over three centuries, provoking ongoing debates about national identity among Western-oriented people versus Slavophiles, Eurasians, etc. Large distances and bad roads still keep these contrasts alive despite the criticism and attempts to overcome the ‘friction of space’.

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Under the reforms of the 1990s, this contrast has been reproduced in a new form. Moscow became the strongly dominating core of decision-making in private business, which is attracted to the capital city by a concentration of political power, communication facilities (including the largest international airport in Russia), quality of services and cultural climate. Moscow is by far the strongest economic region with a lot of new employment opportunities. It is not realistic to expect that under the current economic difficulties the provinces will modernize as quickly as the capital city to provide a compatible business environment. Besides, at a purely psychological level, Moscow still represents the myth of a better world to many provincials, hardly available (because of a restrictive registration system and high costs of living), highly attractive and deeply hated at the same time. This explains why business services and company headquarters show a particularly strong preference for locations in the capital city. Federalism and regionalism are political categories, but in the economic sphere these categories play a much weaker role, given the proportion of poor regions that depend upon donations from the Centre. Another important constraint to the spatial de-concentration of business services is the imprint of Soviet urbanization. A conflict between the new socio-economic processes and the inherited structures (materialized in institutions, laws and the old fabric of the built environment) became an important attribute of all the post-socialist cities, having a big impact on the speed and forms of urban transformation. In Moscow, for instance, many of the business services are situated where the old Soviet institutions were located, as these old institutions actually generated the new companies. This process was connected with a reinvestment and redistribution of public resources by the most entrepreneurial part of the nomenklatura, or with private initiatives of all sorts of specialists trying to commercialize their knowledge. This interdependence between the new and the old structures makes the spatial pattern of business services development in Russia rather complicated and dependent not only on market mechanisms or state regulation but also on formal and informal links between the new and the old elite on the one hand and on sophisticated property relations on the other. One of the imprints of the socialist urbanization is the superimposed role of the Moscow city centre. This centre has always been considerably better maintained than the more peripheral residential areas and provided with all types of services and infrastructure to serve as the main showcase of the country. This policy contributes to the persistent social attractiveness of the capital’s city centre, which even after years of reforms still looks like a different world as compared to the more remote residential districts of the city. Another important characteristic of Moscow is that it never experienced any suburbanization. The notion of suburban living has a completely different meaning in Russia than in the West. The quality of the urban environment rapidly deteriorates as one moves from the centre to the periphery and the words ‘suburban’ or ‘peripheral’ carried a distinctly negative flavour for Muscovites until recently. The urban fringe is represented mainly by new residential quarters with high-rise buildings or industrial zones, often seriously dilapidated. Immediately behind the city boundaries one can find old-fashioned villages and agricultural lands. So far, there are very

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few cores in the urban periphery which have the potential to develop into modern business districts competitive with the Centre. Some signs of suburbanization appeared in Moscow in the early 1990s after the beginning of a cottage boom, but it has a purely residential character. It will definitely take years before it may be followed by the decentralization of working places, especially in such activities as business services and company headquarters which are sensitive to the quality of their social environment. It is also symptomatic that Western investments, even if they are located in the vicinity of the capital city, hardly generate any particular industrial districts or business areas. Foreign companies may use local resources, markets and labour for their production but turn to the capital city as regards banking and professional services. Moreover, Western companies operating in Russia as a rule utilize services offered by Western business services companies, located primarily in Moscow, while Russian business services cater to the domestic market. This generates two basically different worlds of business services, which co-exist alongside each other without interlinkages or co-operation. This separateness impedes the otherwise stimulating effects of foreign enterprises on the local economy. Analysing the trends of urban transformation in Western countries, Sassen (1995) argues that there are also considerable differences among them, in particular between the European and the American patterns. In Europe, the expansion of office functions in the old centres is limited because of protective measures, lack of parking space, or sites of sufficient size for office buildings, which drives many offices out of the centre. In American cities, the centres have often been rebuilt, leaving vast spaces for adjustments to the requirements of the time. Moscow has features of both European (cultural heritage) and American (chaotic land-use) cities, but on the whole, spatial resources for the extension of office functions in the city centre are still not exhausted there. This serves as an extra argument in favour of the continuation of the existing monocentric structure into the near future. The post-socialist type of built environment and the remaining elements of earlier Soviet management are the most important constraints on Russia at the moment from following the standard Western trajectory of the spatial organization of business services. It is hardly possible to expect spontaneous decentralization of high-ranked business functions while market-mechanisms are still not totally working, while the legal system is not fully developed, while the urban administration consists partly of the old nomenklatura, and while the structure of investments in urban development contributes to maintaining the existing disparities.

Advanced business services and finance, insurance and real estate in the metropolitan and provincial environment: social background and spatial patterns The differences between the two major sectors of business services – advanced business services (ABS) and the finance, insurance and real estate sector (FIRE) – can be related to their degree of stability, links with other economic sectors, and spatial choices. In Russia and other transitional economies, companies operating in these

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sectors often have a different origin, social background, and pattern of spatial behaviour than companies in these sectors have in the West. These differences make it difficult to apply Western theories to the patterns of development of these companies in transitional economies, as the following examples will illustrate. 1) In Western economies the origin of the different business services sectors is usually related to different social classes. The FIRE establishments act more like brokers of capital and, for them, the availability of funds, network relations, and political power is essential. Therefore, the FIRE sector is dominated by large firms, often connected with large corporations, and tends to be related to the ‘old elites’. ABS businesses, on the other hand, rather act as brokers of knowledge, taking advantage of an academic education and working experience at a professional level. This sector consists mostly of small and medium-scale companies run by highly specialized experts, and is related to the ‘new professionals’, constituting the basis of the ‘new’ middle class. These class-related differences only partly apply to Russia. Like many other commercial activities, business services in Russia had a very quick start and their origin is much more mixed. Indeed, many of the new companies in the finance sector were established by members of the former Soviet elite and sometimes even on the basis of state institutions or enterprises. The origin of the initial capital in such cases is hardly ever advertised; but it is not difficult to trace it to state capital ‘lost’ in the process of privatization and redistribution in the early 1990s, such as the mysterious disappearance of Communist Party funds, which became the favourite subject of speculation in the mass media already more than ten years ago. However, in many cases, having capital or knowledge was not enough to start a new business. Among the new bankers or business advisers there were a lot of ‘gamblers’, better prepared to take the risks of running a private company within an insecure half-market environment than were the real professionals. Some of these ‘gamblers’ managed to build up a substantial capital on the wave of easy moneymaking, which very quickly turned them into real ‘brokers of capital’. A perfect example of such a broker is the well-known financial ‘oligarch’ Berezovski who, in Soviet times, pursued an academic career in mathematics. In the ABS some of the ‘new professionals’ came from the Communist Party and Komsomol (communist youth movement) elite, lacking specialized knowledge but possessing their own networks and managerial experience. Being able to recruit professionals from the academic environment, they took over the administrative part of running commercial consultancies, which many of the Russian academics, raised in the tradition of ‘pure science’, considered a dirty job. This flexible recruitment is especially convenient for the academics, trying to combine work in the prestigious but poorly paid state academic sector with contract research in commercial companies. The practice of having two and more jobs has become very common among Russian academics (and other professionals) during the last decade. Later on in the 1990s, more companies were established by professionals, but the art of operating in the complicated and legally unstable Russian bureaucratic environment is still considered to be an asset, and this keeps the old elite highly represented in the socalled professional services.

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These examples show clear contrasts between Russia and the West, with the ‘old elite’ running the ABS, capitalizing on their skills to mobilize ‘brokers of knowledge’, and with former professionals moving into the FIRE sector, using their professional knowledge for building up capital. 2) The literature suggests that the Western ABS establishments use primarily a well-educated male workforce of analytic professionals or managers, whereas FIRE establishments, especially banks, have more female employees, many of them less skilled and trained only to perform repetitive tasks (Coffey, 1996). In Russia, again, this is only partly true, because of a traditionally high representation of women on the labour market, including a high share of females with an academic education, even at the PhD level. In the 1970s and 1980s social sciences, humanities, law, and economics had an overwhelming majority of female students in high schools and universities, as these were disciplines of secondary importance to the Soviet industrial economy, leading to potentially poorly paid jobs and being generally more attractive to girls than to boys who enrolled in the technical schools. As a result, the current cohort of professionals in the ABS-related fields has a relatively high share of females. This concerns mostly the age cohort of 30–45, which was crucial in setting up the new ABS companies in the 1990s. The orientation of banks and other FIRE companies towards the less educated female labour force also looks pretty peculiar in the Russian situation. Many of the bank employees are women with higher education, many of them graduates of technical high schools and universities, who preferred a less skilled but better paid job in commercial banking and other FIRE sectors to a professional career with an uncertain future in their own field. 3) It is common knowledge that both ABS and FIRE companies depend on faceto-face contacts with clients and are sensitive to prestigious locations and proximity to the clusters of business activity. ABS companies, providing professional made-tomeasure expertise for each particular case, are services of a more individual character. FIRE activities have a relatively high share of standardized operations and routine jobs, offering numerous packaged products or sets of services. According to Dahles (1999), Western literature on business services suggests that ABS establishments, sending their employees out to visit clients, are less dependent on a representative office location than are FIRE establishments, as the latter are usually visited by their clients. In this context Dahles suggests that FIRE companies, especially their headquarters, remain more persistent in their choice for a central location, whereas the APS establishments are more easily inclined to leave metropolitan areas. This pattern is reinforced by the massive use of information technology making communication of the ABS companies with their clients mostly virtual. In the case of Russia this sort of locational pattern is not common, nor will it emerge in the foreseeable future. The reasons are not only the already mentioned differences in urban traditions and structures, but also because of social values and rules, distinct from those of western societies. First, representation and prestigious location of the office play a much more important role in Russia, especially for activities which are supposed to demonstrate a higher social status. A luxurious office that makes an impression of opulence on

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the client seems to be important even for small companies. In the ABS sector the importance given to the office is not less pronounced than in the FIRE sector because in Russia professional consultants are more often visited by their clients per se. It is true that information technology makes professional services less dependent upon the location, but in Russia, with its domination of the old city centres in business life, a good address still remains a kind of a reliable trade mark. Second, another factor keeping the ABS companies in the urban centres is the availability of office space. In Moscow, as well as in other big cities, central areas had a relatively high residential population until recently, which quickly decreased in the 1990s under the pressure of the market. The reconstruction of the former residential buildings or of those which were earlier occupied by numerous Soviet institutions, and the construction of new office complexes became a booming business in the 1990s. In 1996–7 both office supply and office prices, often set for a long-term rent (up to 50 years), became excessive and, as a consequence, part of the new office space remained unoccupied. Many of the professional consultancies, especially small companies, rent (or buy) big apartments to use as office space. These apartments are still registered as residential space, which helps the companies avoid high taxes and bureaucratic difficulties. Another group of professional services, being spin-offs from bigger institutions (such as high schools, research institutes, state committees, etc.) are often located, at least formally, in the office of their mother company. The practice of educated professionals having several interrelated jobs and several salaries makes it even easier to fiddle around with office space. Therefore it is difficult to speak of market forces pushing offices out of the city centre. 4) In the Western literature a big gap is observed between major cities and the provinces as far as the variety and quality of ABS is concerned. This gap is explained in terms of a narrower client base, a less qualified and less skilled workforce, and less wide-ranging experience (Dahles, 1999). In Russia this gap is even bigger than in the West because of the strong concentration of research and higher education in Moscow and St Petersburg and because of large differences in the quality of these sectors between the two urban centres and the provinces. As a result, many provincial universities produce very few specialists able to establish and operate local business services and to compete with the companies in the capital city. The provincial small and medium-sized businesses also fail to provide a stable client base for business services, being simply not strong enough financially to use local professional services on a regular basis and lacking trust in banks. As a consequence, they prefer to keep most of their assets at home in cash, which deprives the FIRE sector of working capital.

Business services and the new middle classes: the role of socio-political and cultural history The new middle classes play a pivotal role in post-industrial transformations, although their origin varies in different types of societies. In Western countries the middle classes were nurtured among the urban citizens while, in Asia, they developed mostly from the agrarian and colonial bureaucracies (Robison and Goodman, 1996a). In Western countries the share of the population which can be related to the

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middle classes – not only by income but also by education and qualification level, way of life, and consumption patterns – has become as large in the last decades as the sociological interest in this category has declined. In the countries where the post-industrial transition is lagging behind, the emerging middle classes are looked at as carriers of progressive transformations and indicators of efficiency. In Russia the concept of the middle classes has practically been frozen for 70 years, although the social group known as Soviet intelligentsia (engineers, scientists, university teachers, medical doctors, journalists, etc.) was to a certain extent (by professional structure, education, and qualification level) comparable with the Western middle classes, setting aside the differences in income (Starikov, 1998). The new Russian middle classes that appeared after the reforms of the 1990s seem to be a combination of fragmented social groups, united by a similar level of income and at the same time divided by social status, education, and way of life. It is only the Russian upper middle class (well-paid professionals, managers of commercial enterprises, owners of successful middle-sized companies) which resembles the Western middle classes in terms of consumption level and lifestyle (Savin, 1998). The lower segments of the Russian middle classes are too fragmented to show similarities in lifestyle or consumption patterns. They, in fact, can be compared with only the lowest segment of the Western middle classes. This category includes owners of small companies, ordinary employees of commercial enterprises (both professionals and supporting staff), the middle level of the state bureaucracy, street salesmen, and also parts of the Mafia, all of them united only by their income level. Russian experts assume that real changes in lifestyle and consumption pattern may be expected when the new generation – the children of the present Russian new rich or upper middle class – enters the labour market. Many of them are obtaining an education abroad and adopt foreign lifestyle patterns, which sets them apart from their parents. The question is how many of them will return to Russia instead of looking for jobs abroad. Today, the social base of the new middle classes is strongly undermined by a significant brain drain of professionals and academics settling in the West. Russian sociologists write about the continuing de-intellectualization of the social structure (Belyaeva, 1996). Another difference between the Russian middle classes and their Western counterpart is age. In the advanced economies a large part of the new middle classes belongs to a generational cohort which, in the 1960s, entered higher education in larger numbers than ever before and developed into a social group with distinct orientations, tastes, and dispositions (Featherstone, 1990). In Russia the new middle classes are mostly people in the cohort of 25–40 who, from the beginning of the reforms, benefited from the growing commercial sector. Young professionals found themselves in a more advantageous position than the older specialists because of their mobility, their ease with changing life patterns and risk taking, their knowledge of foreign languages, and their minds devoid of Marxist dogmatic thinking. The growth of the commercial sector caused a strong polarization among the Russian middle classes. The most active professionals from the younger age cohorts, who became involved in commercial business services activity, saw their income and social status grow considerably, approaching the elite or the new middle classes in Western

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economies. At the same time, many of the professionals, especially the older ones, remained outside the commercial sector and found themselves among the social losers, staying practically below the poverty line with their public budget-funded salaries. In spite of a potentially sound social basis for the new middle classes – the share of employees with a higher education has been traditionally high in Russia – this group is clearly underrepresented in society. The crisis of 1998 has hit the new middle classes severely, undermining their already unstable position in Russian society. Its share in the population went down from 30–33 per cent before the crisis to 20–21 per cent after it.3 The per capita income of all the groups of the middle classes declined considerably in the first three months of the crisis, with the upper middle class turning out to be the biggest loser. But while the crisis was extending to Russian society at large, their incomes started growing again. The upper middle class, in particular, regained its position more quickly than other social groups did. In the long run it was the lowest category of the middle class that suffered most from the crisis. While the middle classes as a whole are generally underdeveloped in Russian society, the new professional classes are strongly under-represented among these middle classes. The major part of the professional classes is concentrated in Moscow and St Petersburg, whereas in the provinces this social category remains very weak. The provincial middle class is dominated by the owners of small companies, most of them operating in consumer services, commerce, or small-scale production. The rise of consumer services in the Russian provinces reflects not so much the growth of incomes but rather the initiative of private business to compensate the deficiency of goods and services, inherited from the central planning system. It may be too early to expect that industrial growth will take off quickly to benefit business services. So far, the industrial activity in the country is not strong and occurs mostly in the resourceintensive industries with little impact on the provincial economies. This has at least one positive side for the provinces: the crisis of 1998 turned out not as devastating as in Moscow and St Petersburg, due to a low share of ‘whitecollar’ workers who are most exposed to economic instability. The crisis caused further deterioration of the provincial middle-class structure, although its total share in employment decreased insignificantly (from 6–10 per cent before to 5.5–9.5 per cent after the crisis). The upper level of the middle class (highly qualified specialists from big commercial companies, managers of small and medium companies, high-ranked employees of the state sector) was among the clear losers with its share falling from 1–2 to 0.5–1.5 per cent. The middle category (owners of enterprises with 3–5 employees or of retail units, specialists working in advertising and the leisure industry, bank employees, mediators in commercial services) declined from 3–5 to 2–3 per cent. At the same time the share of the lower category (street salesmen, independent providers of commercial goods, supporting staff of commercial companies) increased from 2–3 to 3–5 per cent (Butuzova, 1999).

Conclusions The patterns of business services developments in Russia illustrate how the political situation, socio-cultural factors and built environment reshape processes which,

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according to Western theories, could be expected at this stage of post-industrial transformation to develop in a similar way as in Western economies. In the Russian case the most powerful factor is the post-socialist inertia, which is impeding market processes. The reforms of the early 1990s initiated some sort of a wild capitalism, when the entrepreneurial spirit and business networks were often more important for operating a business than knowledge and even capital. Economic and political instability, weakness of the legal basis, and corruption certainly work as extra aggravating factors. In this context it is difficult to say whether it is the old elite or rather new people outside the old establishment who benefit more from the existing business opportunities. Both the ‘elite continuity’ and ‘new opportunities, new people’ hypotheses are quite appropriate for Russia and other transitional economies. What makes the Russian experience different from the Western and Asian situation is that the concepts of ‘old elite’ and ‘new people’ mean different things. The post-communist old elite has favourable positions not only because of its family background and wealth, but also because of its formal and non-formal networks, contacts and bureaucratic experience, and access to former state capital available for privatization. The ‘new people’, lacking these connections but capitalizing on ‘new opportunities’, are not only professionals using their knowledge as a capital asset. This category also comprises people with very different social and educational backgrounds, willing and able to take risks to run a private business. In this respect the patterns of social mobility, connected with the expanding services sector, are not as clearly shaped as in the established market economies, both developed and developing. Among those who enter the business services sector, some may seek not social advancement but consolidation of their formerly held position, while others who are looking for social advancement may find prosperity or face bankruptcy and social degradation. The analysis of post-industrial processes in transitional economies may be used for understanding similar developments in other non-Western societies and Asian economies in particular. Both Asian and transitional economies had a later start with post-industrial transformations than the advanced Western economies had. In both Asia and Russia, governments are making attempts to accelerate transformations by means of innovative policy. In both cases business services are characterized by a strong spatial concentration in the main economic regions and largest cities, a slow diffusion to the provinces, an underdevelopment of the middle classes and their fragmentation. Both categories of new rich and ‘old elite’ are very important to the changing social structure, attesting to the fact that changes are recent and quick. Differences in the way post-industrial processes proceed in Asian and East European countries are explained predominantly by their specific political and socioeconomic background. Asian countries are passing through accelerated processes of industrialization and ‘de-industrialization’ after decolonization. Eastern Europe is experiencing the second coming of capitalism and extended industrial development. Most of the Asian economies have been open to internationalization since their independence, while Eastern European countries were hidden behind the iron curtain for several decades. Cultural differences between Asia and Eastern Europe

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also have a big impact on economic performance and social patterns. Nevertheless, the main lesson learned from this case study of business services in Russia, i.e. the necessity to ‘edit’ or even reconsider Western theories before applying them to other parts of the world, may be useful for all sorts of social studies on non-Western societies.

Notes 1 Both terms ‘producer services’ and ‘business services’ are used interchangeably in the literature. The term ‘producer services’ emphasizes the difference of this sector from consumer services; ‘business services’ reflects their character. 2 Assessments of the author based on the Russian employment statistics, which give only aggregated figures on basic activities. 3 Estimated by the experts of the Institute of Socio-Economic Problems of Population and of the Laboratory of Social Technologies in Moscow (Savin, 1998).

13 Conclusion Otto van den Muijzenberg

Groping around for sociological insight into the rise and development of producer services in Asia, we were confronted with a relative lack of theorizing, not to mention empirical evidence. Work by Saskia Sassen and Manuel Castells provided important contours for our discussions. In the New International Division of Labour (NIDL) the most recent round of booming innovation was the IT revolution of the 1990s, in which Asian countries participated as major players, not only in delivering hardware from their special economic zones, but also in the software and internet design fields. But apart from the insight on ramifications of the global control in a few ‘global cities’ and concomitant generation of producer services, the linkages with their ‘hinterland’, i.e. the rest of the world, remained undefined. The theory of ‘flows’ was also found to be helpful at a general level in understanding post-industrial developments in the global capitalist setting, but difficult to translate in concrete data available for Asia. In recent work on the new economy, many authors still show a tendency to focus on product development and production rather than ‘immaterial’ activities subsumed under the term ‘services’. In this concluding chapter, the main results of the preceding chapters will be reviewed in terms of the questions raised on the expansion of producer services in globalizing Asian economies as well as the possibilities for vertical social mobility generated by the emerging service occupations. We will wind up with some suggestions for further exploration and research. Summarizing our findings on the two principal questions raised in Dahles’ introductory chapter, we may conclude – not unexpectedly – that simple answers are impossible. In an effort to organize the insights from the preceding chapters, a key term shall therefore be ‘diversity’. First of all, diversity is striking when we study the trajectory of incorporation of the various societies in this volume into the global capitalist system. The large ‘transition economies’ of China and Russia show obvious differences with the experiences of the West, where theories on producer services were developed. Also in the other countries discussed here, India, Malaysia, Singapore, and the Philippines, such theories proved useful not so much as recipes to apply to Asian developments, but by providing several starting points from which to review available evidence and test preliminary hypotheses. In that regard, the very different historical trajectories of industrialized and newly industrializing societies proved to make ‘Western theories’ applicable only to a

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limited extent. In this connection, the rather different past and present of (colonial and post-colonial) state involvement in the market appeared to be a major variable. India, with a past of a mixed planning and market economy, has made a jump forward in the newest global innovations, the IT sector, but turned out to suffer from substantial institutional problems in the more traditional ‘FIRE’ sector. Neither were more ‘open’ economies like the Philippines, Malaysia, Singapore and Hong Kong carbon copies of Western experiences as projected in the literature. Even in Hong Kong, often described as the paradigmatic ‘model’ of market development, state interference turned out to have been instrumental in promoting the newest of producer services. Diversity also is to be noted in the definition of the subject matter at hand, producer services in Asia. Not only have we been confronted with a plethora of terms, like producer services, business services, intermediate services, corporate services, specialist services, professional services, etc., all with their respective intellectual history, but also a wide range of specialisms have been studied within that vaguely delimited range of economic activities called producer services. The major subsectors that have been discussed in some detail can be systematized in Table 13.1. While it is relatively easy to show that FIRE services have increased in most Asian countries over the past five decades, comparable figures for the advanced producer services are difficult to find (see Table 5.1 on p.66). This is certainly the case when we move from the national to the sub-national level. Because our contributors were free to concentrate their work on a particular service (sub-)sector, it is also not easy to draw conclusions about our other leading question, i.e. whether the emerging importance of producer services in Asia has led to the emergence of new elites, or provided new possibilities of consolidating established societal positions for ‘old’ elites. Such an outcome is not that amazing either. It is not uncommon for social sciences to come up with ‘either/or’ propositions, with ‘forty per cent for, sixty per cent against’ results. In the preceding chapters we see that newly emerging elite groups can be found in most countries, but not necessarily at the cost of old elites. Often new elites find a place next to the old-established groups. Many of the latter are able to diversify and consolidate their position by engaging in new opportunities opening in the services sector, in particular in the accountancy sector, information technology and, to some extent, technical consultancy businesses. Talking of emerging and declining groups, a unifying finding is that both established and emerging groups are forced to obtain high levels of education and Table 13.1 Sub-sectors of producer services studied in this volume Old producer services (FIRE)

Advanced producer services (APS)

Money lending (pawnbroking) Chan Banking and insurance Lee, Pinches Non-banking financial companies (NBFC) Awasthi Real estate brokers Sajor, Pinches, Chu Shipping Loh, Pinches Labour brokerage Goodman

Software services, IT Firms Lakha, Chu, Pinches Call and transcription centers Lakha, Pinches Consultancy, counselling Awasthi Accountancy Pinches Advertising Pinches Business services Gritsai

Conclusion 211 training to perform in the producer services. In other words, even if we find wealth and good connections (or economic and social capital) as favourable conditions for upward mobility or consolidation of high status, we have seen that most producer service activities require up-to-date training as well. The sector, certainly in its newer specialisations (APS), therefore shows a meritocratic side. As the Asian education market is a market indeed, in the sense that ‘good’ education requires high fees, this also means that the spending power of parents very much influences the mobility opportunities of their children. Short distance vertical social mobility is the rule, and the ‘rags to riches’ story within one generation is the exception, no matter what media reporting on some meteoric stars leads us to believe. Those who make it to the highest levels of producer service performance and income in Asia often have expensive overseas training and experience abroad, after which they decide to return ‘home’. This confirms older research on vertical mobility, where the phenomenon of ‘spiralism’, i.e. of combined geographical and socio-economic upward mobility has been documented.1 In some cases like Filipino-American Diosdado Banatao and Indian-American Umang Gupta, such information technology entrepreneurs shift to ‘global citizenship’ and a transnational lifestyle rather than opt for a definite return. Even though the state managers ‘at home’ would like them to make a definite choice in favour of the motherland, playing both ends appears to be a more attractive option for such entrepreneurs, and in the end the state gives in by allowing various kinds of privileges, including double nationality and investment premiums (Pinches, Lakha in this volume). Quantitative sociological research to underpin statements on the rise and fall of producer service entrepreneurs, managers and professionals is still lacking. One may, however, safely assume that Pinches’ statement, ‘[W]hile … many professionals do not move beyond middle management positions some rise to executive positions and assume comparable influence over corporate decisions as do the majority shareholders…’ (Pinches, in this volume) is valid not only in the Philippines, but elsewhere in the continent as well. In this connection the findings in the ‘transitional economies’ of Russia and China are intriguing, because a ‘corporate industrial or commercial capitalist’ or large landowner elite are lacking as the launching pad for careers in new producer services. Not only do we find a different overall set-up where producer services are largely absent, performed within production units, or within the state apparatus, or only recently emerging. We are also confronted with the overwhelming importance of connections in the (receding or abolished) party nomenklatura, which in that sense plays the role of ‘established elite’. In the Russian case a very curious cross-over process was found by Van der Wusten-Gritsai, where former apparatchiks (‘old elite’) grabbed the opportunity to move into modern advanced producer services, leaving the less rewarding financial, real estate and insurance business to formerly state-employed professionals. The Chinese case, where the party remains in power, shows more continuity and mutual support between cadres and increasingly respected capitalist businessmen, or ‘model entrepreneurs’, who recently even received the honour of being recognized as a potential new ‘pillar’ of the party at the national level (Lawrence, 2002; Goodman, this volume).2

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When talking of mobility, it is important to define our units of research, which differs among our authors. In some chapters individual performance stands centre stage, in others it is firms that are discussed, often linked with a discussion of the long-term history of families. Again, sub-sectors as aggregates have also been described in their emergence or decline. For more definite conclusions about mobility facilitated by producer service occupations we need further historical research on specific firms and business families over long periods. Statistical data required for aggregate statements on mobility are available in far too broad categories to be useful (see Table 5.1 on p.66). Even firms and families may be too wide as categories, if we realize that families are arenas of negotiation, or even of conflict, rather than the monolithic units under one patriarch that the business literature often projects. This is certainly the case in second- or third-generation firms of the kind discussed in the chapters by Pinches, Lee, Loh and Visscher. The methodological complications for more quantitative research approaches to vertical mobility are large, including the problem of what White in a different context called ‘the moving target problem’ (White, 1980: 21). Measuring the ‘distance’ of vertical mobility between the parent and the child in occupational status over, say 30 years, presupposes an assessment of occupational statuses as if the total aggregate of statuses remained the same over time, which was not even true in Asian agricultural society before the Green Revolution, but certainly not in Asian urban society of the past two generations. To use one of our examples: being the owner-proprietor of a pawnshop in Singapore in the year 2000 may entail a very different status from nominally the same position in 1965 Singapore (Chan, this volume). The span of possible statuses has expanded with the progressive integration of the economies in the global economy. The theoretical and practical complications being what they are, we will probably have to settle for a long time to come with more or less impressionistic descriptions and forego the quantitative testing of hypotheses on generational rises or declines among producer service professionals in Asia that have been tried for other sectors. Although longitutidinal exercises at the village level (e.g. Schendel, 1981; Eder, 2000) or small-town mobility studies in the West may offer some inspiration, such approaches can hardly be followed for producer service professionals in metropolitan areas or/and large urban regions. The best option at this stage seems to be to call for detailed longitudinal studies of a producer sub-sector like accountancy, or particular producer service firms and their personnel in a broad anthropological fashion, i.e. with attention to the intertwining of occupational with familial, religious, ethnic, political and cultural realms. Tracing their intergenerational provenance and the ‘ups and downs’ involved may yield more insight on ‘crucial variables’ or ‘favourable configurations’ for success.3 The miniatures of successful entrepreneurs in the chapters by Lakha and Pinches, if extended both in time (over generations) and in thematic scope, could serve as inspiring examples, as do the more elaborate discussions of Philippine political entrepreneurs in McCoy’s An Anarchy of Families (1993). Reaching beyond a conception of mobility as first and foremost economic mobility, that is, a substantial increase in the income and property position of the subject, future work on vertical mobility will profit from broader views on culture, lifestyle, and political mobilization of middle classes that has been mentioned in

Conclusion 213 earlier chapters. Several of our authors refer to Bourdieu’s theory on conversions of several types of ‘capital’. As our knowledge stands, it remains to be seen whether professionals in the producer service sector develop a special distinguishing lifestyle and culture. One may, however, tentatively conclude that they show a tendency of refraining from, instead of promoting, closer connections with the political powers that be. Again, more detailed research of the anthropological kind is needed to come to conclusions confirming or nuancing Sassen’s theory on lifestyle changes in the global city. Do concentrated numbers of producer service professionals in major Asian cities make professionals in the ‘new economy’ and APS sectors more likely leaders in cultural fashions? Do others remain trend followers, while ‘old’ service professionals stay culturally very conservative (compare for instance the expressive and creative professionals versus bankers) (cf. Pinches, 1999a)? In this vein, transitions from ‘conservative’ to ‘modern’ lifestyles might be interpreted as manifestations of cultural mobility. A similar set of questions may of course be asked about differential propensity for political mobilization. Chan’s chapter on pawnshop family firms in Singapore draws our attention to a rather obvious mobility dimension that should be further explored, i.e. gender. We seem to be confronted with a paradox here. Whereas educational statistics show huge and growing proportions of female students in higher education in Asia for several decades, women are hardly mentioned in the case studies. They appear only in the Singapore case, be it largely ‘behind the scenes’. Is the absence of women in the Asian ‘producer services story’ real, or virtual? Have those large numbers of highly educated professional women (as we know from the statistics) opted to work outside producer service functions? Or have they voluntarily restricted themselves to other service functions in, e.g., the teaching and medical sectors as Aihwa Ong suggests, referring to a survey among female university senior students in Malaysia in the early 1980s that seems to point in this direction: ‘… they did not believe in competing with men in the labor market. They would only seek jobs which involved serving others – for example, as clerks, teachers, nurses, or doctors (attending to women and children only). The respondents considered occupations that would put them in authority positions over men forbidden by Islam, because to work in such positions would change the status of women vis-à-vis men…’ (Ong, 1995: 181). But this was 1980, Malaysia, and Muslim women. So the question remains: do Malaysian and other Asian women still refrain from seeking access to such new and promising channels for mobility such as advertising, legal consultancy, computer software development and the like? This would mean that the hypothesis ‘new opportunities, new people’ should be answered by ‘new opportunities, male people’. Or are we neglecting their actually occurring participation because ‘entrepreneurs’ or ‘professionals’ are perceived to be men to start with? If our case studies reflect reality indeed, and if new and advanced producer services are by and large a male domain, this would underpin claims of exclusion by the ‘formal sector’ occupations that are tightly connected to the globalized economy. At this stage it is too early to decide to what extent producer services in Asia reflect the rather outdated view that (Southeast-)Asian women are relegated to the home or, at best, the informal trading sector, and further research is called for.

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Interestingly, another critical divide that is often studied in relation to processes of emancipation and mobility, ‘ethnicity’, in particular the possibility of emerging ‘ethnic niches’ in certain producer services, should receive more attention. Loh Wei Leng’s chapter gives a lead here. The Malaysian shipping sector provides an example of an old (Chinese) elite losing its grip on a niche, which is taken over by the (Malay-dominated) state which, in turn, facilitates Malay careers that were impossible before. Unlike in other economic sectors under Malaysia’s New Economic Policy, the state has not privatized shipping. In other words, it does not permit those Malays to build up independent service business firms, but keeps them in salary- and wage-dependent positions that provide large opportunities for political patronage, at the same time limiting the possibility for big upward mobility jumps. Such questions on ethnic niches and ethnically-based patronage and shifts in them should be asked in other contexts as well. The importance of patronage ties, guanxi, friendship and other ‘informal’ ties, brings us to one of the unifying themes of this book, the importance of the state as a direct or indirect factor of the growth of producer services in Asian societies. As discussed by Dahles, theorizing on producer services as developed in the West, shows a high ‘market’ and a low ‘state’ content. Processes of flexibilization, vertical disintegration of enterprises, outsourcing, fusion and fission, concentration and centralization and their opposites are represented as developing more or less autonomously, in a neo-classical fashion. It is then no coincidence that China, Japan and India are mentioned first by Dahles, to show the relevance of the state in promoting, regulating, or hindering innovation and/or leading to expansion of producer services. Reluctantly, it seems, the US and the EU are added to illustrate the role of the state in promoting ‘strategic planning and development and research of their technology and informational industries’ (Dahles, this volume). If foregoing chapters show ‘diversity’, the dominant role of the state is a ubiquitous factor. This applies not only to the nation-state, but emphatically also the local state. Boosterism and competition among city and regional state elites has been shown to lead to remarkable innovative initiatives in such cities as Bangalore (Lakha), Cebu City (Sajor), Hong Kong (Chu) and Taiyuan (Goodman). Earlier, another similarity was found to be of importance in all cases of producer service careers, i.e. higher education. In many cases state educational policies play a crucial role in generating producer services. Most recently this happens by special programs for IT-related education in such countries as India, Malaysia and the Philippines, but we could find other examples easily in earlier phases where education was reoriented towards providing technical or administrative (wo-)manpower. However, universities, polytechnics and management schools are not only important as producers of young graduates. Their staff often engage in private producer-service business, in order to supplement a meagre salary, or keeping up with a normative lifestyle followed by age-mates who engage in private business. Such ‘double’ track activities in areas like advertising art work, media consultancy, market research, management consultancy, auditing, legal service work and others, whether authorized or done in a form of ‘sidelines’ or ‘moonlighting’ (see Pinches, Goodman, this volume) may lead in the end to the launching of a fully privatized company. Other state institutions showing

Conclusion 215 outflow towards private producer-service entrepreneurship are the equally highly educated military officer corps and diplomatic service (Lakha, this volume). As a major force in the educational field, the state influences the flow of new personnel into producer services not only in the quantitative sense, but also qualitatively. In the more ‘state’ directed countries this entry is controlled by certification, in some of the others the professional sector itself is instrumental in certifying the respective occupations. In the case of real estate brokerage in the Philippines, Sajor shows how the big players in the real estate market of Cebu are national-level firms with international ramifications. By sheer economic power, wielding large amounts of capital as well as sustaining large speculative risks, they tend to squeeze out the small locally-based real estate brokers who lack the ‘knowledge and information on global–regional and national … market trends’ (Sajor, this volume). But they also bring connections to national government officials, technical knowledge and, as illustrated by Sajor in another paper, the power to regulate the profession by certification, and thereby marginalizing local brokers (Sajor, 2002). This underlines the need to investigate the composition of personnel working in producer service occupations in more detail. Most of our authors have focused on entrepreneurs and managers, but warnings abound in the chapters that there are many more ‘invisible’ small-scale, boutique-type, middle-level entrepreneurs, and even more salaried personnel employed in the service providing firms. Whereas the former are still relatively ‘visible’ in directories, websites and the like, the latter, the ‘middle cadres’, the ‘other professionals’ (below the owner/manager level) have still escaped systematic research. Employment in the ‘new’ producer services until recently carried the aura of being an excellent avenue to rapid upward mobility. After the Asian Crisis and the collapse of the dot-com bubble, matters look more complicated. While it is generally known that most employees in Asian banks are hardly better paid than those in other jobs requiring a certain level of education, this may increasingly be the case in IT work like software development. At any rate, such sector-wise vertical analysis of layering and promotion opportunities, including gender, family connections, ethnic dimensions and international ‘spiralism’, would be highly recommendable. Seen from the perspective of ‘globalization’ as a process in which national boundaries become less relevant and transnational organizations including producer service TNCs grow in importance, the attraction of service ‘multinationals’ as channels for social climbing by well-educated professionals in the Asian continent seems obvious. Not only do they often offer better salaries, their structure also facilitates international travel and training, one of the conditions for vertical mobility, as we saw before. This means that we should also focus on recruiting and entry mechanisms at work. At the anecdotal level, several cases have been described in foregoing chapters. One reads about small service entrepreneurs being co-opted by a TNC, or developing an ‘outsourcing’ relationship with it, or being outcompeted into oblivion. Finally, we may call for new research into the effects of the Asian crisis and the world economic recession on the constitution of producer service sectors in Asian societies as well as the present mobility chances. Earlier we pointed out that in many countries old elites made use of new opportunities offered by producer service

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activities to consolidate their position, without this being a zero-sum game that would prevent ‘new men’ from rising as well. It looked like there was a place for all. This finding was based largely on the situation before 1997, however. Half a decade later, it is time to investigate which services declined in number, who has survived until now and who fell by the wayside – in other words, whether the gains of newly emerging elites have been continued or the old-established groups have proved more resilient in terms of connection and resources.

Notes 1 ‘People who get ahead tend to become geographically as well as socially mobile and to join the increasingly large class of professional and managerial workers who do not have strong roots in any local community’, Watson wrote on Brtitish industrial society in the early 1960s (as quoted by Bell and Newby, 1972: 177). 2 Backman (1999: 189) refers to taizi, ‘princelings’, children of senior party officials who rise through their connections and good education combined. 3 Cases of failure or decline escape such an approach, of course.

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Index

advanced business services 3, 5, 18–20, 201 advertising 4, 7, 9, 77, 78, 100, 134, 206, 210, 213, 214 Ahmedabad ix, xiii, 40, 41, 45–7, 49 Bangalore 12, 51, 53–5, 57, 62, 214 banking ix, 5, 18, 27–9, 40–9, 56, 65, 67–75, 83–9, 95, 103, 115, 117, 129, 144, 146–50, 152, 157–63, 166–9; commercial banking 48, 203; nonbanking financial services 18 body-shopping 53, 54, 59 British Malaya 113, 115, 116, 129, 157, 172, 177 brokerage 7, 111, 127, 210, 215 brokers x, xvii–xix, 1, 19, 23, 36, 37, 47, 72, 86, 111–13, 115, 121, 122, 125, 132, 141, 145, 148, 202, 210, 215; knowledge brokers 23, 36; power broker 112 bourgeoisie 14, 55, 61, 62, 192 business i, v, ix, x, xiii–xv, xvii, 1, 3–9, 11–14, 16–20, 23, 24, 26–32, 34, 36, 37, 41, 42, 45–9, 51, 52, 54–9, 62, 66–74, 76–89, 91, 94–103, 104–6, 111–17, 118–20, 125, 127–129, 131–47, 149–66, 168, 169, 171–3, 175, 177, 181–3, 198–208, 210–12, 214; business elite x, 55, 69, 71, 84, 85, 96, 103, 111–14, 116, 118, 125, 127, 128; business families 57, 68, 70, 71, 73, 80, 154; business networks xiv, 8, 11, 17, 24, 36, 37, 153, 207; business services x, 3–5, 7, 18, 20, 27, 30, 41, 48, 66, 73, 79, 86, 198–208, 210 capital i–iii, v, vii, viii, xiv, xvii–xix, 1, 4, 6, 8, 10, 11, 13–15, 17–20, 24, 26–8, 31, 33– 7, 41–49, 52, 55, 57, 59, 63, 64, 68, 70,

71, 74, 77, 82, 83, 85, 86, 90, 91, 93–95, 97, 98, 101–4, 106, 112, 115, 117, 127, 131, 133, 135–8, 145, 148, 150–4, 160, 163, 165, 167–9, 177, 187, 188, 191, 192, 198–204, 207, 211, 215; cultural capital 1, 10, 59, 63; economic capital 1, 8, 10, 14, 112, 136; social capital 1, 41, 82, 131, 134, 136–138, 145, 211 China i–v, x, xiii, xiv, 15, 17, 19, 20, 29, 34–9, 73, 101, 113, 114, 117, 118, 128, 132, 135, 146, 148, 151, 153–6, 159–63, 165, 166, 168, 169, 173, 175, 176, 179, 181, 187–92, 196, 209, 211, 214 Chinese Advisory Board 115, 128, 153, 155, 157–159 Chinese business elite x, 111–14, 118, 125, 127, 128 Chinese Communist Party (CCP) 187, 188, 191–6 Chinese community 111, 114, 116, 117, 120, 125, 126, 128, 129, 147, 148, 152, 154 city planning 91 clansmen xi, 135, 137 collective sector 189, 191, 195 colonial bureaucracy 14 communication technology 8, 89 containerization 181 corporate power 68, 69, 73–5, 85–8 corporate behaviour 25 corporation xi, 34, 38, 42, 44, 45, 52, 56, 58, 71, 73, 74, 79, 80, 84, 89, 95–9, 104–6, 115, 146, 154, 156, 158–61, 169, 170, 173, 178 decolonization x, 111–13, 118, 127, 165, 172, 207 developmental state 16, 38 diaspora 19

Index education i, xv, 9, 15–17, 19, 24, 26, 30, 50, 55, 57–62, 77, 79, 80, 82, 83, 85, 115, 118–21, 123–6, 127, 141, 142, 147, 155, 156 educational achievement 190 Eastern Shipping Company (ESC) 175, 178, 182 elite ix, x, xviii, 9, 16–20, 27, 41, 48–50, 55, 58, 59–62, 64, 67–75, 78–80, 82, 84–7, 90, 92, 96, 97, 100, 102–6, 111–16, 118, 120, 122, 124, 125, 127, 128, 131, 132, 144, 145, 147, 169, 183, 188, 193, 195, 198–200, 202, 203, 205, 207, 210, 211, 214; business elite x, 55, 69, 71, 84, 85, 96, 103, 111–14, 116, 118, 125, 127, 128; capitalist elite 69, 74, 78, 85, 86 elite continuity xviii, 49, 112, 115, 145, 196, 193 ethnicity xv, 125, 128, 173, 175, 214; ethnic riots 19 European Union 11 family business 56, 58, 131, 136–42, 156, 173; Chinese family business 131, 138 Filipino-Chinese trading community 68 financing 66 Fordist 7–10 Foreign Direct Investment (FDI) 12, 94, 122 Fujian province 187 gender 145, 213, 215 global city 7, 209, 213 global economy 1, 11, 13, 24–7, 36, 38, 41, 51, 87, 175, 188, 212 global market 24, 59, 216 Great Eastern Life Assurance (GE) x, 146, 154, 158, 166, 169 Guangzhou 187 guanxi 131, 214 Hakka 129, 135, 136 Hokkien xi, 115, 121, 129, 135, 148, 149, 153, 154, 156, 157, 158, 160, 162, 163, 165, 167, 174, 189, 193, 210, 214 Hong Kong iv, ix, xiii, 13, 15–17, 23, 27–39, 72, 95, 129, 131, 150, 152, 153, 158, 160, 162, 163, 165, 167, 174, 189, 193, 210, 214 information technology ix, 7, 23–5, 27, 30–3, 35–7, 45, 51, 56, 57, 65, 67, 71, 79, 80, 85, 203, 204, 210, 211;

237

information technology sector 35, 36, 45, 51 Infosys Technologies 56 India i, ix, xi, xiii, xiv, xviii, xix, 11, 12, 14, 18, 40–6, 49, 51–62, 81, 89, 115, 165, 166, 169, 178, 181, 209, 210, 214 Indian Institute of Technology (IIT) 57 Indonesia ii, iii, xv, xviii, xix, 14, 15, 17, 101, 118, 130, 167, 178, 182 insurance 1, 3, 18, 19, 27, 41, 42, 65–7, 70–2, 74, 76, 80, 85, 87, 88, 91, 94, 97, 104, 117, 143, 146–148, 150–4, 156–70, 172, 173, 175, 193, 196, 201, 210, 211 insurance companies 1, 76, 94, 146, 150–2, 154, 158, 160–6, 169 Japan ii, iii, 11, 15, 16, 65, 84, 128, 174, 181, 214 knowledge-based economy, industry, service industry xviii, 3, 59, 131, 195, 196 knowledge-intensive technology 1 lifestyle 10, 54 Malacca, Melaka 149, 154–8, 168, 171, 173, 176, 177, 179 Malaya xi, xiv, xv, 14, 113, 115, 116–17, 118, 129, 146–52, 157, 160–9, 171, 172, 176, 177, 179 Malaysia i–iii, x, xi, xiv, xv, xviii, 15–19, 109, 122, 125, 126, 130, 132, 136, 146–8, 167–9, 171, 172, 178, 180, 182, 183, 209, 210, 213, 214 Malaysian International Shipping Corporation (MISC) xi, 178, 180, 182, 183 Manila xiv, 64, 65, 67, 68, 70–3, 75–8, 82, 84, 87–9, 92–100, 102, 105, 106, 174 manufacturing v, 3, 4, 6, 9, 10, 12, 13, 15, 24, 27, 31, 33, 34, 40, 45, 49, 52, 56, 65, 80, 83, 91, 94, 95, 97, 98, 101–4, 106, 122, 146, 149, 188 mass consumption 10 Metro Cebu, Cebu City x, xi, 18, 64, 67, 68, 70–2, 76, 77, 84, 87, 90, 92–107, 214, 215 metropolitan areas 8, 9, 14, 15, 199, 203, 212 micro finance 42, 43 middle class i, x, xiv, 9, 13–15, 17–19, 28, 41, 47, 49, 51, 54–6, 58, 60–2, 68, 70,

238

Index

82, 84, 86, 109, 124, 134, 144, 151, 183, 192, 202, 205, 206; professional middle class 14, 60, 61 mobility i, viii, ix, xvii–xix, 1, 2, 8, 10, 13, 15, 16, 18–20, 24, 26, 37, 41, 47, 48, 51, 54–8, 60–2, 64, 67, 70, 72, 75, 77– 82, 85–8, 92, 187, 198, 205, 207, 209, 211–15; upward mobility ix, 64, 67, 70, 72, 75, 77–9, 81, 85–7, 198, 211, 214, 215; social mobility i, viii, ix, xvii-xix, 1, 2, 8, 10, 13, 15, 16, 18, 19, 20, 24, 41, 47, 48, 51, 54–8, 60–2, 67, 70, 80, 82, 86, 88, 92, 187, 198, 207, 209 moneylenders 40, 42, 46, 49 nation state 11, 38, 128, 214 New Economic Policy (NEP) 17, 32, 33, 183 new economy ix, 1, 4, 14, 17, 21, 23, 25, 27, 29, 32, 37, 79, 82, 85, 86, 142, 171, 187, 192, 195–7, 209 new entrepreneurs x, 2, 10, 18, 23, 55, 60, 62, 68, 78, 86, 187, 192, 194 New International Division of Labour (NIDL) xiv, 51–3, 62, 209 new middle classes 2, 9, 10, 12, 14, 15, 198, 204–206 new rich 14, 64, 192, 205, 207 new technology 20, 27, 37, 188, 192, 195 network xi, 5, 9, 12, 13, 24–6, 28, 33, 34, 40, 131, 136, 140, 142, 144, 148–150, 161, 162, 202 non-banking financial companies 40–2, 45, 49, 210 non-governmental organizations 18 Oversea-Chinese Banking Corporation (OCBC) x, 115, 146–9, 154–157, 159, 161–3, 165–9 oligarchy 67, 71, 72 party-state xi, 187, 190–6 patrilineal kin ties 134 patronage i, xvii, 14, 16, 67, 183, 184, 214 pawnbroking x, 131–45 People’s Action Party (PAP) 122–5, 127–30 Philippines i, iv, ix, xiv, xviii, xix, 14, 16, 18, 64, 65, 67–70, 73–86, 88, 89, 92, 94, 95, 97, 104, 105, 209, 210, 215 post-capitalist economy 6 post-Fordist 7, 9 private sector 11, 12, 20, 41, 43, 46, 188–92 property x, xix, 14, 15, 17, 18, 25–9, 32–4,

38, 55, 68, 70, 72, 76, 79, 85, 90–106, 157, 159, 212; property boom x, 90–4, 95, 96, 100–4, 105, 106; property development 18, 28, 32, 91, 92, 94–8, 102, 104, 157; property investment 90, 101 province 82, 94, 135, 187, 188, 198–200, 204, 206, 207 provincial xiv, xvii–xix, 2, 15, 18, 41, 45, 51, 64, 67, 68, 72, 76, 79, 85, 96–8, 101, 173, 187, 188, 193, 194, 196, 201, 204, 206 real estate xv, 3, 5, 14, 17, 23, 27–9, 32–9, 41, 46, 47, 55, 66–8, 70–2, 74, 75, 80, 85, 88, 89, 90–106, 193, 201, 210, 211, 215 restructuring iv, v, ix, xv, 1, 2, 8, 17, 18, 30, 32, 62, 64, 65, 84, 86, 91, 183, 188, 199; economic restructuring iv, 1, 2, 8, 18, 31, 65, 84; restructuring of space 91 Russia x, xv, 19, 20, 198–211 self-employed 7, 41 services i, iv, ix–xi, xiv, xvii–xix, 1–15, 18–20, 23, 24, 27, 28, 30, 32, 34, 41, 43, 46–9, 51–3, 56, 58, 64–7, 70–3, 75, 78–82, 84–7, 90, 92, 111, 112, 128, 132, 133, 143, 150–2, 160, 162, 166, 171–3, 175, 178, 182, 183, 185, 187, 188, 192, 193, 196, 198–208, 209–11, 213–16; business services x, 3–5, 7, 18, 20, 27, 30, 41, 48, 66, 73, 79, 86, 198–208, 210; consumer services 1, 3, 4, 11, 67, 84, 132, 144, 206, 208; information services 28, 32, 34, 58; producer services i, ix–xi, xiv, xvii–xix, 1–15, 18–20, 24, 48, 49, 64–7, 70, 71, 73, 75, 78, 79, 82, 84–7, 90, 92, 132, 144, 171, 183, 185, 187, 188, 192, 193, 198, 209–11, 213–15 services-based economy 3 Shanghai 146, 150, 153, 158, 160, 163, 165, 167, 174, 187 Shanxi province 187 shipping x, xi, 19, 69, 71, 74, 76, 88, 97, 111, 118, 129, 147–51, 153, 154, 156–8, 160, 161, 167, 168, 171–83, 210, 214 shipping companies x, xi, 19, 153, 158, 168, 171–4, 176, 178, 179, 181, 183 Silicon Valley 26, 51, 54, 58, 83 Singapore i, iv, v, x, xi, xiii, xv, 13, 15, 16, 18, 19, 33, 54, 65, 109, 111–38,

Index 142–59, 161–70, 172–82, 209, 210, 212, 213 Singapore Chinese Chamber of Commerce (SCCC) 112–14, 116, 117, 121, 123, 124, 125, 127–9, 156 small-scale enterprise 40 software industry xiv, 18, 51–55, 57, 59–62 Socialist planned economy 199 sojourner 136 Southeast Asia i, iv, v, xi, xiv, xv, 64, 65, 67, 114, 131, 136, 148, 150, 151, 153, 161, 163, 168, 172, 173, 179 South Korea ii, iv, xiii, 15, 16 Standard Industrial Classification (SIC) 5 state industrial sector 19 state intervention 2, 16, 18, 38, 92, 177 Straits Chinese 146–8, 150, 151, 153–63, 166–9

239

Taiwan iv, xiii, 33, 131, 181, 189, 193, 195 Thailand xv, 15–17, 117, 158, 162, 176, 178, 179 Teochew 117, 129, 155, 159 transitional economies x, 19, 185, 198, 201, 202, 207 transnational corporations (TNCs) 28, 52, 53, 215 trust 8, 9, 15, 42, 91, 128, 131, 137, 138, 144, 154, 204 urban conglomerates 7 Western economies ix, 1–3, 198, 202, 207 western hemisphere 2, 12 women ii, iv, xvii, 43, 131, 132, 138–40, 144, 145, 203, 213 World Trade Organization iv, 12, 35