Towards Recovery in Pacific Asia (ESRC Pacific Asia Programme Series )

Towards Recovery in Pacific Asia

Can there be economic growth without economic reform? Is Asia in crisis or just going through a business cycle? Was the Asian crisis really a crisis of global capitalism? Attempts to define the Asian crisis and its future course are vigorously contested. Towards Recovery in Pacific Asia deals with financial and industrial reform, defence policies, the ‘Asian Values’ debate, corruption and cronyism, as well as China, Japan and intra-regional affairs. Rather than trying to resolve the heated debate about the causes of the crisis, this book reflects on underlying trends to examine the possible paths to recovery. Bringing together experts in the field, Towards Recovery in Pacific Asia suggests that recovery is by no means impossible nor as difficult as it might at first have seemed. But it requires political reform, the tackling of specific economic problems and the international support of the US, European Union and World Bank. There are still causes for concern, such as Indonesia’s transition from the Suharto era and political reform in China and, most significantly, Japan. With its highly topical focus on the social, political and economic development of Pacific Asia, this book represents a vital analysis for students and researchers in Asian Studies, International Relations and International Political Economy, as well as policy-makers and professionals working in, or with, Pacific Asia. Gerald Segal is Director of Studies at the International Institute for Strategic Studies in London. David S.G.Goodman is Director of the Institute for International Studies at the University of Technology in Sydney, and a member of the Australian Government’s Foreign Affairs Council. Both have written extensively; the most recent collections they have co-edited include China Deconstructs: Politics, Trade and Regionalism and China Rising: Nationalism and Interdependence, both published by Routledge.

ESRC Pacific Asia Programme

Europe and the Asia Pacific Edited by Hanns Maull, Gerald Segal and Jusuf Wanandi The East Asian Welfare Wodel Welfare orientalism and the state Edited by Roger Goodman, Gordon White and Huck-ju Kwon Education and Training for Development in Asia The political economy of skill formation in East Asian newly industrialised economies Edited by David Ashton, Francis Green, Donna James and Johnny Sung Agriculture and Economic Development in East Asia From growth to protectionism in Japan, Korea and Taiwan Penelope Francks with Johanna Boestel and Choo Hyop Kim Towards Recovery in Pacific Asia Edited by Gerald Segal and David S.G.Goodman

Towards Recovery in Pacific Asia

Edited by Gerald Segal and David S.G.Goodman

London and New York

First published 2000 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002. © 2000 Selection and editorial matter, Gerald Segal and David S.G.Goodman; individual chapters © the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Towards recovery in Pacific Asia/edited by Gerald Segal and David S.G.Goodman. p. cm. —(ESRC Pacific Asia programme) Includes bibliographical references and index 1. Financial crises—Asia. 2. Asia—Economic conditions–1945– 3. Asia—Economic policy. 4. Asia—Foreign economic relations. I. Segal, Gerald, 1953– . II. Goodman, David S.G. III. Series: ESRC Pacific Asia Programme (Series) HC412.T68 1999 332’.095–dc21 99–38470 ISBN 0–415–22353–9 (hb) ISBN 0–415–22354–7 (pb) ISBN 0–203–06253–1 Master e-book ISBN ISBN 0–203–21210–X (Glassbook Format)

Contents

Notes on contributors Editors’ foreword 1

Introduction

vii ix 1

GERALD SEGAL AND DAVID S.G.GOODMAN

2

Financial reform: the incomplete transition

12

MICHAEL HELLER

3

Industrial reform: insights from the electronics sector

26

MICHAEL HOBDAY

4

Changing defence policies

39

TIM HUXLEY

5

What happened to ‘Asian Values’?

56

ANTHONY MILNER

6

Coping with corruption and cronyism

69

PETER SEARLE

7

China: incomplete reforms

85

MICHAEL YAHUDA

8

Japan and Pacific Asia: from crisis to drama JEAN-PIERRE LEHMANN

96

vi 9

Contents Regional solutions to regional problems?

108

MICHAEL LEIFER

10

A new relationship between the West and Pacific Asia?

119

FRANÇOIS GODEMENT

Bibliography Index

132 143

Contributors

François Godement is Senior Associate, French Institute of International Relations (IFRI), and Professor, National Institute of Oriental Studies, Paris, France. David S.G.Goodman is Director, Institute for International Studies, University of Technology, Sydney, Australia. Michael Heller works at the Institute for International Studies, University of Technology, Sydney, Australia. Michael Hobday is Professor of Innovation, Science and Technology Policy Research Institute (SPRU), University of Sussex, Falmer, UK. Tim Huxley is Director, Institute of Pacific Asia Studies, University of Hull, UK. Jean-Pierre Lehmann is Professor of International Political Economy, International Institute for Management Development (IMD), Lausanne, Switzerland. Michael Leifer is Director of the Asia Research Centre, London School of Economics and Political Science (LSE), UK. Anthony Milner is Professor of Asian History, Australian National University (ANU), Canberra, Australia. Peter Searle lectures in South-east Asian politics in the School of Humanities, Faculty of the Central Coast, University of Newcastle, Australia. Gerald Segal was Director of the Economic and Social Research Council (ESRC)’s Pacific Asia Programme, and is Director of Studies, International Institute for Strategic Studies, London, UK. Michael Yahuda is Professor, Department of International Relations, London School of Economics and Political Science (LSE), UK.

Editors’ foreword

This book is, in the jargon of the UK’s Economic and Social Research Council (ESRC), an ‘end of award’ volume. It is an attempt to bring together some of the best expertise that was supported by the ESRC’s Pacific Asia Programme, a £2.2 million research effort that included nineteen projects assessing various dimensions of success and failure in Pacific Asia. The programme, the largest single European research effort in the social sciences concerning Pacific Asia, began in 1994 and ended in March 1999, thereby encompassing both pre-crisis euphoria about Pacific Asia’s prospects, and post-crisis gloom. While several of its nineteen projects were badly surprised by the crisis, a pleasing number were warning of the problems that were to come. Incisive scepticism had been voiced especially clearly regarding Pacific Asia’s lack of welfare provision, the risks of ‘Asian-Values’ hubris, the failure to lay the basis for a post-industrial economy, the dangers inherent in neglecting political reform, and the difficulty in finding effective regional solutions to regional problems. To reflect on what we have learned, and on what we believe is emerging in Pacific Asia, the Pacific Asia Programme invited colleagues from Australia to join the ESRC in evaluating the causes and consequences of the crisis, not least because Australia’s interests have become increasingly focused on Pacific Asia. This book is the result of that collaboration, and more specifically of a conference held at the British Foreign and Commonwealth Office in November 1998. The choice of venue in no way suggests that the product of the meeting constituted official UK government policy, but the connection with the concerns of policy-makers is evidence of the extent to which the ESRC’s Pacific Asia Programme took seriously its mandate to undertake policy-relevant work in close collaboration with government, business and the media. This mandate was often pursued in the teeth of strong opposition from the British academic community. Throughout the Programme, and certainly in the production of the studies in this volume, the organisers ensured that the work of specialists was tested by regular constructive criticism from officials in the UK, Europe, Australia and further afield. Partly for these reasons, the papers in this book may sometimes seem

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Editors’ foreword

more like essays than was initially intended; those wanting more orthodox academic analyses will find them in the major book-length studies these authors have written, or are completing, on their chosen subjects. Finally the editors would like to thank all those involved in the production of this book; special thanks to to Matthew Foley at the IISS.

1

Introduction Gerald Segal and David S.G.Goodman

If, as in victory in war, Pacific Asia’s successes had many claiming parentage, its crisis, unlike defeat, seems to have had still more progenitors. The crisis, which surfaced with the collapse of the Thai bhat on 2 July 1997, has joined the 1990–1 Gulf War as a defining event of the post-Cold War world. Like the Gulf conflict, the strategies of the main actors following its most intense periods are vigorously contested. In many respects, attempts to explain both the causes and the course of the Asian crisis are part of a broader struggle to define the nature of the world that has emerged in the Cold War’s wake. The chapters in this book cannot possibly resolve the heated discussions over the causes of the crisis. Instead, they reflect on underlying trends to illuminate what needs to be done if Pacific Asia is to recover. They examine the reasons for the region’s past success and, to some extent, the reasons for its crisis. But we look back only to help us to anticipate paths to recovery. Such a confident assertion of the value of anticipating the future may seem foolhardy in the immediate aftermath of a crisis in which one of the more spectacular casualties was precisely the ability of specialists and pundits to foresee where Pacific Asia was heading. Few analysts emerged unblemished, though the more sceptical remained relatively unscathed. Those who spoke confidently of the dawning of the ‘Pacific Century’ and emphasised the merit of a supposedly unique set of ‘Asian Values’ now have most questions to answer. Asia’s high savings-rate, intense work ethic and close-knit families— all supposedly fundamental Asian Values—were no insurance against crisis. The sceptics who saw much of Asia’s growth as yet another version of successes in the Atlantic world in creating developed capitalism have been less shocked by the crisis. When one argues that Asia’s growth was essentially part of the widening core of ‘Westernistic’ systems, its crisis appears to be a more ‘normal’ process of the ‘creative destruction’ inherent in capitalism and an evolving liberal political order. While this book does not attempt to give a definitive verdict on the causes of the Asia-Pacific crisis, it is possible to outline at the outset what we see as some crucial myths about the crisis, the core elements of a regional recovery, and some of our most serious concerns about the future.

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Crisis myths Under the first myth, Pacific Asia’s crisis is most often described as ‘the economic crisis in Asia’, or even simply ‘the financial crisis in Asia’. The vast bulk of analysis thus far argues, sometimes in absurdly restricted terms, that specific technical ‘fixes’ to the way in which international capital flows would have prevented the crisis from taking place (Asian Development Bank 1998; Feldstein 1998; McLeod and Garnaut 1998). However, as all the papers in this book make clear, the crisis in the system is really something else, and can only be seen in the shortest of terms as confined to economic or financial matters. Rather, it is at least as much about political and social change, or more properly its absence or failure. Problems in economic and financial management are of course vital short-term explanatory factors, but an analysis that sets out merely to explain, for example, why the bhat was forced to devalue tends to see only part of a much larger picture. Those who argue that the crisis was simply financial will fail to understand the full extent of the challenge of recovery. This issue is best illustrated by the notion that countries only need more transparency in their banking sector in order to avoid future problems. But financial transparency is, in essence, a product of political transparency, which is in turn the result of greater social and political pluralism and public accountability and the more effective rule of impartial justice. Those who do not go beyond a description of the crisis as financial will tend to settle for short-term fixes, thereby storing up trouble for the future. The second myth has it that Pacific Asia’s crisis has become a crisis of global capitalism. Advocates of this view have begun to refer to ‘a global crisis that began in Asia’, and therefore see less reason to focus on any of Pacific Asia’s particular features which may have caused a mostly local crisis. Indeed, this interpretation, which gathered momentum with the collapse of the Russian economy in August 1998, helps to explain the proliferation of pundits claiming to know the cause of the Asian crises. By redefining the crisis as global, solutions are seen to lie outside Pacific Asia. This is a dangerous position since, in important respects, it absolves the region’s peoples of having to make special efforts to bring about recovery, and may encourage foolish policies outside Pacific Asia. Some stark facts about the crisis are therefore important. First, while the pain has been sharp for Pacific Asia and other emerging markets, there is no evidence that the Atlantic world’s most advanced economies have been seriously damaged; repeated prophecies of economic catastrophe—see, for example, the now-legendary Roubini website (www.stern.nyu.edu/~nroubini/ Asia/AsiaHomepage.html) —have simply not materialised. The collapse of emerging markets in Asia and Russia, together with deep concerns about Brazil, have knocked no more than half of 1% of gross domestic product (GDP) off the growth-rates of the non-Asian states of the Organisation for Economic Co-operation and Development (OECD). Despite dire predic tions,

Introduction

3

Table 1.1 Growth rates in Pacific Asia, 1998–9

Sources: Asian Development Bank projections for growth; currency, stock market data from The Economist

the economies of the US and the European Union (EU) are still the engines of international growth. Perhaps most striking in this context is Australia’s success in containing the impact of Asia’s economic woes after more than a decade of Australians telling themselves that their prosperity is tightly knit to that of Pacific Asia (Segal 1998). Reality has, however, not stood in the way of those who, for various reasons, wish to see the crisis in Pacific Asia as essentially global, and some long-time critics of a global market economy have emerged from the woodwork to proclaim the ‘crisis of capitalism’ and the ‘death of globalisation’ (Economist 30 January 1999). These voices faded after the Russian collapse failed to bring down the developed world’s economies, but returned for an encore in January 1999 with the devaluation in Brazil. Each time, it appears that those who would globalise this crisis are proved wrong. Asia’s crisis— and its solution—are Asia’s alone. Nonetheless, the global crisis argument has been useful in highlighting an important fact about the world economy: that globalisation is far less complete than many people think. If capitalism’s globalisation was truly extensive, the developed world should have failed within months of the Asian collapse. Instead, it seems that what was often described as globalisation is in fact more properly Westernisation—the spread of core principles and practices developed in the Western world (Buzan and Segal 1998b). For all the talk of the Pacific leading the global economy, real power still lies in the Atlantic world. Those not adept at playing by the rules set there will suffer. This Westernisation is best seen in the way in which Western interests responded to the Asian crises. There was undoubtedly a major outflow of short-term capital from Asia back to North America and, especially, Europe as one Asian country after another revealed its economic flaws. The power of

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Gerald Segal and David S.G.Goodman

this money, whether in hedge funds or in bank loans, led many to blame Westerners for the crisis: if only they had left their money where it was, the crisis could have been avoided. This has caused some to argue that constraining the flow of free-market capitalism will bring recovery, and will prevent future catastrophes. However, this view blames the messenger, rather than addressing the genuine causes of the problem in Pacific Asia. Money flooded into the region because foolish Westerners believed the hype and hubris about the Pacific Century and Asian Values. Short-term money from Europe was especially late in arriving, and therefore European bank losses were far greater than those of the Japanese or Americans. But the developed world took its money out only because Asians themselves were doing so, and were willing to admit the depths of their countries’ economic problems. This can only be interpreted as an ‘International Monetary Fund (IMF) crisis’ if Pacific Asia’s so-called ‘fundamentals’ were as sound as Asians and foreigners claimed they were. Countries whose people worked, saved a lot and were not distracted by competitive politics were supposed to be protected from crises. But these fundamentals were insufficient and often flawed. Foreigners and locals alike were mistaken in their belief that some new form of Asian capitalism had been invented. For example, Asians who trumpeted the fact that their savings-rates were higher than those in the US now understood that easy money made possible mistaken investments and corruption. The real fundamental is capital’s efficiency, not the sheer size of the accounts. Pacific Asians had found no special set of values or essentially Asian features that protected them from crisis. If the first two myths are still strongly contested, the third—concerning the uniformity of the crisis—is easier to accept. But what in shorthand is described as a singular crisis in Pacific Asia is in fact a series of crises. Not all apply to every country laid low; the problems of inefficient South Korean chaebol (family-owned conglomerates), for example, tell us nothing about Thai or Indonesian industrial difficulties. The virtues of pegging currencies to the US dollar vary from country to country. Similarly, understanding that not all countries in the region are in deep trouble is vital when thinking about recovery. In this respect, it is as important to understand what has not in fact happened, as it is to grasp what has. Why have the Philippines, Singapore and, especially, Taiwan done not too badly in the crisis? Is China’s crisis deferred or dodged? The relative success stories indicate that the crisis was not irresistible. If fundamental flaws in global capitalism caused it, then all these countries should have been as devastated as South Korea, Thailand or Indonesia. That some survived quite well tells us something about how to achieve sustained prosperity, and warns us that we should be sceptical about apportioning blanket blame to the international economy. A crucial factor in this context is the disproportionate role of Japan. In another of those conveniently neglected facts about this crisis, it is important to note that Japan accounts for two-thirds of all Asian GDP. Japan’s failures sparked, and have sustained, the crises. Increasing interdependence in Pacific

Introduction

5

Asia, led by powerful Japanese growth since the 1960s, left the region vulnerable to problems in Japan. When the country’s bubble burst in 1990 and its growth effectively stopped, it was only a matter of time before other Pacific Asian economies would have to undertake fundamental changes, or else themselves undergo a crisis. Similarly, in thinking about immediate paths to recovery, Japan must loom largest. Even sparkling rejuvenation in South-east Asia and resumed success in China would have only a minor effect on the developed world. Only Japan’s return to health matters, both for the global economy and for the prospects of regional success. To put it harshly, so there is no misunderstanding: in the short term, the economies of South-east Asia and China could disappear from the map of the global economy, and the developed world would not feel much of a pinch. When thinking about paths to recovery, it is worth making sure that our analytical priorities are right. Elements of recovery At the core of this book is a discussion of the elements of recovery. Despite important differences between the contributors, three major themes can be identified. First, sustained economic recovery requires political reform. This categorical statement is fiercely contested in Pacific Asia. Nevertheless, the weight of evidence indicates that achieving sustainable economic reforms requires deeper political and social change. This does not mean that some autocrats will no longer proclaim the creation of a transparent financial sector, nor that gullible Western investors will stop taking them at their word. But foreigners and, more importantly, Pacific Asia’s bruised middle classes, will be less willing than before to take such assurances on trust. Financial transparency requires a political system which allows, indeed orchestrates, fierce questioning of officials in public debate. It also requires the rule of law, in which civil servants and citizens are subject to impartial justice, not the rule of man, as well as a system structurally committed to pluralism. While China’s behaviour shows that lack of political reform and openness can provide some short-term protection, in the longer term, sustaining economic growth in post-industrial economies requires change. It could be argued that Pacific Asians have a long way to go before they need to become serious competitors in a post-industrial economy in which success is based on information and innovation, but that does not suggest that political reform can be avoided. It would certainly narrow the Asian vision to argue that these countries need not compete in the information and innovation world. Political reform is not a short-term remedy, but a long, indeed never-ending, process; its variations among the OECD states indicate that it has no single shape. Pluralism cannot absolutely guarantee the end of crises since developed democracies also endure them, nor does reform lead to swift and easy recovery. South Korea’s experience shows how competitive politics can often make tough economic decisions harder still. Indonesia demonstrates that partial reform that stalls can be debilitating and dangerous. But it would be little short of racism to

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argue that, while more political pluralism is essential to prosperity in the OECD world, it is not needed in Asia. When there is more talk in Asia and the wider world of ‘the Asian crisis’, rather than ‘the Asian economic crisis’, we will feel more assured that the region is on a sustained path of recovery. The second element of recovery is, of course, the need to tackle specific economic problems. Substantial literature has already developed in this area, and is becoming increasingly differentiated for specific cases (Godement 1999; Mallett 1999). Reforming the management of Korean chaebol, ensuring greater openness in the Thai banking sector, breaking up the crony-capitalist networks of the Suharto era in Indonesia—all are well-understood reforms, some of which are under way. Reforming China’s state-owned enterprises (SOEs) and reforming and recapitalising its banking sector are also understood as essential in preventing China’s developing crisis from deepening. Decentralising and deregulating the Japanese economic system is perhaps the biggest challenge that really matters for the regional economy. As Peter Searle points out, a large literature has also developed around detailed discussion of the perils of corruption and cronyism. Long-time students of Pacific Asia had grown used to accommodating both, and some had even become accustomed to arguing that they were an essential lubricant for often congestion-prone transition economies. Others have been quick to cite persistent problems with corruption in non-Asian OECD states. But corruption and cronyism are really signs of problems in the operation of markets. They not only constitute unnecessary transaction costs, but also corrode those values and norms vital for the creation of the more efficient and innovative economies necessary for sustained development. For early industrial economies in good times, these costs can be absorbed, and can even appear to be essential features of success. But bad times reveal waste and fraud. Who can argue that the billions of dollars siphoned out of Indonesia are not part of the problem in an economy that needs new capital and a level playing field? Who can suggest that capital flight from China by corrupt Chinese officials and entrepreneurs is anything but a drag on the country’s ability to weather the crisis? Recovery’s third element concerns the policies of the world beyond Pacific Asia. Few can expect the outside world to do much more than it has already. The US and, to some extent, the EU have pushed the IMF and the World Bank to lead a programme of international support. Americans and Europeans have contributed $30–40 billion each in the form of specific pledges and money contributed via IMF subventions. The stabilisation of currencies and interest rates in much of the region suggests that, for all its failures, the IMF succeeded in its fundamental task of achieving financial stability. Lessons will be learned about what might have been done better, but it now appears that the hysterical criticism of the IMF was misplaced. Would Suharto have fallen without a tough line from the IMF? Would South Korea even be contemplating real reforms of the chaebol if the Fund was not determined to move beyond a narrow interpretation of its role in establishing financial stability? Critics make the

Introduction

7

common error of making the best the enemy of the good. The IMF of course made mistakes—among them being slow to change gears and tolerate budget deficits—but counselling perfection in a rapidly unfolding crisis would have meant inaction. Would critics have preferred the IMF to stay out of the crisis? As the intense days of crisis recede, the critics seem more unreasonable and unconstructive. While providing money and support for global economic institutions is impressive enough, what came as more of a surprise was the fact that the developed world did not respond to the crisis by closing its markets. It was quickly understood that larger trade deficits would have to be endured as Asians tried to export their way out of trouble. Reminders of the lessons of the 1930s, and the immediate impact of the modern crisis on the developed world in the form of deflationary pressures, helped to ensure that European, American and Australian markets stayed open. Keeping them open will not be very difficult so long as the Asian crises do not lead to collapse in the developed world. It will be much harder to persuade developed nations that they should re-invest in ‘emerging markets’, or even that they should take much interest in political and social developments in Pacific Asia. Worries about the future The elements of recovery noted above are fragile, and rehabilitation and future success far from assured. The verdict might be so far so good, but going further requires far more to come good. What follows are the main causes for concern in the future. The first is to do with Indonesia, the world’s fourth most populous country and, arguably, the strategic linchpin of South-east Asia. How Indonesians handle their transition from the Suharto era will matter a great deal to the region. There can, however, be no confidence about where the country’s debates and rivalries will lead. What is more certain is that Indonesia has made some important breaks with its past. Reform, albeit contested, is real. There is more political pluralism and the possibility of more real decentralisation of power. But there is also the risk of more violent ethnic unrest, no certainty of economic recovery and, ultimately, questions about the viability of the state. Stagnation is a very present risk, and is not made less serious by the deeper worries about total collapse. Although the potential regional impact of Indonesia’s problems has so far been contained, the country’s leading role in the Association of South-East Asian Nations (ASEAN) means that its difficulties have contributed to the Association’s paralysis in the face of the regional economic crisis, and have helped to ensure that the organisation has been shambolic in its response to political problems with Myanmar and Cambodia. But there are wider explanations for these trends too. Indonesia’s transition to political pluralism has not yet been sufficiently clear to have had a major impact on its autocratic neighbours, but Malaysia has felt the blast of pressure as it struggles with a more closed-minded response to the crisis. Indonesia’s

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Gerald Segal and David S.G.Goodman

democratisation and calls for ‘reformasi’ were quickly echoed in Malaysia, and encouraged Prime Minister Mahathir Mohamad to remove his rebel deputy Anwar Ibrahim, who had argued for reform. In the medium and longer term, it is hard to see the states of South-east Asia being stable, or projecting a convincing image of stability, without more clearly successful reforms in Indonesia. The country remains the regional anchor in so many areas: free trade, calm ethnic relations and deterring an expansionist China are all virtually impossible without successful reform and stability in Indonesia. A second and more pervasive worry is the fate of reforms in China. As Michael Yahuda’s chapter (p. 85) makes clear, China has in some respects had a ‘good crisis’ —but for negative reasons. It has been praised for not collapsing, not devaluing and not threatening its neighbours. By contrast, it has done little to demonstrate positive leadership. Its contributions to IMF reform packages have been welcome but tiny, especially in comparison to Japan’s. The rationale for China’s caution is increasingly well understood, and is a growing cause for concern in its own right. The country’s two decades of economic reform were premised on evidence from Pacific Asia that there was a path to prosperity through an Asian form of capitalism that avoided having to buy into the entire Western liberal package. China’s ‘Market-Leninism’ was only the latest in a series of efforts by its communist leaders to escape the logic of the Westernistic world (Buzan and Segal 1998b). Unlike its embrace of Soviet communism or indigenous radical experiments, this phase of marketfriendly reforms made China appear far more acceptable to the West. But at the heart of the most recent decades of experiment was the same flaw as before: the belief that China could make meaningful the notion of ‘capitalism with Chinese characteristics’. The collapse of the ‘Asian miracle’ came as a serious fright. In 1999, as the country contemplated its history through the prism of the fiftieth anniversary of the revolution that brought the Communist Party to power, such big issues and their risks were acutely felt. This is not the place to rehearse in detail why China has backed away from far-reaching economic reform. It is undoubtedly true that reforming SOEs is difficult and risky, not least because mass unemployment will follow serious attempts to do so. Reforming the banking sector is no less of a challenge, and the experience of Pacific Asians is a serious warning of what happens if markets impose their solutions. Some might have hoped for a bold leader in the mould of the late paramount leader Deng Xiaoping— instigator of the reform and opening process—who would treat adversity, as did Deng the collapse of the Soviet Union in 1991, as a reason to speed up rather than slow down reform. Instead, China under Jiang Zemin has a cautious leadership unwilling to take risks. As a result, the country will be a worry both to its neighbours and to interested great powers. The lack of serious political reform, the risk that China will find nationalism an appealing distraction and the possibility of a major economic collapse, all make its neighbours nervous.

Introduction

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While no one should underestimate the potential impact of a major Chinese collapse, the international repercussions of a China that meanders around the roadblocks of reform should not be exaggerated. Such relative sanguinity is based on an understanding that, despite the hype, China remains for the present a relatively small economy, and by no means a superpower, much as its leaders might wish otherwise. Its power is more theatrical than theoretical, let alone real. Its ideological pull is minuscule. China’s military power is relatively easily deterred if the US and Japan have the will to do so. Outposts on the South China Sea’s disputed Spratly Islands loom large for ASEAN countries, but could be disposed of with nothing more than a pair of accurate missiles in a time of real crisis. Even in economic terms, China’s power is exaggerated. Leaving aside the vexed question of what part of China’s GDP figures is accurate, it is far from obvious that a Chinese recession would matter very much to the outside world. China’s devaluation in 1995 was, if anything, a minor part of the explanation of South-east Asia’s problems. Most Asian exports go to OECD markets, including Japan. In fact, many lower-income countries in Pacific Asia would probably, albeit quietly, welcome weakened Chinese competition in markets such as textiles and toys in which its performance is impressive. As with Indonesia, many people’s concerns about China are to do with what might not happen. An unreformed China threatening an economic crisis would impair the ability of others in the region to sell the notion that it is safe to invest in emerging markets again. Should China become more nationalistic, for example towards Taiwan, there would be a risk of a major crisis drawing in the US and Japan. As Michael Yahuda explains, failure to reform would also make it harder to drag Hong Kong out of its deep recession. But neither China nor Indonesia is as big a worry as Japan. As Jean-Pierre Lehmann points out, there are good reasons to worry deeply about Japan’s ability to lead regional economic growth. To the extent that Japan can be meaningfully seen as the lead goose in the flying geese pattern of regional economic growth, it must be a cause for concern that the splattering of the lead goose has not led to far-reaching commitments to reform. Optimism about a long-term return to growth in Pacific Asia requires signs of true reform in Japan. The final area of concern is the relationship of Pacific Asia’s states to each other, and to the wider world. In this book, Michael Leifer offers a convincing argument as to why there can be no regional solutions to regional problems. In the midst of the crisis, one thankfully hears little about the ability of Asian Values or a distinctive Asian form of capitalism to plot the route to success. To the extent that there was an international dimension to the management of the crisis, it was through the IMF and the World Bank. All regional efforts, whether by ASEAN, the Asia-Pacific Economic Co-operation (APEC) forum or the Asia-Europe Meeting (ASEM), were inconsequential. For those content with the solutions advanced so far, this lack of regional answers is not a problem, but a blessing. Imagine if, at the prompting of ASEAN states, Japan had put together a regional rescue package in September 1997

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without strict IMF conditionality, as it considered doing. No one seriously argues that the crisis would have been any less severe than it was. The most obvious outcome would have been a waste of money and an even higher mountain to climb in convincing people of the need for painful reform. Still, the debate over the ‘lost opportunity’ for a regional solution rumbles on. Its latest guise is the notion of an Asian Monetary Fund (AMF), taking on aspects of the IMF and the Asian Development Bank (ADB) to provide Asian funds more quickly, and to tailor them better to Asian conditions. This farfetched notion is in part explained by asking where the advocates of Asian Values and Asian Fundamentals have gone after the crisis demonstrated the vacuity of their arguments. One even hears Asians musing that if Europeans can seek safety from the whims of global finance through a single currency, Asians should explore a similar option. As Michael Leifer has pointed out, this is a ‘category error’ that confuses the European project —which is about surrendering sovereignty—with the exactly opposite interests of Asian states in strengthening their sovereignty. It is not so much that we should be worried about far-fetched ideas being debated in public-policy circles, for such diversity of views is to be welcomed. The concern is that the idea of an AMF or other regional solutions is sometimes seen as appealing precisely because it appears to offer an escape from the need to reform. There is no doubt an attraction in not having to ‘take orders’ from Washington or Brussels—although few Chinese would really want to replace these centres with Tokyo, and few Pacific Asians anywhere outside China would want to take orders from Beijing. So long as the Western recipe for recovery works—and so far it has—the dangers of seriously trying regional escapism are minimal. If the IMF had failed to stabilise currencies and interest rates there would have been a serious risk of a backlash against the Westerners who imposed their global solution to regional problems. Indeed, whatever the economic solutions in the longer term, the possibility of renascent nationalisms is never far away in South-east Asia, as Anthony Milner indicates in his chapter (p. 56). If economic growth does not return, critics may still want to revisit the issue of whose orders it is best to follow. But the Atlantic powers look like emerging from the Pacific Asia crisis of the 1990s as they did the Latin American ones of the preceding decade—with their authority and power intact. Indeed, it is this question of authority and power that is now emerging as one of the most important reasons for assessing the Asian crises. The events in Pacific Asia are so important not merely because they have affected the lives of so many hard-working people in the region and shattered so many of their dreams. They are important not simply because they teach one of the crucial but unpleasant lessons of capitalism and liberalism: that markets can go up as well as down, and that mistakes can be made. Creative destruction is a fundamental and unavoidable feature of the recipe for long-term prosperity. It is hard learning that there is no easy way to success.

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The crises in Pacific Asia are important also because of what they mean for the developed world. Developed nations are still trapped in the notion that they too must suffer with their Pacific Asian protégés. But as it becomes clearer that Asia can have its own crises without bringing everyone else down too, the risk is that Western hubris will take hold. Those who never properly read Francis Fukuyama will think that the end of history really has arrived (Buzan and Segal 1998a), but one of the important lessons of the Pacific Asian crises is that achieving prosperity and a liberal peace is a never-ending struggle of reform. Post-industrial economies should never have looked to Pacific Asians for the values that would sustain them in an information and innovation age. Rather than pretending that there is some way that the developed world can slow down the global economy or manage its hedge funds, the challenge will be to find new ways to prosper and manage change. Just as not all Asians were knocked over by the crisis, so not all OECD countries will prosper in the innovation age. If Asia and its crises have anything to teach the developed world, it is the need to avoid hubris and the belief that there exists some haven, safe from the turbulence, providing for prosperity.

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Financial reform The incomplete transition Michael Heller

Joseph Schumpeter once complained that ‘historians of crises primarily talk about stock exchange events, banking, price level, failures, unemployment, total production and so on—all of which are readily recognised as surface phenomena or as compounds which sum up underlying processes in such a way as to hide their real features’ (cited in Freeman 1990:21). Asia’s financial crisis is no exception: rather than the result of isolated errors and the faulty working of credit mechanisms, it stems from more deep-rooted, structural weaknesses. The crisis has revealed an underlying ‘crisis of disproportionality’ between the slow pace of institutional development at home, and the fastchanging process of global economic integration. Asian governments fell victim to a series of errors in the way they perceived the region’s political economy: a nostalgic faith in economic planning and interventionism; premature confidence that Asian high-performers were rapidly evolving into modern capitalist societies; and a naive emphasis on capital accumulation at the expense of qualitative appraisals of real market transactions. Prolonged statism, secrecy and monopolistic behaviour meant that, by the 1990s, Asia’s crisis-prone high performers had lost the flexibility to adapt to changing economic conditions. Failure to safeguard legitimate entrepreneurial activity made several economies vulnerable to booty-seekers long before the crisis broke. While there is no panacea, it is doubtful whether technical ‘fixes’ can be meaningfully implemented without broader domestic institutional reform. There is a long-term relationship between political pluralism and economic pluralism. Governments have numerous options for regulating capital flows and other economic activity as a basis for sustainable growth and development, but the ability to use these tools well depends on a commitment to uniform ownership rights, and to a mobile social order. Dirigiste fantasies The financial crisis should have dispelled a few myths about Asian banking institutions. In 1993, the World Bank argued that the region’s high-performing economies had attached importance to promoting stable and well-regulated

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financial institutions, with depositors protected from bank defaults. There was a widespread perception that close contact between government and business in the region had helped to enable monitoring and sharing of information. Thus, the World Bank pronounced that ‘routine, often daily interaction enables regulators personally to assess the riskiness of a bank’s portfolio’ (World Bank 1993:213). Despite reservations about moral suasion, restricted market entry, weak disclosure rules and interlinked ownership between banks and firms, the World Bank concluded that the region’s governments could respond rapidly and effectively to periodic crises caused by insufficient supervision or speculative lending. It gave cautious praise to government-directed credit programmes in Japan and South Korea, arguing that credit appeared to have been allocated according to commercial rates of return and ‘objective lending standards, rather than on the basis of political considerations’ (World Bank 1993:274, 286, 290). Supporters of a dirigiste approach to development policy were wholehearted in their commendation of Asia’s government-directed credit programmes. Successful late development, as in South Korea and Taiwan, could not be achieved without ‘financial repression’ (Amsden 1989). A crucial element in this strategy was government allocation of credit as a political device to encourage industrialisation. The superficially plausible advantages of a credit-based system in developing countries are fourfold: it allows for faster investment ‘than would be possible if investment depended on the growth of firm’s profits or on the inevitably slow development of securities markets’; it permits the ‘selective fostering of key sectors’; it ‘helps avoid the bias towards short-term company decision-making inherent in a stock market system’; and leverage over firms enables governments to build ‘social coalitions’ to support national industrial strategy (Wade 1988: 131–9). Companies are less likely to oppose the government when it has the power to cut a firm’s credit lines. As well as a lender of last resort, government is justified in supporting banks imperilled by loan losses. In the event of solvency problems, there is an obligation on governments in developing countries to help ‘socialise’ the risk, otherwise ‘firms are likely to borrow less, and banks to lend less’. The system can also encourage banks to become shareholders in companies, and governments to become shareholders in banks, since it is ‘imperative…for the supplier of credit to become intimate with company management’. The system requires government and banks to develop an ‘institutional capacity to discriminate between responsible and irresponsible borrowing, and to penalise the latter’. Finally, government must be able to control financial flows in and out of the country, otherwise it will be unable to guide investment allocation. It is difficult to imagine a general prescription more calculated to lead to financial crises. The assumption on which this whole thesis rests is tenuous at best: that government can or will evolve and then sustain indefinitely the capacity to monitor performance and to penalise irrational credit allocation. But as economies grow larger and more complex, so allocating credit rationally

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becomes proportionally more difficult. Moreover, the more regulatory, allocative and productive functions a government has, the more likely it is that monitoring and compliance will be relaxed, as links of interest develop between officials and non-state players. Asian bank monitoring tended to degenerate into relationships that weakened credit-risk assessment. Statism, even if temporarily effective, self-destructs once interest groups consolidate within and around unaccountable government policy institutions. The technical aspects of planning become too demanding, and create opportunities for corruption and abuse of power. Thus, the state loses the ability or willingness to be selective, responsive and flexible in the face of changing social and economic conditions. Errors of foresight; lessons of hindsight The favourable and influential dirigiste analyses of East Asian financial instruments were clearly wrong. They called for great faith in human nature or in Asian cultural values, and did not foresee that deliberately fostering ‘intimate’ relations between regulators, banks and firms would lead to rentseeking, or that the principle of ‘socialised risk’ would make companies inefficient. Socialised risk allowed firms to borrow, and banks to lend, far more than a market-based credit system would have permitted. This system worked in the 1970s, when governments in countries like South Korea focused only on maintaining incentives to spur export growth. By the 1990s, however, its consequences had become disastrous; dirigiste discipline had declined into something akin to institutional rigor mortis. Controlling capital flows in and out of the country had not improved the judgement of government bureaucrats. Had banks and firms borrowed internationally at their own risk, it is doubtful whether South Korea would have accumulated the large short-term foreign debt in the mid-1990s that helped precipitate crisis in late 1997. Exposure to international credit-risk standards in the 1980s could have encouraged greater discipline in domestic lending more generally. Subsidised finance to heavily protected firms was the central element in the South Korean model of industrialisation. According to one estimate, the average cost of loans throughout the 1970s was -6.7%, encouraging the worst kind of speculative activity as ‘relatives in government lent money to relatives in business, piling money upon growth expectations and growth upon money expectations, somewhat like a chain letter or a crap game that worked year in and year out as long as the pie kept expanding’ (Cummings 1997:317–18). Any advantages in being able to foster ‘key’ sectors through directed credit are just as likely to be outweighed by social and economic costs. Decisionmaking in this area is too subjective to withstand the influence of interest groups. Capital markets might perhaps be less inclined to encourage long-term company strategy than Asia’s state-centred credit systems, yet if they are run with adequate disclosure rules, enforceable regulations to minimise insider

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trading and carefully delimited controls on short-term capital mobility, stock markets can be excellent market-information systems, and are not so easily distorted by personal influence and graft. Indonesia’s stock market did not achieve these regulatory standards in the early 1990s, so companies could not use it to full advantage in developing long-range strategies. Finally, the supposition that government-directed credit will generate a bias towards longterm economic strategy conveniently ignores the tendencies of governments to make short-term decisions in pursuit of political survival and alliances which rely on dipping into the public purse. In the wake of the Asian crisis, it became evident that most East Asian political economies had not institutionalised another of the basic tenets of a functioning market society: the universal expectation that business failure can lead to bankruptcy. Despite evidence that loans were often geared to performance, and that export firms would be exposed to global markets, the policy mechanisms and relations between government and business which sustained financial repression also encouraged piecemeal discretion and incentives which could protect firms from the consequences of failure. After the crisis broke, it became clear that companies in the worst-affected countries could default without great risk of being held to account to their creditors under the law. Western investors had little chance of foreclosing on money owed to them by private or public companies. Implicit government guarantees to firms and banks could have significantly contributed to over-lending, overborrowing and speculation. Bankruptcy proceedings after the crisis could have devastated young industries, but had rules been in place before the crisis, incentives for profligacy would have been fewer and disaster might have been avoided. A question remains about why Taiwan fared better than its neighbours during the meltdown. Taiwan’s political economy, like South Korea’s, has been dirigiste, and for many years guided by a competent and meritocratic bureaucracy. As in South Korea, Taiwan’s banking sector was state-owned for much of the period in which growth took off. However, the state has tended to keep the private sector at arm’s length. Public-private networks in Taiwan are apparently less ‘dense’, less informal and less institutionalised than they are in Japan and South Korea, and business does not participate in economic policy fora (Evans 1992:160). The Taiwanese state has thus been unusually ‘autonomous’. The Kuomintang (KMT) regime ‘progressively exposed its “greenhouse capitalists” to the rigours of the market… diminishing protection over time. Thus the state was able to enforce the emergence of a free market rather than allowing the creation of rental havens’ (Evans 1992:162). This pattern is more pronounced and enduring in Taiwan than in the East Asian countries which performed badly during the financial crisis. Taiwan’s microeconomic environment may also be unusually fluid and flexible (Economist 3 January 1998). It is as easy to start up new firms as it is for them to fail. The business sector has experienced ongoing ‘creative destruction’; state decisions alone cannot account for the flood of

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firms into new profit niches. Competition and fear of bankruptcy spurred productivity growth. Taiwanese companies are smaller, more responsive and lighter footed than those of most neighbouring countries. Gradually diminishing government-directed credit and infant-industry protection, combined with capital controls to prevent companies from taking on foreign loans for speculative projects, produced a more sustainable debt structure. The knowledge that the legal system upholds bankruptcy laws also encouraged prudent use of capital resources (Economist 3 January 1998, 24 January 1998). Since Taiwan cannot gain recognition as a sovereign entity in international fora, external security priorities drive it to maintain a virtual ‘war economy’ capable of riding out crises. This may partly explain why technocratic decision-making was not dragged down by rent-seeking. Huge foreign-exchange reserves, together with limits on short-term foreign borrowing, protected Taiwan from the worst effects of the crisis. Together with the distinctive nature of Taiwan’s state autonomy, this produced a quasidirigiste polity which remained adaptable and flexible for longer than would usually be the case. The rise and fall of South-east Asian capitalism When Asia’s high-performing economies were expanding faster than any others in history, it was tempting to revise earlier analyses emphasising the traditional patron-client characteristics of the region’s political culture. Conventional wisdom since the 1960s had it that South-east Asian countries such as Thailand and Indonesia were patrimonial ‘bureaucratic polities’, whose élites were cut off from the societies which surrounded them. The system of parasitic office-holding was seen as a hindrance to modernisation because only ‘pariah entrepreneurs’ with good connections prospered. By contrast, economic growth and the increasing size and dynamism of the business sector suggested that the isolation of the bureaucracy and polity could itself be the source of state strength and developmental success (McVey 1992:28). This view chimed neatly with the plausible theory that ‘relative state autonomy’ is necessary during early stages of capitalist development, when the business classes were weak. Ruth McVey’s 1992 analysis, Southeast Asian Capitalists, typifies a theoretically diverse pre-crisis literature which searched for signs of dynamic capitalist development in South-east Asia. Her starting point—ridiculing critics who believed that South-east Asian capitalism might be ‘ersatz’, or qualitatively second-rate—is especially pertinent: ‘The spectre of capitalism is haunting Southeast Asia. A most concrete ghost, it has revealed itself in office blocks towering above Kuala Lumpur, in banking palaces glittering amidst Thai district towns, and in the whitewashed mansions of an Indonesian elite whose wealth comes neither from land-holding nor bureaucratic position’ (McVey 1992:7). It is unfortunate that McVey chose triumphal physical edifices, especially the ‘glittering banking palaces’, as

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emblems of South-east Asian capitalism. Within five years, the crash of the financial sector had pulled the veil from a construction boom which had become a speculative bubble of catastrophic proportions. Charles Kindelberger has described the ‘euphoria’ that precedes a crash, when the objects of speculation are, as they were in several Asian countries during the 1990s, visible real estate, golf courses, shopping centres and condominiums, and when the psychological stimulus to ‘overtrade’ is heightened (Kindelberger 1996:13–15). In 1997, up to 35% of bank loans in Asia were committed to property, which had soared artificially in value until overcapacity set in and prices fell dramatically. Too much investment in construction is typical in countries which have over-guaranteed and underregulated banks, and when there is complacency about future growth prospects (Economist 10 January 1998). The bubble bursts at the first signs of trouble, and there is a stampede out of speculative assets and into money, causing a sharp drop in the price of property (Kindelberger 1996:13–15). Owners default on their loans, and banks are no longer willing to accept property as collateral. McVey’s analysis stressed the development of the manufacturing industry, and the growth of large-scale indigenous business corporations. She did not read off capitalist progress from superficial manifestations of flaunted mercantile wealth, technology and middle-class consumption patterns. Other analysts have cautioned against assuming that the phenomenon of the ‘new rich’ in Asia indicated ‘capitalist’ development as usually understood by Western observers. In China, the ‘capitalist’ credentials and opportunities of many individuals and groups engaged in wealth accumulation and entrepreneurial behaviour depend on membership of the Communist Party or management of state-owned enterprises. As Goodman argues, either this is not capitalism, or capitalism needs redefining (Goodman 1996). Nonetheless, McVey’s concept of capitalism is representative of the bulk of the literature of this type. It is confined to ‘a system in which the means of production, in private hands, are employed to create a profit, some of which is reinvested to increase profit-generating capacity’. Sectors of the economy are thereby capitalist only ‘provided they are carried on in a capitalist manner and involve domestic capital’ (McVey 1992:8). Under this definition, McVey reaches the hasty conclusion that the growth of domestic capital that emerged from ‘the nexus of business, politics, and the state… has been central to the Southeast Asian capitalist upsurge’ (McVey 1992:9). Richard Robison has suggested that rent-seeking and clientism in Indonesia were absolutely necessary, or at least inevitable, when the emerging domestic bourgeoisie ‘rely upon privileged access to licenses, concessions, credit and contracts achieved through special relationships with the politico-bureaucrat appropriators’ (Robison 1986:394). These approaches neglect important social and institutional features of long-term capitalist development. In particular, greater emphasis is given to the quantitative increase of ‘capitalists’ or ‘capital’ —almost always

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‘domestic’ or ‘indigenous’ —than to the legal and civic environment in which business operates, or to qualitative measures of how markets actually function. It is clear that, in South-east Asia’s financial sectors, the state was more protective than catalytic, and that its actions were compromised by the economic interests of its officials. The state encouraged the private sector to make inappropriate or over-ambitious investments, and it helped to hide the extent of bad debt from foreign investors and international institutions. In so often and actively taking the role of ‘guarantor’ of loans, the state also more or less nationalised private-sector debt. Supporters of dirigisme and state autonomy seemed not to recognise that effective autonomy required strong meritocratic institutions and a political commitment to building a postpatrimonial market society. These simply did not exist in countries like Indonesia. The alternative view—that states which limit themselves to ‘parametric’ policing functions will be more capable market regulators than ones that become overloaded by strategies of ‘pervasive’ economic intervention— was barely heard (White 1984). Thai finance: state autonomy and the autonomy of firms The history of the Thai banking sector does not support the theory that patrimonial polities were rapidly becoming effective modern states. The major Thai banks began as associations of Chinese trading groups formed before and immediately after the Second World War. As in Indonesia, military leaders and ‘political bureaucrats’ found it expedient to utilise Chinese capital and entrepreneurial skills. Unlike Indonesia, where state banks remained dominant in the financial sector, this ‘alliance of convenience’ encouraged the rapid growth of a small number of large commercial banking conglomerates dominated by Chinese families which shared the same clan or dialect. These families invited leading Thai army or police officers and bureaucrats to become board members and shareholders. By the early 1980s, four families of Chinese origin controlled 62% of total bank deposits (Christensen et al. 1993; Suehiro 1992). Thai commercial banks operate a virtual cartel, collectively setting service-charge and loan rates (Warr 1993:24). While the government protected these banks from foreign competition, these conglomerates were attractive partners for incoming foreign investors. In contrast to other Asian newly industrialising countries, the Thai government’s autonomy in the domestic financial sector was limited mainly to controlling the money supply (Laothamatas 1992). Regulations encouraged the close clustering of industrial groups around a few giant commercial banks, adopting a role which was functionally equivalent to the South Korean or Indonesian government-directed credit programmes: ‘Banks gathered the savings which financed expansion and made scale possible… identifying opportunities, smoothing relations with government, broking partnerships, setting up links overseas…[they] looked around for the best

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opportunities for growth, urged their business friends to pick these “winners”, supplied them with the capital’ (Pasuk and Baker 1996:227). Nevertheless, there were sharp contests between state agencies and the banking sector once commercial banks had become relatively autonomous quasi-monopolies. By the 1970s, government technocrats worried that banks were becoming a source of economic distortion and financial instability. In the 1980s, the unusually independent Finance Ministry attempted to put some distance between banks and industrial firms, including efforts to diversify banks’ shareholdings. However, a World Bank-sponsored study in 1993 observed that ‘these regulatory efforts have failed. The big banks are typically family-controlled and closely linked to industrial firms owned by the same families…it becomes difficult to sort out who owns what, which complicates the efforts of the Bank of Thailand to assess the quality and riskiness of bank portfolios’ (Christensen et al. 1993:16). During the export take-off of the 1980s, the Central Bank provided guarantees to large commercial banks threatened by debt defaults in the industrial sector and soft low-interest loans to help them stay afloat, and continued to protect them from competition. The transformation of the banking sector did not begin until the early 1990s, when competitive pressures were introduced through a rapidly growing stock market, the liberalisation of foreign exchange and an offshore banking scheme which allowed foreign banks to open branches in Thailand and capture a large portion of the foreign lending market. Thailand quickly became a ‘haven of financial freedom’ —requiring regulators to come of age at ‘breakneck speed’ (Financial Times 5 December 1994). New finance and securities companies played risky, complex and illegal games. In the past, the big banks had lent only to those they knew, and patterns of insider-dealing had been relatively predictable. By the 1990s, however, Thailand’s financial authorities needed a degree of policy flexibility and supervisory stringency that they did not have. Analysts such as McVey, who had detected the metamorphosis of the patrimonial polity into a modernising state, and Suehiro, who spoke of the creation of a world-class banking sector, were premature. The weakness of the judiciary is one of the main reasons why Thai social relations remain shaped by authoritarianism and patronage (Girling 1990: 167–8). Parliament gives a low priority to the legislative process and does not uniformly protect the rights of individuals in their dealings with the state. The antiquated civil-law code devolves significant legal power to administrative agencies (Christensen et al. 1993:19). Officials decide who wins and who loses from the regulation of business activity. Bureaucracy has such broad legal authority that deregulation could not be undertaken without the acquiescence of agencies which had in the past supervised the sector. Under these conditions, much-needed economic liberalisation only produced new forms of corruption. Thailand was warned repeatedly by outside analysts in the years leading up to the crisis that ballooning current-account deficits,

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overheating and high levels of foreign debt risked major financial-sector problems in the event of any shift in the market mood. Once these problems peaked, foreign creditors felt little commitment to an economy where investor security was so unpredictable. A closed community: financial sector rent-seeking in Malaysia The Malaysian banking sector presents a mixed picture of limited dirigiste state autonomy undermined by patronage networks and a weak legal framework. Since the 1970s, the dominant players have been required to assume an overtly political role within an institutionalised financial ‘holding’ framework designed to promote the growth of an ethnic-Malay business class. According to James Jesudason, ‘two mechanisms were critical for the rapid ascent of the Malay bourgeoisie. The first was its access, from strong connections and political links, to enormous funds from…state-controlled and state-owned banks.’ The other mechanism was the ‘state’s regulatory power in opening up ownership opportunities for Malays in local and foreign companies… It is hard to think of a country where the rich have burgeoned so quickly’ (Jesudason 1989:105). The state’s commitment to augmenting Malay (bumiputera) ownership dramatically increased the government’s shareholding in commercial banks. As early as 1975, government patronage enabled three Malay banks to replace British houses as the country’s largest financial institutions (Crouch 1996:205). By advancing loans to business groups closely allied to the government, by 1982 bumiputera equity stakes represented 77% of the entire banking system, up from 3.3% in 1970 (Salleh and Meyanathan 1993:31; Gomez and Jomo 1997:60). In the 1990s, the government further consolidated the banking sector by restricting foreign ownership, limiting new licences and encouraging mergers. The re-routing of resource flows brought benefits to some social sectors, but was detrimental to overall economic performance. It cultivated a ‘subsidy mentality’, with a middle class that clung to the state for employment, and a parasitic, rent-seeking and speculative business sector (Gomez and Jomo 1997:118, 177–81). It also meant that the latent entrepreneurial energy of domestic ethnic-Chinese capitalists was diverted away from key export industries (Lubeck 1992). In the banking sector, three problems stood out. First, ‘because the path to wealth has come so easily and without many risks, it is very tempting [for Malay entrepreneurs] to over-stretch and expand at a frantic pace, piling up dangerous levels of debt’ (Jesudason 1989:108). This left banks exposed to the possibility of major defaults. Second, since ‘business size and political influence have interacted as part of the new idiom of power in contemporary Malaysia…commercial banks [have] been more inclined to provide credit to larger establishments’ (Gomez and Jomo 1997:49). Third, reliance on an oligopolistic banking sector and directed-credit mechanisms to manipulate

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the flow of large-scale investment brought abuses of power: the ‘greatest corruption was in the banking system, especially in the state-owned banks where state managers oversaw enormous funds and could hide behind secrecy laws protecting depositors and borrowers’ (Jesudason 1989:120). The legal aspects of these issues are crucial. One observer notes that ‘speculation and peculation’ discredited Malay enterprise because it allowed businesses to avoid market discipline and seek government intervention. Legal regulation offers little promise in contemporary Malaysia because ‘lawmakers have become too involved in the game themselves, and few officials have the courage and independence to enforce the controls that do exist’ (Sieh 1992:125). The independence of the judiciary is limited: ‘When court decisions have threatened fundamental government interests, the government has taken whatever action necessary to defend its position… the judges continue to be essentially conservative custodians of a political system dominated by the Malay elite’ (Crouch 1996:137–42). Manipulating the legal system is one way in which Malay élites limit pluralism and control the flow of information. These are not conditions that foster confidence in property rights or the predictability of the investment environment. They tarnished Malaysia’s image in the eyes of the world, and contributed to the country’s vulnerability during the financial crisis. Indonesia’s financial deregulation Did liberalisation attack the foundations of Indonesia’s patrimonialism as it should, or did it simply encourage monopolistic rent-seeking? For a quarter of a century, President Suharto astutely managed the division of power between conservative technocrats and nationalist bureaucrats. The relative influence of these groups depended on the perceived policy needs of the day. The fall in oil prices in the mid-1980s sparked a series of structural adjustments. Technocrats saw the decline in oil revenue as an opportunity to liberalise an over-regulated and over-subsidised economy with vested interests in recycled oil wealth (Hill 1996:242). Assisted by overseas advisers, they introduced bold reforms in the late 1980s to restructure the economy and stimulate manufacturing and non-oil exports. In 1988, sweeping deregulation of the banking sector allowed more private national and foreign banks to enter a financial market previously dominated by state houses. Reform was rapid and unbalanced as liberalisation outstripped the introduction of new regulations. In just 18 months, 40 new private banks had received licences (Schwarz 1991). Sudden financial liberalisation spawned near-boom conditions in the private sector, but new banks introduced gimmicky and risky schemes to attract savers, and few had experience of loan assessment or project appraisal. Liberalisation was taking place within the traditional patrimonial rent-seeking relations of

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government-business ‘cronyism’. Credit analysis remained a matter of procedure rather than analysis; bankers relied on the name of the borrower more than assessments of the project’s feasibility. There are ‘no generally accepted accounting principles for measuring a bank’s health and the professionalism of many accounting firms is questionable. The absence of reliable financial reports makes the central bank’s monitoring responsibilities that much more difficult to fulfil… Provisions for collateral enforcement are vague and many banks do not even bother trying to collect non-performing debt through the judicial system’ (Schwarz 1991:29–30). The Central Bank’s supervisory capacity was limited; there were no accurate data on loans which were in arrears or default. The collapse of several major private and state banks in the early 1990s confirmed the financial chicanery of the political élite and the secretive and interlocked nature of government-business relations. It also reduced the pressure for reform. Nationalists claimed that financial deregulation had helped to send the country’s external debt spiralling out of control. However, official figures probably considerably understated total external debt even before deregulation (Hill 1996:248–9). Technocrats continued to defend the principle of reforms; what really mattered, they claimed, was how the borrowed funds were used (Schwarz 1994:78–9). Foreign loans had often been used unproductively because of corruption and political favouritism, while foreign banks were prepared to overlook the poor prospects of repayment as long as a state bank was involved in the project, thereby providing a de facto government guarantee. These guarantees contributed to the sharp increase in Indonesia’s foreign debt from the late 1980s. After a ‘quarter century of…making ill-advised loans to privileged borrowers, the state banks entered the 1990s saddled with mammoth uncollectable debts’ (Schwarz 1994:147–51). Technocrats worried by the lax credit analysis of state banks formed a team to monitor all overseas borrowing for any project connected with the government. However, loan screening struck at the heart of cronyism, and its proponents were soon forced to waive some of these borrowing restrictions (Schwarz 1994:79, 152). Hall Hill concludes that Indonesia’s poorly developed regulatory regime survived relatively unchanged after the economic reforms of the late 1980s. Indonesia remained ‘a rather lawless society’ (Hill 1996:245). The severity of Indonesia’s financial crisis cannot be understood in isolation from the untrustworthiness of certified financial data, and the inability of the courts to protect investors and creditors. Promising waves; dangerous undertows East Asian financial repression invited rent-seeking. Accumulating state and private-sector capital did not significantly diminish patrimonialism in Indonesia. Banking-sector policies in Indonesia, Malaysia and Thailand

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remained guided more by the principles of bureaucratic polity than by state autonomy and market rationality. Financial-sector regulatory frameworks in South-east Asia did not help to establish arm’s-length relationships between government, judiciary and business. Asian financial institutions hid the true state of affairs from overseas investors and international institutions. Financial liberalisation was implemented in ways that would reproduce, rather than reduce, cronyism. Arguing that countries should not have liberalised financial markets during the last ten years, that they liberalised too fast, or that they were somehow tricked into debt crisis, ignores the wider process which culminated in rapid financial liberalisation. Bad debt had accumulated for many years before deregulation, and East Asia’s financial institutions were in poor shape long before the crisis. A desperate need for new capital to roll over maturing debts or support clientist ‘mega-projects’ may have been behind the panicky way in which the financial sector opened up in countries like Thailand and Indonesia. Reforms are only as good as the mentalities, motives and institutions which shape them, which in turn partly reflect deep-seated patterns of economic culture. Analysts failed to predict the Asian crisis in part because they tended to see the region’s development prospects in terms of policy dogmas, usually choices between state-centred and market-centred economic paths. Insufficient attention was given to the core institutional edifices which supported Asia’s emerging-market economies. In several respects, these remained incompatible with regulations on social and economic relations which, regardless of cultural difference, are universal elements of a functioning capitalist market society. Financial institutions can least afford to be exceptions to these basic rules. Capitalism is, by definition, ‘enterprise carried out with borrowed money’. The fundamental impulse that sets and keeps the capitalist economy in motion comes from innovation (Schumpeter 1950:83). To innovate, an entrepreneur (or a developing country’s government and firms) must assemble the necessary financial resources. Economic development requires constant innovation. Bankers are thus a necessary evil because they fuel the engine of capitalist innovation. They are also easily blamed for widespread misery if they choose to call in debt from countries and firms which have failed to ‘realise’ their investments, to maintain a sustainable debt-equity ratio, or to accumulate sufficient reserves and investor confidence to see them through downturns. Bankers assess entrepreneurs largely on trust. It is rational that they should share a common ‘culture’ or outlook. When different cultural understandings of what trust means come together in a bank manager’s office, adequate disclosure rules, standard accounting procedures and bankruptcy laws which carry a credible threat of being applied are the best ways to avoid misunderstanding. Asia’s economic success depended on participating effectively in world markets. Restoring that potential will mean leaving behind the institutions and ideologies which eventually fettered the ability of Asian states to be flexible, responsive and selective. This means moving into a post-dirigiste era, a shift

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which implies greater pluralism, both political and economic. It also means restoring investor confidence and capital flows. Concepts such as ‘transparency’, ‘market-friendliness’, and ‘the rule of law’ may be hackneyed, but they are at the core of improvements in financial sectors—without them recovery is inconceivable. Policies will be thoroughly debated by economists, but the job will be easier if they also convey an understanding of the relationship between capitalist modernisation and the development of rational law. As long as state officials and enterprises operate without reference to these laws, and there is no credible threat that they will be implemented, politics and economies will remain patrimonial. Once systematised and formal law replaces the arbitrary law-finding of patriarchal or autocratic administrations, safeguards will exist to encourage people to challenge monopolies and to question economic conspiracy. Countries may appear to be moving towards international legal standards, and might feel forced to adapt to rules required by foreigners in order to do business, but the real test is in the objectivity of adjudication and the consistency of implementation (Segal 1997c). As economic historian Douglas North argues, ‘even with a constant set of rules, detection procedures, and penalties there is immense variation in the degree to which behaviour is constrained. Strong moral and ethical codes of a society are the cement of social stability which make an economic system viable’ (North 1981:47). East Asia’s cultures of trust were temporarily effective in domestic business terms, but became irreconcilable with the assumptions and expectations present in fast-moving global markets. Debates in international fora about how to police cross-border financial dealings are a natural and healthy sign of the process by which regulatory change will be brought about. Yet we should not be shy of expecting players to conform to tried and tested operating norms which, though far from perfect, are already broadly successful and deeprooted. For a decade or more, investors and scholars were swept credulously along by the spell-binding claim that unique ‘Asian ways’ to economic growth did not need the institutional paraphernalia and normative expectations which governed economic transactions in the West. Now it is clear that rediscovering the route to an ‘Asian Century’ will require more than International Monetary Fund recipes for stabilisation, more than the perspiration and deferred gratification which had helped the earlier take-off, and more than simply recalibrating the central-planning tools which may have helped to kick-start industrialisation in an earlier epoch. With increasing globalisation, Asia has little choice but to fall into line with the dominant norms of economic and political behaviour. Self-consciously ‘Asian’ leaderships which sought to carve out a distinct economic and cultural identity are now even more unlikely to be able to teach the rest of the world to adopt nationalist development discipline and unwritten codes of trust and consensus. Their own societies have in any case changed over recent decades in ways that make these codes seem antiquated. In response to internationalisation and the increasing size and complexity of national political economies, new middle classes are demanding

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greater ‘transparency’ and are more assertive about their political and economic rights. Outsiders have ample evidence that both the ‘unwritten codes’ and the ‘discipline’ were either ephemeral or double-edged. These countries can instead look to the cross-cultural institutional changes which characterise modern capitalism. Even if they do not always evolve at speeds that best match the economic moment, they at least work tolerably well.

3

Industrial reform Insights from the electronics sector Michael Hobday

Although most observers recognise the importance of technology to economic development, there is remarkably little understanding of the nature of technological progress in Pacific Asia. The ways in which both local and foreign firms acquire, assimilate, adapt and generate technology are poorly understood—not least in the electronics industry, by far the region’s largest sector. The lessons to be gleaned from how electronics firms have combined learning and innovation with export-led growth lend a positive dimension to what, for several countries, has recently been a gloom-ridden story of macroeconomic mismanagement, financial imprudence and rapidly declining economic growth. In contrast with the countries of Latin America and Eastern Europe, which have also faced deep economic crisis, each of the Pacific Asian exporting nations has integrated itself into the world’s productive, technological and market centres through exports, and capable exporting firms. If the region’s major governments can implement the reforms needed to overcome the economic crisis, both major groups of electronics firms—local and foreign transnational corporations (TNCs) —could spearhead a new wave of export-led growth. Corporate strategies and patterns of sectoral governance

South Korea South Korea has concentrated on scale-intensive production of hardware within a small number of locally owned large integrated firms (chaebol) (see Table 3.1). This has often been conducted under sub-contracting relations with major TNCs, known as original equipment manufacture (OEM) and own design and manufacture (ODM).1 In the past, this strategy produced very good export results, and it may continue to do so; given the new global demands generated by telecommunications, information processing, the internet and other major hardware-using sectors, the electronics hardware industry is unlikely to experience a long-term fall in growth in the foreseeable future despite regular cyclical downturns. However, to expand into design-intensive systems, complex

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software, multimedia and network technologies, the successful strategies and structures of the past are unlikely to be adequate for the demands of the future (Ran Kim and Cawson 1997). The chaebol have at least four main motivations to break out of their core business of mass production of electronics hardware: • to capture more value-added by moving into design and software activities • to help shape the global electronics and information technology industries, rather than responding to them with hardware production • to reduce dependence on Japanese and US competitors for core components and new product designs • to reduce the commercial risk of being confined to a narrow range of production activities. In other words, the chaebol would like to make the full transition from ‘latecomer firms’ to leaders across a range of product areas, not just semiconductors, in order to compete on an equal footing with the main players in the global electronics industry.2 However, the data show that the chaebol have not yet made much headway in software and multimedia (Ran Kim and Cawson 1997). Instead, they remain ‘trapped’ in a repeated ‘catch-up’ cycle in hardware production. The structures and strategies of the chaebol are not elastic enough to allow them to develop creative software-intensive niches, or to permit swift, flexible and innovative responses to new customer demands. Moreover, during the 1970s most TNCs withdrew from South Korea as the chaebol took over the local electronics industry and, until the mid-1990s, South Korea remained virtually closed to foreign direct investment (FDI) in electronics. The de facto exclusion of foreign firms has prevented the chaebol from forming alliances at home in sophisticated electronics and capital goods. Instead, they have purchased companies overseas (especially in the US) in the hope of integrating them into their internal organisations (Hobday 1997). These weaknesses were evident before the onset of the economic crisis. However, the crisis has highlighted the exclusion of foreign investors from South Korea and put pressure on the government and firms to allow more joint ventures and FDI in electronics and other sectors, such as automobile manufacturing. Even before the crisis, South Korean firms were aware that the strategy of vertical integration and mass production of hardware had reached its limits. In some cases, domestic market protection policy had isolated South Korean firms on their home ground, leading to a rethink and an awareness of the need for inward investment. In the mid-1990s, South Korean firms began to forge major strategic alliances with foreign TNCs within the country— Anam with Texas Instruments (TI), and Samsung also with TI—and encouraged US and Japanese capital-goods suppliers to enter South Korea to meet the growing demands for sophisticated equipment. The chaebol have traditionally

Table 3.1 Structure, strategies and product specialisation, 1990–6

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allied themselves with Japanese and US collaborators under OEM, licensing and other arrangements because of their product specialisation. European TNCs such as Philips and Thomson have been viewed as direct competitors, rather than potential collaborators. This partly explains the historically tiny presence of European TNCs in South Korea. In some areas, telecommunications for example, South Korean firms are increasingly linked to US and European TNCs in technology transfer and asset-swapping arrangements. Taiwan Taiwanese firms, like their South Korean counterparts, also wish to progress fully from OEM to design-intensive, own-brand sales in markets such as the US and Europe. Some firms (ACER for example) have had major successes, but most have not. In Taiwan, firms are demonstrating a growing strength in small changes to product designs in computers and related products, building on their close connections with Silicon Valley firms in the US. Taiwan is now viewed by many major TNCs as the world purchasing source for the computer industry. Many global brand leaders, IBM of the US for example, depend heavily on Taiwanese suppliers’ innovative, low-cost computer models and parts. Production networks in Taiwan are more closely aligned with American markets and TNCs, compared with the close links South Korean firms have with those in Japan. Many more companies from the US and Japan have a presence in Taiwan, compared with European firms, although historically Philips has been highly significant in the development of semiconductors and consumer goods. However, the growth of locally owned industry has dwarfed foreign TNC investment since the early 1980s. During the 1990s, more inward investment in joint ventures took place, as Taiwanese firms made components for the burgeoning local computer industry. Examples include the TI-ACER and Taiwan Semiconductor Manufacturing Company (TSMC)-Philips joint ventures. Malaysia and Thailand In contrast to South Korea and Taiwan, TNC investment in Malaysia and Thailand is overwhelmingly dominant. Policies to support free trade zones (FTZs) have left most TNCs largely dislocated from the local industrial infrastructure (Hobday 1999). Some backward linkages to supply firms have been forged but these have tended to be with second-tier foreign component suppliers, rather than with local firms. In Malaysia, many of the second-tier TNC investors are from Taiwan, which in 1996 and 1997 was the leading foreign investor. Local firms such as Sapura and Likom have made significant headway, but these have been the exception to the rule; some local firms in Thailand, among them Alphatec, have faced serious financial

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difficulties due to their very fast, high-risk growth strategies (Chairatana 1997). Contrary to popular views of TNC subsidiaries as mere ‘screwdriver (assembly) plants’, in Malaysia a great deal of important technological progress has taken place in manufacturing facilities, albeit focused mainly on process-improvement technology (Hobday 1996). Malaysian TNCs have now reached the stage of developing simple new products and tailoring existing designs to efficient mass production (so called design-for-manufacture), stages which South Korea and Taiwan reached a decade or so earlier. Such activities require knowledge of product designs, product-process interfacing, advanced automation technology, computer-aided design and software. In Malaysia and Thailand, US and Japanese TNCs—Intel, Motorola and Sony in Malaysia, for example—dominate most exporting sectors in electronics. US and Japanese companies, due to their much larger shares of the world electronics markets, and for geographical and historical reasons, have invested much more heavily in Malaysia and Thailand than have European TNCs. However, European TNCs such as Philips, Thomson, Ericsson and Siemens are active in consumer electronics, components and simple telecommunications products. In general, TNCs have not only benefited from the rapid growth of the regional market, but also from engaging in the region’s fast-changing and competitive environment. Motorola, for example, has appointed a Hong Kong Chinese as regional director to its main board, and has given considerable weight to Pacific Asian investments. Similarly, TI has developed a coherent investment strategy throughout the region. Philips has promoted a Taiwanese national to its board and created new ventures in several newly industrialised economies (NIEs). Strengths, weaknesses, opportunities and threats To examine how the crisis relates to electronics exporters in the NIEs, it is helpful to conduct a so-called ‘SWOT’ (strengths, weaknesses, opportunities and threats) assessment. SWOT is a standard business technique for examining strengths and weaknesses internal to firms, and the opportunities and threats external to them. The SWOT method makes it possible to disentangle the problems caused by the crisis from other difficulties, and provides a way of assessing future prospects. Tables 3.2 and 3.3 outline the challenges facing firms in the electronics sectors of the four NIEs. Despite considerable industrial and technological progress, major problems were present in the mid-1990s prior to the onset of the crisis. South Korea In South Korea, the chaebol have tended to be hierarchical, rigid and bureaucratic. To succeed in information-intensive and service sectors, they need to become more agile and entrepreneurial. They also need to be more

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decentralised and less bureaucratic in structure and style, particularly if they wish to go beyond hardware production to compete in software-intensive areas such as the internet, business networks, multimedia and telecommunications services (Ran Kim and Cawson 1997). Attempts to promote a strong small- and medium-sized enterprise (SME) sector in South Korea have had little success in electronics, and indeed in other sectors, because of the concentration of human talent in the chaebol and their overwhelming dominance of South Korean industry. A transition to a more professionalised management and less family-oriented business structure is widely viewed within South Korea as a necessary step towards business efficiency and flexibility. However, the strategy of mass producing hardware adopted in the past has often been called into question and may yet confound observers. As a result of advances in information and communications technologies, more low-cost hardware is constantly required by world markets and there is, as yet, no evidence of a long-term slowdown in the growth of the electronics hardware industry overall, despite fluctuations in particular sub-sectors such as semiconductors, and in specific product areas such as DRAM memory chips and personal computers. With the ability to shape international hardware standards, the chaebol could continue to grow in the future, without making the transition to software-intensive activities. The crisis which began in 1997 has posed fundamental problems across South Korea’s banking, monetary and currency systems. Without reform of the currency system, resulting macroeconomic instability could threaten the progress of individual firms in electronics, as in other sectors. Assuming that these problems can be resolved in the short to medium term, the depreciation of the won could make South Korean electronics exports cheaper and more desirable on world markets, stimulating rapid growth and greater competitiveness. However, it is by no means assured that the reforms required will be undertaken effectively. Taiwan Taiwan also faces a series of specific threats and opportunities. Unlike the other three NIEs, Taiwan had by late 1998 remained free from serious currency speculation and banking instability. However, weakening world demand in electronics and instability in other countries could adversely affect its economy in the future. At the industrial level, Taiwanese companies such as ACER and Inventec have grown to become global corporations. As with the chaebol, most are still familyrun, and recognise that they need to become less paternalistic and more professionally managed. Due to the relatively small size of most firms compared with South Korean companies, research and development (R&D) capabilities remain weak. Also, R&D spending is low as a proportion of company turnover. Most Taiwanese firms, like their South Korean counterparts, depend for new

Table 3.2 Internal strengths and weaknesses facing Pacific Asian firms in electronics

Table 3.3 External opportunities and threats facing Pacific Asian firms in electronics

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product designs, core components and capital goods upon major Japanese and US firms, which are often their targeted competitors. One major challenge facing Taiwanese firms is to progress beyond production-intensive activities into designing and distributing own-brand products in order to capture more value-added and to expand market opportunities. Again, this is a challenge which has little or nothing to do with the economic crisis, but it will need to be addressed if firms are to realise their ambitions. While major opportunities remain in Taiwan’s core areas of strength, particularly personal computers, narrow product focus means that production is highly sensitive to Western market recession. In the past, market downturns have caused industrial turbulence and heavy losses at individual firms such as ACER. If the financial crisis in the international economy continues, or if major importers like the US and UK fall into recession, Taiwan could face a sharp drop in export growth and company profitability. In contrast with South Korea, Taiwan has a diverse and robust industrial structure, involving high-technology SMEs as well as large companies. Together, they constitute a fast-moving and responsive industrial base, closely connected to American firms and Western market needs. Malaysia and Thailand Despite the underlying strength of the electronics industry and its major role in the export development of Malaysia and Thailand, both countries have since 1997 confronted major crises. These have been characterised by severe financial and macroeconomic mismanagement, currency speculation and depreciation, and dramatic falls in industrial and economic growth. Underlying problems which caused these difficulties need to be resolved if export growth in the medium term is to return to rates approaching the heights of the 1980s and early 1990s. Available evidence suggests that, with sufficient political will, this is possible (World Investment Report 1997: 78–80; Department of Trade and Industry (UK) 1997:8–14; Mason 1997; Economist 18 October 1997:18). If the necessary macroeconomic and financial decisions are taken, rapid growth in the electronics sector could resume by 2000 or 2001. Indeed, currency depreciation in both countries could benefit exporting TNCs by lowering the cost of exports, bringing down the costs per dollar of new investments and reducing labour costs. However, any benefits are only likely to be gained within a framework of resumed macroeconomic stability. Apart from the problems generated by the crisis, both countries compete with China, Vietnam and other low-cost East Asian countries. Skill shortages have also caused difficulties during the rapid growth periods of the past. If fast growth resumes, these shortages will need to be addressed through greater government investment in vocational education. On the positive side, there are surprising underlying technological capabilities, particularly within the TNC subsidiaries operating in Malaysia. The case of Thailand appears to be similar, although the country probably lags behind

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Malaysia in the scale and depth of its technological activities (Chairatana 1997). Both countries host global TNCs in electronics, which have invested heavily in the region and would prefer to retain and increase their investments if economic and political circumstances allow. During the 1980s and 1990s, Malaysia became a low-cost alternative to Singapore for FDI and, given the TNCs’ desire to continue growing within Pacific Asia as a whole, both Malaysia and Thailand provide a welcoming base from which US and European TNCs can compete. By contrast, Japan and South Korea have traditionally been less open and less welcoming to FDI. Lessons, insights and policy responses Regardless of past successes, it is clear that major difficulties confront firms in the electronics sector. Some are independent of the crisis, while others have been exacerbated by it. Because of the wide diversity in the histories, strategies and structures of the electronics industries in each of Pacific Asia’s economies, no single set of corporate strategies or government policy responses will address the problems of each country. Nonetheless, four general points can be made. First, Pacific Asian companies are generally weak in R&D and lack the new product-design capabilities of leading companies such as IBM, Hewlett-Packard and Thomson. While important innovations do take place in manufacturing technology, low spending on new product design and weak capabilities in R&D limit the scope of both local firms and TNCs in Pacific Asia. In order to improve the value-added opportunities for the future, companies need to invest more in product engineering and R&D, and government policies should be devised to encourage them to do so. Government incentives can be based on tax breaks for R&D, as in the case of Malaysia. However, it is important for governments to include TNCs in policy discussions and policy-making processes. In Singapore, this has helped to resolve misunderstandings, provided a useful input into policy thinking and helped to link education, export and industrial policies to the needs of exporting industry. Malaysia or Thailand have yet to involve TNCs in this way to any great extent. The second difficulty stems from South-east Asia’s foreign-investment strategies, where there has been insufficient linkage between TNC enclaves and other parts of the economy. The problem in retaining TNC investments and encouraging firms to go beyond enclave production faces other Pacific Asian countries not only in electronics but also in other sectors. Again, perhaps the main lessons come from Singapore (Hobday 1994), which treated exportprocessing-zone/enclave production as only the first step in a gradual progress up the ladder of electronics technologies. The Singaporean government, with some success, has encouraged new product design, R&D and the location of regional headquarters within Singapore. In other countries, more could be done to attract and integrate foreign firms into the technological infrastructure through greater recognition of their importance and deeper inclusion in the policy-making process.

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Third, the crisis has exacerbated the ever present threat of footloose investments going elsewhere if economic and political conditions deteriorate, or become preferable in other countries. This not only applies to foreign TNCs but also to South Korea’s large multinational firms, which are increasingly locating their investments abroad. While FDI has proved an effective export mechanism in the past, and while training and learning has proceeded within the subsidiaries of many TNCs, if the crisis continues this accumulated learning could easily be lost with the withdrawal of investment. The lesson for policy-makers is that greater recognition of the important technological development and exporting functions of TNCs is needed to help shape the reform agenda. Fourth, the crisis indicates that governments have begun to fail in the central area of macroeconomic management. For the past three decades, the main role of government in each country has been to provide a stable macroeconomy, good vocational education and outward-looking, export-led policies. Although it appears that the basic causes of the crisis relate to financial and macroeconomic management and institutions, rather than the production and technological activities of exporting firms, in South Korea the debt-led expansion of the chaebol after 1993 contributed to the macroeconomic problems of 1997 and after. In South Korea, as in Malaysia and Thailand, macroeconomic instability, monetary mismanagement and protected, non-transparent financial institutions have all contributed to exchange-rate speculation and turbulence, lack of confidence in local currencies and wider economic disruption. In Taiwan, the macroeconomy and the electronics industry both performed well in 1997 and 1998 partly because of the country’s strong reserves and sound macroeconomic management. But not even Taiwan’s position is assured. The policy response must therefore be to work with international financial institutions to restore economic stability and investment confidence. With the exception of Taiwan, the crisis has, for both local and foreign firms, cast doubt on the basis of long-term investment confidence from which the region has benefited for some 30 years. Economic instability, exchange-rate fluctuations and, in some cases, social and political unrest undermine confidence and threaten to reduce the region’s share of global FDI (investment in East and South-east Asia together accounted for around 60% of developing-country FDI in 1995). South Korean firms have faced a crisis of confidence as well as major debt burdens due to their heavy foreign borrowing in the early 1990s. Electronics exports have also slumped due to recession (particularly in semiconductors) and exchange-rate depreciation. Many observers believe that the chaebol should restructure to concentrate on their core businesses. However, current government policies forcing chaebol mergers, for example in electronics and automobile manufacturing, will lead to increased concentration in an already highly concentrated industrial structure, and could undermine the corporate rivalry which has proved so successful in spurring on the chaebol in successive export markets.

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For the future, one positive and unusual feature of Pacific Asian latecomer enterprise is the way in which firms have used exports to climb the value-added ladder through market-led technological innovation. Few other, if any, developing countries or regions have managed to enter the fiercely competitive international electronics market, let alone narrow the technology gap between themselves and the market leaders. Under the import-substitution conditions prevalent in Latin America and Eastern Europe in the past, the growth of ‘exportled’ technological and entrepreneurial capabilities has been much weaker than in Pacific Asia. If and when recovery gets under way, this fundamental strength will probably allow firms to resume their ‘keeping-up’ and ‘catching-up’ performance in relation to the advancing technological frontier. If planned reforms are implemented and stability returns in the short term in South Korea, Malaysia and Thailand, the exporting and investment conditions facing both TNCs and local firms could improve. Lowered factor costs and exchange-rate depreciations could make exporting firms more competitive and improve their scope for expansion, learning and innovation. TNCs and indigenous exporters could play a part in assisting recovery through increasing export competitiveness, building upon the region’s traditional manufacturing strength. Conversely, if reforms are delayed or fail to restore stability, the history and benefits of learning and innovation could easily be erased as firms withdraw or scale back operations. This would further worsen the economic crisis by damaging the region’s productive export base. Conclusion There can be no doubt that the current crisis poses a major threat to the exporting industries of Pacific Asia, including electronics, by undermining investment confidence and causing regional demand for electronics products to fall. But there are also older difficulties which will still need to be addressed when recovery begins. The first-tier East Asian economies—South Korea and Taiwan—remain weak in new product design, R&D and capital-goods production. The South-east Asian economies—Malaysia and Thailand—are even weaker, despite the learning process within the TNCs which dominate electronics exports. Overall, a prolonged economic crisis, especially if accompanied by political and social instability, is likely to lead to withdrawals of investment and further falls in industrial and export growth. This could worsen the economic crisis, leading to further instability which could affect countries such as Taiwan and China. In addition, a prolonged economic crisis threatens to erase the hard-won technological gains of the past, which have enabled firms to keep up with and, in some cases, catch up with Western and Japanese market leaders in electronics. Despite the gravity of the threats posed by the crisis, the electronics industry offers important grounds for optimism in an otherwise gloomy outlook. The sector remains an important technological, industrial and exporting asset. In South Korea, Taiwan, Malaysia and Thailand, the electronics sector had been at

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the forefront of the rapid export-led growth of the past two decades, and helped to integrate each economy into the world system through export marketing, technology transfer, FDI and sub-contracting relations with firms in Japan and the West. Unlike other regions which have faced severe economic crises, such as Latin America, Eastern Europe and Africa, Pacific Asia has the advantage of being an outward-looking region with strong exporting capacity, well-developed entrepreneurial capabilities and an advanced technological infrastructure. If the region’s governments are willing and able to implement the reforms necessary to overcome the economic crisis, both major groups of electronics firms—TNCs and local—would be in a strong position to lead a new wave of export-driven recovery. But without the required adjustments and reforms, and perhaps a little good fortune, there is small hope that this positive outcome will be achieved. Notes 1

2

Original equipment manufacture (OEM) is a form of sub-contracting whereby a foreign TNC or buyer provides the detailed technical specification to a local firm, which then manufactures the product. Own design and manufacture (ODM) occurs when the local (or ‘latecomer’) firm not only manufactures but also designs the product, which is then bought and distributed as in OEM. In own-brand manufacture (OBM), the latecomer has acquired the technology and marketing capabilities, as well as the brand names, to compete directly with industry leaders (Hobday 1995). A single firm may conduct all three types of operation, according to product type. A ‘latecomer firm’ is a firm in a developing country which operates outside the scientific and technological centres of the world economy (led by the US, Europe and Japan). A latecomer is also unconnected to the clusters and networks which are essential to innovation in firms in developing countries. By contrast, ‘leaders’ and ‘followers’ operate within these clusters, and benefit from the surrounding, advanced technological and market infrastructure.

4

Changing defence policies Tim Huxley

During the 1990s, many countries were forced to revise their defence policies fundamentally. Alliances disintegrated, as in the case of the Warsaw Pact, or, as with NATO, were compelled to reassess their role. Institutions such as the Organisation for Security and Co-operation in Europe (OSCE) and NATO’s Partnership for Peace (PfP) have started to build a new non-confrontational security architecture. Since threat perceptions have become more diffuse, the resources allocated to defence have shrunk, the need for more cost-effective defence procurement has grown and national defence industries have been forced to restructure. The new geopolitics, technological developments associated with the Revolution in Military Affairs (RMA) and resource constraints have led many European states to reassess the usefulness of conscription and, in some cases, to follow the US and UK by professionalising their militaries. In contrast, changes in defence policy in Pacific Asia have generally unfolded incrementally, rather than dramatically, and have been influenced by quite different factors. Threat perceptions The Soviet Union’s collapse significantly affected the defence policies of Japan and China, the two East Asian states most closely involved in the Cold War, by largely removing the principal perceived threat to their security. The personnel strength of the People’s Liberation Army (PLA) is being reduced from 3 to 2.5 million by 2000 and, albeit after a lengthy delay, Japan’s defence spending has fallen slightly (Drifte 1998). The threat perceptions of other East Asian states which had aligned themselves to a greater or lesser degree with the superpowers—South Korea, Thailand, the Philippines, Singapore and Vietnam—were also affected by Moscow’s revised and effectively demilitarised post-Cold War relations with the region. South Korea benefited from Moscow’s withdrawal of military and diplomatic support for North Korea; the Association of South-East Asian Nations (ASEAN) benefited from the resolution of the Cambodian dispute, which was facilitated by Moscow’s effective abandonment of its alliance with Hanoi in the wake of Sino-Soviet détente in the late 1980s.

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However, clear-cut threat perceptions of the type prevalent in Europe had never dominated the East Asian security scene, and the end of the Cold War did not significantly lower the overall potential for armed conflict in the region. Communist regimes in China, North Korea and Vietnam, deriving their residual strength to a large degree from nationalism, have remained in power. While the Vietnamese regime has apparently surrendered its ambition to dominate Indochina, China and North Korea are still revisionist powers. Important disputes of Cold War origin relating to Taiwan and the Korean Peninsula have persisted, and have at times appeared dangerously close to erupting into major war as the result of brinkmanship by Beijing and Pyongyang. In consequence, Taiwan and South Korea increased their defence spending considerably during the 1990s (Taiwan by 62% and South Korea by 84%) (IISS 1991:169; IISS 1998:187, 197). These two major potential regional flash-points have also influenced Japanese defence policy by accentuating concern over the danger from Chinese and North Korean ballistic missiles and the vulnerability of vital commercial sea lanes. While both China and North Korea hold revisionist international outlooks, there is a distinct contrast between their threat perceptions. The North Korean leadership has perhaps had legitimate reasons for feeling insecure given its manifest domestic failings, loss of Soviet and Chinese support, South Korea’s economic prosperity and growing military strength, and the presence of substantial US forces in the South, backed by an array of nuclear weapons. Notwithstanding Beijing’s justifiable paranoia over internal challenges since the Tiananmen Square massacre in 1989, during the 1990s China’s government was in the fortunate position of facing a less dangerous external environment—at least in terms of military threats—than at any time since the early nineteenth century. China has continued to perceive a range of potential threats around its periphery, most notably from the continued US regional security role and in particular its alliance with Japan and security links with Taiwan, while India’s nuclear tests of 1998 have added a new dimension to Beijing’s threat perceptions. However, the removal of the Soviet threat has allowed China to reorient its defence thinking and the PLA’s capabilities southwards. This has involved not only exerting pressure on Taiwan, but also protecting and promoting wider national maritime interests. Deterring interference by the US navy in regional conflicts is a particularly important influence on the development of China’s fleet. Intra-regional tensions related to disputes over maritime territory have become increasingly prominent following the relaxation of the constraints on international behaviour in the region previously imposed by Cold War alignments, and the, heightened awareness of the economic importance of maritime resources. After the Korean Peninsula and Taiwan, East Asia’s third major potential flash-point derives from the competing claims of China and others—Brunei, Indonesia, Malaysia, the Philippines and Vietnam—to maritime territory in the South China Sea. Other marine disputes, often

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reflecting profound political conflicts rooted in deep mutual distrust, involve Russia and Japan, Japan and China, Japan and South Korea and various combinations of South-east Asian countries. At the same time, many regional states have been challenged by other problems such as piracy, fish-poaching, smuggling, environmental pollution and illegal immigration, encouraging them to make improving their armed forces’ naval and maritime air capabilities a priority. China and North Korea have not been the only sources of external security threat to influence other East Asian states’ defence policies. Although mutual concern over the North Korean threat may bring Tokyo and Seoul closer together, South Korea’s ‘360-degree defence’ policy introduced in the mid-1990s assumed that an increasingly militarily powerful Japan, possibly autonomous in security terms, was a potential adversary. There is evidence that the Japanese and South Korean defenceprocurement programmes interact with each other (Opall 25 November 1996; Drifte 1998:67). Suspicions between South-east Asia’s states run high; it is clear, for example, that Singapore’s defence planning centres primarily on the perceived need to deter Malaysian interference or aggression. It has become a commonplace that, since the 1970s, South-east Asian states have reoriented their armed forces away from internal security and towards external defence in line with efforts to become more self-reliant in security matters. There is some truth in this: in 1989, the surrender of the Malaysian and Thai communist parties and the Vietnamese military withdrawal from Cambodia removed counter-insurgency as a major concern of the Malaysian, Thai and Vietnamese armed forces. But internal security remains the primary responsibility for the armed forces of Indonesia, where the army is still waging counter-insurgency campaigns, while simultaneously attempting to maintain civil order throughout the country. In Myanmar, the military is still fighting Karen and other separatist groups, as well as standing by to defend the regime against popular revolt. While the Philippines’ internal security improved considerably during the 1990s, the government continues to face serious threats from both Islamic-separatist and communist sources. As a result, plans for the Armed Forces of the Philippines (AFP) to relinquish their internal security role have been suspended. In Malaysia as well as Indonesia and the Philippines, aspects of improvements to conventional warfare capabilities during the 1990s, particularly nascent rapid-deployment forces, are applicable to internal security contingencies. Defence relationships and security institutions While Pacific Asia is still home to potentially dangerous international tensions, in comparison with the Euro-Atlantic region security—as well as economic—institutions are conspicuously lacking. There is no multilateral alliance structure linking East Asian states possessing essentially common

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values and interests. While there is a collection of fairly stable, more or less democratic states which might be called East Asia’s ‘status-quo powers’ — Japan, South Korea, Taiwan, the Philippines, Thailand and Singapore— these countries (together with Australia) are all linked to the US through bilateral security arrangements, rather than through a grand regional alliance. The failure of the South-East Asia Treaty Organisation (SEATO) to defend the anti-communist Indochinese regimes during the 1960s and 1970s, the lack of strongly held common threat perceptions and the fear of antagonising China all help to explain why multilateral defence co-operation is not a feature of the region, and can be virtually ruled out even in the long term. Even more fundamentally, a security community in which war between members is unthinkable is missing. Defence links between East Asian states consequently remain almost entirely bilateral, particularly within ASEAN, and mainly involve smallscale exchanges and exercises aimed at confidence-building rather than developing the functional co-operation likely to be useful against third-party aggressors. Even this limited defence co-operation within ASEAN, however, is often hostage to fluctuations in the temperature of bilateral political relationships. Beyond ASEAN, Japan has entered into defence-related dialogues and exchanges with China, Russia and South Korea, also aimed at reducing bilateral tensions. The significance of the bilateral security links with Washington should not, however, be underrated. Any substantial change in the US regional strategic posture—which is possible for any one of a number of reasons, including the perceived redundancy of basing US forces in the region following Korean reunification—would almost certainly destabilise East Asian security considerably. Many regional states would be forced fundamentally to review their security and defence policies, with unpredictable but possibly dramatic results. Most importantly, in order to provide for its defence, Japan could feel the need to expand its power-projection capabilities, and might even develop nuclear weapons. With some exceptions, most regional states do not want the US to reduce its regional role. A principal North Korean foreign-policy objective is to secure the withdrawal of US forces from South Korea, and Malaysian Prime Minister Mahathir Mohamad has occasionally questioned the need for Washington’s regional security presence. At least rhetorically, China seeks the withdrawal of US forces, but there are reasons to believe that Beijing recognises their usefulness as a constraint on potential Japanese militarism. During the 1990s, concern grew within the region over America’s supposedly weakening commitment to a leading, direct military role in East Asian security. However, despite widespread criticism of the first Clinton administration’s often uncoordinated and insufficiently prioritised Asian policies, more recent signals from Washington indicate that the US will maintain its regional security commitment in the medium term at least. Key regional alliance relationships with both Japan and Australia, which are

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concerned about China’s rising power and assertiveness, have been reinforced since the mid-1990s. The US has maintained its commitment and capability to defend South Korea, and has been resolute in attempting to forestall North Korea’s nuclear weapons programme through its leading role in the Korean Peninsula Energy Development Organisation (KEDO). While its desire for stable relations with Beijing constrains Washington’s security links with Taiwan, the US has remained Taipei’s major arms supplier, and responded forthrightly to the 1996 Taiwan Straits crisis. Despite President Bill Clinton’s enunciation of the ‘three no’s’ during his visit to Beijing in June 1998—that the US did not support Taiwanese independence, that it did not recognise two Chinese states and that it did not believe that Taiwan should be a member of any international organisation for which statehood is required—there is no indication that Washington will evade its security responsibilities towards Taiwan. Although the US relinquished its forward base at Subic Bay in the Philippines in 1992, Washington has strengthened its security relationships with other ASEAN states. Singapore has intensified its bilateral military cooperation with Washington, and will provide facilities for US aircraft carriers at its new Changi naval base. Even the Philippines government has been trying to provide a legislative basis for renewed direct military co-operation with the US. Defence relations with Thailand remain close, and the annual bilateral Cobra Gold exercise is still South-east Asia’s largest military manoeuvre. Indonesia and Malaysia are rhetorically non-aligned, but have nevertheless maintained arm’s-length defence relations with Washington, benefiting from US arms sales (though human rights concerns have increasingly restricted these in Indonesia’s case) as well as small-scale joint exercises and training provision. Vietnam, the ASEAN member most exposed to potential Chinese expansionism in the South China Sea, is tentatively edging towards defence contacts with the US, but for obvious historical reasons these are unlikely to expand easily or quickly into any sort of functional co-operation. In 1995, apparently motivated largely by concern over what it perceived as a growing Chinese threat to its maritime interests, Indonesia put aside its non-aligned scruples and indirectly linked itself to the US-led alliance system through its Agreement on Maintaining Security (AMS) with Australia. This is essentially a consultative arrangement, but it has provided a framework for intensifying defence relations. Although strictly bilateral in scope, the AMS is comparable to the Five Power Defence Arrangements (FPDA) linking Australia, New Zealand and the UK to the security of Malaysia and Singapore. The FPDA plays a particularly important role by providing a framework for defence co-operation between Malaysia and Singapore, despite the tensions between them. China is the only regional state not to seek security guarantees from other powers. Notwithstanding their rhetoric and long-term ambitions, most East Asian nations recognise that self-reliant defence is neither practicable given

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their limited resources nor, in the current regional security environment, desirable. Nevertheless, the region’s status-quo powers recognise that, even under the umbrella of their security and defence relationships with Washington, they need to maintain credible defence efforts to convince the US that they are willing and able to share the burden of regional defence. Major spending cuts by South Korea and other regional allies and associates during the current economic crisis have provoked expressions of concern from senior US officials, such as Admiral Joseph Prueher, Commander-inChief of the US Pacific Command (Soh 16 October 1998). One important aspect of East Asian states’ lack of self-reliance in defence is their heavy dependence on imported arms (Huxley and Willett 1999: 23– 44). This is the case even for China, which has attempted to accelerate its defence modernisation by acquiring Russian, Israeli and Western military equipment and technology in order to compensate for the shortcomings of its own outdated arms industries. Despite benefiting from industrial offsets, including substantial technology transfers, from outside suppliers, East Asian defence industries’ progress towards greater self-reliance in developing and producing defence equipment has been patchy. Continued dependence on foreign technology and know-how, and the small size of domestic markets, have constrained defence-industrial development. Moreover, although spinon from high technology civilian industry has contributed to development in Japan and, to a lesser extent, Singapore, South Korea and Taiwan, throughout the region national defence-industrial bases remain weak in systemsintegration skills and other key areas. The economic crisis seems likely to exacerbate the contradiction between the rhetoric and attempted practice of defence-industrial self-reliance on the one hand, and on the other the impetus for closer international collaboration driven by the need for access to capital, technology and markets. East Asian states accept the central role of military power in maintaining their security, both through national military capabilities and by encouraging or, in China’s case, at least accepting the role of the US as a ‘regional balancer’. Nevertheless, with greater or lesser degrees of sincerity they all profess also to believe in notions of common and co-operative security. This belief is expressed primarily through embryonic multilateral regional institution-building, and most importantly through the ASEAN Regional Forum (ARF). The pan-regional ARF, which includes non-East Asian powers (notably the US, Russia, Australia, India and the European Union (EU)) interested in the region’s security, seeks to build on ASEAN’s success in providing its politically diverse members with a valuable framework for containing intra-mural security tensions. However, the diversity of the ARF’s membership and ASEAN’s lack of competence to run an institution seeking ultimately to manage major North-east Asian security issues may prevent progress far beyond the Forum’s present anodyne discussions (Lim 1998:115–33). More fundamentally, until considerably greater political accommodation is achieved between regional states (particularly China and

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Taiwan, Japan and the ASEAN states) and between China and the West, it is probably unreasonable to expect significant progress towards rules-based institutions capable of fostering a genuinely co-operative approach to regional security. Defence technology New, more sophisticated conventional-weapon systems proliferated throughout East Asia. Reflecting the increased salience of a wide range of maritime defence and security considerations, the emphasis on procuring naval and air systems has been particularly striking. At the same time, East Asian armies have generally shrunk, while increasing their firepower and developing appropriately equipped rapid-deployment forces. Military procurement and defence-industrial development have affected the relative military capabilities of East Asian states. However, hardware procurement does not automatically translate into enhanced military capabilities. Qualitative factors, including adequate numbers of well-trained, motivated personnel, efficient logistics support, comprehensive doctrine, combined arms and joint-service co-operation and high readiness levels, are critically important in distinguishing those East Asian armed forces which are developing real capabilities from those which are merely incoherently purchasing expensive equipment with little genuine military utility. To a limited extent, doctrine is transferred with military equipment through training arrangements with supplier nations, and industrial offsets may help to build recipients’ logistic and maintenance capabilities. But the impact of contemporary technological and doctrinal developments, usually summed up as the RMA, must be taken into account. The RMA derives from the combination of joint-force doctrines, strategies and tactics, changes in military organisation, and integrated logistics support with technological advances in intelligence collection, surveillance and reconnaissance (ISR), command, control, communications and computer-processing (C4) capabilities and precision-guided munitions. In practical terms, the key to the RMA is the real-time integration of complex information and weapons systems (Nye and Owens 1996:23–4; Dibb 1997–8:113). A key question over and above their acquisition of relevant equipment concerns the extent to which East Asian armed forces are making the fundamental doctrinal, logistical and organisational changes necessary to allow them to benefit from the RMA. During the 1990s, some of the most significant defence-equipment procurement in East Asia involved ‘invisible systems’: secure command, control and communications systems (sometimes using satellites); technical intelligence systems (including signals intelligence and high-resolution satellite imaging); electronic warfare systems; advanced radar and sonar; and precision munitions such as laser-guided bombs. These systems have received relatively little attention compared to the more high-profile

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procurement of combat aircraft and ships. Nevertheless, they are crucial force multipliers, and could assist regional armed forces to participate in the RMA. But even with the benefit of such procurement, most East Asian armed forces suffer from fundamental deficiencies which will seriously detract from their ability to absorb the RMA for the next one or two decades. Crucially, they have generally paid little attention to the need for integrated logistics support, systems integration or developing joint-force doctrine and organisation. Shortcomings in national defence-industrial bases and science organisations may also limit RMA capabilities. As Paul Dibb points out, ‘greater creativity, flexibility and innovation’ is necessary in order to adapt sophisticated systems to East Asia’s ‘unique operating environments’. In some East Asian states, political factors may stifle or obstruct the creative impulses necessary for the indigenous development and integration of the advanced information and communications systems at the heart of the RMA (Dibb 1997–8:100–4). Even if the rapid increases in many East Asian states’ defence spending in the decade prior to 1997 had continued, most would have been able to afford to adopt the RMA thoroughly only in the long term. In the present economically depressed environment, acquiring RMA capabilities has become an even more distant prospect for many of the region’s armed forces. RMA-based armed forces are not necessarily panaceas, particularly given the low-intensity security issues still prevalent in South-east Asia. However, those regional states able to deploy even partial or ‘hybrid’ RMA-based capabilities may be able dramatically to improve their ability to detect, target and destroy enemy aircraft, ships and armoured vehicles—and will probably have a distinct military advantage over neighbours lacking similar capabilities. The RMA, or at least elements of it, therefore seems likely to accentuate existing differences in military capability within East Asia, as well as between the capabilities of East Asian states and those of the US. It is conceivable that military modernisation could increase the likelihood of conflict in East Asia. Greater power-projection capabilities could bring the forces of potential adversaries into more direct contact. China’s increasing strategic reach might lead to clashes with Malaysian or Indonesian forces in the South China Sea, for example. But those East Asian states currently building on their sub-regional or local conventional military advantages— Japan, South Korea, Singapore and Taiwan—are essentially status-quo powers. Since they are the region’s most technologically advanced states, possess a superior ability to absorb elements of the RMA and are all linked strategically to the US, thereby allowing a high degree of access to critical RMA technologies, they are likely to be most successful in enhancing their military capabilities, despite the possible impact of economic recession on their defence programmes. However, none of these states is likely to use its burgeoning military capability aggressively. By East Asian standards, these are all relatively strong states, with more or less accountable systems of

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governance. In consequence, their foreign policies are predictably peaceful. At the same time, America’s overwhelming lead in developing RMA capabilities suggests that it will continue to dominate the region in conventional military terms. At least for the next ten years, there are grounds for confidence that the superior and growing conventional capabilities of the US and the regional status-quo powers will help to deter conflict, not least over the Korean Peninsula and Taiwan. However, two developments could challenge and, in the longer term, undermine the conventional military advantage of the regional status-quo powers and the US. The first is the proliferation of weapons of mass destruction (WMD) and associated long-range delivery systems. This has been given added salience by East Asian states’ uneven absorption of the RMA: countries with relatively unsophisticated conventional forces may see WMD and related missile systems as effective asymmetric counters to RMArich adversaries. North Korean and Chinese long-range missiles and WMD, by threatening vital US interests outside East Asia as well as targets in South Korea, Taiwan and Japan, could make the US more reluctant to intervene in regional security crises. Proposed national and theatre missile defences may not be sufficiently effective in time to neutralise missile-launched WMD threats. The second factor which may challenge the conventional military advantages of the US and the regional status-quo powers is the probability that China’s defence-industrial base and defence-science establishment will eventually enable the PLA to develop its own RMA-type capabilities. These sectors have been boosted by both overt and covert technology transfers from diverse sources, and have been made more effective by thorough restructuring. The PLA leadership has laid great stress since the 1991 Gulf War on preparing for warfare in ‘high-technology conditions’, and seems intent on ensuring that China will not be a military pushover in the event of a regional conflict. Indeed, an ‘RMA with Chinese characteristics’, as Brookings Institution analyst Bates Gill put it, may already be emerging (Holloway 24 July 1997). Economic conditions The massive cost of absorbing new military technology, together with the economic crisis, helps to explain why there has been no ‘peace dividend’ for most East Asian states following the end of the Cold War. Even including Japan’s massive expenditure which, while huge by regional standards, grew relatively little, aggregate constant-price defence spending by East Asian states increased by approximately 20% between 1990 and 1996 (Stockholm International Peace Research Institute 1997:197). Some states—notably South Korea, Malaysia, Singapore, Taiwan and Thailand—registered much higher increases. East Asian government announcements, together with most academic assessments, claim that regional states have used increased defence

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spending simply to ‘modernise’ their armed forces, implying that existing equipment has merely been upgraded or replaced (Da Cunha 1996). Closer analysis, however, reveals that many East Asian states have implemented expensive programmes intended to develop new types of military capabilities which go far beyond this. As well as providing resources for upgrading East Asian states’ armed forces, rapid economic growth presented these countries with more demanding military roles. In particular, expanding trade both between the region and the rest of the world, and within the region, has increased the need to protect sea lines of communication, contributing to most regional states’ greater emphasis on developing maritime-defence capabilities. In some cases, the creation of new coastal industrial zones, as in China and Thailand, has increased the importance of littoral defence. While the allocation of resources to defence throughout East Asia increased substantially between the late 1980s and the late 1990s, military expenditure as a proportion of gross domestic product (GDP) or of total government spending did not grow so significantly. In some cases, Singapore for example, governments explicitly geared defence spending to national economic performance. A similar linkage has also been evident in the reduction of some East Asian states’ defence spending following serious shortfalls in expected economic performance in the second half of the 1990s. Economic problems affected some defence budgets even before the regional financial crisis began. By mid-1997, slower than expected growth in South Korea had already forced cuts in planned defence-budget increases and the deferment of major procurement plans (Jane’s Defence Weekly 18 June 1997; Lewis 3–9 September 1997). Partly in belated recognition of the security environment created by the end of the Cold War, but also with the equally important aim of reducing its debt burden and budget deficit, Tokyo cut more than $8 billion from projected military expenditure under its 1996–2000 defence build-up programme, leading in fiscal year 1998 to the first, albeit extremely small, contraction in Japan’s defence budget since its post-war armed forces were established in 1954. In 1996 and 1997, the Thai government’s concerns over its ballooning current-account deficit led it effectively to freeze defence spending at 1995 levels, forcing major procurement projects to be postponed (Tunsarawath 13 June 1996; Bangkok Post 27 April 1997). In addition, the precipitate depreciation of East Asian currencies against the US dollar substantially reduced the international purchasing power of remaining defence-procurement funds. The most seriously affected countries, apart from already blighted South Korea and Thailand, have been Indonesia, Malaysia and the Philippines. Given the state of Japan’s economy, which was bordering on depression by late 1998, it seems likely that Tokyo’s defence spending will remain virtually stagnant for some years. However, the recession has not affected the region uniformly, and the defence spending and procurement programmes of China, Taiwan and Singapore have not

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suffered the serious reverses seen elsewhere (Huxley and Willett 1999:20– 22). Although a long-term recession could exaggerate existing discrepancies in national military potential, particularly by increasing China’s relative strength, it will be some years before current spending feeds through into actual capabilities. Some analysts already perceive the first signs of recovery in those East Asian economies that have taken their International Monetary Fund (IMF)prescribed medicine (Sachs 5 November 1998:53; Tassell 24 November 1998). But for most, a return to rapid growth is unlikely within the next five years, while additional problems are looming, including a full-blown depression in Japan and currency devaluation in China. While the prognosis for the region’s economic future is far from clear, it seems likely that the longer its problems persist, the less likely it is that their effect on East Asian defence policies will be felt simply in terms of constraints on defence spending and procurement. Developments since mid-1997 have seriously undermined a principal foundation of East Asia’s security: tangible economic success. In the short term, the main security impact will be felt internally, in terms of social stability, but there could be longer-term effects on intra-regional relations, and even on the regional power balance. Some of the recession’s wider security implications have already become apparent. Where political systems are relatively strong, with broad popular participation and legitimate mechanisms for political transition—as in South Korea and Thailand—ineffective leaders or governments have been removed without the system’s wholesale revision. However, in Indonesia, which lacked an effective mechanism for political change to reflect popular pressures under President Suharto, economic collapse produced an unstable and ineffective interim regime and simmering social discontent. The political forces suppressed under Suharto are re-emerging. Democratic politics could lead to a popular government able to deal more effectively with the country’s massive economic, social and environmental problems. Alternatively, the pressure of unremitting economic recession and multipolar political confrontation—between Muslims and nonMuslims; indigenous Indonesians and ethnic Chinese; the military and civilians; the central authority in Jakarta and outlying provinces—could push Indonesia towards social and political breakdown. Continuing social disorder might provide the military with a pretext for opposing movement towards democracy and re-imposing strict political controls. While the military is under pressure from civil society to reduce substantially its traditionally strong political influence, the armed forces are likely to remain deeply involved in maintaining internal security until Indonesia finds a new, more stable political arrangement. A prolonged economic slowdown could undermine other East Asian regimes’ hold on power, notably in China, Malaysia, Myanmar and Vietnam. All of these regimes have based their legitimacy essentially on economic performance, and resist pressures for political change provoked or reinforced

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by the recession. Direct involvement by the armed forces in suppressing dissent is almost assured in Myanmar. It is possible in Vietnam, but less likely in China, where public-order duties are the responsibility of the paramilitary People’s Armed Police, and almost unthinkable in Malaysia, where the Federal Reserve Unit and Police Field Force act as an effective ‘third force’. Economic recession and related social and political instability could increase friction between East Asian states. For example, as economic inequalities between different parts of the region widen, increased illegal immigration could cause contention. Unstable regimes, challenged by growing internal dissent, might resort to nationalist or even adventurist foreign policies. So far, the recession appears to have done little to aggravate regional relations. The Four-Party Talks on Korea involving the US, China and both Koreas have continued, and China and Japan, Japan and Russia, and Japan and South Korea have all resumed or intensified bilateral political dialogues. In South-east Asia, relations between ASEAN members have, as usual, been characterised by both co-operation and tension. ASEAN states continue to recognise their mutual interests: in 1997–8, for example, Indonesia and Malaysia came together to deal with the problem of illegal Indonesian immigration to Malaysia and to fight Indonesia’s forest fires. Singapore agreed in 1998 to purchase Indonesian natural gas worth $8bn, and Malaysia and Thailand agreed to share gas produced in a contested offshore area. On the other hand, the recession has strengthened potentially dangerous undercurrents of distrust between certain ASEAN members. During 1998, Singapore-Malaysia relations plumbed new depths: for the first time in 27 years, the annual FPDA exercise was called off after Malaysia withdrew its participation. The arrest of Malaysian Deputy Prime Minister Anwar Ibrahim in 1998 provoked unprecedented criticism from the leaders of Indonesia, the Philippines and Thailand, undermining ASEAN’s established principle of non-interference in members’ internal affairs. Ironically, only two months earlier, an initiative by the Philippines and Thailand to replace noninterference with a ‘flexible engagement’ policy had been defeated. It had been aimed at the management of problems such as the regional environmental impact of forest fires in Indonesia and cross-border tensions generated by political repression in Myanmar. There are now grounds for questioning whether ASEAN will be able to sustain its most important role: damping down (though not resolving) disputes amongst its members. Increasing tension between South-east Asian states may provide a rationale for continued military upgrading, most obviously by Singapore. At the same time, defence co-operation between ASEAN members may become even less significant. The recession is also affecting regional perceptions of the roles of major powers in East Asian security. It may be enhancing China’s regional image, particularly in South-east Asia, helping to undermine fears that Beijing is a

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potential regional threat. China’s financial aid to South Korea, Thailand and Indonesia has been small compared with Japan’s, but Beijing’s decision not to devalue its currency has impressed South-east Asian governments, whose industries could be decimated if China’s exports became more competitive. While there has been unease in Jakarta over Beijing’s belated expressions of concern over the victimisation of Indonesia’s ethnic Chinese during the May 1998 riots and subsequently, there is no expectation of any direct Chinese intervention. At the same time, South-east Asian governments have widely perceived Japan’s response to the recession as ineffective, despite Tokyo’s massive financial assistance. Japan has not exercised the regional leadership that these governments would have liked and, during 1998, it became increasingly preoccupied with its own worsening economic predicament. Clinton’s visit to Beijing in June 1998 and talk of a Sino-US ‘strategic partnership’ may have further undermined Japan’s regional stature. The economic downturn has also reinforced doubts over the long-term future of the US as a major player in East Asian security. Regional critics, particularly in Indonesia and Malaysia, portray Washington’s response to their economic problems as slow and inadequate. Some even believe that the US intentionally provoked East Asia’s economic downfall as punishment for its success and for disregarding ‘Western’ human rights values, for example by admitting Myanmar into ASEAN in 1997. Although this remains a minority view, anti-Western attitudes could gain wider currency if the recession is prolonged, or if Western politicians are seen to interfere in East Asian states’ domestic politics, as when US Vice-President Al Gore expressed support for Malaysian anti-government protesters in November 1998. Malaysia has partially rejected what Mahathir sees as a Western approach to overcoming the recession. While Kuala Lumpur’s decision to suspend its participation in 1998’s FPDA exercises may simply have reflected the gravity of the deterioration in its relations with Singapore, it might also be interpreted as the first tentative sign of a shift towards a less pro-Western security posture. If these trends become entrenched, they would reinforce China’s already growing regional influence while undermining the roles of the US and Japan. In the medium term and beyond, this could weaken security and defence ties between the US and East Asian states such as Indonesia, Malaysia, South Korea and Thailand. Some of these states might become more inclined to accommodate, rather than attempt to balance, China’s growing regional role, with implications for the type of armed forces they require. But these are early days: a Chinese currency devaluation or renewed military pressure on Taiwan or in the Spratly Islands might act as a ‘reality check’ for the region. And while Japan’s problems will probably prevent it from adopting a regional leadership role for some time, the US clearly remains committed to East Asia’s security.

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Domestic political developments During the 1990s, domestic political developments, especially the shifting nature of civil-military relations, emerged as a significant agent of change in defence policy-making in some East Asian states. Their impact is likely to increase as the region’s political systems become more democratic and open. The influence of domestic political change has been felt most strongly in South Korea, Taiwan and Thailand. In all three countries, political systems moved further in the direction of liberal democracy during the 1990s, in each case involving a reduction in the armed forces’ political role. In both South Korea and Thailand, economic turmoil since 1997 has precipitated further political change, bringing to power leaders and governments less influenced than their predecessors by military interests. In the Philippines, former President Fidel Ramos, although democratically elected, was a retired general who had protected military interests (notably the 15-year armed forces’ modernisation programme authorised in 1995). He was succeeded in June 1998 by the populist Joseph Estrada. Suharto’s resignation in Indonesia, the installation of an interim government led by former Vice-President B.J.Habibie, who had been at loggerheads with the military leadership, particularly over defence-procurement issues, and the rapid pluralisation of the political system have all seriously challenged the role and interests of the armed forces, which had played a central political role under Suharto. While defence policy-making had previously been the preserve of small military-dominated cliques, political change in these countries is opening it up to greater influence from civil society. In several cases, this has allowed the imposition of constraints on defence spending. In Taiwan, democratic reforms have made possible direct legislative oversight of the armed forces: in October 1998, the chief of the armed forces reported directly to the Legislative Yuan for the first time (Jane’s Defence Weekly 14 October 1998). After assuming office in December 1997, South Korean President Kim Dae Jung—a long-standing pro-democracy activist—and his government set up a national defence reform committee, including nonmilitary experts, to review key areas of defence policy from personnel management to procurement (Yonhap News Agency 6 April 1998). Although the North Korean threat, as well as pressure from Washington, limits how far Seoul’s defence spending can be cut, Kim’s government has nevertheless held expenditure at 1997 levels. Because of the substantial depreciation of the won against the US dollar, this has implied a significant reduction in procurement funds, forcing 220 programmes to be postponed or extended over longer periods. In Thailand, Chuan Leekpai, unlike many of his predecessors a genuinely civilian politician rather than a serving or retired general, took over the defence portfolio as well as becoming Prime Minister in December 1997, and promised to reform the military. In addition to imposing cuts in planned defence spending, he has subjected the

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armed forces’ traditionally sacrosanct ‘secret fund’ to auditing and pressed for the number of senior officers to be reduced (Kasitipradit 2 July 1998). In the Philippines, one of Estrada’s first major policy decisions was to postpone the modernisation of the armed forces in favour of social programmes. In Indonesia, Suharto’s overthrow in May 1998 led to significant defence-policy changes, although Habibie’s government was only an interim administration pending elections in 1999. Apart from fundamentally reassessing the armed forces’ long-established dual (civilmilitary) function, the new regime removed the police from military control, reduced troop levels in East Timor and Aceh and cut funding to a level where significant new procurement is out of the question. Political change may reduce arms-related corruption, which provoked considerable domestic controversy in South Korea, Taiwan and Thailand during the 1990s. The economic recession, having focused the attention of international institutions such as the World Bank, IMF and Asian Development Bank (ADB) on the need to counter corruption (Marozzi 9 July 1998), is likely to make it easier for reform-minded governments to introduce cleaner, more transparent defence-procurement processes (Jane’s Defence Weekly 1 April 1998; Karniol 8 July 1998:26). Although China’s political system remains essentially totalitarian, domestic political change has also affected defence policy there. In the mid1990s, it was often argued that the PLA had assumed considerable political influence, particularly over foreign policy, because of President Jiang Zemin’s need to cultivate a military power-base (Joffe 1997:53–70). While the PLA still possesses considerable political clout, particularly in security matters, Jiang and his technocratic clique appear to have consolidated sufficient political control to enforce reforms considerably reducing the PLA’s political and economic power and autonomy. The role of the President and State Council in determining defence policy and in overseeing the military budget has apparently been strengthened (Pomfret 29 July 1998). A rules-based promotion system prevents senior officers from building patronage networks, and the PLA now has no representative on the Standing Committee of the Communist Party’s Politburo. During 1998, the PLA was told to relinquish control of its lucrative commercial interests (Kynge 15 December 1998). Moreover, the PLA is now being asked to pay market prices for arms and equipment that it previously received virtually free of charge. If the PLA is to maintain and continue to improve its capabilities despite these fundamental changes in its financial standing, defence spending from state resources may ultimately need to be substantially increased. However, the Party may be willing to pay this price in order to speed up military professionalisation and depoliticisation (Gilley 10 September 1998:18–21; Harding 21 October 1998).

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Conclusion Whereas the political collapse of their former ideological opponents encouraged Western states to perceive the 1990s effectively as a post-war environment, many East Asian states tended to see inter-state conflict as no less likely than during the Cold War. Particularly in North-east Asia, threat perceptions—sometimes specific, immediate and well defined—have played as great a role as ever in shaping regional states’ defence policy-making. For some, but by no means all, East Asian states, China has loomed increasingly large as a potential threat. The absence of a regional security architecture, in the form of a defence community, a substantial rules-based co-operative security institution or effective arms-control measures, has significantly influenced defence policymaking. Many regional states have become anxious over the future of the US regional security role, despite Washington’s attempts to demonstrate its commitment. While they remain dependent on the US to act as a ‘regional balancer’, particularly in the light of China’s growing power and assertiveness, East Asian states have felt the need to become more self-reliant in defence. But, with the exception of China, this self-reliance in the face of external threats is usually rhetorical, rather than real. All East Asian states, including China, continue to rely on external supplies of arms and military technology. Some are interested in developing RMA-type capabilities, which may accentuate dependence on such international links. Rapid economic growth provided most East Asian states with extra resources for defence. The region’s crisis has thus caused many to reduce or restrain their spending, but those facing more serious or immediate threats— Singapore, South Korea and Taiwan—have yet to rein in their expenditure to the same extent as Indonesia, Malaysia and Thailand. However, if the recession deepens, lengthens or widens, it could have a more profound, and unpredictable, impact on regional states’ defence policies. This could extend beyond military spending and arms procurement. Ultimately, domestic political change is likely to exert the most profound influence on East Asian states’ defence policies. In the long term, the growth of strong, stable states with high degrees of domestic social and political cohesion and prosperous, resilient economies could lead not only to more transparent defence policy-making under greater democratic control, but also to more effective regional economic and security regimes. The first buildingblocks for such a transformation are in place in the form of the region’s democratic, or at least quasi-democratic, status-quo powers: Japan, the Philippines, Singapore, South Korea, Taiwan and Thailand. Indonesia’s democratic experiment is fragile, but may survive. It is not inconceivable that Malaysia might become a more democratic country. It seems unlikely, however, that an effective regional security regime can be established until the political systems of the region’s major communist powers, China, North Korea and Vietnam, have been transformed. It is particularly important that

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China develops politically as it grows economically. In the meantime, East Asian states will continue to view military power, deriving from the US regional role as well as from their own national capabilities, as an essential and, in some cases, the most important, guarantor of national and regional security.

5

What happened to ‘Asian Values’? Anthony Milner1

On the face of it, the case for ‘Asian Values’ is in tatters. From the outset, advocates met powerful intellectual and ideological opposition, particularly from Western commentators. By the end of 1998, faced by the humiliation of a farreaching Asian financial crisis, these values were presented as discredited, and we increasingly read of the triumph of ‘Anglo-Saxon market values’, and even of a new, expanded American ‘hegemony’ (Coyle 26 November 1997; Mallaby 1998:21). Some triumphalism is, admittedly, tempting given the assertive and sometimes arrogant tone of many advocates of ‘Asian Values’ —Malaysian Prime Minister Mahathir Mohamad and Singapore’s Senior Minister Lee Kuan Yew, for instance. But to comprehensively dismiss ‘Asian Values’ is unwise for those seeking to look ‘beyond the Asian Crisis’, because it may lead us to ignore deeper social and cultural processes tending to work against a liberal convergence of values in the region. The ‘Asian-Values’ debate The main facts of the so-called ‘Asian-Values’ debate, which emerged with some vigour in the 1990s, are by now reasonably well known. The most prominent advocates of the importance of ‘Asian Values’ in the economic, social and political development of East and South-east Asian nations have been Mahathir, Lee and a number of public intellectuals—Noordin Sopiee, Tommy Koh, George Yeo and Kishore Mahbubani—associated with the ruling regimes of Malaysia and Singapore. The ‘Asian-Values’ position comprises a complex combination of arguments and assertions, some of them capable of causing considerable confusion. They include the following beliefs or claims:

1

The author would like to thank Alison Broinowski, Rey Ileto and Deborah Johnson for their assistance and advice.

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• A set of values is shared by people of many different nationalities and ethnicities living in East Asia. (Although certain south Asian thinkers contributed to developing the concept of ‘Asia’ in the first half of this century, ‘Asian Values’ are today usually associated solely with East and South-east Asia (Milner and Johnson 1997).) These values include stressing the community rather than the individual, placing order and harmony over personal freedom, refusing to insulate religion from other spheres of life, emphasising saving and thrift, insisting on hard work, respecting political leadership, believing that government and business need not necessarily be natural adversaries and stressing family loyalty (Sopiee 1995:180–93; Mirsky 3 April 1998:26). • In seeking to understand the economic success of certain Asian societies, due credit must be given to the role of these ‘Asian Values’. It is not enough to analyse this success in purely economic terms, or to see it as a result of adopting specifically Western values. • In the process of developing modern political systems in Asian societies, due recognition must be given to the need to ground these systems in the specific Asian cultures in which they are to be situated. It is not acceptable to reform or criticise such societies solely on the basis of liberal-democratic forms developed in the West. • A major international shift is under way, involving the rise of ‘the East’ and the fall of ‘the West’. • There is disquiet regarding certain ‘Western Values’, especially related to a perceived excessive stress on the individual rather than the community, a lack of social discipline and an excessive tolerance for eccentricity and abnormality in social behaviour. The suggestion is sometimes made that Western countries would do well to learn from ‘Asian Values’. A further feature of the case for ‘Asian Values’ concerns the way in which it has been delivered. The style of Mahathir and Lee’s pronouncements, in particular, conveyed the new confidence that emerged in the region during its record-breaking economic growth, and also a degree of irritability arising from what some saw as the complacent dismissal of ‘Asian Values’ over many years by Western commentators. For decades, those (usually Western) development specialists who tried to identify why Asian societies had lagged behind the West economically often cited the role of ‘Asian Values’; in many cases, these were precisely those which were to be cited later in a spirit of triumph by Mahathir and others (de Bary 1998:159). To some extent provoked by the assertive nature of Mahathir and Lee’s advocacy, their pronouncements prompted a rapid and vigorous response, particularly from academics and other intellectuals, many but not all of whom are based in ‘the West’. This response has included the following statements:

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• The suggestion that a set of ‘Asian Values’ existed throughout Asia, or even just in East Asia, contradicts what we know about the presence of long-standing religious (Islamic, Buddhist, Confucian) and other regional divisions, and the major social and cultural transformation that has been under way, especially in the last decade or so (Milner and Quilty 1996:10– 17; Maiping 1997:5–6). • Many so-called ‘Asian Values’ are equally Western ones; in some cases, they have been deliberately inculcated into Asian societies as a consequence of the influence on Asian élites of Western models. The role of the writings of the popular philosopher Samuel Smiles in developing the philosophy of ‘hard work’ and ‘self-help’ in Japan and a number of other Asian societies over the last century is an excellent example (Kinmonth 1981; Milner 1995:125). • The role in social and economic analysis of ‘Asian Values’, ‘Western Values’ or ‘culture’ in general is questionable: economic change may be seen as the result of other, deeper processes. Cultures are contingent things; they are reconstructed, constructed or invented to serve the specific purposes of their inventors. • In advocating ‘Asian Values’, a number of Asian regimes specifically aim to defend illiberal forms of government. These regimes are believed to cloak their autocratic strategies and methods in arguments of cultural exceptionalism (Lawson 1995). • ‘Asian Values’ are ideological constructs by Asian leaderships, rather than beliefs genuinely held by their people. • The ideology of ‘Asian Values’ represents radical conservatism serving the needs of capitalism at a particular stage of its development in specific Asian societies—it ‘combines organic statism with market economies’ (Jayasuriya 1997:23; Robison 1996:309–27). • There is disagreement within Asia about what ‘Asian Values’ actually are. Non-governmental organisations (NGOs) and even some political leaders, such as President Lee Tenghui of Taiwan, are powerful advocates of ‘universal’, liberal values. • As a unifying ideological system, the ‘Asian-Values’ doctrine, like the idea of ‘Asia’ itself, has proved of little use. The Association of SouthEast Asian Nations (ASEAN), despite the apparent growth in enthusiasm for the idea of ‘Asia’, is a relatively weak international association incapable of real executive action. The East Asian Economic Caucus (EAEC), which is intended to include East as well as South-east Asian countries, has made little headway. • ‘Asian Values’ are based on double standards. For example, those claiming to believe in filial piety are in fact accused of being worried about young people not supporting their parents; those claiming that the West is materialistic are accused of being engaged in enriching themselves.

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The case against ‘Asian Values’ has clearly been boosted by the collapse of the economies of a number of East Asian countries. Thus, it is argued, the ‘Asia crisis’ discredits the ‘Asian-Values’ position. Moreover, the triumphalism of many public pronouncements seems to announce that Mahathir and others could not have been more wrong about the rise of Asia and the fall of the West. The economic crisis has sounded ‘the death knell for the Asia-values debate’, demonstrating that ‘in the long run you need openness and accountability to have sustainable economic growth’ (CQ Researcher 24 July 1998). ‘Asian values’, claims Mortimer Zuckerman, Editor-in-Chief of US News and World Report, ‘have become Asian liabilities’ (Zuckerman 17 August 1998:77). According to Francis Fukuyama, ‘What the current crisis will end up doing is to puncture the idea of Asian exceptionalism. The laws of economics have not been suspended in Asia’ (Fukuyama February 1998:27). Journalist Diane Coyle concludes that the crisis will ‘finally lay to rest this unquestioning worship of Asian values… capitalism in its free-wheeling, Anglo-Saxon variety is coming into its own’ (Coyle 26 November 1997). In May 1998, the UK’s New Statesman observed that ‘yesterday, we admired Asian values and almost despised our own. Today, deregulated America is in fashion.’ Sebastian Mallaby sees with perhaps unrivalled clarity the imperialist possibilities in the Asian economic crisis. The ‘Rise of the East’ could not be further from his mind: the US, he observes, ‘enjoys world dominance in diplomacy, warfare, industry, science, media and the sheer sense of how to live.’ Mallaby admits that some ‘conservative’ Americans ponder ‘whether Asian values might teach Americans something’. However, the country now has the opportunity, especially through the International Monetary Fund (IMF), to ‘spread its worldview at almost no cost to itself’ —though Mallaby adds, with due humility, that ‘a hegemon should proceed cautiously by all means’ (Mallaby 1998:21; Roche 1 October 1997; Lingle 27 October 1997; Elegant 10 November 1997). The case for ‘Asian Values’ seems to be in retreat, although some of its critics at least admit that these values were once significant, albeit in the most damaging way. But we should be careful not to underestimate the continuing significance of ‘Asian-Values’ arguments, or at least some elements of them. Why ‘Asian Values’ cannot be dismissed It would be unwise to overlook the ideological resourcefulness of the leading ‘Asian-Values’ advocates. Lee Kuan Yew argues, with some bluntness and justification, that ‘Asian values are not the cause of the meltdown because nepotism, favouritism and corruption have been endemic and present since the “Asian Economic Miracle” which—with its high growth rates—began nearly twenty years ago’ (Bangkok Post 15 March 1998). Furthermore, if ‘Asian Values’ were to blame for the crisis, ‘how come Hong Kong and Singapore have not been affected?’ Turning to the Philippines, Lee notes

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(McCarthy 16 March 1998) that the country has been ‘praised for democracy and freedom of the press’, but ‘have they done better in this crisis?’ Lee’s defence of ‘Asian Values’ is not rigid. He admits the advantage of certain institutions inherited from the West, particularly those related to the civil service and open competition, and also criticises ‘cronyism and corruption’ —the result, he says, not of Confucianism as some would claim, but of the ‘debasement of Confucian values’. ‘Asian values’, he insists, ‘will help these countries recover’, just as they assisted economic growth in the past (Tanzer 23 March 1998). Mahathir’s response to his liberal critics is uncompromising. He seems to see the Asian crisis as an opportunity to reassert ‘Asian Values’ and Asian unity, warning that it was actually Western capitalism that brought it about (Utusan Express 2 October 1997; Mahathir 5 October 1998). He raises the spectre of a ‘Western conspiracy’ to ‘shake up the economies of the Asian Miracle nations’, and speaks of ‘racists’ who are ‘not happy to see us prosper’, and who are ‘descendants of the old white-supremacist colonialists’ (Wahab 31 August 1997; Stewart 5 September 1997). Mahathir goes on to identify solutions to the crisis that entail employing the traditional ‘Asian’ style of government intervention, suggesting that such a solution should involve greater collaboration between Asian countries (Australian 18 August 1997, 17 October 1997; Utusan Express 10 November 1997). The defiance in Mahathir’s statements is encouraged by the gravity of the domestic, political and economic challenges he faces. He reminds the world that, despite Western attacks on ‘Asian Values’ and Asian governments, ‘East Asian countries had all grown at a rate well above that of the developed countries of the West. And their growth can be shown to have benefited people as a whole.’ He also repeats his long-standing praise for what he calls the ‘Asian system of lifetime employment and low wages’ (Mahathir 5 October 1998). He confirms that he ‘still believes Asian values will pull us through’ (Utusan Express 14 March 1998). After all, ‘hard work, discipline, a strong commitment to the community, thrift and moderation are Asian values which have in fact contributed to the emergence of the Asian Tigers and Dragons’ (Utusan Express 2 October 1997). As for Western or Anglo-Saxon triumphalism, Mahathir could not be more dismissive. He accuses those who brought down Asia’s economies of being ‘totally materialistic, inconsiderate of the problems of others’, and asks whether ‘Asian values are bad as compared to Western values.’ ‘History’, he argues in an angry and almost foolishly one-sided account of the twentieth century, ‘provides the answer. The two world wars and the dropping of the atomic bombs on Asian cities, the holocaust, the killings of Bosnians—these are not perpetrated by Asians’ (Utusan Express 2 October 1997). It would be easy to portray Mahathir as an isolated and perhaps desperate figure, especially given the international and local criticism he faces over the imprisonment of former Deputy Premier Anwar Ibrahim. But the responses to the economic crisis of Mahathir—and Lee, for that matter— are not alone.

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Although systematic critiques of the type carried out by Mahathir are rare, there is clear evidence of support for his views elsewhere. Kim Yong Hwan, the former Chairman of South Korea’s Joint Presidential Committee on economic policies, has criticised the IMF’s programme for his country, arguing that reform should be more suited to the ‘Asian constitution’, and that closer cooperation should be fostered among Asian nations (Yeoh 8 June 1998). In 1997, Thailand proposed a single Asian currency (Australian 22 September 1997). Sura Sanittanant, Adviser to the Thai Deputy Prime Minister, was reported in January 1998 to be promoting the idea of Asians banding together to overcome the financial crisis. He reportedly pointed to special meetings with Malaysia, Singapore and the Philippines, arguing that an Asian trading bloc similar to the EAEC was gaining international support (Sherer 18 January 1998; Higgott 1998: 340–6). Whether or not solutions to the Asian crisis of the type proposed by Mahathir make economic sense, the need to assess how far they have attracted support around the region is clearly a matter of genuine significance, even for economists. The view that support for ‘Asian Values’ is narrow has long been a feature of condemnations of them, and has probably been promoted by the media’s tendency to concentrate on Mahathir and Lee. However, the ‘Asian-Values’ viewpoint has a longer history, and wider support, than many observers admit. As far back as 1994, Shim Jae Hoon, the Seoul Bureau Chief of the Far Eastern Economic Review, commented on the ‘suspicion arising from Malaysia to Korea to Japan, that the Western media’s agenda of human rights and environmental protection…are means to keep Asia from developing further economically’ (Shim 1994). Not surprisingly, the Chinese have made so-called ‘Confucian’ values central to an ‘Asian’ cultural unity, arguing that in East Asia the commitment to ‘hard work, thrift, filial piety and national pride’ has encouraged rapid economic growth (Dupont 1996: 15). In Japan, Thailand and the Philippines, interest in ‘Asian Values’ has grown, along with an upsurge of enthusiasm for the whole concept of ‘Asia’ (Dupont 1996:14–15). The idea of ‘the Asianisation of Asia’ has been used by Japanese intellectual Yoichi Funabashi to describe the well-documented development of regional interest in the ‘Asia’ ideal and ‘Asian Values’ (Funabashi 1993). One tactic used to demonstrate the narrowness of support for the Mahathir/ Lee position has been to cite what are perceived to be the liberal views of their most influential Asian opponents. Anwar has pleased international proponents of liberal values by declaring that ‘it is altogether shameful, if ingenious, to cite Asian Values as an excuse for autocratic practices and denial of basic rights and civil liberties’ (Anwar 1996:28). The Philippines leadership has not tended towards enthusiastic public support specifically for the ‘Asian-Values’ case. This does not, however, mean that Anwar or Philippines President Joseph Estrada are advocates of universal liberal values. They seem to be influenced by at least the spirit of the ‘Asian-Values’ argument, in the sense of being determined to assert national or regional perspectives over global or Western ones. In September 1997, for instance, Anwar used language similar to Mahathir’s when he spoke of

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the need for ASEAN members to ‘draw up collective strategies to fight those vicious speculators’ destroying Asian economies (Stewart 5 September 1997). Anwar has a long and impressive record as an Islamic intellectual and activist: he was once the leader of the reformist Muslim youth movement Angkatan Belia Islam Malaysia (ABIM), which called for Malaysian society to return to true Islamic values. He was recruited into the United Malays National Organisation (UMNO) government in 1982 and, as a junior minister visiting Australia in 1983, complained about the ‘wholesale imitation of Western values and practices’ in Malaysia, and explained that ‘Islam provides an ideological alternative to the dominant paradigm’ (Anwar 1983). He has continued to speak of a dichotomy between the West and Asia, noting in particular that, unlike the Westerner, ‘the Asian man is a persona religiosus. Faith and religious practice…permeates the life of the community’ (Anwar 1996). Asians ‘firmly rooted in their cultural and spiritual traditions do posses the intellectual capacity to perceive the cultural unity of Asia, its meta-culture’ (Anwar October 1996:187). Estrada has supported Anwar since his arrest in 1998, and has therefore been associated with a liberal perspective. However, he also appears to be engaged in ‘re-Asianising’ the Philippines, seemingly the most ‘Western’ democratic state in Asia. Estrada’s approach to government involves not only support for democratic procedures, but also efforts to re-establish the national leadership’s links with the non-élite community and its roots in the country’s populist heritage. Estrada was the first President of the Philippines to deliver his inaugural address in Tagalog rather than English; the nineteenth-century revolutionary hero he appears most to admire is not the largely Spanish-speaking José Rizal, who is usually given most official adoration, but the Tagalog-speaking populist Andrés Bonifacio, who addressed the masses in the language and idiom of their own folk literature (Ileto 1998:20, 243–51). Why culture still matters Anwar and Estrada are reminders that relying too heavily on an overly simplistic opposition between ‘Asian Values’ and liberal democracy is dangerous. Criticism of the ‘Asian-Values’ position implies that the stress on ‘Asian culture’ is found only among the élite; the wider population in Malaysia, Singapore and the other countries of Asia, it seems to be suggested, hold values that are not radically different from those usually associated with liberal democracy. Condemnation of the analytical concept of ‘culture’ as a factor in social investigations adds to the credentials of this argument (Kahn 1989:5–29). Despite these question marks over cultural analysis, a number of recent studies underline the danger of dismissing entirely the role of different cultural perspectives in analysing processes of change and interaction in Asia. David Hitchcock’s 1994 survey of the value preferences of officials, business people, scholars and professionals from the US and eight East Asian societies, while it does not support the ‘Asian-Values’ case, does confirm that there are genuine differences in the region. In certain areas, it also points to clear agreement over

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values between US and Asian interviewees. Nevertheless, Hitchcock reports that a large majority of Asian respondents favoured an ‘orderly society’ and ‘harmony’, which were given little attention by Americans; positions were reversed on the question of the importance of ‘personal freedom’ (Hitchcock 1994; Emmerson 1995; Mauzy 1997). Following his 120 interviews with ‘middle class Malays’ in 1992–4, Joel Kahn ‘found that almost all respondents articulated some form of the Asian values argument.’ They stressed concerns about the ‘threat posed to Malay culture by modernisation’ and criticised the West for its ‘lack of family values, individualism and selfishness, a lack of cultural values, permissiveness, secularisation and uncaringness’ (Kahn 1997: 29–40). In addition to surveys focusing on values in the abstract, some analysis concerned with everyday economic and social behaviour in Asia also takes into account current conceptual critiques of ‘culture’. This new analysis does not seek to establish evidence of a homogeneous body of ‘Asian Values’ and is impatient with the idea (as formulated by political scientist Samuel Huntington) of civilisational blocs. It does not expect ‘culture’ to be unchanging or uncontested, even within a single society, and notes the many obvious ways in which Western, global influences transform behaviour, styles and tastes in Asia. Moreover, this new analysis accepts that ‘culture’ is dependent upon political and other conditions. At the same time, however, it insists that ‘culture’ has a potential independent significance in explaining human behaviour. Although it accepts that the phrase ‘Asian Values’ is inadequate as a descriptive expression, it also argues that we cannot proceed from this point to the further assumption that there is no need to examine the substantial range of cultural perspectives and values which influence behaviour within and between Asian societies. One such exercise in this ‘open’ cultural analysis, Market Cultures edited by Robert Hefner, has drawn attention to the particular characteristics of ‘Chinese capitalism’, insisting that it is ‘first and foremost a network capitalism. It is built from the ground up, not on the basis of legal contracts and the supervisory authority of the state but on particularistic relationships of trust.’ The analysis observes that Malays and Javanese, unlike Chinese, tend to be ‘reluctant to submit to patriarchal authority, at least when it comes to economic affairs’; their families seem ‘more individualistic than their Chinese counterparts’. Successful Chinese businesses are ‘marked not by the creation of an ever-larger and vertically integrated corporation as in South Korea or Japan, but by a mother company’s establishment of independent firms loosely tethered in a multi-firm business group’ (Hefner 1998). Another study, Australia in Asia: Comparing Cultures, observes that Malay business people are described as perceiving the Chinese habit of charging interest on loans to family members repugnant to their sense of family obligation. The study argues that perspectives on industrial relations differ markedly in Asia, with South Korea’s being especially confrontationist by other Asian standards. In business ethics, the views of Thais and Indonesians

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towards gifts of money in carrying out a commercial transaction differ from those of Chinese and Malaysians. In other areas, including perceptions of ‘national security’, the role of government and the meaning of democracy, the study draws attention both to differences in Asia and to the way in which virtually any value or perspective is subject to far-reaching processes of change (Milner and Quilty 1996, 1997). Both these studies focus on day-to-day practical experience, rather than the broad influence of, and contest between, cultural traditions. The type of observations they make strongly reinforce the image of Asia’s cultural complexity. This contradicts the viewpoints both of ‘Asian-Values’ proponents and their critics. However, while there is little evidence of a coherent value system across Asia, it is clear that it is impossible to discount the social and economic importance of contrasting value systems. Mahathir and Lee are of course well aware of the political utility of ‘Asian Values’, but the type of cultural analysis described above, like the conclusions of opinion surveys and questionnaires, demonstrates that these South-east Asian leaders must always construct their ideological packages in a cultural context. Ideological work The rhetorical style of Mahathir and Lee has helped to focus attention on the instrumentalist and didactic aspects of the ‘Asian-Values’ viewpoint in Asian societies. What has received too little notice is the degree of genuine intellectual and ideological endeavour involved: the real work of probing the often contested, constantly changing, value systems of Asian countries to formulate ‘national’ and ‘Asian’ political visions appropriate to the postcolonial era. Anwar for one does not disguise the confusion and uncertainty that exist in this area: ‘Asia has no settled identity as yet. It is in the process of coming into being. The long and intense process of self-definition and self-understanding is just beginning’ (Anwar 1996:186). Anwar has clearly been aware of the developing contest between Islamic, East Asian, Western and many other perspectives and values in Malaysia and other parts of Asia. He has promoted ambitious ‘dialogues’ on Asian civilisations aiming to assist Asian ‘self discovery’ by investigating ‘the myriad Asian traditions in order to understand and know each other better’ (Bakar 1997:11–17). The much-published Singaporean diplomat Mahbubani also eloquently portrays the intellectual endeavour and contest that has been part of the ‘AsianValues’ debate. He observes that ‘it is vital for Western minds to understand that the efforts by Asians to rediscover Asian Values are not only or even primarily a search for political values. They involve, for instance, a desire to reconnect with their historical past after this connection had been ruptured both by colonial rule and the subsequent domination of the globe by a Western Weltanschauung.’ Mahbubani insists that Asian thinkers have been undertaking ‘an effort to define their own personal, social and national identities that enhances their sense of selfesteem in a world in which their immediate ancestors had subconsciously

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accepted the fact that they were lesser beings in the Western universe’ (Mahbubani 1998: 35). From this perspective, the ‘Asian-Values’ project is part of a far-reaching intellectual and ideological enterprise in Asia. The cultural ‘rediscovery’ spoken of by Mahbubani and Anwar is by no means a phenomenon only of the 1990s; intellectuals in nineteenth- and early twentieth-century Japan, China, South-east Asia and India responded to the challenges of modernity not only by adopting the new European doctrines, but also by mining their own cultural resources. In the opening years of this century, especially in India and Japan, influential thinkers began to experiment with the concept of an ‘Asian’ cultural unity. For different reasons, this experimentation became intense in the 1930s and 1940s (Milner and Johnson 1997:1–19). The operations of the Japanese East Asia Coprosperity Sphere, the Indian ‘Asian Relations’ conferences of the 1940s, the South-East Asia Treaty Organisation (SEATO), the Association of South-East Asia (ASA), ASEAN, the Asia-Europe Meeting (ASEM), the Asia-Pacific Economic Co-operation (APEC) forum and so on have all played a role in shaping the way in which Asians view their national and regional identities. In recent times, a number of these organisations, including ASEAN, have been criticised for failing to find solutions to major regional crises. In these circumstances, it is easy to overlook the apparently mundane way in which their routine processes can promote a sense of community in a growing sphere of bureaucratic and other participating groups. In September 1998, for example, the ASEAN Sub-Committee of Health and Nutrition met in Brunei; the ASEAN Experts Working Group in World Trade Organisation (WTO) matters met in Bangkok; the co-ordinating meeting for the ASEAN Network for Rapid Exchange of Strong Earthquake Data met in Jakarta; the ASEAN Work Group on Air Navigation met in Singapore; and the ‘ASEAN Select Committee’ met in Kuala Lumpur. Meetings continued with the same frequency throughout the following months. The sheer relentlessness of events such as these helps to promote a sense of community that reaches beyond the individual nations involved. Aspects of popular culture also contribute to developing a community identity, albeit unintentionally on the part of the participants themselves. The increasing number of people in Asian countries outside Japan converted to Japanese New Religions, or the Taiwanese and Hong Kong soap-opera producers selling their products in Malaysia and Singapore are, in their own way, drawing attention to issues concerning the creation of an ‘Asian’ consciousness (Siddique July-September 1993:64). The Japanese concert-video cassettes so popular in Thailand, or the Japanese clothing that sells so well in Singapore and South Korea, also play a part, as does the television show Asia Bogus, which is conducted in Japanese, English and Malay, and compèred by a Malay man and a Japanese woman (Milner and Quilty 1996: 202). The tension between the ‘Asia’ ideal and national, religious or ethnic aspirations is nearly always present. In an important essay on ‘the empowerment of Asia’, for instance, Alexander Woodside has cited the planning for an Asia-

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Pacific Information Superhighway as an example of a specific attempt to promote ‘Asianness’. Although the plans speak of an ‘Asia’ ideal, the fact that it would be based on the Chinese language, focuses on China, Taiwan, Hong Kong and Singapore and invokes the ‘sunshine of Confucian culture’ suggests it would do more to promote ‘Chineseness’ than ‘Asianness’ (Woodside 1996:22–3). Whether ‘Asian’ or ‘Confucian’ prevails, there is implicit resistance to the idea of a solely Western-driven globalisation. The Superhighway, ASEAN meetings, the criss-crossing of religious influences, television programmes and clothing styles within Asia all help to develop alternatives to the powerful European and American discourses that have been seeking to dominate Asia since the beginning of high colonialism in the nineteenth century. Listening to the intellectuals Despite the importance of popular culture in finding Asian alternatives to Western models, this is also to be understood as an academic enterprise. One of its consequences has been to breathe new life into previously moribund academic disciplines (Milner and Morris-Suzuki 1998:113–28). For influential Indian historian Partha Chatterjee, ‘against the arrogant, intolerant, self-aggrandising national subject of modernity, critics in recent years have been trying to resurrect the virtues of the fragmentary, the local, and the subjugated’ (Chatterjee 1993: xi). When Anwar speaks of Islam as providing ‘an ideological alternative to the dominant paradigm’, he is engaged in precisely this type of intellectual subversion on behalf of Islam. He and other Islamic intellectuals are aware of the complex, deep-seated influences of colonialism in Malay society. In social, legal and economic matters, they look for ways to introduce an Islamic perspective, including an Islamic epistemology. According to John Bousfield, an English philosopher who engaged in close debate with Muslim intellectuals at the high point of Islamic revivalism in Malaysia in the 1970s and 1980s, Islamic critics of the ‘dominant paradigm’ have been ‘reasserting the place of Revelation as an epistemologically legitimate mode of knowledge’ (Bousfield 1988:128). Even in the Philippines, after centuries of Spanish and, later, US rule, there has been an academic endeavour to re-establish links with the country’s precolonial past. The written evidence of the ‘Malayan’ heritage of the Filipinos is being closely examined with the warning that ‘our so-called national culture is still emerging’. Certain old values or key concepts contained in the various Filipino languages— ‘spirit’, ‘internality’, ‘conscience’, ‘life drive’ and ‘personhood’, for example—are identified, and consideration given to how they might be incorporated into interpretations of the past and, by implication, projections of the future of Filipino society (Covar 1998; Llanes 1996:314–27; Salazar 1998). This type of intellectual inquiry is integral to the project announced so eloquently by Anwar, Mahbubani and others. Although it often leads to conclusions which differ sharply from the specific values and aspirations

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insisted on by Mahathir and Lee, the determination to counter the pervasive colonial heritage is very much in the spirit of ‘Asian Values’. Linking together these different types of activists—from the defiant, didactic Mahathir to the determined academic researcher trying to strip back the layers of Western dominance—helps to underline the fact that the ‘Asian-Values’ phenomenon cannot be seen merely as a tool manipulated by a political or capitalist regime, or an artificial screen behind which to hide illiberal government. The ‘AsianValues’ debate of the 1990s is one episode in a long-term post-colonial cultural project. There is no question that it is Asia’s colonial heritage that is the target of this attack, but there is genuine confusion and debate over precisely what type of regional, national, religious and other visions will be developed to replace, or at least modify, the powerful globalising forces that in many cases trace their origins to that European heritage. The attempt to ‘reconnect with [a] historical past’, as Mahbubani puts it, is a genuine intellectual inquiry. Its possible outcomes, as he himself admits, are not yet fully known by the participants. Conclusion During the years of the ‘Asian miracle’, of course, there was a sense of exhilaration about the ‘Asian-Values’ campaign. Mahbubani wrote of the ‘explosion of confidence’ that gave East Asians the sense that ‘they can do anything as well as, if not better than other cultures’ (Mahbubani 1995: 103). These were heady days for those public intellectuals who, working to some extent in sympathy with ‘Asian-Values’ political leaderships, committed themselves to the task of asserting intellectual as well as political agency on behalf of their region. Today, Mahbubani admits a ‘genuine hint of regret at having spoken so confidently of the rise of Asia’ (Mahbubani 1998:12). He is nonetheless right to see the ‘Asian-Values’ debate of the 1990s as part of a much longer process of international cultural change. Mahbubani is wrong, however, to expect the debate of the 1990s to be seen in retrospect as the ‘initial round’ in the long campaign. It would by contrast strengthen his case to situate the debate in its proper place, well into the long-term process of defending the ‘local’ in Asia. Understanding ‘Asian Values’ as part of a realignment which began in the nineteenth century draws attention to the wellestablished forces that will help to maintain the momentum for change, even at a time of economic reversal. While the economic crisis certainly challenges ‘Asian-Values’ proponents and their intellectual allies, the way in which it is interpreted in the region has to be influenced by the firmly established ‘Asian’ campaign of resistance to the West. Mahathir is by no means the only influential figure to resist IMF interpretations and solutions. For many intellectuals and other opinion-leaders in Asia, the economic downturn has been seen as a reason to condemn liberal values as much, or more than, Asian ones. Bitter about the economic vulnerability that the crisis has revealed, many prominent members of Asian societies feel a renewed

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distrust of ‘the West’ and have strengthened their resolve to develop postcolonial visions and meanings for the people of Asia. The main game in the next months and years will be economic, and the forces of globalisation will remain formidable in bad times, as well as in good. The power of the US is such that it is not surprising to hear talk of the triumph of ‘Anglo-Saxon market values’ and the likelihood of a consolidated American ‘hegemony’. In speculating about future directions in Asia, however, it may be dangerous to trivialise ‘Asian Values’. The real, everyday presence of different and contrasting value systems across Asia will continue to influence practical developments in all kinds of fields, including the economic. The idea of ‘Asia’, despite the cultural problems associated with it, is attracting a growing emotional investment. Consciousness of ‘Asian’, as well as ‘Confucian’, ‘Islamic’ or ‘Malay’ identity—just like the promotion of nationalism within the region’s states—reinforces resistance to the claims of a purportedly universal, global community. For many people in Asia, ‘the global’ has a Western flavour. The fact that the global economy is seen in numerous parts of the region to have failed Asia makes it possible that the long campaign to disarm the colonial heritage—a campaign which has underpinned ‘Asian-Values’ proclamations—may gain rather than lose momentum in the next decades.

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Coping with corruption and cronyism Peter Searle

‘From miracle to meltdown’ has become a common phrase to describe the extraordinary change in Asia’s fortunes since 1997. The roots of the crisis lie both within the region, and outside it. A popular view among some in Asia, proclaimed most loudly by Malaysian Prime Minister Mahathir Mohamad, is that ‘external forces’ are to blame. (According to Mahathir, international fund managers are ‘criminals’; George Soros is a ‘moron’.) Another view identifies corruption and cronyism in some East and South-east Asian countries as the principal reason why some states have suffered more than others, and why some may recover earlier than others. Such a view has led economists and political scientists to focus on how countries in the region are coping with collusion, corruption and cronyism. Background to the crisis While foreign observers may differ about how to resolve East Asia’s crisis, there is a consensus on what caused it. Ross Garnaut argues that the meltdown had its origins in the mismanagement of short-term macroeconomic policy, and its implications in the context of changes in the economic environment (Garnaut May 1998). Financial institutions and the corporate sector generally gambled that the high growth which began in the mid-1980s would continue. The increased mobility of international capital, together with the growing speculative content of a long boom, helped to expose flaws in macroeconomic management, notably in exchange-rate regimes. From the mid-1990s, South-east Asian currencies—fixed against a basket with a high US dollar weighting—were particularly vulnerable to three influences. The first was the strengthening of the dollar against the yen (from ¥80 to the dollar in 1995 to ¥120 by late 1997). Second, inflation in the Indonesian, Malaysian and Thai economies was higher than the low levels in the major industrial economies, including Japan, a principal trading partner. Third, there was a slump in the market for electronics

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products, which particularly affected Malaysia and Thailand (Garnaut May 1998:3). These regional and global forces have squeezed South-east Asian economies in two ways. On the one hand, China has not only attracted global capital, but has also poured cheap consumer goods into export markets. On the other, aided by the yen’s depreciation, Japan has embarked on an aggressive export drive, which has affected South-east Asia’s hightechnology industries (Njo 1997). Important as these ‘external’ explanations are, the timing and development of the crisis owe as much, if not more, to ‘internal’ factors. Among the most important are corruption, cronyism and over-investment in scores of ambitious mega-projects, together with the weakness of financial systems, particularly their control, regulation and lending practices. These factors undermined confidence in the economies of Indonesia, Malaysia and Thailand, and were critical to the spreading of the ‘contagion’ of financial instability throughout the region. This ‘contagion’ also highlighted the fact that investors little understood the region’s economies, particularly the ways in which the causes and consequences of corruption and cronyism differed from country to country. Corruption and cronyism: the scourge of the 1990s? What do the terms ‘corruption’ and ‘cronyism’ actually mean? The simplest definition of corruption, and the one used by the World Bank, describes it as ‘an abuse of public power for private benefit’. This does not mean that corruption cannot exist in private-sector activities—it is clearly present in large private enterprises, and in private activities regulated by the government. In addition, abusing public power is not necessarily for private benefit: it can help a party, class, tribe, friends or family. In many countries in Asia, some of the proceeds of corruption finance political parties (Tanzi 1998). Cronyism can also be defined in a number of ways. William Safire notes that, in South Korea, the term ‘chaebol’ means a family-owned conglomerate. One family can own as many as two dozen companies in varied fields; managers are brothers, cousins and in-laws who steer business one another’s way, and cover up each other’s mistakes. After the Second World War, Japanese businessmen took the conglomerate concept a step further with the keiretsu, in which family members were replaced by professional managers, directorships were interlocked and companies owned parts of each other, making them invulnerable to a hostile take-over. At the core of the keiretsu is its nation-wide bank, which facilitates this mutual back-scratching—all of which is under the indirect but tight control of Japan’s Ministry of Finance (Safire 1 February 1998). In China, cronyism is best described by the word guanxi (‘connections’). Guanxi often goes beyond ‘personal connections’ to describe a form of extreme networking which often replaces good management.

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Neither corruption nor cronyism is, of course, a new phenomenon, but the 1990s may be a high point. The demise of command economies and the globalisation of commerce have engorged the world with money. From the early 1970s, total cross-border direct investment has ballooned, from around $50bn to $318bn a year. Portfolio investment sent overseas rose from $1bn in 1988 to $48bn in 1993 (Walsh 22 June 1998). The role of government in an economy may also contribute to corruption and cronyism, particularly in transitional economies. In the 1998 Corruption Perception Index (CPI), produced by the Berlin-based research group Transparency International, some 50 of the 85 countries surveyed scored less than five of the possible ten points available; numerous states scored less than three. Singapore was ranked ‘cleanest’ of the Asian states with seven points, followed by Hong Kong, Japan, Malaysia and Taiwan. Indonesia was bottom (Transparency International 1998). There is a consensus that corruption is generally connected with the state’s activities, especially when they are monopolistic and discretionary, as they commonly are in Asia. In countries with well-functioning and honest bureaucracies, the short-term impact on public officials of a larger government role will be limited. In countries without this tradition, it is argued, a more invasive government will have a more immediate impact on the probity of civil servants and on corruption (Tanzi 1998:7). However, the way in which a state operates is more important than the degree of public-sector activity. Privatisation is another development of particular relevance to Asia’s transitional economies. Public or state enterprises have been a major source of corruption, especially political corruption, in Asia because many have been used to finance political parties, and to provide patronage to the supporters of particular groups. The World Bank notes that corruption is widespread in developing and transitional countries not because their people are different, but because conditions—poverty, low civil-service salaries and an absence of social safety nets—are ripe for graft (Gray and Kaufmann 1998). Opportunities are numerous. Monopoly rents can be very large in highly regulated economies because of the formerly state-owned property up for grabs. In transitional economies, the discretion of many public officials can be broad. Poorly defined and often constantly changing rules and regulations exacerbate this systemic weakness. Generally weak accountability is high on the list of causes of corruption in transitional economies. Political competition and civil liberties are often restricted, and legal institutions are frequently constrained or simply ill equipped to deal with corruption, particularly the complexities of corporate corruption. Other watchdog institutions, notably the press, are also often weak. Even if detection is possible, punishments tend to be mild when corruption is systemic.

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Malaysia Malaysia’s plural society and the need to maintain ethnic peace and political stability are the most important country-specific factors determining the character of its political economy. Disparities in income, occupation and ownership were major causes of the race riots which broke out in Kuala Lumpur in 1969, and which led directly to the implementation of the New Economic Policy (NEP). The NEP’s principal aims included increasing ethnic Malay (bumiputera) ownership of corporate equity to 30% by 1990, and creating a Malay business class. In 1970, Malays owned only 2.4% of all share capital in limited companies, Chinese 34% and foreigners 63%. This meant that the state had to play a key role in extending Malay ownership of the economy’s ‘commanding heights’: agriculture, mining, manufacturing and banking. New alignments Mahathir’s assumption of power in July 1981 reflected significant shifts within Malaysia’s polity and society. These developments gave the country’s political system an increasingly patrimonialist hue for structural, political and personal reasons. By the early 1980s, the growing number of Malay businessmen fostered by the NEP had become an increasingly important element of the political élite. The composition of this élite was gradually changing from politicians and ‘administocrats’—recruited initially from the ranks of the pre-colonial ‘aristocracy’ by the British colonial regime—to a combination of politicians and businessmen. This development had a particular impact on the United Malays National Organisation (UMNO), the dominant political party in the ruling Barisan Nasional (BN) coalition government. Success in party elections opened the way to lucrative commercial opportunities. Mahathir’s arrival in office therefore coincided with two important developments: the emergence of an increasingly influential core of bumiputera businessmen; and, as a result of restructuring under the NEP, the concentration of power in a few regulatory agencies. Mahathir’s outlook and personality formed the link which fused these two elements. He was driven by an ambition to transform Malaysia into a modern industrial society. The engine to achieve this vision was business. Whereas his predecessor had kept businessmen at arm’s length, Mahathir embraced them. As the political system grew more patrimonial, loyalty became more important in appointments than ability (Jesudason 1989). Political appointment criteria extended from the foremost planning agency, the Economic Planning Unit (EPU), to the central bank, Bank Negara, and all critical levers of economic regulation and control. The Capital Issues Committee (CIC) and Foreign Investment Committee (FIC) —which had authority over all transactions by companies listed on the Kuala Lumpur stock exchange— lost their independence.

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At the same time, authoritarianism and state power also increased. In 1988, the country’s chief justice was impeached in a dubious judicial inquiry. Charges were brought against five other Supreme Court judges, two of whom were dismissed. The government was able to restructure the courts and rid itself of three judges willing to hand down decisions unfavourable to it. In October 1997, for example, the High Court issued an injunction barring the signing of a multi-billion dollar contract awarded to an UMNO-linked company, United Engineers (Crouch 1996:139). Constraints have also been imposed on other watchdogs of government and business probity. Radio and television are effectively government monopolies. The main newspapers are owned either by individuals associated with the UMNO, or by UMNO companies. Legislation permitting the government indefinitely to detain its recalcitrant critics includes the Sedition Act, the Societies Act, the Official Secrets Act and the Internal Security Act. Anwar Ibrahim, the erstwhile Deputy Prime Minister and Minister of Finance, was initially detained under the Internal Security Act in September 1998. Corruption, cronyism and government—business relations As power shifted to the Executive in the 1980s, and the political system became more patrimonialist, so the scope for abuse increased. Following the recession of the mid-1980s, however, pressure for a check on public-sector expansion coincided with changing attitudes in the UMNO over the role of the state in the expansion of bumiputera ownership. Increasingly, members of the small but influential Malay business élite were exerting pressure on the political leadership to curtail state-sector expansion and speed up the transfer of assets under the NEP from the state to the private sector. At the same time, the UMNO itself changed from a passive to an active corporate investor. Its vast, spider-like interests spanned the economy; few political parties in Asia have become so closely involved in business. Although officially the UMNO owned no shares in any company, by the late 1980s it exercised proprietorship (through trusted individuals who owned shares and held directorships) in well over 100 firms. In April 1990, all the major business groups linked to the UMNO were subsumed into a ‘superconglomerate’, Renong. By the early 1990s, Renong had emerged as one of the top three companies on the Kuala Lumpur stock exchange. With a market capitalisation of $6–7bn, it wielded considerable influence in Malaysia’s corporate economy. These developments had important implications, both for politics and for the relationship between politics and business. The large tycoons, who generally depended heavily on their connections with the UMNO, were not inclined to play the classic role of the bourgeoisie in challenging the state’s authoritarian power. On the contrary, they acted, not as a class pursuing common interests, but as individuals fighting for their own survival (Crouch 1996:196, 218).

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Corruption, cronyism and crisis On one level, the rift between Mahathir and Anwar in 1997–8 can be explained as a power struggle between a long-serving premier and his ambitious and increasingly impatient deputy. However, the stakes were much higher than the prestige of office: those with connections to ‘the top’ stand to lose millions if their patron is removed. It appears that Mahathir’s political-business allies in the UMNO were becoming increasingly concerned at the prospect of Anwar’s succession, particularly after his three months as acting Prime Minister in MayJuly 1997, while Mahathir was holidaying overseas. During his tenure, Anwar won accolades for bringing a new transparency to government by his frank criticism of some mega-projects. Anwar was particularly critical of the financing and politicking associated with the $5.9bn Bakun hydroelectric project in Sarawak. The driving force behind the project, Ting Pek Khiing, was a Mahathir protégé. In July 1997, as Anwar’s tenure as acting Prime Minister was ending, Thailand’s devaluation of the bhat triggered the regional financial crisis. The crisis increased the rift between Mahathir and Anwar, as each responded with very different policy prescriptions. While Mahathir blamed ‘external forces’ and branded the currency catastrophe a conspiracy by Western interests, Anwar sought to ‘clarify matters’ and calm the markets. In the process, however, he angered Mahathir’s allies, who interpreted his actions as an attempt to undermine the Prime Minister. Tension between Mahathir and Anwar was apparently also growing over the vexed question of bail-outs. On 17 November 1997, the cash-rich United Engineers bought 32.6% of its ailing parent Renong at a cost of $670m. Under Malaysian law, a purchaser of more than 33% of a listed company must make a general offer for the firm’s remaining shares. However, United Engineers obtained a waiver in ‘the national interest’, exempting it from making an expensive general offer for the Renong shares it did not already own. On 24 November, Anwar, as Finance Minister, censured United Engineers, and ordered its waiver to be withdrawn. The company appealed and, on 31 December, the FIC upheld its exemption, reinforcing the perception that politically connected companies could do anything they liked in the stock market. Despite the Renong setback, it seemed that, by late 1997, Anwar had wrested some control of the economy away from Mahathir. In December 1997, he outlined what amounted to an abandonment of the aggressive, highgrowth policies which Mahathir had championed for ten years. The austerity measures he announced included revising growth figures downwards, from 7% to 4%; slashing government spending by 18%; postponing all megaprojects; and increasing currency reserves to four months’ worth of retained imports, instead of 3.7 months’ worth. Anwar also tried to break down some long-standing assumptions about Malaysia’s ‘political economy’, foremost among them the idea that powerful and politically connected tycoons would be protected, whatever the cost. Foreign investors in particular were

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concerned that the banking system would be compromised if it was forced to carry the welter of bad debts accumulated by the tycoons. According to Anwar, ‘there was no question of any bail-out. The banks will be allowed to protect themselves and the government will not interfere’ (Jayasankaran 18 December 1997). The conjunction of political and economic factors in the growing rivalry over policy between Mahathir and Anwar increased as the economy shrank. At its lowest point, on 7 January 1998, the ringgit had lost almost 50% of its exchange value against the US dollar. Between July 1997 and mid-January 1998, the stock market lost over 65% of its capitalisation—the largest stock-market fall among the five ‘crisis’ countries (Athukorala 1998:85). The last straw in the Mahathir-Anwar tussle came in May or June 1998, after Indonesian President Suharto’s downfall. Suharto’s fall set a precedent for other long-standing leaders to consider the prospect of stepping down. Events in Indonesia appear to have strengthened Anwar’s resolve. In June, he stated that the economic crisis had ‘unleashed a gale of creative destruction’ in Asia that would ‘cleanse society of collusion, cronyism and nepotism’ (Jayasankaran 18 June 1998). The reference to nepotism was apparently too much for Mahathir. Several months earlier, opposition-party leader Syed Husin Ali and close associates had asked the anti-corruption agency to investigate how Mahathir’s sons had gained stock in over 200 companies by late 1994 (Jomo 1998). Anwar’s allies in the UMNO Youth Movement were also campaigning against corruption, cronyism and nepotism, and calling for reform (reformasi) —the same chant which had led to Suharto’s overthrow. Anwar’s allies repeated their demands at the UMNO general assembly in June. Mahathir’s retaliation was immediate, and clearly well planned. In a devastating round-up speech to the assembly, he released lists of tenders, contracts and privatisation beneficiaries from the EPU and the Ministry of Trade and Industry (MTI), highlighting the extent to which all UMNO factions, including that of Anwar, had benefited from government or party patronage. At the same time, Mahathir began curtailing Anwar’s influence in government. On 24 June, Daim Zainuddin, a close Mahathir ally and the Executive Director of the National Economic Action Council (NEAC), was elevated to the Cabinet as ‘Minister of Special Functions’ in charge of economic development. In effect, Daim had broad oversight of all economic policy. His appointment was clearly aimed at curbing Anwar’s power, and shoring up the increasingly beleaguered Malay business élite, with which Daim was closely associated. As the recession deepened and their debts ballooned, Malay businessmen had become more dependent on UMNO patronage— and more determined to remove Anwar. On the day of Daim’s appointment, the government began to implement the expansionary policies favoured by Mahathir. The Central Bank cut the amount of reserves that banks were required to keep on deposit, pumping about $1.97bn into the banking system and presaging lower interest rates.

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Key Anwar allies in the press, notably the editors of Utusan Malaysia and Berita Harian, were pressured into resigning. These newspapers are the country’s largest Malay dailies, and are influential among UMNO supporters. The smear campaign against Anwar gathered pace, with accusations of economic, political and sexual shenanigans (Jayasankaran 17 September 1998). The charges of sexual misconduct seemed specifically designed to tarnish Anwar’s image, much of which derived from his impeccable Islamic credentials. The increasing desperation and viciousness of the campaign against Anwar were reflected in the growing desperation of the UMNO’s major cronies. One after another, these tycoons were bailed out in circumstances which seemed to confirm accusations of increasing nepotism and cronyism in ‘Malaysia Inc.’. Beneficiaries included one of Mahathir’s sons, Mirzan Mahathir, whose shipping company Konsortium Perkapalan had accumulated debts of $420m by February 1998. Other prominent ‘bail-outees’ included Daim protégé Tajudin Ramli, Chief Executive of Malaysian Airlines and telecommunications firm Technology Resources Industries. Other deals apparently worth hundreds of millions of ringgit are reportedly also being considered for Chinese tycoons close to Mahathir, such as Vincent Tan and Ting Pek Khiing, whose companies have been involved in Mahathir’s pet mega-projects (Hiebert 21 May 1998). According to Mahathir, ‘People talk about crony capitalism as if we go and find cronies. What we do is when people have a capacity to do well, we give them a hand’ (Business Week 4 May 1998). Anwar was dismissed from both his government posts on 2 September 1998, expelled from the UMNO the following day, and later arrested and detained. These political events coincided with further dramatic reversals in economic policy. On 29 August, Bank Negara’s governor and deputy governor, both of whom were seen as Anwar protégés, resigned over policy differences with Mahathir. On 1 September, Malaysia lurched into uncharted economic territory by pegging the ringgit at 3.8 to the US dollar and restricting capital movements. The timing of this decision—which flew in the face of financial orthodoxy—was critical. Renong, the flagship of Malaysia Inc., was in trouble, and needed bailing out. It held RM28bn in commercial debt, and accounted for more than 5% of all bank loans in Malaysia. Allowing Renong to fail could have wrecked the country’s banking system. However, acting before currency controls were imposed would have provoked a disastrous attack on the ringgit. According to a senior commercial banker familiar with the Renong bail-out plan, ‘Even if foreign investors don’t like the deal it doesn’t matter anymore because of the capital controls’ (Lopez 9 October 1998). The bail-out involved replacing the group’s $2.76bn-worth of debt with government-guaranteed bonds.

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Corruption and cronyism—‘money politics’, as its Malaysian variant is known—assumed a higher profile in the 1980s and 1990s. Cronyism has added a bitter new dimension to politics, which was all too evident in the struggle between Mahathir and Anwar. But dramatic as events in Malaysia were in late 1998 and early 1999, they pale in comparison with the challenges faced by Indonesia. Indonesia Transparency International’s 1998 index ranked Indonesia as Asia’s most corrupt country. But, as Michael Leifer succinctly puts it, ‘how can a political system that has changed only in form address structural economic problems, which are a product of the system?’ (Leifer 1998). Adam Schwarz’s prophetic judgement—that the ‘worst aspect of [Suharto’s] rule was the way in which he left it’ —has a particularly tragic ring given Indonesia’s economic plight (Schwarz 1994). Between October 1997 and the end of the year, the rupiah’s value against the US dollar almost halved, from Rp3,600 to Rp6,000. By January, it had plummeted to Rp17,000 to the dollar. Unemployment soared, and food prices rose as the El Niño weather system brought drought. Between December 1997 and March 1998, inflation increased by around 118% per annum (McLeod 1998). While external factors triggered Indonesia’s economic woes, domestic issues—the succession challenge, the government’s response to the crisis and the problems of the country’s ‘high-cost economy’ (code for the rapacious corruption and cronyism of the Suharto family) —turned them into a disaster. The roots of the catastrophe lie in the policies and practices of Suharto’s New Order, established in 1965 following the chaos of President Sukarno’s ‘Guided Democracy’ of 1959–65. While it had its achievements, among them securing stability and economic development, introducing a successful family-planning programme, spreading literacy and attaining self-sufficiency in rice, Suharto’s New Order gradually became overshadowed by its darker side. The president suppressed the growth of politics and kept political institutions neutered. The windfall from oil revenues, the progressive deregulation of the economy in the 1980s, increasing foreign investment and large publicworks projects created more opportunities for graft. It also facilitated the distribution of patronage to Suharto’s key supporters, which in turn strengthened his power. As Harold Crouch has observed, the enforced political isolation of the masses, and Suharto’s capacity to win and retain the loyalty of key sections of the political élite, meant that the New Order exhibited key features of a patrimonial state. Suharto presided over the state in much the same way as a Javanese Sultan presided over his court (Crouch 1979). Is there, therefore, a cultural (specifically Javanese) dimension or explanation to the prevalence of corruption in Indonesia? While there are similarities between the New Order and a patrimonialist

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state, there are also differences; important social and economic developments during the New Order period were at variance with, or undermined, Indonesia’s apparently patrimonialist political structures (Crouch 1979). US scholar Dan Lev has stressed that ‘corruption is not a culture, and it’s not related to a certain culture. Corruption emerges and spreads widely as the result of opportunity and leeway to commit corruption; the existence of a venal and greedy political elite; and an excessively strong and uncontrolled government’ (Kompas Online 6 September 1998, www.kompas.com). As the boom of the late 1980s and early 1990s continued, the Suharto family became more rapacious. The extraordinary extent of its greed is still emerging. Estimates of the family’s wealth vary between $4bn and $40bn. (The lower figure of $4bn now seems much closer to the mark.) Much of this is locked inside charitable foundations (yayasans), which channel political ‘donations’ from business associates. Suharto’s children were involved in a staggering number of deals: land swaps, which gave them valuable government land in central Jakarta; government-owned shares sold at a huge loss to a Suharto family company; oil-trading monopolies; banks; hotels; tollroads; and even monopolies on processing driving licences and the charter rights for the annual Haj pilgrimage to Mecca. Michael Backman has identified 1,247 companies in Indonesia with a Suharto family member as a significant shareholder (Backman 24 October 1998). The conglomerates, banks and investment companies of a small coterie of wealthy Chinese businessmen were entwined in many of the children’s business empires. Most notable of these business figures were Liem Sioe Liong (one of South-east Asia’s foremost billionaires), and Bob Hassan (Mackie 1994). Their entrepreneurial skills and networks further enriched the family, which in return used its personal and political connections to give them monopolies in various sectors of the economy. Indigenous Indonesians (pribumi) holding high political office in the New Order also benefited from the symbiotic relationship between business and politics. One of these beneficiaries was the Timsco Group, the family flagship of Habibie, who used the affectionate acronym SGS (‘Super Genius Suharto’) to refer to the president. Michael Backman has observed that ‘the bulk of the earnings of the diverse Habibie group appeared to come from government supply contracts’, particularly from state-owned entities within Minister Habibie’s portfolio (Backman 17 February 1998). The popular anger which toppled Suharto’s New Order and ushered in the Habibie government was partly the result of pressure for political liberalisation. This in turn stemmed from economic development and generational change. But the anger’s focus was Suharto’s inability to distinguish between the interests of his family and those of the state. When Habibie assumed the presidency, he promised to make the eradication of corruption, collusion and nepotism his priority.

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Shortly after pledging to investigate the Suharto family’s wealth and its cronies, Habibie dismissed the Attorney-General, Soejono Atmonegoro, replacing him with Lieutenant-General Andi Muhamad Ghalib. Soejono apparently intended to establish a team, including members of the general public, to investigate corruption. He proposed turning the AttorneyGeneral’s office into an independent agency. The Jakarta Post opined that it was not clear whether or not Soejono’s dismissal was connected with a pledge to protect Suharto’s dignity and good name made by the armed forces commander General Wiranto, Ghalib’s former boss, shortly after the president’s fall (Masuki 12 September 1998). Public pressure for a formal investigation increased after Suharto’s denial in September 1998 that he had accumulated a fortune while in power (‘The fact is,’ he claimed, ‘I don’t have a single cent’) (Australian 7 September 1998). As a result, many of the contracts awarded to Suharto family members have either been cancelled, or are being investigated (Backman 24 October 1998). However, the Habibie government was reluctant to open the Pandora’s box of highlevel corruption since many of its members would be implicated. This reluctance did not extend to Suharto’s Chinese cronies. Their unpopularity and political isolation made them attractive targets, and a number became scapegoats for the New Order’s sins (Antara 1 Se ptember 1998, www.antara.co.id). The reform process seems to face almost insurmountable odds. Good governance cannot be separated from democratic development, which is a gradual process. A ‘big-bang’ approach to political reform could be disastrous, as the fate of the Soviet Union demonstrates. On the other hand, in the present volatile situation timidity and half-measures are just as likely to provoke anger, unrest and a repeat of the May 1998 riots. Successful democratic transition carried out in a relatively orderly way depends on the presence of a strong civil society—which is singularly lacking, or at best very under-developed, in Indonesia. Sarwono Kusumaatmadja, the leader of the new Movement for Justice and Unity party, has charged that ‘the elite is taking over the reform program to preserve their own interests…too few members of the elite have any connection with the masses and many of the new party platforms attempt to capitalize on divisions in Indonesian society rather than solve these problems’ (Vatikiotis 5 November 1998). Corruption in Indonesia has become systemic, and thus difficult to eradicate (Kompas Online 6 September 1998, www.kompas.com). The country’s crisis is both political and economic. Indonesia must also cope with the fact that much of the political, business and bureaucratic élite associated with the New Order remains in place. The changes of government in Thailand and South Korea have made reforms easier in these countries, and have not necessitated making too many concessions to the vested interests which grew out of the clientist patronage system under the previous government. Given the odds against Indonesia, it is hard to be optimistic that the rhetoric will be matched by significant action.

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Thailand In 1998, Thailand’s major daily, the Bangkok Post, boasted that the city had only two superlatives left to its name: ‘the largest number of onetime financial executives selling noodles and the world’s richest housewives. The latter category referred to the fact that when cabinet ministers were forced (in late 1998) to reveal the assets they gained while in office, former premier Chavalit Yongchaiyudh declared a figure of $620,000. Yet his wife Phamkrua, who had never held a job, was found to have accumulated $4.3 million!’ (Newman 29 December 1998). Pasuk Phongpaichit, an economist at Chulalongkorn University, observed in 1998 that ‘it would not be wrong to say that corruption is the single most important reason for our economic meltdown’ (Kahn 26 April 1998). In early 1996, Thailand appeared to be the foremost of Asia’s tiger economies, and a model of developmental success. Two years later, the economy was in a shambles: ‘The exchange rate had collapsed, after the decision to float the currency in July 1997, a humiliating IMF bailout package had been agreed to, and confidence in the country’s economic institutions was shattered, especially that of the Bank of Thailand’ (Warr 1998). Prime Minister Chavalit Yongchaiyudh’s administration was forced out of office. The Chavalit government had comprehensively lost public confidence in its capacity to handle the crisis. It had also been dragging its feet on a new constitution, whose key article strengthened individual rights and freedoms and provided for public accountability to promote transparency (Vatikiotis 18 September 1997). In November 1997, Democratic Party leader Chuan Leekpai swept into office pledging to root out the corruption and cronyism which had helped to bring the economy to its knees. Chuan’s administration faced major obstacles given the historical relationship between government and business in Thailand. Anek Laothamatas argues that patron-client links, together with limited levels of organisational coherence and discipline in many parts of the Thai bureaucracy, have contributed to widespread corruption. At the same time, Anek emphasises that, since the October 1973 student uprising and the end of the long era of military rule, there has been a gradual decline in the scale of clientism and corruption (Laothamatas 1994). There were three reasons for this decline. First, the surge of public resentment from about the mid-1970s at abuse of official power and the creation of patronclient ties curtailed the movement of officials from the public to the private sector to join company boards. Second, the fragmentation and instability within the upper echelons of the military made clientist ties with the bureaucratic élite less productive, and less reliable for private companies. Third, business associations grew, and the government became more receptive to organised business representation. However, as electoral politics achieved a new momentum in the late 1980s and early 1990s, corruption in the relationship between government and business increased (Laothamatas 1994:208). Despite important structural changes in the 1970s and 1980s, clientism and corruption not only remained

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embedded in institutions and society, but apparently also gained new impetus, largely from political competition and the bubble economy, and from the inflow of foreign capital. Vote-buying is rampant in Thai politics. An official election-commission report in 1998 estimated that political parties spent about $1bn to lure voters in the recent elections (Kahn 26 April 1998). For the majority of Thais, particularly the 70% of the population in rural areas, voting decisions remain conditioned by relationships between patrons and clients. Donors are often the big businessmen who dominate most parties, essentially to protect or further their corporate interests. This is ‘money politics’, Thai style. Politicians often rewrite major public contracts to benefit themselves. In its 1998 annual assessment of Thailand’s investment climate, the US Department of State pointed to rampant high-level corruption as an obstacle to doing business in the country. The report also noted that ‘unfortunately, gratuity payments to civil servants responsible for regulation oversight and enforcement remains a common practice in many branches of the government’ (South China Morning Post 24 July 1998). While Thailand’s bureaucracy has been modernised, officials still ‘eat the state’, to use a local phrase. In particular, the police have institutionalised extra-budgetary payments for officers’ welfare (Kahn 26 April 1998). The Secretary-General of the Counter-Corruption Commission revealed in 1998 that a significant number of recently retired officials, particularly those from government agencies and state enterprises, were found to be surprisingly wealthy (New Nation 27 September 1998). Graft also extends to some sections of the judiciary. Debate over laws covering bankruptcy, revised in the wake of the financial crisis, has highlighted the ability of parties to influence judgements ‘through extra legal means’. Some of the most notable cases of clientism and corruption have been in the banking and financial sector. Clientistic relationships and a lack of transparency contributed to the Bank of Thailand’s mismanagement of the financial crisis, particularly its use of billions of bhat to assist many of the country’s debt-laden finance companies. The Bank of Thailand has always enjoyed close relations with the powerful cartel formed by the big five commercial banks (Vatikiotis 4 September 1997). Singapore’s Senior Minister, Lee Kuan Yew, noted in 1998 that ‘many Thai leaders in Government and opposition have personal interests in the fate of finance companies and banks, hence a natural reluctance to discipline them. So warning signs were ignored and remedies postponed’ (Kahn 26 April 1998). Chuan’s political dilemma The Chuan government’s mixed record in combating corruption and clientism in politics and business is not surprising given their pervasiveness. In addition, several factors have eroded Chuan’s standing as the ‘Mr Clean’ of Thai politics. These include concerns over the implementation of a new constitution; a series of scandals; and, most importantly, his government’s need to win new political

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allies from among the discredited politicians of former governments to bolster his slim majority in the legislature. While a number of the provisions of the new constitution are specifically designed to tackle corruption, both official resistance and the environment in which they must operate threaten to undermine them. One clause states that the Counter-Corruption Commission should investigate any accusation against a government official backed by at least 50,000 signatures. The provision has encouraged many people to come forward with allegations of official corruption, but some politicians apparently denounced the petitions as illegal and are seeking to water them down in follow-up legislation (Vatikiotis 5 November 1998). Another clause seeks to promote cleaner politics by reducing the size of population per constituency in Bangkok. However, this may only make it cheaper for vote-buyers to win (Vatikiotis 24 September 1998). In its first year in office, Chuan’s six-party coalition government was also confronted by a number of scandals. In July 1998, the government investigated Transport and Communications Minister Suthep Thaugusban over the bidding process for a high-speed digital telecommunications project. In September, Health Minister Rakkiat Sukthana and his deputy, Thirawat Siriwansan, resigned over a scandal involving the Health Ministry, which was accused of re-selling millions of dollars’ worth of over-priced pharmaceutical products (Vatikiotis 24 September 1998). While firm action against offending politicians (i.e., dismissing them) is likely to boost support for Chuan’s government, reducing his thin majority in parliament threatens government stability, and hence Chuan’s capacity to fight corruption. The relationship between the government, business and the bureaucracy which evolved in the 1980s and 1990s promoted greater democratisation. The election of Chuan’s government in November 1997 facilitated Thailand’s generally robust and effective response to measures attached to the International Monetary Fund (IMF) rescue package. As part of an austerity programme, Chuan’s administration cut investment in state-owned enterprises, lowered public-sector wages and improved the financial system’s regulatory framework (Lauridsen 1998), but the changes which made possible a smooth political transition and political reform were also associated with an upsurge in political activity in the 1990s. So, somewhat ironically, greater democratisation also encouraged clientism and corruption which, together with the tenacity of oldstyle patronage politics, indicate that reform measures may achieve only limited success. Prospects for the future In the 1980s and 1990s, the increasing globalisation of commerce and the rapid growth of international trade exacerbated corruption and cronyism in transitional economies. Malaysia, Indonesia and Thailand share a number of features common to transitional economies, making them particularly vulnerable. These include, though to varying degrees:

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the central role of the state a lack of institutional arrangements allowing for smooth political change the weakness of civil society and of regulatory and administrative institutions the curtailment of civil liberties, including those of watchdog institutions such as the press.

Corruption and cronyism also have characteristics particular to each state, which were critical in their responses to the Asian crisis. In Malaysia, the role played by the state in addressing social and economic disparities led to a change in the relationship between the state, the bureaucracy and business. As a result, power resided in a close and increasingly incestuous relationship between the UMNO and business. Thus, the dependence of the new Malay business class on the UMNO was important in Malaysia’s decision to impose currency controls in September 1998. A principal justification for currency controls is that they give a government breathing space to tackle structural reform. However, Malaysia has squandered this opportunity, as prominent, politically connected, but inefficient or reckless, managers have been bailed out by public funds. Some variation of the crony capitalism which now dominates Malaysia’s political economy is therefore likely to continue partly, also, because the crisis has not been as severe in Malaysia as elsewhere in the region. The weakness of Indonesia’s civil society was a key factor in the concentration of power, first in the principal political and bureaucratic components of the New Order, and later in the office of the president. A combination of internal and external factors supported a patrimonial state, where accruing wealth increasingly depended on links to the Suharto family. However, the downfall of Suharto’s New Order will not usher in fundamental reforms to tackle corruption and cronyism. The atrophy of civil society has left Indonesia bereft of the personnel and institutions which could address these problems vigorously since many are tainted by association with the previous regime. Any progress is at best likely to be sporadic and limited. True, the depth of popular anger has prompted the Attorney-General to question Suharto on corruption in his administration, and many of the contracts given to Suharto family members have been cancelled or are being investigated. Systemic problems remain, however. Good governance has to be underpinned by political development, but successful and orderly democratic transition depends on the presence of a strong civil society—a distant prospect for Indonesia. While Thailand’s greater democratisation makes reform more likely, significant barriers to rapid and fundamental change remain. Clientism and corruption remain embedded in Thai institutions and society and even, somewhat ironically, appear to have been strengthened by the country’s increased political competition and democratisation. Vote-buying is rampant, and party identification weak, so the determinants of political alliances—clientist relationships and cash bribes—are not likely to change in the near future. Despite

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these restraints, though, the government, aided by an increasingly vigorous press, has started to fight back, particularly against the businessmen-politicians who have stonewalled its reform agenda. In the period of recovery from the East Asian financial crisis, the prospects for significant reform are, comparatively, brighter in Thailand than they are in Malaysia, but remain dim and distant in Indonesia.

7

China Incomplete reforms Michael Yahuda

The ‘three Chinas’ (China, Taiwan and Hong Kong) can claim to have coped relatively well with the Asian economic crisis and its political ramifications—at least so far. None was in the immediate firing-line since none suffered from excessive short-term foreign debts or major budget deficits, and each had amassed huge foreign-currency reserves. Yet the responses of all three have differed markedly, reflecting the particularities of their economic and political situations, and each has encountered special difficulties arising out of the economic storms that have battered the region. China has been regarded by some as a beneficiary of the crisis, and it has drawn praise as ‘an island of stability’ amid the Asian upheavals. The country’s leaders have claimed and received acknowledgement of their alleged ‘selfsacrifice’ in not devaluing their currency, as well as of their unprecedented, albeit small, contribution to the international bail-out schemes for some afflicted South-east Asian countries. However, fundamental weaknesses in the Chinese economy are causing the country to be seen increasingly as part of the problem, rather than the solution. Hong Kong has avoided many aspects of the crisis by maintaining its currency peg to the US dollar established in the early 1980s. But it has paid a heavy price: property prices and the value of the stock market have plummeted, and unemployment has risen to heights not seen for 15 years. Hong Kong has become even more over-priced relative to its competitors as a tourist centre and a regional finance and business hub. Its highly praised reputation as a freemarket economy has been put at risk by government intervention in the stock market to buy shares to defeat alleged international speculators. Although there are sound economic reasons for holding on to the dollar peg despite the pain, many argue that, at bottom, the main motive for doing so is political: to avoid huge embarrassment to Beijing and the new government of the Special Administrative Region (SAR) so soon after Hong Kong’s return by the British on 1 July 1997. Taiwan has been relatively insulated from the Asian crisis, largely because of the legacy of the ‘siege economy’ which lasted until the end of the 1980s, and which held the island back from borrowing greatly on international capital markets. As a trade competitor of other East Asian economic tigers, especially

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South Korea, Taiwan allowed its currency to depreciate in October 1997 by around 15%—between three and four times less than its competitors—enabling it to continue trading profitably. Although Taiwan has avoided the economic depression of Hong Kong, trade has not expanded at the rate of earlier years and economic growth is significantly slower. While Taiwan may claim to have emerged from the crisis in relatively better shape than other Asian countries, it is inextricably linked to developments in mainland China. Any truly major setbacks to China’s economy which threatened the stability of Communist Party rule would probably result in a new emphasis on nationalism and the dangers of national disintegration. This in turn could be expected to raise tensions across the Taiwan Straits. Although the ‘three Chinas’ have done better than most amid the Asian financial and economic storms, they have nonetheless been exposed to a significant battering which has highlighted weaknesses in their economic and political positions. These weaknesses could yet cause lasting damage, particularly if China is unable to address the deep-seated problems in its banking sector and state-owned enterprises (SOEs). Taiwan Successful economic management is linked with Taiwan’s survival as an independent entity, and is thus of considerable strategic significance for Taipei. In the 1990s, Taiwan’s diplomatic isolation intensified as the overwhelming majority of states ‘recognised’, ‘acknowledged’, ‘respected’ or ‘took note’ of Beijing’s claim that Taipei was a Chinese provincial capital. By the end of the 1990s, Taiwan was recognised as a separate state by only 27 small and largely insignificant nations in Central America, the South Pacific and Africa. After meeting Koo Chen-fu, Taiwan’s senior negotiator, in October 1998, China’s Vice-Premier and former Foreign Minister Qian Qichen stated that ‘it is a historic trend that Taiwan is suppressed in the international community…it will continue’ (Straits Times 26 October 1998). Taipei’s growing diplomatic isolation has made its economic links—it has relations with more than 140 states and regions—all the more important. Continued economic success and its growing reputation as a genuine democracy contribute to Taiwan’s international standing, and ensure that its voice is heard in the world’s key capitals. Continued de facto independence ultimately rests on Taiwan’s ability—with the help of the US—to defend itself. But the willingness of its people to endure hardship, and Washington’s continued determination to protect the island, would be even more severely tested were it not for Taiwan’s economic success and democratic transformation. Unlike some of its fellow tiger economies, Taiwan’s rulers never became giddy with success at the high points of the so-called Asian miracle. Taiwan’s concern to insulate itself from possible economic subversion by mainland China helped to protect it from the worst effects of the economic crisis when the bubble burst in 1997. Its leaders have always been conscious of the

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country’s vulnerability to possible Chinese financial manipulation via third parties, and so, unlike other East Asian countries, it had little foreign debt (Klintworth 1995:144). Taiwan’s leaders have also tried to limit commerce and communications with the mainland to reduce the risk of over-dependence. Mainland officials occasionally point out that Taiwan’s general trading surplus and foreign-currency reserves stem from its surplus with China/Hong Kong, which stood at over $26 billion in 1997 (www.tptaiwan.org.tw). In response to the relocation of labour-intensive manufacturing offshore—principally to the Chinese mainland—the government encouraged business to adopt a ‘southern strategy’ of cultivating deeper and wider economic relations in South-east Asia. But the government also placed considerable emphasis on transforming the economy to meet the new competitive economic environment as Taiwan left labour-intensive industries behind. This entailed an industrial policy which encouraged new electronics industries and, beginning in 1995, promoting the island as a service-provider—the ‘Asia-Pacific Regional Operations Centre’ — for the region. The government has also been conscious of the need to continue upgrading the technology of Taiwan’s industries and improving the education of its work-force. Finally, since much Taiwanese business is conducted by small and medium-sized firms, it was less afflicted by the excessively close ties to government and to crony capitalism that have been criticised elsewhere in Asia. The government was thus already conscious of the need to meet difficult challenges even before the onset of the crisis. When the crisis hit, it remained faithful to much the same policies. When its currency came under speculative attack in late 1997, it allowed the New Taiwan Dollar to devalue, rather than spending precious reserves trying to maintain an artificially high exchange-rate against the US dollar. Taiwan has retained its ranking as the world’s thirteenthlargest trader; the economy has continued to grow, albeit at a slower rate than hitherto. At $13,198 at the end of 1997, per capita gross national product (GNP) was higher than ever. In July 1998, foreign-exchange reserves stood at $83.6bn (www.gio.gov.tw). Overall trade grew in 1997 by 8.3% to reach $236bn. Taiwan’s relatively good showing suggested at one point that it might take advantage of the new opportunities and challenges that had emerged to deepen its economic ties with South-east Asian countries. In the process, it was thought that it could also improve its political ties. Premier Vincent Siew visited the Philippines and Indonesia, and a government-sponsored delegation of economic planners and businessmen toured the region with a view to buying into businesses whose value had been reduced by the crisis, but which needed access to capital to get going again. One possibility was a take-over of a Bangkok bank by Taiwan’s China Development Bank, owned by the Kuomintang (KMT). There was even talk of Taiwan emerging as an ally of the West, a prospect which alarmed Beijing. In March 1998, Qian accused Taipei of having added ‘fuel to the flames’ by devaluing its currency, seeking to use the crisis for its own ends (Kwan 13 March 1998).

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In the end, little of significance transpired. The question of Taiwan’s relations with the Chinese mainland and the limits imposed by its need for American protection prevented Taiwan from actively pursuing—let alone acquiring—a new role. Indeed, much of the period following the summit meetings between Chinese President Jiang Zemin and his US counterpart Bill Clinton in 1997 and 1998 was taken up with concern that Taiwanese interests might have suffered, and with preparations for a resumption of negotiations with the mainland. Perhaps the best indication of how well Taiwan had weathered the economic storm was the fact that the key foreign-relations issue had less to do with the crisis than with assessing how better Sino-American relations would affect Taiwan and its relations with the mainland. Hong Kong The two main problems that were anticipated upon the reversion of Hong Kong failed to materialise. Thus, contrary to fears in the West, the Chinese did not interfere in the affairs of the region to restrict civil liberties and to erode the probity of economic management. Contrary to their expectations, the Chinese found that the British did not leave ‘troubles’ behind in July 1997. Instead, the SAR has found itself buffeted by a crisis that no one predicted, and that hurt it precisely where it claimed to be strong: in the economy. Zhou Nan, the retiring head of the local branch of the Xinhua News Agency and Beijing’s leading prehandover official in the territory, was criticised for having misled China’s leaders by warning them to expect ‘possibly big trouble, probably medium trouble and, certainly, little trouble’. No one, however, was ready for the Asian economic crisis. Maintaining the fixed exchange-rate by which the value of the Hong Kong dollar was pegged to the US dollar was settled through a currency board established in 1983. This peg was seen as crucial to Hong Kong’s financial stability, and hence acquired symbolic political significance in the transition from British to Chinese sovereignty. Early in the Asian crisis, leaders in both the SAR and Beijing publicly committed themselves to maintaining the peg. This commitment overshadowed the economic arguments. These were between those who pointed out the erosion of the territory’s competitiveness compared with other regional centres which had devalued their currencies, and those who believed that devaluation would undermine business confidence, cause a further collapse in property prices, lead to capital flight and damage Hong Kong’s position as a major international financial and service centre (Goodstadt 1998). The SAR’s government has been struggling to maintain the dollar peg in the face of financial pressures and the activities of what have officially been called ‘speculators’ and ‘manipulators’. This has entailed keeping interest rates high, and enduring a loss of competitiveness. One year after the handover, the value of property and the stock exchange had fallen by 40% and 50% respectively. In August 1998, the government bought large amounts of so-called ‘blue-chip’

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shares—accounting for 10–15% of the total value of the stock exchange—to ‘defeat manipulators’. The following month, the value of the US dollar dropped. As a result of these unrelated developments, the stock market recovered by some 2,000 points, but, at the end of October, was still down about 7,000 points on its peak of 16,673 in August 1997 (Hong Kong Government Information Service 1998, www.info.gov.hk/eindex.htm). Hong Kong’s economy is officially in depression, having suffered two successive quarters of negative growth, and was expected to shrink further in 1999. Tourism, the main foreign-currency earner, is down; unemployment stands at a 15-year high of 6%. The currency’s high value has exacerbated the difficulties Hong Kong faces as a regional service centre as the region experiences significant economic downturn. The government has responded with high-profile infrastructure projects designed to ease unemployment, attract foreign investment and improve general competitiveness. It has also thought hard about a long-term strategy to upgrade technological capabilities and to address social needs, notably in housing. The regional economic crisis has had two significant political effects. The first might be termed a democratic or confidence deficit, the second might be seen as greater dependence on China. The deficit has arisen from the difficulties the new government has faced in trying to persuade Hong Kong’s people that it is sensitive to their needs and aspirations. Chief Executive Tung Chee Hwa, along with the Executive and Provisional Legislative Councils, were all seen as hand-picked by Beijing, and dominated by ‘pro-Beijing’ business interests. The poor handling of incidents such as the ‘chicken flu’, the ‘red-tide’ scare which decimated coastal fishing and the bungled opening of Hong Kong’s plush new airport in late 1997 and early 1998 all contributed to a sense that the government is confused. Tung’s style is paternalistic, the electoral system introduced under his auspices is much criticised, and he and those close to him have suggested that further democratisation should be postponed until well into the next century. As a result, there is considerable disenchantment: popular satisfaction with Tung fell from 60% in January 1998 to 53% in April, while dissatisfaction grew from 24% to 36% in the same period. These figures contrast with those for Chief Secretary Anson Chan, whose satisfaction rating has remained at around 85%, while dissatisfaction has not exceeded 10% (de Golyer 1998). There is general agreement among senior civil servants and the leaders of four of Hong Kong’s main political parties that constitutional reform is needed if popular confidence in the government is to increase in the long term. Legislators complain that they have no means of shaping the policies on which they are voted into office, and that the Chief Executive is accountable to them only in the most extreme and unlikely circumstances. Senior civil servants find that they have to develop political skills to ensure the passage of legislation, thereby endangering their political neutrality, and they complain that they are unfairly blamed for policies which they do not initiate. Meanwhile, even Tung recognises that there are difficulties in securing majorities in the legislature for

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his bills, especially since there is no government political party as such (Interviews 7–12 September 1998). Allied to these frustrations has been concern that Tung and some of his appointees, notably Attorney-General Elsie Teung, have been excessively deferential to what are perceived as Beijing’s interests. Given that the next round of legislative elections is due in 2000, the question of the democratic or confidence deficit is of growing concern, in particular to Tung. The second significant effect of the Asian economic crisis is the deepening of the SAR’s dependence on the mainland. The decline of intra-regional economic interaction and the outflow of foreign direct investment have contributed to the relative decline of Hong Kong’s economy, and have increased the relative significance to Hong Kong of its role as an entrepôt to China. While Hong Kong could be said to benefit from the strength of the Chinese—and indeed Taiwanese—economies, it would also be more vulnerable to any downturn or change of direction in China. Part of the strength and quality of Hong Kong’s economy, which allows it to make a distinctive contribution to the development and modernisation of China’s economy, lies in its international attributes. Were these to diminish, or were Hong Kong to lose its competitive edge over other potential centres such as Singapore, Taipei or Shanghai, the SAR would find not only that it had become tied to China ever more tightly, but that its value to China as an open door to the globe and as a modernising influence would be much reduced. If the SAR is to build on the legacy left by the British, it must not only survive the Asian economic storm, but also reform its politics and place new emphasis on increasing its competitiveness. China Although China is generally thought to have benefited from the Asian crisis, the region’s economic downturn may in the end accentuate the country’s deep-seated economic problems. Ostensibly, China was well placed to deal with the crisis since it had massive foreign-currency reserves of over $140bn, built on considerable trade surpluses valued at $20–30bn a year in 1997 and 1998. In addition, the country had little short-term foreign debt, and was the beneficiary of large-scale direct foreign investment which, for the years 1994–8, was second only to that received by the US. Although its current account was convertible, China’s capital markets were still closed to the outside world. At the beginning of the crisis, China’s leaders saw an opportunity to present themselves as responsible regional members. They contributed $1bn to the International Monetary Fund (IMF) bail-out for Thailand, and approximately the same for Indonesia. This was followed by offering rice at ‘friendship’ prices below market rates. These moves were accompanied by well-publicised promises by top leaders that the country’s currency would not be devalued. These measures elicited praise from both the major external powers and those within the region. Responsible members of the

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international financial community fell over themselves to extol China’s policies and what it presented as its self-sacrifice in not devaluing. US Treasury Secretary Robert Rubin declared in June 1998 that ‘China has been an island of stability in Asia’, while his aides were privately branding the Japanese Finance Minister the ‘Minister for Destruction of the World Economy’ (Sanger 22 June 1998). So influential had China become that it was widely conceded that Chinese pressure had been instrumental in persuading Washington to sponsor concerted action to bolster the yen in June 1998. Chinese Vice-Minister for Foreign Trade Sun Zhenyu warned openly about the possible consequences of the yen’s depreciation for the Chinese yuan (Friedman 18 June 1998). At the same time, the director of poverty reduction at the World Bank was pointing out that ‘China today has the characteristics of every Asian country that was hit by the crisis—but worse’. Moody’s Investor Services was warning that China’s large state banks were ‘in reality heavily insolvent’, with at least $270bn in bad debts. Brookings Institution analyst Nicholas Lardy has clearly spelt out the enormous damage being done to the economy by the soft-budgeting of SOEs by China’s banks at the behest of political leaders (Lardy 1998). In retrospect, what made China particularly vulnerable to the impact of the Asian crisis, despite its apparent advantages, was the slowdown in domestic economic demand. This in itself was partly the consequence of China’s much-praised ‘soft landing’ after its explosive double-digit annual growth in 1992–5. In a stroke of particularly bad timing, the Communist Party Congress in September 1997 finally decided to tackle the excesses of the loss-making SOEs through structural reform, and to bring the banking system more into line with accepted international practice. The decision was confirmed by the National People’s Congress in March, which also affirmed the appointment of Zhu Rongji as Premier. As the architect of the country’s soft landing, it was perhaps only right that Zhu should implement these fundamental reforms, which, for good measure, he promised to complement with a restructuring of the bloated central civil service. Within three months, however, it became apparent even to Chinese leaders that it was going to be difficult to achieve the 8% growth-rate deemed to be the minimum necessary to provide employment opportunities for the millions of workers scheduled to be made redundant, as well as for those reaching employable age, not to mention the 100–150 million rural migrants drifting to the cities in search of jobs. Massive state spending on infrastructure projects was to be the key to growth and to achieving the target of 8% for the year. This spending would largely benefit the inefficient SOEs, the majority of whom were loss-making even by Beijing’s idiosyncratic accounting procedures. Up until this point, much of the economy’s growth had stemmed from the non-state-owned sector. Nevertheless, the labour force employed in the SOEs had expanded from 78m to nearly 110m between 1978 and 1997, even though the SOEs’ share of total industrial-value output had declined from 95% to

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under 40% in that period. Considerable effort went into promoting exports and protecting domestic producers from imports. Yet devaluation was seen to be of limited value: not only would it have dented China’s prestige, but it would also have raised the price of imported materials, which were an important element in Chinese exports. Additionally, it could have damaged relations with the country’s neighbours, which were losing their share of Western markets to China. Devaluation could also have prompted anti-dumping measures from the US and the European Union (EU), both already reeling from substantial increases in Chinese exports of 15–25%. This growth was not accompanied by commensurate increases in their exports to China. Meanwhile, there were reports of growing urban unrest in many parts of the Chinese interior, especially in Sichuan, as SOE restructuring ran into problems. Not only were new jobs not being created at the required rate, but worker discontent was rising because corrupt officials were withholding wages and enriching themselves with assets previously considered to belong to the SOEs. With other reform measures dealing with grain and housing also encountering difficulties, the Chinese authorities backtracked on the key reforms by instructing banks on 25 June 1998 to offer support to loss-making SOEs (Harding 26 June 1998). This decision was made on the eve of Clinton’s summit visit to China. Despite the strong commercial presence in his team, Clinton made little headway in discussing economic issues. Notwithstanding the trumpeting of a so-called Sino-American partnership, no progress was evident in China’s entry into the World Trade Organisation (WTO). By September 1998, US Under-Secretary for Commerce David Aaron had complained that trade relations with China were at a ‘turning-point’ because of Beijing’s new protectionist measures (International Herald Tribune 24 September 1998). By late 1998, some Chinese officials and economists were privately admitting that the economy was in recession (Segal 28 September 1998; Economist 24 October 1998). China’s leaders have to overcome three related economic difficulties if the country is to emerge from the crisis without serious damage. The first centres on reviving the domestic economy. Without many stimuli from the external economy, in terms of exports or foreign investment, the government has resorted to massive investment by government agencies, drawing on the huge savings of the Chinese people. However, this method is not sustainable without addressing the banking problem. This approach also tends to favour the already inefficient SOEs, rather than the economy’s more modern elements. It is thus only a short-term solution in the hope that the broader economic environment will improve. There is, however, no sign of the domestic economy reviving, nor of a recovery in the Japanese market—both of which could provide the required stimulus. The second difficulty turns on tackling banks’ non-performing debts. These are so immense that, in a conventional economy, banks would be threatened with bankruptcy. In an interview in January 1999, China’s Deputy

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Finance Minister Lou Jiwei stated that the government would establish assetmanagement corporations to absorb these debts (International Herald Tribune 21 January 1999). The first such corporation would deal with the more than $30bn-worth of debt held by the China Construction Bank by issuing bonds, backed by the Ministry of Finance, to the debt amount. It would then attempt to collect bad loans. The corporation would not, however, be allowed to sell the bad debt like the trust company established in the US to settle the savings and loans banking problem, on which the Chinese corporation is allegedly based. The scale of debts—conservatively estimated to be at least 20% of China’s gross domestic product (GDP) —is much greater than it was in the US, where they never exceeded 8% (Pomfret 16 January 1999). Foreign confidence in the scheme is not high; in 1999, an analyst at a Western bank described it as ‘more of an accounting trick than anything else’ (Pomfret 16 January 1999). Foreign scepticism has increased because this latest scheme has followed uncertainties surrounding the handling of the bankruptcy of the Guangdong International Trust & Investment Corporation and other southern Chinese firms in late 1998. Foreign banks found themselves unexpectedly downgraded in the order of claimants in the bankruptcies, which involved more than $7bn (Saywell 21 January 1999). The third set of problems that China’s leaders are seeking to overcome concerns the difficulty of maintaining high levels of international trade with a favourable trade balance at a time when Asian markets have shrunk drastically. Exports have in effect been subsidised, and administrative ways have been found to restrict imports. However, Western pressure is growing to limit what are regarded as unfair terms of trade. If China were to find that Asian countries recovering from the financial crisis were using their cheaper currencies to erode its competitive position in Western markets, it would come under increasing pressure to devalue. The Chinese economy faces immense problems. Far from being an ‘island of stability’, the country may be at the heart of a possible second phase of Asian economic crisis. However, it is still largely a continental economy. By virtue of its size and lack of modernisation beyond the coastal provinces, it may be able to weather these problems for much longer than would be the case in other economies. Traditionally, China has been accustomed to serious local disorder, much of it tolerated as long as violence was confined to limited areas and imperial interests were not directly challenged. China survived the Great Leap Forward and the Cultural Revolution. Like India, it too can perhaps weather considerable social disorder and violence (Fitzgerald 1994:21–58). No one knows how long China will be able to muddle through, but it is clear that, even if disaster is postponed, the country has little to contribute to solving the Asian crisis. Moreover, its perceived gains from the crisis may prove illusory. Much of the rhetoric concerning the ‘Rise of China’ has stemmed from the expectation that the impressive growth rates registered during much of the 20

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years of reform would continue almost effortlessly. As a result, China was accorded a degree of strategic respect that its actual power did not warrant within the region, let alone in the wider world. China still lacks the capacity to project military power far beyond its shores. Its science and technology are generally too primitive, and it lacks a sufficient pool of suitably trained technologists and workers (Shambaugh and Yang 1997). Were the myth of China’s supposedly inevitable rise to be punctured, much of the country’s standing and prestige would be affected. Conclusion Of the ‘three Chinas’, Taiwan has coped best with the Asian crisis. This has more to do with sound economic management and the incidental benefits arising from the need to forestall Beijing’s direct or indirect interference in economic matters, but democracy may also have contributed to Taiwan’s relative success, since it has enabled different interests to make their voices heard. It has also bolstered the government’s legitimacy at a time when economic performance alone may not have been enough to ensure popular support. By contrast, Hong Kong has suffered through its attachment to the currency peg with the US dollar. Like Singapore, its government has argued that all its problems have come from outside, since it had a sound financial system subject to appropriate regulatory controls, backed by a civil service of proven excellence and operating within the framework of the rule of law. However, Hong Kong’s problems were exacerbated by growing disenchantment with the paternalistic style of its Chief Executive, who seemed less enamoured with the practice of democracy than the majority of Hong Kong’s people. China’s problems have much to do with the fact that the crisis broke at a time when domestic economic demand was slowing down. China’s leaders were expecting the externally related parts of their economy to continue to grow at the 20%-plus rates they had achieved for much of the reform period. Their failure to do so coincided with the leadership’s recognition that SOE and banking restructuring could no longer be postponed. As a result, reforms have ground almost to a halt, and the government has attempted to plug the gap in growth by the pre-reform practice of throwing savings capital at the SOEs to increase jobs and output. As far as trade is concerned, the Chinese appear to be finding ways to subsidise exports and discourage imports. While these policies may yield apparently impressive results, at least in terms of official statistics, they are unlikely to be effective in the longer term. While China alone cannot solve these problems, the capacity of its rulers to do so would be greatly enhanced by the Japanese economy’s early recovery, and by the continued willingness of the US and the EU to accept rising Chinese exports without a corresponding increase in imports. Just as reform of the Japanese economy involves far more than economics, so reform in China ultimately requires significant political change. Since much of

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the legitimacy of Communist Party rule depends upon ensuring social stability and significant economic growth, the Party is likely to turn to promoting nationalism instead. This suggests that China’s relations with its neighbours, Taiwan in particular, are likely to become more difficult, and that its relations with the West will be marked by more friction over trade.

8

Japan and Pacific Asia From crisis to drama Jean-Pierre Lehmann

Japan’s rapid rise and dramatic fall are without precedent. In the late 1980s, confident predictions were made that the country was on the verge of becoming the world’s leading economy. Bountiful literature proclaimed its economic and technological prowess, and warned of the imminent demise of American economic leadership. Japanese competition had decimated the US automobile industry, and threatened to do the same in semiconductors, computers and even aerospace. The meteoric rise of Japanese capital and the strengthening of the yen seemed to presage a Japanese take-over of America’s—and the world’s—prime real estate, film studios, vineyards and financial institutions. As a seemingly steroid-fuelled Japan, and East Asia as a whole, rose, so the West appeared to decline. Japan emerged as a visionary leitmotif, on the point of fulfilling its leadership potential in Asia. Japanese confidence became arrogance and, ultimately, hubris. Since the early 1990s, a series of mistakes, extraordinary insensitivity, blunders, mismanagement at every level and paralysis have left the country in a spiral of decline. Given its immense regional economic weight, Japan’s ills have inevitably spread to its neighbours. Without its problems, an East Asian financial crisis might still have happened, but it would not have lasted as long as it has. To understand Japan’s current crisis, and hence its future prospects and those of the region as a whole, economic analysis is insufficient; the roots of the country’s problems also lie in its national psychology, its politics, its foreign policy and its history. The paralysis begins In January 1989, Emperor Hirohito died. Japan, at the apogee of its economic power, was both admired and feared. Three ideas were circulating in Tokyo, all of which were meant to mark the beginning of the reign of Hirohito’s son, Akihito. The first was what was referred to as the ‘denomination’ of the yen. At the time, there were approximately 100 yen to the US dollar. ‘Denomination’ — removing two noughts—would have made one yen roughly equivalent to one

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dollar, thereby giving the Japanese currency greater gravitas. A new yen for a new Japan. Second, it was suggested that Akihito should move to Kyoto, for centuries the imperial capital until its replacement by Tokyo (then Edo) in 1872. Hirohito, who presided over two decades of Japanese imperial aggrandisement and war, had been a controversial figure. Relocating the mild-mannered Akihito’s imperial court to Kyoto would confirm his role as ‘symbol’ of the nation, and mark a break with the past. In more practical terms, it would make available a substantial area of land in central Tokyo, creating something akin to New York’s Central Park. With a population of over 30 million people, Tokyo’s inhabitants were in dire need of more room to breathe. The third idea was to relocate not only the Emperor, but also the government. Among the locations suggested was Sendai, roughly 400 kilometres north of Tokyo on Japan’s main island, Honshu. For some time, Japan had recognised that far too much power was concentrated in the Tokyo-based national bureaucracy; central government threatened to stifle the country’s economic, social, cultural and political life. The concentration of power in Tokyo was an open invitation to corruption and cronyism, both of which have been major causes of Japan’s inability to find workable solutions to its current economic problems. With the Emperor in Kyoto, finance in Tokyo and government in Sendai, a more decentralised, dynamic and creative Japan could have come into being. None of these ideas was adopted, mainly, as with so much else in Japan, because of bureaucratic inertia and obstructionism, the absence of political leadership and an apathetic public. Japan remained remarkably averse to change, even as the world around it altered significantly after 1989. Paralysis had become manifest. The management myth In the late 1980s, the Japanese created many myths about themselves and, worse, believed them. One of the most potent and ultimately destructive related to the country’s alleged managerial excellence. To a considerable extent, Japan’s industrial success, and the way in which it decimated foreign competition, was the result of the West’s failure to take the country seriously. Until the 1980s, little was known about Japan’s economy or its approach to business. When, by the late 1970s and early 1980s, Japanese companies had captured large market shares in key industries—notably car-making, electronics, office equipment and factory automation—there was a rush to find out how it had done so. It also became fashionable to ‘learn from Japan’. Some authors focused on the role of government, specifically the alleged effectiveness and superiority of Japan’s industrial policy, while others looked primarily at corporate management. There was certainly considerable justification for admiration and for learning from the Japanese. Japanese industrial policy was very successful in certain sectors, notably electronics, which has been the spearhead of the country’s

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economic development since the 1960s. In the 1980s, Toyota’s management was clearly far more effective than that of General Motors, Volkswagen or Renault. Similar comparisons can be made between NEC and Motorola, Canon and Xerox and Sony and Philips. The mistake was to generalise from these specific sectors. The Japanese economy is divided between those sectors which compete internationally— accounting for roughly 10% of economic activity—and those which are purely domestic. Japanese policy was, and remains, protectionist; while some sectors, such as microchip and automobile manufacturing, operate on what has been termed a ‘compete out/protect in’ basis, most engage in at best limited international activity. Those sectors which are channelled towards ‘outwardlooking protectionism’ come under the aegis of the Ministry of International Trade and Industry (MITI). Other ministries, including Finance, Transport, Post and Telecommunications, Health and Welfare, Agriculture and Construction, have what amounts to exclusively domestic remits and concerns. In all of the sectors under their jurisdiction, these ministries have ‘succeeded’ in protecting domestic players from foreign competition—but have failed to promote global players. Painting all sectors with the same industrial-policy brush was and is clearly an error. By the late 1980s, even MITI was losing its touch. Whereas the VLSI (‘very large-scale integrated circuits’) project was successful, the MITI-sponsored Fifth Generation Computer Project on artificial intelligence failed. As new technologies became more complex and cross-disciplinary, the Japanese government was ill-equipped to play a constructive role. Multimedia, for example, involves disciplines and technologies which would encompass activities under not only MITI, but also the Ministries of Post and Telecommunications and of Education. But central government is marked by bureaucratic rivalries, turf battles, and acute jealousies; ministries find it virtually impossible to work together. There has been no co-ordination in multimedia, while interventionism has continued. In part, this explains why Japanese companies have not so far been successful in business driven by information technology. Bureaucratic weight and interventionism characterise ministries responsible for services, including financial services, and most aspects of cultural life. In education, for example, whereas post-war governments succeeded in laying the foundations which would allow the Japanese to become one of the world’s most literate and numerate peoples, the country has failed in other critical areas. The education system stifles creativity, dissent and individual initiative. With few exceptions, the country has failed to establish global centres of tertiary education and research, accounting for its poor Nobel Prize record. The largest bureaucratic disaster, at least in terms of its current repercussions, has been in the finance sector. In dealings both with the government and with corporations, Japanese financial institutions operate on the basis of cronyism, and corruption is rife. Since accounting regulations are ambiguous and lax, and the accounting profession is mediocre, the finance sector is also opaque. As a

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result, banks are badly managed. During the 1980s, Japanese banks and securities companies expanded internationally on a large and, for some in the West, frightening scale, but bad management means that most have failed. Institutions have not innovated or globalised, and no new financial instruments have been created. The primary, often the only, activity of Japanese banks and other financial institutions abroad is looking after Japanese clients. Even then, when sophisticated and sensitive techniques are called for, in mergers and acquisitions for example, Japanese companies prefer to use Western firms. Japanese financial institutions do not, of course, have a monopoly on poor management, corruption and cronyism. But, as with much else, it is not the nature of the beast that is terrifying, but its size; France has one Crédit Lyonnais, but Japan has at least a dozen. During the 1980s, poor management combined with abundant money generated both by the bubble economy and by the strength of the yen led to financial catastrophe. Disaster was all the more likely because Japanese hubris precluded the possibility that errors might actually have been made. Had the government moved swiftly, the catastrophe could have been contained. But it procrastinated and, at least in public, seriously underestimated the extent of the damage. Lack of transparency means that the size of bad loans is unclear (estimates vary by as much as 50%). It is nonetheless obvious that the economic consequences of the crisis, both domestically and in the Asia-Pacific, are dramatic. Management at both government and corporate levels is so poor that the only solution may be to ask foreign or international institutions to intervene. The political quagmire Despite, or perhaps because of, the dramatic fall of the Japanese economy in 1991, there was until the mid-1990s reason to hope that the country might be changing. Many of these hopes rested on expectations of beneficial political results following the apparent collapse of the Liberal Democratic Party (LDP) in 1993. The LDP had monopolised political power since the party was established in 1955. Not only was it deeply corrupt, but it also effectively stifled political debate. Many, if not most, opposition politicians were covertly on the LDP’s payroll, while the party established a close, indeed incestuous, relationship with the bureaucracy and big business. Japan became what political scientists label a ‘one-and-a-half-party state’. Within the LDP, divisions existed between different factions, though these were based exclusively on personalities and money, not policy. The LDP covers different constituencies representing narrow interest groups, rather than broad policy questions. Consequently, it is the party of, among others, farmers, small shopkeepers, administrators and big business. The LDP’s split in 1993 was driven by a feud between party barons; protestations to the contrary notwithstanding, it had little to do with policy. Government policy issues were exclusively economic. Since the Japanese economy performed well for most of the period between 1955 and the early 1990s, there was no reason to get politically agitated about these issues.

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As everyone knew, the LDP was deeply corrupt. Every once in a while a major scandal would erupt, sometimes forcing the Prime Minister to resign and possibly leading to jail for a scapegoat or two. The public tolerated the LDP for a number of reasons, among them the fact that the opposition lacked credibility. After 1945, the Americans imposed democracy on Japan, and its trappings persist: elections are held and there are political parties. In essence, however, Japan has become a ‘de-politicised’ state. The Liberal Democratic Party was neither liberal, democratic nor a party, but a loose coalition of political factions brought together by common vested interests, above all the need to keep out the left. This was an especially persuasive concern during the Cold War—in the eyes of some, for America’s Central Intelligence Agency (CIA), which for many years bankrolled the LDP, as well as for Japan’s politicians. The LDP’s apparent collapse in 1993 appeared to herald the birth of politics in Japan. Morihiro Hosokawa, the first post-LDP Prime Minister, albeit a former LDP politician, was blessed with the kind of looks that seemed to convey this impression. However, his administration fell within months, and Japanese politics became truly Byzantine. Hosokawa was followed by another ex-LDP politician, Tsutoma Hatta, then by a socialist Prime Minister, Tomiichi Murayama, who formed a coalition government with the LDP. Under Hashimoto, the LDP again seized the reins of power, albeit at least partly in conjunction with others. Meanwhile, political parties have come and gone in quick succession, coalitions have formed and dissolved and the main opposition party, the Japan Socialist Party, has imploded. For those with a morbid sense of humour, perhaps the funniest development in Tokyo in 1999 was the ‘alliance’ between Prime Minister Keizo Obuchi and Ichiro Ozawa, chief renegade from the LDP and its erstwhile leading critic. As political heir of the late Shin Kanemaru, one of the LDP’s shadiest politicians, Ozawa will know something about corruption. Japan and its neighbours Throughout the long period of LDP rule, US protection meant that Japan did not need a foreign policy (as distinct from a purely foreign-trade policy). ‘Foreignpolicy’ questions were posed and answered only in terms of the measures needed to accommodate or follow Washington. Possibly the sole exception to the rule was Japan’s decision to abide by the Arab boycott against Israel after the Yom Kippur War of 1973. Even the country’s relations with China were conditioned by American initiatives. Only after President Richard Nixon’s overtures to Beijing in 1971 did Tokyo renew diplomatic relations with the People’s Republic. The Japanese electorate was never confronted with hard choices, and Japanese politics did not face the prospect of discord over foreign-policy issues; the country has had no equivalent of France’s Algerian war or the debates over the Maastricht Treaty. The Japanese government also protected its people from any soul-searching over the country’s actions during the Second World War.

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When South Korean President Kim Dae Jung visited Japan in 1998, the Japanese government congratulated itself—and was congratulated by many outsiders, including Kim—for having laid to rest the ghost of its rapacity in Korea. Kim received what seemed to be virtually unconditional apologies in writing and, at a state banquet during his visit, the Emperor expressed remorse. The ink on the letter of apology was hardly dry, however, before it became clear that little had in fact changed. On 8 November 1998, the Japan Times published an article under the headline ‘Fear of Rightists Puts Book Party on Hold’. According to the article, ‘a citizen’s group has been forced to twice cancel its plans to celebrate the publication of a book about wartime [Korean] forced labourers because of hotels’ fears of rightists’. The two hotels which had cancelled bookings ‘cited security reasons, saying they anticipated the arrival of rightist groups in loudspeaker trucks, sources said.’ Although in numerical terms Japan’s extreme right is relatively small, it is highly visible: extremists parade through the streets of Japanese cities in military vehicles daubed with militarist slogans, and with imperialist songs blaring from loudspeakers. Rightists wield power far out of proportion to their numbers, partly because of close associations with both the police and the LDP. When Bernardo Bertolucci’s film The Last Emperor was shown in Japan in 1988, Japanese censors expunged the scenes depicting the Nanjing Massacre without consulting the film’s director. Had they not done so, rightists would no doubt have succeeded in preventing cinemas from showing the film. Young Japanese are not told the truth about the war; history is ‘revised’ by the Ministry of Education and the Japanese public lives in fear of extreme right-wing nationalist bullies. While Europe has its own extreme right-wing parties and fascist bullies, in most cases the public is protected from them. In Japan, however, it is the fascists who enjoy protection. For a German politician to deny that the Holocaust took place would be a crime; many Japanese politicians, including senior ministers, have denied that the Nanjing Massacre and other Japanese wartime atrocities happened, and have happily continued their careers, in many cases successfully. Shintaro Ishihara, one of the most extreme right-wing politicians and a fervent denier of the Nanjing Massacre, won privilege and notoriety by co-authoring in 1988 a book entitled The Japan That Can Say ‘No’ with Sony chairman and founder Akio Morita. It is difficult to imagine the president of Siemens coauthoring a book with a German extreme right-wing politician and Holocaustdenier, not least because of the public uproar that would ensue, not to mention legal questions. The Japan That Can Say ‘No’ prompted no uproar, partly because the public has not been made sensitive to Japan’s past behaviour. Curiously, some Western commentators congratulated Obuchi for not ‘kowtowing’ to Beijing when he refused to extend the same apology to Chinese President Jiang Zemin as he had offered to Kim Dae Jung when Jiang visited Japan in November 1998. There is no doubt that China’s communist government is criminal, or that it too refuses to come to grips with its past. However, would these same Western commentators have advised Willy Brandt not to kneel in

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atonement at Warsaw’s ghetto memorial on the grounds that Poland’s communist regime was a brutal dictatorship? Brandt was obviously not expressing remorse to the Polish government, but to all those Jews and Poles murdered by the Nazis. Likewise, the Japanese Emperor could go to Nanjing, kneel at the memorial there and express remorse—without having to mention the Chinese government. Had the Japanese government expressed itself properly to the Chinese people, there would have been no need for the subject even to be raised during Jiang’s visit. What kind of Europe would we have today had Germany refused to recognise that it had committed atrocities under the Nazis, and consequently did not make peace with its neighbours? It is of course true that, after the war, the western part of Germany had much nicer neighbours politically than those surrounding Japan. For most of the post-war period, Japan was surrounded by either communist dictatorships in China, North Korea and the Soviet Union, or by military ones in Indonesia, South Korea, the Philippines and Taiwan. However, East Germany also had some fairly awful neighbours, but it was able to make peace with them and engage in dialogue. It seems unlikely that the Soviet Union would have imploded as it did had there been vestiges of Nazism in Germany. The end of the Cold War in Europe coincided with the end of the Second World War. The Cold War cannot end in Asia because Japan refuses to close the Second World War. Japan’s position on its past does not explain, let alone justify, the continuation of repressive regimes in China, North Korea and elsewhere in Asia. The point, however, is that Germany, by rejecting and condemning its past and becoming an open and democratic society, was able to exercise leadership in Europe and assist in the dismantling of the Soviet empire. Because Japan refuses to reject, let alone condemn, its past, it cannot be a leader or a model in Asia. Japan cannot engage Asia in dialogue if it cannot do so with itself. More than 50 years after the war, Japan is not at peace with its neighbours. The consequences for Asian security and peace are alarming. Asia and the ‘Japan question’ Germany’s economic leadership in Europe has been predicated on its political and ideological positions. Without Germany’s reconciliation with its neighbours, not only would there be no single European currency, there would almost certainly not have been the single market or European Union; even the European Economic Community would have been unlikely to progress far. Economics cannot be dissociated from politics and moral issues. This is one of many reasons why today’s discussions in Asia on a single currency can be nothing more than spurious. Since Japan is not trusted in Asia, not only is a single Asian currency out of the question, but also initiatives such as the mooted Asian Monetary Fund are met with reticence. Germany’s position in Europe has been crucial in another sense. Its economic strength means that the country has been a huge investor in Europe, and is also by far the largest market for European exporters. Non-German European

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companies have also been able to invest in Germany, and to acquire German companies. By contrast, Japan’s relationship with other Asian states is almost exclusively one-way: the country has huge investments in Asia, but Asian investments in Japan are virtually non-existent. Apart from those products or parts which Japanese companies produce in Asia and re-import to Japan—which have greatly diminished because of the recession—and energy and raw materials which Japan does not possess, the Japanese market is largely inaccessible to Asian exporters. The automobile market is a good example of the difference between Germany and Japan. Germany is incontestably an international leader in automobile production, but imports account for 34% of the country’s car market. Although some of these are manufactured by subsidiaries of German companies abroad, or by companies owned by German firms (Seat in Spain, for example), it also includes imports from, among others, France, Italy, Japan and South Korea. French maker Renault has a 6% share of the German market. The foreign share of the Japanese automobile market, including Japanese cars manufactured abroad, is less than 5%. While South Korean firms such as Daewoo and Hyundai have been relatively successful in Western markets, their cars are conspicuous by their absence on the streets of Japan. Japan is the world’s second largest economy and by far Asia’s biggest. It has, however, never acted as a locomotive for Asian producers. As East Asians struggle to export their way out of recession, the potential to sell to 125m of the world’s richest people is limited. The East Asian boom lasted for some 20 years. The end of the Vietnam War and of China’s Cultural Revolution in the mid-1970s heralded an era of greater stability throughout the region, and the emergence of ‘economics-first’ policies. Economies enjoyed high—in some cases, double-digit— growth, to which Japanese capital made a significant contribution in the form of aid and direct investment. Up to the mid-1980s, Japanese investment was driven partly by the need to overcome local import-substitution policies and was usually aimed exclusively at the local market. After the Plaza Accord of September 1985, the yen’s value against the dollar doubled within two years. The Japanese direct investment pouring into East Asia was now designed to secure more cost-effective manufacturing bases, both for exports and for re-imports. While in the early 1970s Japan was the target of significant South-east Asian hostility, by the 1980s its capital was welcome because it included some technology transfer and contributed to obtaining foreign revenue by expanding exports. Following Japan, capital from Australia, Hong Kong, Singapore, South Korea and Taiwan also flowed into members of the Association of South-East Asian Nations (ASEAN) and into China. This rapidly emerging pattern of intra-regional cross-border investments and trade brought about the economic ‘regionalisation’ of East Asia. By the 1990s, Japan had also become East Asia’s largest provider of aid. From the mid-1970s to the mid-1990s, Japan’s economic contribution to the rest of East Asia was basically benign and positive. Japan had no significant political impact, and its role in regional organisations was modest. However,

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from the mid-1990s Japan’s economic role became less benevolent. As its bubble economy burst, it ‘exported’ its problems to the region. Large amounts of cheap Japanese capital poured into Asia, contributing greatly to the realestate and stock-market speculation which ensued. Japanese capital financed, for example, the proliferation of golf courses throughout Southeast Asia, many of which are today empty and bankrupt. Although the Japanese market had always, even in its ‘benign’ days, been essentially closed to Asian exporters, it did absorb a large number of re-imports from Japanese manufacturing subsidiaries in East Asia: printed circuit boards and air-conditioning units from Malaysia; automotive components from Thailand; and television sets and cameras from a variety of countries. With the collapse of demand in Japan, however, intra-firm imports greatly diminished. This collapse partly explains the glut in computer chips, which was one of the triggers of the Asian financial crisis. Japan’s overall influence on the region has been mixed. The country was a lesson to its neighbours in the areas of national economic strategy and corporate management. A number of countries, South Korea especially, emulated Japan’s export-oriented strategy, and were much praised by the World Bank for doing so. The Japanese model of industrial policy was also copied by some countries, again particularly South Korea, as was its establishment of industrial groups (keiretsu in Japan, chaebol in Korea). It is arguable that some Asian countries recognised the importance of investing in human capital, and emulated Japan here as well. Japan provided modest education and training for East Asian professionals. In manufacturing technology, the Japanese were instrumental in teaching techniques such as quality control, although East Asians often complain that technology transfer is less than generous. On the negative side, perhaps the most frequent and bitter Asian complaint concerns Japanese companies’ human-resources management. In Asia as elsewhere, Japanese companies’ subsidiaries are run by a clique of Japanese nationals. Promotions for locals are limited; there are no non-Japanese either on the boards or in senior management positions in major Japanese companies. Asians are not moved around in the same way as many European and American multinational companies relocate their expatriates. Thus, Asian executives working for Japanese companies not only have no prospect of reaching senior management positions within the mother company, but are also unlikely to gain either international or regional experience. Japanese companies fail to develop a native corps of international executives, with significant effects on the host country’s development. The Japanese model and Japanese behaviour have been undoubtedly pernicious in those areas where East Asians as a whole have sinned most grievously. All Asian countries have been justifiably accused of pursuing policies and practices of economic growth incompatible with sustainable development. However, while the Japanese worry about Chinese pollution in much of the rest of Asia, Japanese economic activities can hardly be described as environmentally

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friendly. Environmentalists have condemned logging in South-east Asia by Japanese general trading companies, for example. The Japanese influence has also been overwhelmingly negative in areas related to cronyism, corporate governance and transparency, all of which have considerably distorted Asian economies. This is particularly the case in financial institutions where, in Japan as in most Asian countries, management and supervision have both been abysmal. Similarly, not only is corruption rife in Japan, but Japanese companies also have a reputation for contributing to corruption in other Asian countries. The ‘Japan question’ is critical in determining East Asia’s future; it is both more important, and considerably more complex, than the question of China. In the next two to five years, China’s options are relatively limited. The country is neither particularly rich nor powerful and, since it is a dictatorship, its actions are in some ways predictable. Japan has not served Asia well, either as a market or as a model. Unless major changes take place in the Japanese economy and in Japanese policy more broadly, there is a risk that what began as the Asian financial crisis may become a drama. Japan: the ‘sick man’ of Asia The Japanese economy is in an abysmal condition. Given its size, this is an acute international problem, especially for Asia-Pacific economies. At the beginning of 1998, the Japanese government announced that the economy would expand by 1.7%. In October, this forecast was ‘revised’ to a contraction of 1.8%. By December, the ‘hope’ was being expressed that contraction would not exceed 2.3%, although the Organisation for Economic Co-operation and Development (OECD) warned that it could reach or even exceed 2.5%. The ‘error’ in the government’s original forecast amounted to some 4% of Japan’s gross national product (GNP) —higher than the GNP of Hong Kong, Malaysia, the Philippines or Thailand or, in European terms, the GNP of Denmark. The economic measures taken by the Japanese government have failed, and may in fact be exacerbating the problem. In essence, the government has been pumping money into a moribund system. This is especially the case with socalled infrastructure projects, where funds are allocated to build dams, bridges and toll roads which no one needs, but which benefit crony-linked construction companies. The system needs radical overhaul, not tinkering at the edges. Major change may cause further contraction and other problems in the short term (rising unemployment, for example) but, in the long term, it should have powerful regenerative effects. The critical problem with the Japanese system is its rigidity—indeed ossification—and its obsolescence. In the early 1990s, veteran Japanese economist Shigeto Tsuru had underlined the fact that the Japanese economy lacked that vital element of creative destruction (Tsuru 1993). Sclerosis also, of course, afflicts Europe, but not on the same scale. The German economy has had ups and downs, and is also to some extent rigid, but it has not in recent decades

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endured the horrendous contraction seen in Japan. Tsuru’s warning notwithstanding, the Japanese have either tended to resort to denial, or have continued expressing confidence in the economic packages cobbled together by the government. It is imperative that the Japanese economy is opened up and liberalised as thoroughly as possible. This should apply not only to trade, but also, probably even more importantly, to investment. Currently, the ratio between outward and inward investment is about 12–15 to 1, as opposed to about 1.3 to 1 in the US. For European countries such as France, the Netherlands and the UK, the ratio is generally in balance; in Germany, it is about 4 to 1. Japan has made progress in this area, particularly in financial services, but while the trickle of investment has increased to a small flow, it is far from being a flood. Encouraging foreign investment, especially through acquisitions, will benefit foreign investors by facilitating access to the Japanese market. Its benefits to the Japanese economy, through industrial and management restructuring, will be greater. That such radical measures are not being taken is well illustrated by the Customs procedures at Tokyo’s Narita international airport. Like many others, Narita’s Customs entry is divided into green and red channels. In theory, green channels are for passengers with nothing to declare, and red for those who do. In all airports with this channel system, spot checks are made on suspicious-looking individuals; others pass through unimpeded. In Narita, however, every passenger going through the green channel is systematically stopped, asked for their passport and asked whether they have anything to declare. Just as the green channel means nothing, so the fact that the country’s market is supposed to be open often similarly means nothing. Welcome to Japan. Japan seems incapable of change. A small group of Japanese commentators have recently added their voices to the foreign chorus of concern about the country’s paralysis. In January 1999, Yoshihide Ishiyama, chief economist of IBM Japan and a former Ministry of Finance official, wrote that Japan ‘has created a singularly rigid social and economic system’ (Ishiyama January 1999). This, he argues, prevents Japan from moving into higher value-added and service-oriented industries where greater growth can be gained, since ‘these industries are still heavily regulated or are beset by opaque business practices.’ A devastating indictment of Japan written by Masao Yukawa, a senior executive with Mitsubishi Corporation, claims that plummeting stock values of some ¥400 trillion added to the ¥600tr fall in land values is ‘twice as large as Japan’s current gross domestic product and 12 times the current value of Japan’s loss from World War II. Japan has lost two years and 12 wars in the economic meltdown’ (Yukawa 1999). Laying equal emphasis on myopia and rigidity, Yukawa notes how Japanese companies are ‘ill prepared for the new waves of globalisation and information technology’. Complaining that ‘our discriminatory, nontransparent, and corrupt markets are far below global standards’, he concludes that ‘we can no longer hide from the grim truth: Japan’s economy is broken, and structural change is needed to fix it.’

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Ishiyama, Yukawa and Tsuru all emphasise that Japan’s problems are by no means purely economic. Economic solutions by themselves will thus not work. Japan is a sick society at all levels: politically, economically, socially and intellectually. This sickness is clearly manifested in the country’s attitudes towards other nations, its neighbours in particular. Branding Japan the ‘sick man’ of Asia does not imply that other countries in the region are in particularly rude health. Most suffer from a variety of economic, political, social and intellectual diseases. However, in none of these countries do these problems matter, both regionally and globally, as much as they do for Japan. The country has become the latter-day ‘Ottoman Empire’ of the global economy. Its difficulties present immense regional and global dangers. There is a risk that its situation will worsen, rather than improve. A financial meltdown, which would plunge the world into a 1930sstyle global depression, is not a too-remote possibility. As a result of the export offensives undertaken by the crisis-hit Asian economies and by Japan, the US trade deficit has risen to about $280bn, or some 3% of the country’s gross domestic product. If the American economy keeps up its current momentum, the trade deficit need not be a major problem. There are, however, good reasons to doubt that it will be able to do so. If the US economy starts to fail, the deficit will become unsustainable and, more alarmingly, this may prompt a protectionist backlash. A world economy in which Japan was in negative gear and America stalled would be weak. Currently latent tensions, especially between the US and Japan, could degenerate into acrimonious and dangerous trade wars. Even when the East Asian economic sun shone brilliantly, there was concern that politics were lousy and relations between the region’s countries fragile. East Asia comprises a number of cauldrons and fuses. In the latter half of the 1980s, the high point of Japanese hubris, a number of nationalist writers mused that the days of Pax Americana were rapidly approaching their end, and that the dawn of Pax Nipponica was at hand. Not only has this not happened, but East Asia has been in severe crisis since July 1997. Japan should be able to play an influential role in resolving the crisis, and in enhancing peace and prosperity in the region. However, there is instead a serious risk that the crisis may degenerate into a drama. The international community must realise the depth of the Japanese problem. Solving it is a prerequisite for restoring the region’s health and vitality.

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Regional solutions to regional problems? Michael Leifer

The notion of ‘regional solutions to regional problems’ has a beguiling simplicity and attraction within and beyond Pacific Asia. It implies an authentic ‘neighbourhood-watch’ approach to regional security based on the underlying assumption that resident states are willing and able to act as ‘their brothers’ keepers’, and will engage collectively in constructive dispute-settlement. An implicit assumption of this kind was first recorded in Chapter Eight of the UN Charter, which specifically referred to the ‘pacific’ settlement of local disputes. Any regional enforcement action was subject to the authorisation of the Security Council, with the exception of ‘any enemy state’ from the Second World War. Latin America’s proprietary outlook, which stemmed from concern to protect the collective-security remit of the Act of Chapultepec, concluded in March 1945, was an initial motive for this regionalist disposition (Russell 1958). The onset of the Cold War and the acceleration of decolonisation gave rise to mixed forms of regional enterprises distinguished from each other partly by the degree to which they comprised local resident states (Fawcett and Hurrell 1995). For example, the Organisation of African Unity (OAU), established in 1963, assumed a more authentic regionalism than that of Latin America within the Organisation of American States (OAS). This prerogative outlook was made more explicit in the founding document of the Association of South-East Asian Nations (ASEAN), established in 1967. Of all regional institutions of its kind, ASEAN has come closest to approximating to its declaratory intent. Its ability to impose regional solutions to regional problems is, however, another matter (Leifer 1999). In practice, ‘regional solutions to regional problems’ is more likely to be a slogan serving a particular interest than an operational policy accepted and applied on a regional basis in any common interest. Preliminary misgivings The notion of regional solutions is inherently flawed because it begs a number of questions, notably those concerning the bases of regional identity and coherence. Even if shaped by geography, such an identity is governed by political

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considerations. Second, the idea neglects the likely prospect of regional differences over strategic perspective, or in the definition of the prime external threat. A ‘regional solution’ may thus be both a formula for regional order, and a euphemism for regional hegemony. The government of Indonesia, for example, used the notion during its Confrontation with Malaysia in the mid1960s in an attempt to deny legitimacy to the intervention of non-regional states in support of the embattled Federation. Conversely, as Singapore’s first indigenous head of state, Yusof bin Ishak, put it in December 1965, ‘So many of our neighbours and we ourselves would not have a separate existence if purely Asian forces were to settle the shape of decolonized Asia’ (Parliamentary Debates 1965). Finally, the notion of regional solutions assumes that a regional association can solve problems, whereas any degree of institutional success in Pacific Asia since the Second World War has depended on conspicuously avoiding a problem-solving role. ASEAN’s provision for dispute-settlement, incorporated in its Treaty of Amity and Co-operation (TAC) of 1976, has never been invoked. In the post-colonial era, ‘co-operative security’ has been the prime vehicle for comprehensive regional approaches to regional problems. However, by its very nature co-operative security avoids solving problems because its working premise is that the ideal conditions for finding regional solutions should be sought with others, as opposed to against them (Lawler 1995; Dewitt 1994). It is thus an alternative to a balance-of-power approach, which involves collective defence co-operation against an extra-mural adversary. Co-operative security seeks to manage relations between states which are neither allies nor adversaries, although both categories could find their way into a co-operative security structure. Co-operative security contrasts with the classical notion of collective security, contained in the Covenant of the League of Nations, which has been represented as the institutionalisation of the balance of power. Both are intra-mural arrangements, but co-operative security is distinct because it forgoes the hallmarks of a collective approach—military or economic sanctions. Instead, its main vehicle is dialogue and suasion. In Pacific Asia, this practice of confidence-building has fallen short of either preventive diplomacy or dispute-settlement. The major institutional examples of co-operative security have so far addressed only the general climate of international relations, rather than specific disputes. East Asia’s institutions Despite any tension between a regional association with a remit for managing regional order, and member governments’ sensitivities over national sovereignty, the notion of regional solutions has persisted, at least in aspiration. This endurance has been particularly marked in regions once under colonial domination, and which suffered competitive external intervention during the Cold War.

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ASEAN Authentic, albeit limited, regional association in South-east Asia began in the early 1960s with the Association of South-East Asia (ASA). ASA was aborted with the onset of the Indonesia-Malaysia Confrontation and the Philippines’ claim to Sabah in northern Borneo. ASEAN was an attempt to give an institutional underpinning to the settlement of Confrontation and attendant regional reconciliation (Sandhu et al. 1992). It also aimed to inhibit outside intervention in the region’s affairs. ASEAN may best be defined by what it is not. It is not a political community, a defence community or a substantive economic community. It is an aspirant intra-mural security regime based, in principle, on respect for those international norms set out in the TAC. Indonesia’s self-serving prescription for regional order—based ostensibly on the prerogative rights of resident states—was carried over into ASEAN’s founding document, which declared that resident states shared ‘a primary responsibility’ for managing regional order, and that ‘all foreign bases are temporary’. In 1971, ASEAN’s members declared a Zone of Peace, Freedom and Neutrality (Zopfan) within South-east Asia, so as to avoid ‘any form or manner of interference by outside Powers’. Indonesia’s Foreign Minister, Adam Malik, asserted in 1974 that ‘Regional problems, i.e., those having a direct bearing upon the region concerned, should be accepted as being of primary concern to that region itself (Malik 1975:160). This view is likely to be associated with those states aspiring to a managerial role. It may thus be construed as a threat to national independence by smaller and less powerful nations. In practical terms, Zopfan was a concession to the foreign-policy priorities of a rehabilitated Indonesia, and an acknowledgement of its new-found leadership role in ASEAN. Nonetheless, four of ASEAN’s five founder members—Malaysia, the Philippines, Singapore and Thailand— maintained their security arrangements with outside powers. When Brunei joined the Association in 1984, it did not relinquish the British military presence on its soil. Zopfan allowed ASEAN’s members to reconcile the ideal of regional solutions with their individual security requirements. This accommodation was possible because governments with misgivings about Zopfan knew that it would never assume an active, operational form. Even Indonesia’s interpretation of ‘regional solutions’ has been elastic. The country showed its willingness to violate Zopfan’s declaratory intent when, in December 1995, it entered into a security agreement with Australia, a close alliance partner of the US. ASEAN has been successful in building confidence between member governments sharing similar political outlooks and development priorities. The differences in strategic perspective revealed during the Cambodian conflict of 1978–91 were accommodated to corporate advantage; intra-mural tensions were avoided by virtue of an agreement not to bring contentious domestic and bilateral issues into the Association. Ironically, however, ASEAN’s cohesion has

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depended on not acting as a problem-solving entity, highlighting its inherent weakness as a security model. The Association has been able to maintain a working culture of consultation and co-operation as long as it makes no attempt either to interfere in the domestic affairs of a member state, or to intervene to address a dispute between members. In the disputes over islands in the South China Sea, a declaration by ASEAN Foreign Ministers in Manila in July 1992 called on contending states to avoid the threat or use of force in prosecuting their claims, but failed to address the critical issue of sovereign jurisdiction. The pious plea for peace over the Spratly Islands at the Association’s sixth formal summit in Hanoi in December 1998 demonstrates that there has been no advance on this position. Beyond its walls, ASEAN has sought to act as a diplomatic community, and has had mixed success in addressing regional problems. The Association’s diplomatic role in the Cambodian conflict was part of a division of labour within a tacit alliance coalition with major powers, which aimed to prevent Vietnam from assuming undue dominance in Indochina. ASEAN acted according to balance-of-power principles, not those of co-operative security. Its vigorous diplomacy was bolstered by the military and economic sanctions applied by its tacit alliance partners, especially China and the US. The Cambodian conflict demonstrated ASEAN’s inability to impose a regional solution to a regional problem. The civil war was resolved in 1991 through the diplomatic intervention of the Permanent Members of the UN Security Council. Indonesia’s tenure as one of the two co-chairs at the Paris conference which ended the conflict was a consolation prize, and did not reflect any substantive contribution by Jakarta. The ASEAN states which participated in UN peacekeeping in Cambodia in 1992–3 did so on an individual basis, not as part of an institutional identity. The good press which the Association enjoyed over Cambodia, and the historic reconciliation with Vietnam which came with Hanoi’s accession to ASEAN in 1995, have exaggerated ASEAN’s competence as a vehicle for addressing regional problems. Consequently, there has been a tendency to judge the Association by false criteria. These were invoked with the advent of the region’s financial problems in mid-1997. ASEAN has never been a vibrant economic community, despite the terms of its founding declaration and its efforts to promote a Free Trade Area (AFTA) from January 1992. ASEAN has been largely irrelevant in the economic crisis. Its afflicted member governments have not adopted a uniform approach, and the most the Association has achieved has been an agreement to set up an economic surveillance mechanism to forestall future crises. ASEAN’s feebleness and disarray have diminished its international standing, and its cause has not been helped by bilateral bickering. So-called ‘bold measures’ launched at the Hanoi summit to regenerate regional economies have not inspired confidence outside the region.

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Other attempts at intra-mural problem-solving have also met with a conspicuous lack of success. The Association failed to influence the Indonesian government when forest fires in Kalimantan and Sumatra became an ecological disaster for a number of its close neighbours, as well as for itself. It was also powerless to mediate effectively in Cambodia’s internal conflict from July 1997, when a violent coup mounted by Second Prime Minister Hun Sen removed First Prime Minister Norodom Ranariddh from the country’s ASEAN-endorsed coalition government. When Cambodia’s admission into ASEAN was discussed at the Hanoi summit in December 1998, it prompted contention and ‘an unusually sharp battle of wills’. The country had held elections of a kind in the preceding July, which had confirmed Hun Sen’s political dominance. Although Hun Sen’s government had assumed Cambodia’s vacant seat at the UN, ASEAN heads of government were unable to agree on its admission into the Association. Instead, it was agreed that Cambodia would be admitted at an unspecified future date. At issue was the view of the Philippines, Singapore and Thailand that the newly installed government needed more time to demonstrate its durability and stability (Pura 16 December 1998). The criterion of political legitimacy as a basis for membership was far removed from the original requirement of regional reconciliation. The admission of Laos and Myanmar in July 1997 brought ASEAN closer to achieving ‘One South-east Asia’ comprising all ten of the region’s states. (This was achieved with Cambodia’s admission in April 1997.) Myanmar’s human-rights record has, however, made its accession controversial. ASEAN had justified its political opening to the country in terms of ‘constructive engagement’, but the Association has, to the embarrassment of some of its members, failed to exert any influence over the priorities and practices of the regime in Yangon. Subsequent intra-mural wrangling over a legitimate basis for collective intervention on humanrights issues, which may affect the interests of other members, has not served the cause of corporate cohesion. The Foreign Ministers Meeting in Manila in July 1998 demonstrated that any attempt by ASEAN to reinvent itself beyond the bounds of co-operative security was likely to threaten its viability (Chanda and Islam 6 August 1998). This viability was put at further risk by the willingness of some governments to make openly adverse comments about the treatment of Anwar Ibrahim, Malaysia’s ousted Deputy Prime Minister, who was imprisoned and subsequently tried on charges of corruption and sexual misconduct in late 1998. ASEAN’s greater diversity engendered by its enlarged membership, coincident with Indonesia’s diminished standing and loss of leadership drive following President Suharto’s downfall and acute economic problems, have made forging a corporate consensus even more difficult.

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The ASEAN Regional Forum ASEAN’s enlargement was an attempt to compensate diplomatically for the Association’s diminished strategic role with the end of the Cold War. ASEAN was obliged to abdicate a prerogative regional role by virtue of its successful initiative in 1993 in promoting the ASEAN Regional Forum (ARF). Geographically, the ARF is more extensive, encompassing the very outside powers which, in 1971, were enjoined not to interfere in the region’s affairs. In expanding the structure of multilateral security dialogue, ASEAN had acknowledged the limitations of its regional role and ambit, and of the viability of South-east Asia as a strategic category in the light of post-Cold War change. The ARF was not, however, intended to supersede ASEAN. The ARF is historically unique in Pacific Asia in terms of geographic scope and membership (Leifer 1996; Lim 1998). As a forum for multilateral security dialogue intended to cope with post-Cold War uncertainties, the ARF is based in practice on the same co-operative security model that has, up to a point, served ASEAN well. At the ARF’s second working session in 1995, a Concept Paper prepared ostensibly in Brunei’s Foreign Ministry, and endorsed in the Chairman’s Statement, gave the impression of corporate evolution towards a problem-solving role. The paper incorporated an institutional ‘route-map’ setting out ideal progress in stages from confidencebuilding to preventive diplomacy and, ultimately, conflict-resolution. ‘Conflict-resolution’ was, however, replaced by the ‘elaboration of approaches to conflict’, a diluted alternative adopted at China’s insistence. Although the ARF has since 1997 agreed to address the subject of preventive diplomacy where it overlaps with confidence-building, the outcome has been a cosmetic exercise without substantive progress along the institutional routemap set out in the Concept Paper. Moreover, agreed and implemented confidence-building measures have been of a limited kind, such as meetings of heads of colleges of defence studies and a seminar on the production of defence-policy documents. Such measures are not without merit, but they address the general climate of regional relations, rather than any specific problems. The ARF does not have a remit for regional problem-solving. It has not in any practical sense addressed any of the three prime sources of conflict within Pacific Asia: Taiwan, the Korean Peninsula and the South China Sea islands. Taiwan is, of course, beyond its remit because China regards the island as a renegade province and would leave the Forum if the ARF took steps to accord Taiwan a status comparable to that which it enjoys in the Asia-Pacific Economic Cooperation (APEC) forum. Beijing does not regard Taiwan’s position in APEC as a matter of national sovereignty. Taiwan is addressed at the level of intra-Chinese informal relations, and in the context of Sino-American ties. The issue of the Korean Peninsula has been the subject of pronouncements by the ARF, but the Forum has not been engaged as an institution in any practical attempts to manage the relationship between North and South. While South Korea has been an ARF

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participant from the outset, the North has yet to be admitted. The Korean Peninsula’s problems have been addressed through bilateral dealings between the two Koreas, between Washington and Pyongyang, and in four-party talks involving Beijing and Seoul. The ARF has been more directly concerned with the issue of the islands of the South China Sea, but has not addressed the core problem of sovereign jurisdiction. It has followed ASEAN’s example in seeking to promote a code of conduct for contending states, whereby the threat or use of force would be eschewed in prosecuting claims to islands and maritime space. It has also invoked the UN Convention on the Law of the Sea as an additional source of constraint. The problem of the South China Sea islands has not been addressed directly in the ARF’s prime vehicle, the separate Inter-Sessional Support Group on Confidence-Building. The sole attempt to deal directly with the matter has been made through a series of confidence-building workshops initiated by Indonesia. These initiatives have not achieved anything substantive and, given its post-Suharto problems, Indonesia has almost certainly lost enthusiasm for them. APEC The ARF was conceived as the security analogue of APEC which, since its formation in 1989, has extended to the Latin American reaches of the Pacific Rim. APEC’s goals of promoting freer trade and investment among its members do not directly address regional security, but its success in removing intraregional barriers would have a positive influence on the climate of regional relations. When in 1993 APEC became a forum for heads of government, the expectation was raised that a process of regional community-building would follow from economic co-operation. Despite the lofty commitments which its members entered into, APEC was neither ready nor able to assume responsibility for tackling East Asia’s economic crisis. APEC could be seen as a more authentic example of an attempt at a regional solution for a regional problem (constraints on trade and investment). However, the approach of individual members has been governed by, and subsumed within, their wider commitments under the emerging World Trade Organisation (WTO) regime. With the impact of the regional crisis, these commitments have been honoured in the breach. Moreover, at APEC’s meeting in Kuala Lumpur in November 1998, the US in particular passed comment on the crisis in Malaysian politics precipitated by Anwar’s arrest. A competing Malaysian proposal for an East Asian Economic Caucus (EAEC), excluding the US, Australia, New Zealand and Canada, has made progress in terms of form, rather than substance. It comprises the Asian members of the Asia-Europe Meeting (ASEM), which began its institutional existence in 1996, matched by the participants of an ad hoc summit in 1997 between ASEAN heads of government and their counterparts from China, Japan and South Korea. These states met concurrently with ASEAN’s Hanoi summit in December 1998. However, the EAEC lacks substantive expression, let alone a problem-solving

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role, and little has been heard of it lately from its protagonist, Prime Minister Mahathir Mohamad. The myth of regional solutions Implicit in the idea of regional solutions to regional problems is an assumption that not only are there ‘natural’ regions, but also that their resident states will share the same view of the nature of regional problems and how to address them. The difficulty in seeking to apply such a beguiling formulation on a regional scale is much the same in essence as that faced by the League of Nations in seeking to apply the principle of collective security universally. Attempts at regional solutions in post-colonial Pacific Asia have taken a collective-security approach, but without its economic and military sanctions. Dialogue has been the prime vehicle. This medium has obvious limitations in an ungoverned world, especially where co-operative security has been undertaken in advance of dispute-settlement. This highlights a notable difference between ASEAN, at least at its formation, and the ARF. Although the ARF followed the Cambodian conflict’s resolution, it was not intended to promote reconciliation between former antagonists in quite the way that ASEAN’s prime purpose was to provide an institutional structure for reconciliation between Indonesia and Malaysia after Confrontation. Since the mid-1990s, ASEAN has moved away from being the quasi-familial sub-regional grouping which had begun to make its mark from the mid-1970s. Changes in scale and increased diversity can be an impediment to building a culture of co-operation. In ASEAN, an enlarging membership encompassing a variety of strategic perspectives and, in particular, different relationships with China, has had a mixed impact on the prospects of reaching consensus on the South China Sea islands, for example. The scale of the ARF’s multilateral undertaking is even larger and more diverse. Consensus-building is consequently more difficult, bearing in mind that the guiding operating principle as set out in the Concept Paper is that the Forum ‘should progress at a pace comfortable to all participants’. In Pacific Asia, co-operative security cannot address regional problems. The differences in strategic perspective stemming from the scale and diversity of the region’s institutional undertakings make co-operative security better suited to confidence-building than to problem-solving. At issue here, most importantly in the ARF, which includes all the major Pacific Asia powers, are adverse interpretations which have arisen over the function of co-operative security. Adverse interpretations At the outset, the ARF was primarily the product of a post-Cold War concern within a Western alignment of states—the ASEAN Post-Ministerial Meeting— about how to cope institutionally with America’s apparent strategic retreat from East Asia. The Soviet Union had collapsed, and a rising China would seek to

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exploit its new-found strategic latitude, with the US withdrawing from its military bases in the Philippines. As a result, the key object was to promote a multilateral structure for security dialogue to complement and support the main bilateral alliances in Pacific Asia established by the US during the Cold War. At the same time, there was an important additional interest in coping with a rising China by engaging it in multilateral dialogue as a way of inducing Beijing to show greater respect for international norms. As the US became more enthusiastic about multilateral dialogue, and also showed its determination to retain a military presence in East Asia, the ARF’s founding states became increasingly interested in constructively engaging China in a bid to encourage its ‘good citizenship’. Both the US and China participated in the ARF from its first working session in 1994. Each, however, had rather different expectations. For the US, Japan and others, the ARF had been envisaged as complementary to bilateral defence co-operation. These bilateral links were reaffirmed in the renewed guidelines for America’s Mutual Security Treaty with Japan, and in its new understandings with the Philippines and Singapore over the use of their military facilities (Department of Defense (US) 1998). For China, as well as for countries such as India and Russia, the ARF has been seen as a way of promoting multipolarity, as opposed to multilateralism. This is, of course, code for curbing the unipolar pretensions of the US. In September 1998, for example, Chinese Defence Minister Chi Haotian reportedly indicated that his government was unhappy with the security order in East Asia, in which the US and its allies, especially Japan, played a central role (Richardson 28–29 September 1998). This view can only have been reinforced by America’s military action against Iraq in December 1998, which was undertaken without reference to the UN Security Council. This structural tension in the ARF means that the inhibitions on it assuming a problem-solving role are greater than they are for ASEAN. ASEAN has differences of strategic perspective of its own, but within a group of lesser powers without evident competence in a managerial role. Another, albeit less important, structural tension in the ARF stems from ASEAN’s diplomatic centrality within it. The Forum’s name derives partly from the acronym for the Association of South-East Asian Nations. Lacking a secretariat, the ARF has been tied inextricably to ASEAN from the outset. ASEAN provides the rotating chair for the ARF’s annual working sessions and for meetings of senior officials. It also provides secretarial support and the cochairs for all inter-sessional activity. As such, it has agenda-setting responsibilities. ASEAN’s diplomatic centrality within the ARF is reflected in the Association’s self-assumed obligation to be its ‘prime driving force’, which was supported by participating ministers in the Chairman’s Statement at the working session in Manila in July 1998. ASEAN’s diplomatic centrality in the ARF had been tolerated by other members of the Western alignment because of a realisation that China would have been reluctant to participate if the formal initiative establishing the

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Forum had been taken by either Japan or the US, for example. ASEAN’s role has, however, prompted resistance, especially among some North-east Asian and Pacific governments, which have judged it incongruous that the Forum’s diplomatic centre of gravity should be in South-east Asia, while the main regional problems are in the North-east. The view has been expressed that ASEAN’s position should be transitional and that, in time, the ASEAN Regional Forum should give way to an Asian or Asia-Pacific Forum, thereby reflecting the true balance or distribution of regional power. For China, however, the current arrangement is preferable as an expression of post-Cold War multipolarity. In this, it is supported by Russia and, after its entry into the ARF in 1996, by India. Despite ASEAN’s evident institutional failings— or indeed perhaps because of them—there has been no attempt to revise either the ARF’s title or its format. Neither is, however, conducive to problem-solving. Prospects Neither ASEAN nor the ARF is a vehicle for solving regional problems. Among its participants, the ARF is viewed as a useful and relatively cost-free way of providing additional points of diplomatic contact and cushioning, and even as a way of securing a possibly progressive conformity to international norms. Judgement on ASEAN, however, has become more reserved—even sceptical—as the Association’s spirit of co-operation seems to have drained away with enlargement, economic adversity and an upsurge of bilateral tensions. The issue of Cambodia’s membership exposed ASEAN’s disarray, in ironic contrast to the solidarity displayed by a smaller membership over the Cambodian conflict in the 1980s. Given the region’s economic crisis, ASEAN has been unable to improve the climate of regional relations. The ARF would seem to have been more successful, but not necessarily because of the development of a collegial culture of cooperation. A more likely explanation is that the ARF has reflected the condition of the more important regional relationships and, in particular, that between the US and China. However chequered, Sino-American relations have achieved some working accommodation. This cannot, however, be taken for granted, as shown by China’s principled objection to NATO action in the Balkans in 1999, and by its vociferous opposition to the prospect of theatre missile defence in Pacific Asia. Both ASEAN and the ARF are still a long way from achieving regional solutions for regional problems—which is, in any case, more a myth than a valid aspiration. According to the Chairman’s Statement after the annual working session of the ARF in July 1997: ‘The Ministers agreed that the evolutionary approach to the development of the ARF process and the practice of taking decisions by consensus shall be maintained, taking into consideration the interests of all ARF participants and, at the same time, demonstrating the continued consolidation of the process through increased activities in relevant

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areas.’ Such a statement, employing such an idiom, could only have been drafted by officials with a close familiarity with the diaries of Jim Hacker (Lynn and Jay 1986, 1987). Such an idiom is certainly well known to those who labour for the good of their country within the portals of King Charles Street in Whitehall, but it has little, if anything, to do with finding ‘regional solutions to regional problems’. This remains as elusive a notion as ever, not least in Pacific Asia.

10 A new relationship between the West and Pacific Asia? François Godement

According to Samuel Huntington’s now-famous prediction about ‘the West and the rest’, post-Cold War international relations are set to fragment along irrational lines drawn between religions, communities and cultural groups (Huntington 1993:22–49). While Huntington’s thesis may have been intended to avert such a split, it was often received in Asia as both a description of the present, and perhaps a prescription for the future. His prophecy of a major cultural divide never really travelled beyond the confines of international conferences and newspaper op-ed pages. Nonetheless, his assertions, and those of the advocates of ‘Asian Values’, became mutually reinforcing. On serious issues such as human rights, outside interference in domestic affairs and co-operative security-building, several Asian nations have held views at odds with, or irreconcilable to, those of the West. Yet the debate over ‘Asian Values’ as a basis of legitimacy for regional standards remains a very limited tug of war. Even before the Asian catastrophe took hold, the Cambodian crisis of July 1997 prompted the Association of South-East Asian Nations (ASEAN), for the first time in its history, explicitly to interfere in the domestic affairs of a regional state. Following Co-Premier Hun Sen’s ousting of his FUNCINPEC colleague, Prince Norodom Ranariddh, ASEAN called for his reinstatement, and delayed Cambodia’s admission into the Association until April 1999. ASEAN’s stance could be justified by the Paris agreements of 1991, which ended Cambodia’s civil war, and it may have been easier for the Association to intervene in the domestic affairs of a former communist state. Nonetheless, just as agreement had been reached with the West over a policy of constructive pressure on Myanmar, so ASEAN was giving up its non-intervention dogma in response to events in Cambodia. The financial crisis has both deflated overblown pretensions to an ‘Asian Way’ and its attendant, specific political values, and thwarted more modest attempts at regional economic co-operation. Much of Asia is now threatened with becoming ‘the rest of the West’: a loose area where huge investment and capital

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flows, important trade with global markets and a democratically oriented urban and middle class coexist with a lack of co-ordination, regulation and, ultimately, sovereignty over essential monetary and economic matters. The recipe for making East Asia a suburb of the developed world—no regional economic or monetary backbone, security ensured by bilateral links with the US and increasing openness to outside business—is in place. The advent of East-West co-operation Between 1989 and 1997, Asia increasingly became a partner of the West. Despite isolated but strongly voiced regional objections, the creation, enlargement and institutionalisation of the Asia-Pacific Economic Cooperation (APEC) forum took place quickly, with ambitious free-trade targets set in 1993. Albeit tortuously, the forum’s self-described ‘voluntary and unilateral’ bargaining process began to put some flesh on the bones of its lofty objectives, notably with a November 1996 free-trade agreement in the electronics and information sectors. The birth of the Asia-Europe Meeting (ASEM) in 1996 is largely a tribute to APEC’s effectiveness. Asian participation in ASEM remains limited to South-east and North-east Asian members, as opposed to South Asian and Pacific countries. ASEM has indirectly resulted in the first-ever international dialogue among the major East Asian states, virtually creating the East Asian caucus for which Malaysian Prime Minister Mahathir Mohamad had earlier campaigned. Asia’s ASEM heads of government met among themselves for the first time in December 1997, although in a completely new regional context of acute economic crisis. Several trends reinforced this overall movement towards improved cooperation between the West and Asia. The first was real economic change: if the business world barely paid attention to international organisations such as APEC or ASEM, it could not fail to be impressed by the rise in Asia’s share of global trade, both inside and outside the region. Private initiative was the engine that pulled in the record amounts of direct international investment into East Asia. It is now fashionable to decry this trend because of the overflow of financial capital that took place at the same time. Yet the technological, industrial and infrastructure changes that these flows created in Asia are huge and their benefits persist, the current crisis notwithstanding. Asia’s economic rise entered a new phase in the early 1990s, when the region’s demand for investment and consumer goods resolved the issue of the trade imbalance between East Asia and the West, particularly Europe. The West was now selling more to Asia, particularly emerging Asia, as regional incomes rapidly improved. As a consequence, commercial relations with Asia have been a source of both conflict and co-operation among Western economies, becoming perhaps one of the main issues on the transatlantic agenda. As in its trade relations with Japan in 1993, the US led the APEC process, and sought to exploit its global advantage to extract trade concessions from Europeans, just as it tried

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to use ‘sectoral targets’ to manage its commercial balance with Japan. In more recent years, however, Washington has often seen the European Union (EU) as undercutting, at least rhetorically, the efforts of US negotiators to break open trade and service exchanges with Asia. Europe’s disinterest in a transatlantic free-trade agreement underscores the wish of at least some European nations to keep their options open, while at the same time subscribing to any concessions won by American bargaining. The second influence on the closer co-operation between the West and Asia was the way in which what had started as a purely commercial and economic trend towards regional and global integration also became a political and security process. This is not, however, easily achieved. Indeed APEC, where US influence and leadership were keenly felt, was never accepted by China and other states such as Indonesia as a proper forum for security co-operation or even discussion of these issues. Conversely, American diplomacy has treated the emergence of co-operative security endeavours, particularly in South-east Asia with the Council for Security and Co-operation in Asia-Pacific (CSCAP) and the ASEAN Regional Forum (ARF), as very much of a side show, even if substantial amounts of individual goodwill and activism have gone into these ‘second-track’ efforts. For all participants, this process has chiefly been aimed at engaging China; they have barely used this avenue to pursue the concrete disarmament issues on their own agendas. Europeans have rejoined this process in several areas: contributing to the Cambodian conflict’s solution since 1991; shouldering some of the costs of the Korean Peninsula Energy Development Organisation (KEDO), the scheme to replace existing North Korean nuclear plants with safer Western ones; and participating in the budding ARF debates. China remained both the key factor and prime source of dissatisfaction in relations between the West and Asia, and possibly among Western nations themselves. The international response to 1989’s Tiananmen repression had apparently led to a high point of global co-operation, with the Group of Seven (G7) nations agreeing on a series of sanctions, and the EU putting them into effect. As Tiananmen has receded, however, Asian and Western paths have diverged; Japan in particular asked for and obtained release from the sanctions framework as early as July 1990. More recently, welldocumented suspicions and divisions among the principal Western nations themselves have emerged. It is often said that this split originated with disagreement over whether engagement or containment should be the basis of relations with China. While the large US military presence in the western Pacific can only be described as military containment—applauded both by Asia-Pacific states and by Europeans—there is no doubt that mainstream diplomatic attitudes have favoured engagement, however conditional. While there is no real dissent on the military and strategic containment policies towards China, political and diplomatic engagement is the cause of a deep split among Western partners. A summary list of achievements and drawbacks or failures in East-West relations before 1997 might therefore contain the following elements:

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PLUSES • • • • •

the institutionalisation of transpacific relations the inclusion of China in these relations the advent in most cases of free trade in goods the decline of commercial quarrels the select opening of capital markets (truer in North-east than in Southeast Asia) • the appearance of a regional security debate with the participation of the West (truer in South-east than in North-east Asia) • the initiation of a framework for Asia-Europe relationships • the acceptance in principle of universal values and norms by Asian states.

MINUSES • East Asia’s continued dependence on the US for security • the undercutting of bargaining or compliance policies between Europe and the US • the lack of co-ordinated European policies • the increasing impotence of Western human-rights policies • the inability to transform intra-Asian relationships from a power balance into an institutional framework for co-operation. Even in this summary form, this list highlights the fact that relations between Asia and the West were overwhelmingly positive in economic terms, yet remained problematic in political or strategic ones. The only true test of will and ability in this field came in 1996 with the missile crisis off Taiwan. Although in 1994 the US and its allies may have come close to military action against North Korea, Pyongyang’s diplomatic and military weakness would have ensured that long-term international consequences would have been minimal in any case. A military conflict with China over Taiwan would have had much more profound political and economic repercussions. Europe’s abstention in all but vocal pronouncements during the 1996 crisis means that the US, whose military withdrawal from the region was seen as likely in the first half of the 1990s, is confirmed as the preeminent power in the western Pacific. Washington’s commitment is not doubted in times of emergency. At the same time, however, the EU economies have increased their stake in Asia, reaching the same absolute level of exports as America and, in China’s case, surpassing it. European exports have been expanding by, on average, 17.5% a year since 1981, reaching the same absolute level (about $140bn) as those of the US in 1996. Although European firms still lag behind their US counterparts in terms of direct industrial investment, events have shown that European banks had by far overtaken American ones in their loans to Asia. At the end of June 1997, Bank for International Settlements (BIS) figures indicated that European banks held almost

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40% of Asian debt, US ones only 10% (BIS 1997, 1998). This may have proved to be a curse rather than a blessing, but at least it creates a very large European interest in Asia’s economic well-being. As a partner, albeit a passive one, Europe is as involved in Asia as the US. While at the end of the 1980s it was possible to speak of the lack of Euro-Asian relations as the ‘missing link’ in the Europe-Asia-US triangle, Euro-Asian exchanges have been improved during the last decade by the rise in trade, and by the corresponding urge on the part of diplomats and politicians to create the building blocks of a relationship. Europe’s political leaders have taken longer than their American counterparts to recognise Asia’s success but, through ASEM, they have finally done so. Rather than a European absence, we must now fear European inaction towards Asia. On the eve of its London summit in early April 1998, fashionable talk in the hallways of the European Commission tended to regard the ASEM process as a ‘facilitator’ —in other words, an arena for better mutual understanding in which disagreements could be ironed out, rather than a substantial decision-making exercise. Unsurprisingly, those national decision-makers, whether diplomats or financial and trade officials, who believe most strongly in the necessity of Asia policies also tend to be downbeat about European involvement because their primary aim is to gain the benefits at national level. In this as in other areas, European co-ordination tends to take place at the level of the lowest common denominator. Whether in political and strategic relationships or in economic and trade matters, the rise of the West’s relationship with Asia before 1997 was accompanied by a dangerous imbalance. US policies and pronouncements may vary widely over time, as vicissitudes in America’s relationship with China and even Japan have demonstrated. However, Washington’s Asia policy constantly leads that of Europe, and has measurably shaped events. For better or worse, Asian issues are at the centre of American public life. There was, for example, public controversy in the US over the 1997 Loral satellite deals with China, which allegedly resulted in sensitive technology transfers. Far less publicised was the decision by the French government, also in early 1997, to force a deal between Arianespace and its Chinese counterpart. Since 1993, Germany has sold $1.5bn-worth of space-related equipment to China (Blackwill and Archick 1998). Americans occasionally throw their weight around, and their policy process is fraught with public scandals and controversies, but they have a valid argument when they point to the black box of European-wide policies on issues of strategic interest. It is particularly remarkable that the current review of the EU’s policy towards China is taking place in a vacuum sealed from public scrutiny. The impact of the financial crisis Has the financial crisis shaken dogmas and beliefs, particularly those relating to Asia’s standing with the West? In Huntington’s terms, since the crisis began Asia is fated to become, or to be seen as, ‘the rest of the West’: a vast zone of

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indecision and confused identities, whose future lies in adopting Western formulae to manage the growing marketplace. The West now sees East Asia as a suburban territory without identity or heading; where linguistic and cultural divides inevitably lead to simmering conflicts; and where central government is largely nominal or intended to harmonise community relationships at the expense of its effectiveness. This may seem an extreme judgement, but the status changes that have taken place since the financial crisis begin to bear it out. A still-born ‘Asia-Pacific Century’? The so-called ‘Asia-Pacific Century’ has disappeared from view, along with some of its most celebrated exponents. The 1997 APEC summit was noted for its disarray, while the Pacific Economic Co-operation Council (PECC), the business ‘club’ which started transpacific co-operation among businessmen and officials, has been notably silent. Instead, there has been celebration of the New American Economy and of its guide—not President Bill Clinton, of course, but Federal Reserve Chairman Alan Greenspan. One of Greenspan’s main virtues is that he speaks out a lot, giving regular congressional testimony as well as many other speeches (Greenspan 1 October 1998). In speaking out, however, Greenspan has inadvertently compiled an archive of Western (or, more specifically, American) interests regarding the Asian crisis. The 1997 crash fortuitously curbed the ‘irrational exuberance’ which, according to Greenspan, was out of control in Western markets. Until June 1998 at least, Greenspan saw cause for optimism rather than for outright concern in the Asian crisis: it would dampen expectations and cool the overheating US economy. Events proved him right. Prices of primary materials have dropped and ‘hot’ money has fled Asia for safer havens in the US and Europe; interest rates have fallen and stock markets boomed. Europe is enjoying its first bout of optimism since 1974, and the advent of socialdemocrat or ‘third-way’ governments across the continent brings a sense of kinship with America’s public policy of ‘surfing’ on the economy. Instead of an Asia-Pacific Century, we should now, we are told, expect a Western one, in which Joseph Nye’s celebrated ‘soft power’ will be symbolised by software, and where the former economic and monetary orthodoxy of high savings and high interest rates is challenged: ‘Spend and grow rich— it is the American way’, claimed one Business Week commentator in January 1998 (Coy 26 January 1998), a sentiment shared by those European political leaders advocating lower interest rates. If the then German Chancellor Helmut Kohl at first appeared concerned with the fate of South-east Asia, particularly of Indonesia, where German interests are strong, he soon gave in to the need, for electoral purposes, to consider domestic matters above all else. Primarily, this implied not frightening voters with the Asian crisis. While British Prime Minister Tony Blair issued the most forceful warning about the Asian crisis, which he described as the most important economic event since 1945, he did not go on to offer concrete

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proposals to tackle it. The main result of the London ASEM meeting of April 1998, though not solely the work of the British government, was an ASEM fund for financial advice and consultation that, at $47m, is neither impressive nor very original; at Japan’s request, the Asian Development Bank began a similar project at just the same time. In France, Prime Minister Lionel Jospin and his Socialists largely treated the Asian crisis as if it were taking place on another planet. Economy and Finance Minister Dominique Strauss-Kahn regularly warned of its possible domestic repercussions, but the government as a whole made every effort to encourage France’s first consumer boom since the late 1980s. It did not have to try too hard: it is a key economic hypothesis that the Asian crash, with its accompanying sense of failed Asian models and policies, has actually increased the optimism of the average Western consumer and saver, even if business opinion has been less sanguine. The perception of global economic relationships as a zero-sum game—Asia’s losses must be the West’s gains—has kept markets and other economic indicators healthy. Not even the brief global equity crash of late summer 1998 really affected this trend, even if it revealed the underside of Western financial markets. The ‘fundamentals’ which Asian economic leaders called to their rescue in 1997 were this time of no avail simply because market trust was waning and a convincing regulatory authority or adequate public intervention were nowhere to be seen. Japan: the grounded albatross The second major status change in the Asia-Pacific concerns Japan. In a year, and despite $43bn-worth of Japanese support for Asian debtors (with a further $30bn pledged at 1998’s APEC Summit), Japan was transformed from Asia’s ‘shadow’ leader into its largest problem. The suddenness of the change has, it is true, been exaggerated. Japan’s domestic stagnation and credit crunch began in 1991, while the potential of the country’s industrial and technological plant is now seriously underrated. But a financial crisis is a crisis of perception, and perceptions have a lot to do with political economy, as opposed to microeconomic advantage. In barely over three years, the strongly rising dollar, initially intended as an informal act of co-operation to benefit Japan’s export industries, crushed its financial establishment. Just as the last bout of endaka (yen devaluation) in 1994–5 was marked by acrimony and recrimination between Tokyo and Washington, so the period from July 1997 to June 1998 saw the most publicly bitter disagreement between the two governments on economic and monetary matters. Conformity to free-market ideology makes many economists wary of explaining monetary trends in terms of self-conscious strategies, let alone conspiracies. Yet yen-dollar movements since the early 1980s lead to the conclusion that simmering USJapanese economic rivalry is a key factor of the crisis. Conversely, accommodation, whether in May 1995 or after August 1998, brings quick

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and positive results on the market floor. In choices between accommodation and struggle, the US, not Japan, is the deciding factor. The other element is of course the paralysis of Japan’s decision-making process. Beyond the standard parliamentary or process-oriented explanations for its gridlock lies a long-standing impasse in the country’s post-war policies. These were tenable only if Japan remained a medium-sized economic power, and was not expected to exert either political or monetary influence. There have been many attempts to portray post-war Germany and post-war Japan as equivalent states of a new kind, bent on economic prowess and constructing a new, legalistic international order. However, while a new generation of Germans is busily rebuilding Berlin and distancing itself from the country’s past, Japan remains stuck in the rut of post-war guilt and correspondingly weak political influence. Never was this more evident than during the financial crisis. Tokyo’s proposals for a region-wide monetary rescue mechanism, formulated before the crisis really took hold, were transformed into the so-called Asian Monetary Fund concept after the crisis of the Thai bhat. It attracted a large degree of support in Asia, China excepted, but was stonewalled in the West, principally by the US. Throughout the crisis, EU governments adopted an attitude that might best be described as following the World Trade Organisation (WTO) policy paradigm: verbal expressions of concern and open-mindedness, while silently toeing the US administration line. In terms of the Asian financial crisis, this meant staying under the mantle of International Monetary Fund (IMF) policy. In an ironic twist, several US administration figures have since distanced themselves, on or off the record, from the IMF policies of 1997, now occasionally dubbed the product of a ‘French bureaucracy’. Europeans on the other hand continue to follow the IMF’s official line. Japan’s initial response to the Asian financial crisis, which implied a large financial bail-out with region-wide involvement, has often been criticised in principle for the huge moral hazard it would have condoned. After nine months of IMF Phase I policies between August 1997 and May 1998, which emphasised market mechanisms at the expense of restoring public trust, the international community was finally spending equally large sums, with the disadvantage that any sense of Asian regional cohesion had been lost. Retrospectively, Japan’s early proposals appear to have been vindicated in 1999. China: the unlikely role model The third major change since the crisis began concerns China. It is perhaps not surprising that China’s authorities, themselves trying to convince international investors of their solidity and commitment to a market economy, were pleased at what they saw throughout Asia: Japan’s economic role being cast aside and Asian competitors being trapped like small ships in a market storm, an image that Joseph Stiglitz of the World Bank made his own. Not only has popular consent— the media, international economists, government pronouncements—christened China the rising power of East Asia, but the country has also been congratulated

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for exemplifying the kind of market reforms and sense of international responsibility that other Asian states lacked. It does not seem to matter that Mahathir’s Malaysia, for example, remains more open to international investment, possesses a developed capital market and has implemented more economic reforms than China since the crisis began. It does not seem to matter that Tokyo’s municipal budget matches that of China’s central government. The elasticity of export prices set by Chinese state firms, the adjustment in the renminbi exchange-rate on the swap markets, which exceeded 10% in mid-1998, and the huge bubble of so-called Keynesian spending by China’s government suggest something other than an economy going to market. Nonetheless, most Western commentators and many officials have chosen to see China as Asia’s role model, while treating other Asian states, with whom relations of alliance and extensive exchanges exist in principle, as laggards or delinquents. China has of course concurred with this view, and in 1998 loudly trumpeted Prime Minister Zhu Rongji’s market reforms. It has not helped that Mahathir, whose economic strategy for resisting international panic has now made many converts, ruined his effectiveness with poor political judgement. China has emerged as a leader by proxy for the region—a role that it cannot, however, play. Western advice and self-interest The fourth status change is in the regional standing of Western advice. Happily, the wave of nationalist, anti-Western and chauvinistic sentiment that many political observers foresaw at the beginning of the crisis has not materialised, despite articles in the region’s press, and occasional pronouncements by significant figures suspecting conspiracies. Asian public opinion has proved thoughtful and aware of the region’s deeper faults; demonstrations in Bangkok, Jakarta, Kuala Lumpur and Seoul have largely focused on domestic issues of reform and conflict. Burning American or European flags are nowhere to be seen. At the same time, the original accent of Western-inspired policies and comments on market liberalisation, conditional outside help for public debts and inaction regarding private debts are fading memories. Even Mahathir’s policy of currency and capital controls and its resolute emphasis on public bail-outs faces increasingly less criticism. The Hong Kong government’s massive plunge into the local stock market and Taiwan’s ban on most forward-contract activities and its warnings to international speculators have attracted short-lived criticism at most. In the space of a year, the West’s prevailing stance on the Asian crisis changed from neo-liberal economic prescriptions to a new framework of international co-operation, with political economy to the fore. The fundamentals of Asian economies were improving in mid-1999. Yet the fact that the eye of the financial storm had moved elsewhere, and that Western governments were now concerned with possible deflationary effects on their own economies, produced an audible sigh of relief in Asia. This was no longer the

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‘Asian crisis’. Intervention to tame speculation or to restructure private debt was no longer taboo. Loosening monetary or budgetary policies to fight a credit crunch was no longer a capital sin. Asians could be forgiven for concluding that the West changed its view of the financial crisis when it started sucking the air from all international financial markets. The change in US monetary policy from June 1998, with a high-profile intervention to stop the yen’s fall, and Greenspan’s new advocacy of lower interest rates in August 1998, could be seen in this new light. Asians could be excused if they felt that this put the neo-liberal advice they had been given in a new light. Now a bellwether of regional trends, China’s leaders have seized the opportunity to draw back from market reform in favour of ‘economic security’. In a lecture on ‘Deng Xiaoping thought’ by President Jiang Zemin made public in October 1998, Jiang launched a scathing indictment of privatisation and jointstock ownership, and mounted a staunch defence of the ‘public economy’. Jiang’s speech was replete with dark mentions of ‘leading comrades’ who pretend to follow communist ideology while ‘doing something else’. Beijing has challenged international financial orthodoxy by bankrupting the Chinese firms holding the largest share of international credit. This has prompted a test of strength between China and its international creditors. More worryingly, China’s government is recentralising, slowing down the reform of state-owned enterprises (SOEs), disciplining foreign trade and investment and increasing its spending to reach otherwise unattainable gross domestic product (GDP) growth targets of 8%. Every indication points to a severe slowdown in the economy’s market components. China is avoiding the trauma of the financial crisis by doing the opposite of what the West preaches, and of what it itself pretended to be doing for a full year. The European response The fifth and final change concerns relationships within the West, where events have revealed a strange truth. At the worst possible time this century, while Japanese lenders were starting to look for cover and American financiers largely stayed on the sidelines, Europe’s national banking and financial establishments have almost unanimously increased their stakes in Asia. If BIS statistical reports are taken as at least a probable indicator of actual lending, Europeans have combined rigorous monetary and budgetary discipline in preparing for the euro with enthusiastic financial operations in Asia (and Russia). Since the crisis began, Europe has, by the nature of its past involvement, been much closer than the US to Asian debtors and sinners. In the protracted negotiations on South Korea’s debt in December 1997, for example, European banks were more inclined to make concessions. Yet the US has taken the initiative of talking interest rates down, the single measure most likely to ease pressures on Asian currencies and markets. Several European leaders have not resisted the temptation to advertise the euro as a future reserve currency for Asia, a move

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tempting to Asians who have suffered from their one-way dollar peg. However, the fact that there appears to be no study of the impact of a reserve-currency role for the euro on the European economy makes these claims disquieting. During the first year of the crash, Europeans complained at the lack of consultation by the US on key economic decisions. The French proposal in 1998 to strengthen government co-ordination within the IMF reflects this dissatisfaction. Yet no European counter-proposal has emerged to fight the financial crisis, and co-ordinating European policies remains a problem, to say the least. The most heated debate within the West over the crisis and its repercussions took place, not between Europe and the US, but between the IMF and the World Bank. The US will not relinquish its leadership role in the near future, while Europe will not exert more influence merely by passively watching the euro’s reserve use increase. A triangle comprising Asia and the ‘two sides’ of the West is emerging from the financial crisis. The sharing of responsibility for liquidating debts, monetary policies and attitudes towards intra-Asian economic co-operation will become sensitive issues between the Western allies. All quiet on the Eastern front? Asian security issues after the crisis The Cold War order was never as compelling in Asia as it was in Europe. With the disappearance of the Soviet Union, the region has been split between an international order marked by nation-states in a new power balance, and the search for co-operative security. The financial crisis and unprecedented economic recession are a test case for regional relations, and may become the proving-ground for some basic assumptions. If the region’s largely informal institutions and its cluster of vague declarations and treaties gathered under the heading of the ‘ASEAN Way’ were no more than papering over unresolved conflicts and tensions, several international crises should be brewing. If China’s self-defence and peace rhetoric were only a front for longer-term powerprojection plans, 1997–8 presented the ideal opportunity for some hard-nosed power-play, either in the South China Sea or the Taiwan Straits. When large-scale economic crisis casts doubt on a Westphalian balance between states, the old Leninist teaching has it that competition and tension between all participants will increase, eventually leading to armed conflict. There has been no dearth of predictions of imminent conflict in Asia based on border quarrels, arms races, rivalry within divided nations and disputes over natural resources. Tempers have indeed flared. In the first months of the crisis, several ASEAN leaders blamed their neighbours for causing it. Singapore’s leaders, notably Senior Minister Lee Kuan Yew, have elevated this exercise to an art form. Malaysia’s relations with Singapore have been difficult, yet even here, where past history is deeply controversial, more mundane economic interests lie behind these tensions. A difference of economic perspective between Singapore, an off-shore financial centre and free-trade zone, and Malaysia, a nation burdened with industrial and social problems, has sparked their quarrel.

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Economic issues—Singaporean ownership of Malaysian firms; the quotation of Malaysian firms on Singapore’s Simex market in Singapore’s currency; and capital controls—are most important between the two states. Customs posts, airspace, water supplies or Senior Minister Lee’s memoirs are secondary. Meanwhile, little was heard about the disputed islands of the South China Sea, barring a lone incident between the Chinese and Vietnamese navies in early September 1998. The discovery that Chinese construction was continuing on some islets off the Philippines is disquieting, but it remains unclear whether these works started during or before the Asian crisis. Since almost all militaryspending budgets are down in the region— Japan introduced an 18% spending cut in 1998—it is hard to argue that the financial crisis and resultant political havoc in some countries are aggravating international security issues throughout East Asia. Only North Korea, characteristically, may have seized the opportunity for some high-profile strategic gesturing by launching its first satellite-carrying rocket. This decision is part of an established pattern of opportunistic actions in the face of enemy weakness, but it hardly leads to a genuine threat to regional order, much less a threat to the West. The prominence of North Korea’s military establishment contrasts with the taming of China’s generals by Jiang. Along with the downgrading of General Zhang Wannian, who had masterminded the March 1996 military manoeuvres against Taiwan, the reorganisation of China’s arms industry, research and development (R&D) and trade point to the possible end of the ‘rogue era’ of China’s military establishment. The conclusions to be drawn from these non-events are perplexing for the West, particularly for the US, which remains the guarantor of East Asian security. When the wave of foreign investment recedes from the region, local appetite for it is revealed in its true light. No government has decided to challenge the status quo, rather than continuing to pursue the foreign policies that accompany integration into the global marketplace. The retreat, where it exists, is on the economic front, not in security issues. Thus, several economies have decreed a pause in, or partial withdrawal from, their transition to the market. Even with the best of intentions, many of Asia’s governments, from Thailand to Japan, must nationalise part of their banking and financial systems to stem the tide of bankruptcies. Hong Kong, Malaysia and Taiwan have chosen short-term interventionist methods, and have experimented with forms of capital control. China’s recent turnaround, as the country hovers on the brink of major social problems and has yet to grapple with its own financial bubble, is perhaps the most severe. Yet no government, not even Mahathir’s, which has hired major Western consulting firms to engineer its financial bailout, is taking a road that would lead to international conflict. The tensions arising from the crisis are played out domestically: the diminishing popularity of South Korean President Kim Dae Jung and Thai Prime Minister Chuan Leekpai; the power-play within Malaysia’s ruling élite; and Indonesia’s first free elections in almost half a century. In East Asia, the strains of economic modernisation and institutional (if not always political) reform are creating

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networks of reformers and dissenters unconstrained by established borders. Shell-shocked politicians and rulers are either unwilling or unable to put forward new ideas. The present crisis has not made traditional security issues and potential crises more acute; it may in fact have eased them. The emerging political challenges all over Asia are internal, and concern political, religious and ethnic conflict within nations, or deal with the reform agenda. Aircraft carriers do not prevent civil wars; security pledges do not enhance democracy per se. The challenge the West faces is a new one, and stems from the consequences of the economic liberalisation and globalisation process which it has pressed Asian governments to introduce. The crisis is taking place in an interconnected global system. The West must thus take more responsibility for it than snap judgements about crony capitalism have led us to believe. We must acknowledge the confusion that prevails today in Asia, and the drawbacks for regional construction that it has created. Asia is a major economic region, increasingly open to outside investment and capital flows. However, its lack of acknowledged or even possible economic leadership and an institutional framework means that it is in a precarious state. Overplaying the issue of economic change at the expense of economic security, as was done in 1997–8, is a dangerous policy. Further economic and social crisis will only play into the hands of more conservative political and social forces, who may be content with a status-quo Asia locked into a Westphalian nation-state system. Encouraging change is not the same as forcing it. The region’s security is less likely to prove enough of a base for automatic agreement between Asia and the West. Once Asians become freer to pursue co-operation within the region, they will grow less fond of the gift of security from the West.

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Index

References to tables are indicated by a ‘t’ after the page number, and references to notes by an ‘n’ after the page number. Aaron, David 92 Agreement on Maintaining Security (AMS) 43 Akihito, Emperor 96–7 Amsden, A. 13 Angkatan Belia Islam Malaysia (ABIM) 62 Anwar Ibrahim 50, 60, 112, 114; Asian Values 61–2, 64, 66; downfall of 8, 73, 74–7 Archick, K. 123 ASEAN Free Trade Area (AFTA) 111 ASEAN Regional Forum (ARF) 44, 113– 18, 114, 121 Asia-Europe Meeting (ASEM) 115, 120, 123, 125 Asia-Pacific Economic Co-operation (APEC) 113, 114–15, 120, 124 Asian Development Bank (ADB) 2, 10, 125 Asian Monetary Fund (AMF) 10, 103, 126 Asian values 10, 56–68 Association of South-East Asia (ASA) 110 Association of South-East Asian Nations (ASEAN) 10, 58, 104, 108, 109, 110– 17; bilateral defence links 42; and Cambodia 110, 111, 112, 119; and community identity 65; co-operation and tension 50, 119; effect of ending of Cold War 39; paralysis 7–8 Athukorala, P. 75 Australia 3, 42, 110 automobile market 103

Backman, Michael 78, 79 Bakar, O. 64 Baker, C. 18–19 Bank of International Settlements (BIS) 122–3 banking sector: Indonesia 21–2; Japan 98–9; Malaysia 20–1; role of 23; Thailand 18–19 bankruptcy: role in market society 15; see also legal regulation Bertolucci, Bernardo 101 bilateral security arrangements 42, 46 Blackwill, R.D. 123 Bonifacio Andrés 62 Bousfield, John 66–7 Brandt, Willy 102 Brazil 2, 3 Brunei 110 bumiputera 20, 72, 73 Burma see Myanmar Buzan, B. 3, 8, 11 Cambodia 8, 110, 111, 112, 119 capital flight 3–4, 36 capitalism, defined 23 Cawson, A. 27, 31 Central Intelligence Agency (CIA) 100 chaebol 27–9, 31, 32t, 36–7, 70 Chairatana, P. 30, 35 Chan, Anson 89 Chanda, N. 112

144

Index

Chapultepec, Act of 108 Chatterjee, Partha 66 Chavalit Yongchaiyudh 80 Chi Haotian 116 China 17, 50, 55, 63, 70, 121; contribution to IMF 8, 91; defence policy 40, 43–5, 47; growing power 43, 46, 49, 50–51, 54, 116, 126–7; opposed to concept of conflict-resolution 113; People’s Liberation Army (PLA) 39, 47, 53; reforms 5, 6, 8–9, 85–95, 128; relationship with Japan 100, 101; relationship with Taiwan 9, 86–7; relationship with US 42–3, 123 Christensen, S. 18, 19 Chuan Leekpai 52, 81–2, 131 clientism 17 Clinton, Bill 88 Cold War, effect of ending 39, 40 computer industry, Taiwan 29 conflict-resolution, and China 113 Confucianism, and corruption 60 construction boom, South-east Asia 16–17 corruption 6, 53, 69–84 Corruption Perception Index (CPI) 71 Council for Security and Co-operation in Asia-Pacific (CSCAP) 121 Covar, P.R. 67 Coy, P. 124 Coyle, Diane 56, 59 creative destruction 1, 15 credit, government allocation of 13, 14–15 crisis, explanations for 2–5 cronyism 6, 69–84 Crouch, Harold 20, 21, 73, 77 culture, and Asian values 62–4, 65 Cummings, B. 14 Da Cunha, D. 48 Daim Zainuddin 75 de Bary, W.M.T. 57 de Golyer 89 debt-led expansion, South Korea 36 defence policies 39–55 Deng Xiaoping 9 Department of Trade and Industry (DTI) (UK) 34 deregulation 19, 21, 23 devaluation: China 92; Taiwan 87 Dibb, Paul 45, 46 dirigisme 18; illusions in 12–14; Malaysia 20; shortcomings of 14–16 Drifte, R. 39, 41

Dupont, A. 61 East Asian Economic Caucus (EAEC) 58, 114 education, Japan 98 electronics sector, industrial reform 26–38 Elegant, R. 59 Emmerson, D.K. 63 endaka 125 Estrada, Joseph 52, 53, 61 European Union (EU) 29, 30, 120–1, 122– 3, 128–9 Evans, P. 15 exports 9, 37 fascism, Japan 101 Fawcett, L. 108 Feldstein, M. 2 financial crisis, impact of 123–31 financial reform 12–25 Fitzgerald, J. 94 Five Power Defence Arrangements (FPDA) 43, 50, 51 foreign direct investment 70–1 foreign relations, Japan 100–2 free trade zones (FTZs) 29 Freeman, C. 12 Friedman, A. 91 Fukuyama, Francis 11, 59 Funabashi, Yoichi 61 Garnaut, Ross 2, 69 Germany, and the Second World War 102 Ghalib, Andi Muhamad 79 Gill, Bates 47 Gilley, B. 53 Girling, J. 19 globalisation 2, 3, 24–5, 68 Godement, François 6 Gomez, E.T. 20 Goodman, David S.G. 17 Goodstadt, L.F. 88 Gore, Al 51 Gray, C. 71 Greenspan, Alan 124 growth rates 3t guanxi 70 Guided Democracy 77 Habibie, B.J. 52, 53, 77, 78, 79 Hacker, Jim 118 Harding, J. 53, 92 hardware, electronics 31 Hashimoto, Ryutaro 100

Index Hassan, Bob 78 Hatta, Tsutoma 100 Hefner, Robert W. 63, 64 Hiebert, M. 76 Higgott, R. 61 Hill, Hall 21, 22 Hirohito, Emperor 96 Hitchcock, David 63 Hobday, Michael 27, 29, 30, 36 Holloway, N. 47 Hong Kong 85, 88–90, 94 Hosokawa, Morihiro 100 human-resources management, Japan 104– 5 Hun Sen 112, 119 Huntington, Samuel 63, 119, 123 Hurrell, A. 108 Huxley, Tim 44, 49 ideology, and Asian Values 64–6 Ileto, R.C. 62 Indonesia 15, 17, 83, 109, 112; alliance with Australia 110; and China 51; corruption and cronyism 77–9; democratisation 54; deregulation 21–2; internal security 41; political change 52, 53; political turmoil and the military 49; reforms 6, 7; relationship with US 43 Indonesia-Malaysia Confrontation 110 industrial reform 26–38 industrialisation 13, 14 intellectuals, and Asian values 66–7 internal security 41 International Institute for Strategic Studies (IISS) 40 International Monetary Fund (IMF) 49, 61, 82, 126; China’s contribution to 8, 91; management of crisis 6–7, 10 Ishak, Yusof bin 109 Ishihara, Shintaro 101 Ishiyama, Yoshihide 106 Islam, S. 112 Japan 4–5, 10, 29, 70, 121; compared to China 127; credit programmes 13; crisis of political economy 125–6; defence 39, 40, 42, 47, 48; economic crisis 105–7; Liberal Democratic Party (LDP) 99–100; limitations as regional leader 51–2; political and economic problems 96–107; reforms needed 6, 9; relations with Asian neighbours 100–5

145

Java 63; see also Indonesia Jay, A. 118 Jayasankaran, S. 75, 76 Jayasuriya, K. 58 Jesudason, James 20, 72 Jiang Zemin 9, 53, 88, 102, 128 Joffe, E. 53 Johnson, D. 57, 65 Jomo, K.S. 20, 75 Jospin, Lionel 125 judiciary, weakness of in Thailand 19 Kahn, Joel 62, 63, 80, 81 Kanemaru, Shin 100 Karniol, R. 53 Kasitipradit, S. 53 Kaufmann, D. 71 keiretsu 70 Kirn Dae Jung 52, 101, 131 Kim Yong Hwan 61 Kindelberger, Charles 17 Kinmonth, E.H. 58 Klintworth, G. 87 Koh, Tommy 56 Kohl, Helmut 124 Koo Chen-fu 86 Korean Peninsula 50, 113–14 Korean Peninsula Energy Development Organisation (KEDO) 43, 121 Kwan, D. 88 Kynge, J. 53 Laos 112 Laothamatas, Anek 18, 80 Lardy, Nicholas 91 Lauridsen, L.S. 82 law, rule of 23–4 Lawler, P. 109 Lawson, S. 58 Lee Kuan Yew 81, 130; Asian Values 56, 57, 59–60, 64 Lee Tenghui 58 legal regulation: Malaysia 21; see also bankruptcy Lehmann, Jean-Pierre 9 Leifer, Michael 10, 77, 108, 113 Lev, Dan 78 Lewis, P. 48 Liberal Democratic Party (Japan) 99–100 liberalisation 19, 21, 23 Liem Sioe Liong 78 Lim, R. 44, 113 Lingle, C. 59

146

Index

littoral defence 48 Llanes, F.C. 67 Lopez, L. 76 Lou Jiwei 93 Lubeck, P.M. 20 Lynn, J. 118 McCarthy, T. 60 Mackie, J. 78 McLeod, R. 2, 77 macroeconomic management, electronics 36 McVey, Ruth 16, 17, 19 Mahathir, Mirzan 76 Mahathir Mohamad 8, 42, 69, 72, 76; and Anwar 74, 75; and ASEM 115, 120; Asian Values 56, 57, 60, 64 Mahbubani, Kishore 56, 64–5, 67–8 Maipung, C. 58 Malaysia 8, 41, 54, 63, 127; corruption and cronyism 71–7; electronics 29–30, 34– 5; opportunities and threats in electronics 33t; participation in FPDA suspended 50, 51; politics and economy 50; relationship with US 43; rentseeking 20–1; and Singapore 130; strengths and weaknesses in electronics 32t; structures, strategies and product specialisation 28t; TNCs and electronics 35; transitional economy 83; see also Anwar; Mahathir Malik, Adam 110 Mallaby, Sebastian 56, 59 Mallett, V. 6 management, Japanese myth of 97–9 Marozzi, J. 53 Mason, A. 34 Masuki, T. 79 Mauzy, D.K. 63 Meyanathan, S.D. 20 Milner, Anthony 57, 58, 64, 65, 66; debate about economic recovery 10–11 Ministry of International Trade and Industry (MITI), Japan 98 Mirsky, J. 57 Moody’s Investor Services, on China 91 Morita, Akio 101 Morris-Suzuki, T. 66 Murayama, Tomiichi 100 Myanmar 8, 49, 112, 119 Nanjing Massacre 101 New Economic Policy (NEP) 72

New Order 77, 83 Njo, U. 70 non-performing debts 22, 93 Norodom Ranariddh 112, 119 North, Douglas 24 North Korea 40, 42, 43, 122; as security threat 41, 130 Nye, Joseph S. 45, 124 Obuchi, Keizo 100, 101, 102 oil revenue, Indonesia 21 Opall, B. 41 Organisation of African Unity (OAU) 108 Organisation of American States (OAS) 108 original equipment manufacture (OEM) 26, 29; see also 38n Owens, W.A. 45 own design and manufacture (ODM) 26; see also 38n Ozawa, Ichiro 100 Pacific Economic Co-operation Council (PECC) 124 Pasuk Phongpaichit 18–19, 80 People’s Liberation Army (PLA), China 39, 47, 53 Philippines 41, 52, 53, 59–60; relationship with US 43, 116 Plaza Accord 103 pluralism 23–4 political developments, and defence 52–3, 54 political instability, and recession 50 political reform, and economic recovery 5– 6 Pomfret, J. 53, 93 portfolio investment 71 product design, weakness in 35 product specialisation, strategies in electronics industry 28t property, South-east Asia 17 protectionism, Japan 98 Pura, R. 112 Qian Qichen 86, 88 Quilty, M. 58, 64, 66 Rakkiat Sukthana 82 Ramos, Fidel 52 Ran Kim, S. 27, 31 recession: and defence spending 49–50; and international tensions 50–1

Index recovery, elements of 5–7 reforms, industrial 26–38 regional institutions 108–18 regional security 54 regulatory framework: inadequate 22–3; Indonesia 21–2; Malaysia 21 Renong 73, 74, 76 rent-seeking 14, 17; Malaysia 20–1 research and development (R) 34, 35 Revolution in Military Affairs (RMA) 39, 45–7 Richardson, M. 116 Rizal, José 62 Robison, Richard 17, 58 Roche, D. 59 Rubin, Robert 91 Russell, R.B. 108 Russia: economic collapse 3 Sachs, J. 49 Safire, William 70 Salazar, Z.A. 67 Salleh, I.M. 20 Sandhu, K.S. 110 Sanger, D.E. 91 Sanittanant, Sura 61 Sarwono Kusumaatmadja 79 Saywell, T. 93 Schumpeter, Joseph 12, 23 Schwarz, Adam 21, 22, 77 Searle, Peter 6 security, and ASEAN 111 security institutions 41–5 Segal, Gerald 3, 8, 11, 24, 92 Shambaugh, D. 94 Sherer, P.M. 61 Shim Jae Hoon 61 short-term foreign debt, South Korea 14 Siddique, S. 66 Sieh, L.M.L. 21 Siew, Vincent 87 Singapore 35, 36, 43, 130; defence policy 41, 48; see also Lee Kuan Yew small- and medium-sized enterprises (SMEs), South Korea 31 Smiles, Samuel 58 soap operas, and community identity 66 socialised risk 14 Soejono Atmonegoro 78–9 Soh, F. 44 Sopiee, Noordin 56, 57 Soros, George 69 South China Sea, islands of 9, 40, 114, 130

147

South Korea 7, 15, 39, 70, 131; credit programmes 13; defence 40, 41, 44, 48, 52; electronics 26–9, 31, 32t, 33t, 36; macroeconomic instability 36–7; politics and economics 6; relationship with Japan 100, 101; short-term foreign debt 14; structures, strategies and product specialisation 28t South-East Asia Treaty Organisation (SEATO) 42 Soviet Union 39 Special Administrative Region (SAR), Hong Kong 85, 88, 90 speculation, Japanese capital 104 Spratly Islands 9, 111 state: autonomy in Thailand 18–20; and corruption 71; as market regulator 18 state-owned enterprises (SOEs), China 8, 91, 92, 94, 128 statism see dirigisme Stewart, I. 60, 62 Stiglitz, Joseph 127 stock markets 15 strategies, product specialisation in electronics industry 28t Strauss-Kahn, Dominique 125 strengths, weaknesses, opportunities and threats (SWOT) 30 structure, and strategies in electronics industry 28t subsidy mentality, Malaysia 20 Suehiro, A. 18, 19 Suharto family, fortune of 78–9, 83 Suharto, Thojib N.J. 21, 52, 75, 77, 79 Sukarno, Ahmed 77 Sun Zhenyu 91 Suthep Thaugusban 82 Syed Husin Ali 75 Taiwan 40, 52, 85–8, 94, 113; and China 8, 86–7; electronics 29, 31–4, 32t, 33t, 36; missile crisis 122; political economy 15–16; structures, strategies and product specialisation 28t; US relationship with 43 Tajudin Ramli 76 Tan, Vincent 76 Tanzer, A. 60 Tanzi, V. 70, 71 Tassell, T. 49 technology: defence 45–7; transfer of and arms imports 44 Teung, Elsie 90

148

Index

Thailand 6, 41, 43, 48, 52–3; and autonomy 18–20; corruption and cronyism 80–2; electronics 29–30, 32t, 34–5, 35; structures, strategies and product specialisation 28t; transitional economy 83, 84 Thirawat Siriwansan 82 Ting Pek Khiing 74, 76 trade: and defence 48; Japan 107 transnational corporations (TNCs): electronics in Malaysia and Thailand 29–30, 34–5; policy towards in electronics 35–6; and South Korea’s electronics industry 27–9 transparency 2, 5, 99 Treaty of Amity and Co-operation (TAC) 109 Tsuru, Shigeto 106 Tung Chee Hwa 89, 90 Tunsarawath, S. 48 United Malays National Organisation (UMNO) 72–3, 75, 83 universal values, and Asian values 59 US 30, 100, 115–16, 128; and bilateral defence links 42–3, 46; and European Union 120–1, 129; as regional power 47, 51, 54, 121, 122–3; relationship with Japan 107, 125–6; relationship with Taiwan 29, 86, 87, 88 Vatikiotis, M. 79, 80, 81, 82

very large-scale integrated circuits (VLSI) 98 Vietnam 41, 43, 49, 111 vote-buying, Thailand 81 Wahab, A. 60 Walsh, J. 71 war economy, Taiwan 16 Warr, P. 18, 80 weapons of mass destruction (WMD) 47 Western interests, response to crisis 3–4 White, G. 18 Willett, S. 44, 49 Wiranto, General 79 Woodside, Alexander 66 World Bank 12–13, 19, 71, 91 World Trade Organisation (WTO) 114 Second World War, and Japan 101 Yahuda, Michael 8, 9 Yang, R.H. 94 yayasans 78 Yeo, George 56 Yeoh, O. 61 Yukawa, Masao 106–7 Zhang Wannian 130 Zhou Nan 88 Zhu Rongji 91, 127 Zone of Peace, Freedom and Neutrality (Zopfan) 110 Zuckerman, Mortimer 59