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By Ronald D. Palmer

Ambassador Ronald D. Palmer contributes the following political and economic assessment of Southeast Asia, which may be read usefully in conjunction with the Woodrow Wilson Center’s special report, also to be found in this issue of American Diplomacy.

Ambassador Palmer, professor of the practice of inter-national affairs at the Elliot School of International Affairs, the George Washington University, Washington, DC, also is a member of the board of AMERICAN DIPLOMACY PUBLISHERS, this journal’s parent organization. His earlier article on Southeast Asia appeared in the Autumn 1998 issue of American Diplomacy.

~ Ed.

The Southeast Asia financial and economic

crisis of 1997 revealed various problems

in the region that the surging growth of the

early go-go 1990s had obscured. These

problems were rooted in outmoded political

and economic frameworks. They had various

sources, but many seemed to arise from

political and economic practices associated

with the persistence of inward looking eco-

nomic nationalism development strategies

designed for yesterday’s world, in today’s

information-based world economy which is

propelled by free trade, the market economy

and open capital markets.

I have retained several books on Southeast Asia I studied while in graduate school at Johns Hopkins in 1955-1957 and I refer to them from time to time to help maintain some perspective, especially when I use terms as I just did such as “outmoded political and economic frameworks” and “economic nationalism strategies designed for yesterday’s world.”

I think it useful to take a look at yesterday’s world. At the outbreak of World War II, there was no region called Southeast Asia; it was given this name as a theater of military action by Lord Louis Mountbatten’s headquarters in Colombo, Ceylon (Sri Lanka). There was little or no contact between the countries which looked outward thousands of miles to European or American colonial metropoles rather than inward to their nearby neighbors. The wealth of the East Indies enriched Holland; the wealth of Burma, Malaya, Singapore and Borneo enriched Britain; the wealth of Indochina enriched France; and the wealth of the Philippines enriched the United States. Only Thailand had escaped colonialism.


Colonialism and anti-colonialism, imperialism and anti-imperialism, capitalism and socialism and communism, class warfare, white supremacy and nonwhite resistance — all seem rather antiquated terms now in 1999, fifty-four years alter the end of World War II in 1945 and year ten of the post-Cold War era. These ideas in their day, however, generated powerful anti-British, anti-Dutch, anti-French, and anti-American nationalist sentiment.

Few people remember that Japanese troops had the potential of being welcomed as liberating heroes when they occupied Southeast Asia. The brutality of the occupiers soon changed the minds of the occupied. Nevertheless, Thailand sided with Japan and the Axis for most of the war. Japan also had the help of the Vichy Administration in governing Indochina. By contrast, the Vietnamese communist leader Ho Chi Minh led the anti-Japanese resistance and had a close relationship with the American OSS espionage service. The Vietnamese Declaration of Independence, which Ho Chi Minh proclaimed in September 1945, looks a lot like the American document. But the French insistence on trying to reestablish their control of Indochina, with American Cold War support, ended any possibility for U. S. cooperation with Ho Chi Minh.

Japan, of course, provided military training in the East Indies to men such as Sergeant Suharto of the local formerly Dutch native militia force. The Japanese encouraged nationalist leader Sukarno to declare independence in August 1945. Like the French, the Dutch attempted to come back and reimpose their political control, but they were fought to a standstill in the 1945-1950 revolutionary war in which Suharto distinguished himself, rising to the rank of Colonel. The Dutch were supplied with financial and material Cold War aid by the United States from 1945-1949. The Indonesian-Dutch fighting ended, though, by 1950 when the United States decided to cease supporting the Dutch colonialists and, instead, to support Indonesian nationalism and independence.

Colonel Suharto served the Republic of Indonesia faithfully and became a two-star general under President Sukarno until the latter stepped down in 1967 as president in the aftermath of the abortive September 30, 1965, coup by pro-communist elements. General Suharto took over as president of Indonesia in 1967 and ruled until 1998.

Japan provided military training in World War II also to a cadre of Burmese leaders who became the icons of independent Burma. First among these was General Aung San, initially commander of the Japanese-trained Burmese National Army. He had organized the 1936 anti-British student strike of the University of Rangoon. Apparently a noncommunist, he helped organize the communist party Burma in 1939. He went to Japan for military training in 1940 and returned with the Japanese forces. He became Minister of Defense in the Japanese-installed government, heading the Burmese National Army which he extricated from Japanese control to form the Burmese Independence Army, and cooperated closely with the nationalist political front group, the Anti-Fascist Peoples Freedom League (AFPFL). He was the chief negotiator for the Burmese in the negotiations with the British. He became the leader of the AFPFL Government in 1946. The first act of his government was to exclude communists from AFPFL ranks. Aung San sought to meet the demands of frontier ethnic groups (Chins, Karens, Kachins, Wa and Shan and others) against the objections of ethnic Burmans. Aung San, however, had many enemies. He and six of his top followers were assassinated on July 19, 1947.

Aung Sang was succeeded by U Nu, who obtained independence from the British in early January 1948. The Communists split into so-called White Flag (majority) and Red Flag (minority) factions; they and non-Burmese ethnic groups and anarchic outlaw dacoit groups opposed the U Nu AFPFL Government. Burma began a slide into deeper and deeper political, security, and economic disorganization. There was a severe reaction against capitalism as it had been practiced by the British in the colonial era. Finally, the military under the Japanese-trained General Ne Win was asked to take power temporarily in 1958 in an effort to impose some order on the chaotic situation. Power was returned to civilians in 1960, but Ne Win and the military seized power in 1962 and established the military regime that has continued until the present. A salient feature of this regime was a reluctance to engage with the outside world politically or economically — Burma has essentially been a hermit kingdom since 1962. Under Thai tutelage, the Burmese military regime has slowly become more active in exploring commercial interactions with the outside world. Nevertheless, Burma represents the extreme example of Asian suspicion and nationalism.

The United States has sought to isolate and ostracize the Burmese military regime because of its human rights violations, including the house arrest of Aung San’s daughter, Aung San Suu Kyi, who led an electoral coalition to apparent victory in the 1991 elections. The military annulled the election result. Subsequently, Aung San Su Kyi became a martyr for Burmese democracy and the symbol of Burmese nationalist and democratic aspirations.

The after-effects of Japan’s rule in Malaya (Malaysia since 1963) and Singapore persist. Prime Minister Mahathir’s Look East Policy represents positive Japanese influence on him as a teenager during the Japanese occupation of Malaya. Mahathir’s father was strongly anti-colonial and anti-West and imbued his son with these values. His father was reportedly a supporter of the pro-Axis Indian National Army leader, Subash Chandra Bose. Mahathir remains defiantly nationalist, anti-West and anti-colonial.

Singapore’s Lee Kuan Yew has written in his 1998 autobiography that despite the brutality of the Japanese occupiers, he was impressed with the effectiveness of their authoritarian control. Lee Kuan Yew expressed a theme in the book that has resonated throughout the region, namely, after Japanese rule, he and his generation would never again submit to foreign rule.

These themes of anti-colonialism and nationalism had special relevance for the Philippines because it was the first Southeast Asian country to experience organized political nationalism. This was in the 1870s and 1880s when the target of Philippine nationalists was Spain. The Philippine insurrection began in 1897. The United States intervened in 1898 but did not control the Insurrection until 1911. The United States recognized the strength of Philippine nationalism and established a Commonwealth of the Philippines in 1935 which was to lead to Philippine independence in 1946. But the war intervened. Some eminent Philippine nationalist collaborated with the Japanese; some fought the Japanese bitterly. Independence came in 1946, but at the price of economic and political concessions, including the ninety-nine year lease by the United States of major military bases in 1947. Philippine nationalism finally forced the removal of American bases in 1992.

By 1997, the ten Southeast Asian nations, excepting Burma, were involved, at least nominally in the market economy. However, these connections were strongly conditioned by the strategies adopted in this post-colonial region after World War II. As former colonies, the new states had to confront both their limitations and their possibilities. Limitations included the necessity of building state structures appropriate to the requirements of independence and the development of their peoples. Their potential was to base such development on the proven capabilities of the commodity-production orientation of the colonial economies.

The following sections examine the question of globalism versus economic nationalism in Southeast Asia by dividing the years since World War II into the following periods:

1945-1955 – Economic Nationalist Strategy

1955-1965 – Growing Complexity

1970-1995 – Economic Growth, and

Globalization and its Discontents: Malaysia


Economic Nationalist Strategy
The 1945 to 1955 period encompasses the beginning of the Cold War, the first Indochina War and the Geneva Accords; the failure of Liberal Democracy in Indonesia and rise to dominance of Sukarno; the victory over the Communists by Britain and Commonwealth forces in Malaya, Singapore, Brunei and Borneo; the rise of Magsaysay in the Philippines and the beginning of the decline of parliamentary democracy in Burma.

The World Bank and the International Monetary Fund played key roles in outlining development concepts for the new Southeast Asian political economy in the first ten years after 1945. The Bank drew up sectoral programs for investment and, working with the Fund, promoted import-substitution strategies. Import substitution emphasized the role of the local state in mobilizing local capital and local élites to establish local industries to replace imported products. Alliances were made between holders of capital, often Chinese, and the local political élite to erect protectionist barriers to keep out competing products. The post-World War II political élites were typically members of the traditional patrimonial élite, so their political power was strengthened by economic wealth as economic growth began.

Typically, the Southeast Asian region consisted of closed economies in the prewar period and were oriented to colonial metropoles. Virtually only Singapore, an entrepot, had direct exposure to international trade. In the independence period, controls similar to prewar controls were continued on trade and financial flows. Employment-generating investments were high priorities for local governments, which pursued full employment goals. Fiscal and monetary policies were tailored to domestic needs. Welfare state regulations and initiatives were promulgated. Poverty was widespread. Education was limited.Nevertheless, postwar governments, by and large, managed domestic change with relative success. Domestic interest groups tended to agree explicitly or tacitly to arrangements concerning the distribution of income and the organization of economies. Webs of commitments and patron-client payments to rent-seeking patrimonial authorities facilitated cooperative behavior. This promoted political stability and boosted the international credibility of individual states.Inward-looking import-substitution policies, combined with strong emphasis on the public sector as the regulator of the private sector, promoted domestic stability. Governments intervened in trade, the financial system, prices, agriculture, manufacturing, and labor markets. Political nationalism was the driving force of economic nationalism. The goal of Southeast Asian governments was national development and national growth. Malaysia was a special case where the development of the Malay underclass was a high priority. 

lsolation of the Southeast Asian Capital Market

Statistics for the 1950s are incomplete in the series maintained by the International Monetary Fund. However, it seems that GDP per capita in the region was about $50 in 1950. It appears that GDP doubled from 1950 to 1955 and increased again by about a third from 1955 to 1960. However, until the beginning of the 1960s, domestic financial markets tended to be protected from external competition by capital and exchange restrictions introduced to limit the destabilizing effects of short-term cross border flows of private capital. A 1967 OECD study noted that international capital transactions were still dominated by official government transactions outside the of financial markets. Transactions with international commercial banks had only slowly developed. Private sector finance was still dominated by traditional domestic banking activity and was subject to government controls. Security markets were narrow. Transactions by nonresidents rarely had an impact on domestic markets. Governments sought to minimize the risk of foreign exchange and international payments crises.

1950s Summary

In summary, in the 1950s the region enjoyed U. S. war-related spending in the Korean conflict which drove up prices of strategic commodities such as tin and rubber. The wealthy politico-economic élite in Malaya, Singapore, Thailand, and Indonesia prospered greatly, but the masses fell behind. Malays were angered. Singapore was restive; there was twenty percent unemployment. The Thai and Indonesian communist parties grew rapidly in this period.The United States sank deeper into involvement in Indochina. U. S. Cold War aid to the French in Indochina began in 1950 and mounted rapidly. By the time of the French defeat in 1954, the United States was paying ninety percent of the cost of the war. Hectic wartime prosperity resulted in Indochina, but deep political and economic dissatisfaction fueled communist appeal in Vietnam, Laos, and Cambodia.

Growing Complexity
During 1955-1965, Southeast Asia’s economic and political development grew more complex. It is useful to recall though that in 1957 there were no holders of economics doctorates in Malaysia, Vietnam, Laos, Thailand or Cambodia. There were two in Singapore, two in lndonesia and a few in the Philippines.

Economic nationalism based on import-substitution continued as the basic economic strategy in the 1955-1975 period and the Philippines, Malaya (Malaysia in 1963), and Thailand grew rapidly. The U. S. commodity import programs in South Vietnam, Laos, and Cambodia brought artificial prosperity to the élites of those endangered dominoes. Meanwhile, Indonesia suffered the mounting inflation and declining productivity of Sukarno’s hypernationalistic Guided Democracy era (1957-1965).

Japan followed up its large 1950s reparations payments in the region by offshore investments to service local consumer markets. Matsushita set up its first plant in Malaysia outside Kuala Lumpur in 1959. The United States had strenuously urged Japan to take a leading role in Southeast Asia in the 195Os, but by 1960 Japan had invested only about $100 million in the region. By comparison, U. S. investment was over one billion dollars in 1960. However, Japanese investment in Southeast Asia grew massively in the1960s.Driven by immense U. S. Vietnam War-related spending in the 1965-1975 period and increasing Japanese economic activities, the Southeast Asian region boomed. Moreover, Thailand, Malaysia, Singapore, Indonesia, and the Philippines adopted export-oriented development strategies.Nevertheless, this was a politically desperate period for these countries. The 1950-1973 dictatorship of the Thai military ended in violent 1973 student demonstrations.Malaysian trickle-down economics favoring Chinese economic interests were inadequate to satisfy Malay resentments and violent Malay-initiated riots occurred in Kuala Lumpur in 1969 in which hundreds of Chinese and Malays lost their lives. State intervention in favor of Malays was instituted in 1971 by the New Economic Policy. Such methods included affirmative action, quotas, and any form of positive discrimination deemed necessary. Mahathir was a leader of the movement to improve the status of Malays. He was considered an ultra-nationalist and had been ousted from the leading Malay party in 1969. Rehabilitated politically in 1971, Mahathir soon was clearly the heir-apparent to national power, becoming deputy prime minister in 1976 and prime minister in 1981. His avowed and unwavering goal has been the unrelenting promotion of Malay interests to enable Malays to compete with Chinese in all fields of activity, including business.The Malaysian development concept is that there can be no economic development without political stability and there can be no political stability if there is inadequate Malay participation in the economy. Fortunately, oil production came on stream in the 1970s and supported wide-ranging income redistribution goals. Malaysia began pumping 600,000 barrels a day and made initial investments in natural gas production.


Singapore was ejected from Malaysia in 1965 and faced an apparently bleak future. Brilliant politico-economic leadership by Lee Kuan Yew avoided that fate. Singapore needed housing badly and had twenty percent unemployment. The government began building public housing financed by its Central Provident Fund (more or less Social Security) and that has remained a salient source of its political legitimacy to the present. Presently eighty percent or so of the Singapore population lives in government-supplied housing.Singapore is a Chinese island in a Malay sea and economic growth and development were deemed essential for its security. The Singapore Government led a vigorous drive to achieve economic security and by 1975 had achieved seven percent annual growth.


Indonesia in 1965 went through the horror of the Year of Living Dangerously. After Sukarno relinquished his power to General Suharto in 1967, the new leader’s first priorities were slowing down runaway inflation, reducing government spending, and increasing productivity. He was aided in these efforts by a cohort of US-trained economists who became collectively known as the Berkeley Mafia. They cooperated closely with the World Bank in instituting market-favoring policies. Recovery was so strong that Suharto was able to win convincingly his first electoral victory in 1970 and commence his “New Order” of Pantjasila Democracy. Suharto’s legitimacy arose from his ability to promote economic development and a rising standard of living.President Marcos of the

Philippines declared martial law in 1972 and began a determined effort to replace the traditional élite with his own cronies. As the Marcos “kleptocracy” grew, his regime increasingly lost legitimacy.

1970-1995 Economic Growth

Since the 1970-1980 period is the key decadebefore the recession of the 1980s and the

beginning of globalized capital flows, it is

useful to stop momentarily and compare 1970

and 1980 data.

Indonesian GDP was 8.5 billion rupiah in 1970 and nearly doubled to 17.6 billion in 1980.

Malaysian GDP nearly tripled, from 15.8 to 34.2 billion ringgit, in the decade.

Philippine GDP almost doubled, from 83.4 to 154.9 billion pesos.

Singapore GDP more than doubled, from 8.5 to 18.4 billion Singapore dollars by 1980.

Thai GDP almost doubled, from 220.2 to 432.2 billion baht.

In short, from 1950 to 1980, economic nationalism had been a successful strategy in Southeast Asia.


The 1975-1985 era began with the fall of Vietnam, Laos, and Cambodia to communist forces in 1975.      • Laos was the least developed of the three, both economically and politically. Despite the abdication of King Savang Vatthana, the new successor communist regime was drawn from the same élite that had previously served the monarchy. Nevertheless, Laos like other communist regimes had its era of rehabilitation camps, retribution against minorities such as the Hmong, who had been allies of the United States in the war, and other political undesirables. However, this period was transitory and Laos soon sought to establish normal relation with the United States, Thailand, and the World Bank. Indeed, Laos came under virtual World Bank tutelage. Lao development was slow in the 1970s.     • Cambodia underwent savage Khmer Rouge oppression from 1975 to 1979. Perhaps two million of its citizens were murdered. The intelligent, the literate, the urban, were declared to be the class enemies of the Cambodian people by the Khmer Rouge. A generation of recovery, learning, and development was lost. The Khmer Rouge sought to make time stand still or go backwards.• Vietnam was flushed with victory in 1975 and jubilantly adopted a virtual carbon copy of the Soviet Russian development model. The generation of aging leaders who had successfully waged war were convinced communist ideologues, but they proved unable to apply ideological organizing principles to the homely problems of economic development. One feels that the Vietnamese leadership turned to making war against the Khmer Rouge in December 1978 with relief. Waging war was something they knew how to do. The Soviets subsidized the Vietnamese war effort in Cambodia. They also made vast amounts of low-cost fertilizer and energy supplies available. Strains on the Soviet economy became evident in the 1980s, however, and by 1985, when Gorbachev assumed power, the Soviets were forced to cease their support of the Vietnamese economy.
As the 1970s ended, economic nationalism and crony capitalism were firmly entrenched in Malaysia, the Philippines, Indonesia, and Thailand. Corruption was also deeply rooted in these economies. Singapore had waged war on corruption and relentlessly pursued vigorous human and social engineering programs. Singapore was the first location of American microchip producers seeking low-cost, labor-intensive production environments. The Singapore government quickly perceived the limits of labor-intensive industrialization; by 1977 it had deliberately raised the cost of its labor and launched a program to attract higher-tech investment, with special emphasis on computers and computer peripherals.
Malaysia and Thailand eagerly sought to capture the labor-intensive overflow from Singapore. These countries, the Philippines, and Indonesia, also enjoyed a boom in the prices of their commodity products (rubber, tin, palm oil, oil, timber, apaca, bananas, etc.) in the late 1970s. However, Indonesia was suffering the effects of oil-led dependency and corruption as the 1980s began. Suharto faced strong opposition from influential retired and active duty military leaders. But by 1980, Suharto’s political machine was able to crush such opposition, although it was clear a new economic strategy was needed. The World Bank offered a strategy based on non-oil development, including opening the economy to foreign investment. Suharto’s family became one of the main beneficiaries of such investment.

The Philippines plowed onward economically in the 1975-1985 period in the grip of the Marcos cronies. The 1983 murder of Benigno Aquino hastened the implosion of the Marcos regime in 1986. Corazon Aquino became president of the Philippines, but inherited an economy in negative growth, strangled by the landed élite.

The Malaysian economy went into recession in 1982 as commodity prices fell and huge state interventions in favor of the Malays went sour. Upper class Malays had been favored with generous loans, but unproductive loans were ruthlessly terminated. Mahathir turned to younger, able, middle-class Malays instead. They became the new entrepreneurs and the Mahathir goverment worked closely with them to attract foreign investment in 1985-1986. It gave up its cool and distant attitude toward foreign investment. Foreign investors had been limited to forty percent ownership of enterprises. They were allowed now to have 100 percent ownership of enterprises particularly if output was entirely for export. Other generous provisions for both foreign and domestic investors were attractive to both local Chinese and Taiwanese investors.1985-1995

Little progress was taking place in Laos as the 1975-1985 period ended.

Vietnam was mired down in the Cambodian war in 1985. At that time, when Gorbachev took power in the Soviet Union, Vietnam was informed that Soviet economic problems were so severe that its military and economic assistance would be ending. This put pressure on the Vietnamese leadership to adopt new policies. If Russia were no longer to be a strategic partner, Vietnam would be forced to improve relations with the America. Movement toward the development of such policies began at the Sixth Party Congress of the communist party of Vietnam in 1986. The wartime leadership was retired and market opening policies adopted. Vietnam began withdrawing its military units from Cambodia and seeking normalization of relations with the United States, including supporting U. S. efforts to account for servicemen missing during the war. The Seventh Party Congress took place in 1991 and confirmed these policies. Meanwhile, Vietnam began achieving seven and eight percent rates of growth. Relations with the United States were normalized in 1995 and Vietnam entered the Association of Southeast Asian Nations (ASEAN).

Thailand had begun its own boom in 1986 when a civilian-oriented regime took over from a military government. The boom gathered strength as Vietnam wound down its war in Cambodia and the Thai began an effort to become the economic leaders of mainland Southeast Asia from China to Malaysia. As Japan made Thailand an important platform for offshore production, growth rocketed along at eight percent a year. This prosperity provoked military interest in another takeover in 1992, which was met by widespread Thai civilian resistance. The greed and corruption of what became known as the ATM government set new records. Still, the frenetic pace of economic activity masked deep instability; the Thai economy was perched on a foundation of overvalued assets.

History will record that Philippine President Corazon Aquino performed a political miracle in her 1986-1992 term of office. Despite six attempted military coups against her government, political stability was maintained. Indeed, Mrs. Aquino somehow restored public confidence in the political system again after the excesses of the Marcos period. Fidel Ramos won the 1992 presidential elections with only twenty-six percent of the popular vote and there was no public protest. But Aquino’s economic record was unremarkable. When Ramos became president in 1993, he inherited an economy still in the stranglehold of élite special interests.

Lee Kuan Yew stepped down as prime minister of Singapore in 1992, but he continued as senior minister and continued to look balefully over the shoulders of his designated successors. These men, including his son Lee Hsien Long, have done an excellent job in running the economy. Singapore was hit only a glancing blow by the 1997 crisis.



Preparations for renewed Multilateral Trade Negotiations began early in the 1981-1988 Reagan Administration. U. S. embassies were instructed to facilitate GATT efforts to harmonize customs procedures, tariff categories, etc. GATT launched its drive from Geneva in 1986 to implement the Uruguay Round. The then-European Community launched its drive for EC-92 from Brussels. This began in 1986, in the early years of the Reagan Administration, as preparations began for the launching of the GATT Uruguay Round. As the Reagan Administration was ending, a series of market opening concepts was pushed. The 1989-1992 Bush Administration continued the Reagan Administration’s promotion of free trade and put powerful energies into the launching of the free trade-oriented Asia Pacific Economic Forum (APEC) in 1989 at Canberra and subsequently in Singapore, Bangkok, and Seoul.

The Bush Administration’s eager advocacy of APEC provoked a strong reaction from Malaysia’s Mahathir, who feared that the United States might use APEC to usurp ASEAN’s hitherto leading role in Asian policymaking. To counter what he conceived as a U. S. neocolonial strategy, Mahathir proposed the establishment of an East Asian Economic Caucus that would exclude the United States. There were angry exchanges between Washington and Kuala Lumpur on the EAEC issue that reached a point where Mahathir would not accept a phone call from President Bush. Mahathir’s opposition to the APEC was based on mistrust of the United States. He believed that Southeast Asia was a minor factor in U. S. worldwide interests and that America would sacrifice Southeast Asia to those interests if necessary.

When the Clinton Administration came to power in 1993, Washington made a concerted effort to improve bilateral relations with Malaysia. However, Mahathir spurned participation in President Clinton’s APEC Leaders Summit in Seattle. Meanwhile, Mahathir and Lee Kuan Yew began clamoring for the primacy of Asian Values. Mahathir and Clinton had a highly successful meeting in 1994; Mahathir also attended the 1994 APEC Summit at Bogor in Indonesia and subsequent meetings. He and Clinton had another good meeting in 1995.

Although Southeast Asia was booming and growing rapidly in the mid-1990s and registering seven and eight percent growth, Paul Krugman of the Massachusetts Intitute of Technology was one of the first to question the reality of that growth. His 1994 Foreign Affairs essay, “The Myth of Asia’s Miracle,” emphasized that growth was more a result of increased inputs than increased productivity: “Mere increases in inputs,” he wrote, “without an increase in the efficiency with which those inputs are used—investing in more machinery and infrastructure—must run into diminishing returns; input growth is inevitably limited.” The era of growth would end. (My own essay on this topic, entitled “End of an Era,” was posted in the previously-cited Autumn 1998 issue of American Diplomacy.)

It was a coincidence that the journal Foreign Policy devoted its summer issue of 1997 to the globalization issue, just at the time when the flow of capital to Southeast Asia was overwhelming the capacity of local banking and financial institutions to absorb it. Thailand had $9.1 billion in net capital inflows in 1990, $13.3 billion in 1994, $10.5 billion in 1995, and only $168 million in 1996. There was a net outflow in 1997 when the Thai currency was floated and lost forty-five percent of its value by December 31,1997; the stock market lost seventy-six percent of its value in the same period.

The $17.0 billion IMF rescue plan for Thailand called for higher taxes and other measures to strengthen the economy, but also focused on repairing the banking system. It called for, as examples, faster liquidation of non-performing assets, higher capital requirements, greater transparency, and greater opportunities for foreign participation in commercial bank ownership. These provisions were aimed at reducing the capability of influential politicians to make rent-seeking deals (the exchange of political influence for economic gain).

Perhaps it was these provisions of IMF policy that were least attractive to Malaysia. It has been official Malaysian government policy since 1971 to favor Malay interests, by any means necessary or possible, literally in Mahathir’s words, “to create Malay millionaires.” Some of the Prime Minister’s protégés and political supporters suffered grave losses when the financial contagion swept from Thailand to Malaysia. Finance Minister Anwar Ibrahim began gingerly to apply “virtual IMF” measures without actually negotiating an IMF agreement. This was in the period July 1997 to August 1998 and the result was that Mahathir’s protégés, including his bankrupt son, got little government help or sympathy. Anwar and his supporters appeared all too eager to push Mahathir and his supporters from center stage. It was this perceived direct political threat, as well as the fact that unorthodox, even questionable, means would be necessary to help the Malay entrepreneurs, that led Mahathir on September 1, 1998, to impose a fixed exchange rate and currency controls, restrict repatriation of profits, ease monetary policy, require local banks to be accommodating with regard to non-performing loans, reform the financial and corporate sectors, and demand that banks increase their new loans. Meanwhile, Anwar was arrested under apparently false charges. Mahathir had sufficient control over the judiciary system that Anwar was found guilty and imprisoned.

The results of Mahathir’s economic nationalist measures as of March 9, 1999, had shown success. Seventy-five percent of the lost value of the Kuala Lumpur stock market had been recovered. Malaysia had a trade surplus of 58.4 billion ringgit in 1998, in contrast with the deficit of forty-five billion in 1997. The international reserves of the central bank have increased to six months of imports. Non-performing loans had been reduced to 9.0 percent on the six-month classification and 14.9 percent on the three-month classification. Consumption was up. Sales of automobiles increased to 19,081 units in November 1998 alone, in contrast with the 12,517 sold in the previous ten months. Total bank loans rose from 2.7 billion ringgit in May 1998 to 9.9 billion in December 1998. Inflation was down. The economy has apparently bottomed out.

Nevertheless, the current growth rate estimate for 1999 is one or possibly two percent. Malaysia will need inputs of foreign investment to increase its growth rate. Malaysia eased capital controls on February 15, 1999. New capital can exit at any time, although profit will be subjected to a thirty percent levy if repatriated within twelve months and ten percent thereafter. Capital already in Malaysia before February 15 would be subjected to a graduated levy on repatriation. This favors investors with a longer term view of the economy.

Malaysian policies under Mahathir have been established to retain local freedom of action, to protect Malay gains, and to protect the prime minister’s own political position. Abstract values of economic correctness or cooperation with the IMF have little meaning for those like Mahathir who are pursuing goals of political survival. The Malaysian strategy has created unease among advocates of free market ideology because it suggest that an alternative exists to the deflation, reduced government spending and inflation controls of the IMF prescription. The Malaysian strategy does not attack the underlying political problems of corruption, lack of transparency, and poor governance. Malaysia will still have to install such reforms eventually to achieve greater efficiency in the use of resources. Efficiency is not the present Malaysian goal, but rather that of political survival. Mahathir and his cohorts, like their counterparts elsewhere, will do whatever it takes to retain political power. 


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