Association For Asian Studies

Approaches to the Politics of Economic Growth in Southeast Asia
Author(s): Richard F. Doner

Source: The Journal of Asian Studies, Vol. 50, No. 4 (Nov., 1991), pp. 818-849
Published by: Association for Asian Studies
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Approaches to the Politics
of Economic Growth
in Southeast Asia
RICHARD F. DONER
I. Introduction
THE PACIFIC RIM'S RECORD of impressiveeconomicgrowth over the past twenty

years is now well known. While most obvious in Japan, this expansion has been
striking in the East Asian Newly Industrialized Countries (NICs): Singapore, Hong
Kong, South Korea, and Taiwan. But it has also occurred to varying degrees in
four of the original members of the Association of SoutheastAsian Nations (ASEAN):
Indonesia, Malaysia, the Philippines, and Thailand.' In addition to increases in
overall output, each of these four economies has achieved a considerable degree of
restructuring in favor of manufacturing and away from commodity production since
the 1970s (e.g., Lee and Naya 1988:S134).
Among those who have tried to explain this process, neoclassical economists
have attributed growth in the East Asian NICs and in Southeast Asia to government
successat "getting the prices right," at letting free market-basedprice signals determine
the most efficient allocation of resourcesfor national economic growth (e.g., James,
Naya, and Meier 1989; Noland 1990). To this end, policymakers have allegedly
promoted relatively open economies, avoided the provision of more incentives to
some industries than to others, and generally limited the government's economic
role.
But recent studies of economic growth, especially in the East Asian NICs, have
suggested limits to the explanatoryusefulnessof neoclassicalviews. Some have asserted
that economic success in the NICs results from governments providing selective
incentives and "getting the prices wrong," i.e., deliberately engineering price
distortions to create comparative advantage where none existed before (e.g., Wade
RichardF. Doner is AssistantProfessorof Political Scienceat EmoryUniversity.
An earlierversionof this articlewaspresentedat a conferenceon SoutheastAsianStudies
and the Socialand Human Sciencesat the WingspreadConferenceCenter,July 22, 1990,
sponsoredby the Joint Social Science ResearchCouncil/AmericanCouncil of Learned
SocietiesCommitteeon SoutheastAsia. I wish to thankAlasdairBowie, Don Crone,David
Feeny, Anek Laothamatas,Nathaniel Leff, LindaLim, Ansil Ramsay,Danny Unger, and
MarthaWinnackerfor helpful comments.
'Singaporewas the fifth originalASEANmember.Brunei,whichhas sincejoinedASEAN,
will not be treatedhere. In this article, "SoutheastAsia"will referto Indonesia,Malaysia,
the Philippines,and Thailand.
TheJournalof Asian Studies50, no. 4 (November 1991):818-849.
?C 1991 by the Associationfor Asian Studies, Inc.
818

POLITICS OF ECONOMIC GROWTH IN SOUTHEAST ASIA 819
1988a; Bradford 1987; Amsden 1989:ch. 6). Others, while acknowledging that
economic growth requires market-conformingpolicies, emphasize the need to explain
why and how such policies have been implemented in certain countries and time
periods, but not in others (Haggard 1990; Wong 1990:418; Myhrman 1989).
Work on the roots of economic expansion by scholars studying East Asia, as
well as Latin America and Africa, has contributed to the study of political economy,
an emerging subfield within political science whose broad focus is the ways in which
politics influences aspects of economic policymaking, and economic interests and
outcomes influence political processes and outcomes. My emphasis in this article is
on political economy as the study of the institutional bases of economic growth.
But my overall concern is the unfortunate gap between Southeast Asian studies and
political economy more broadly defined.
The mutual influence of politics and economics has certainlybeen part of Southeast
Asian studies (e.g., Furnivall 1944; Boeke 1961; Geertz 1963; and Anderson 1977).
But with the notable exception of the debate over moral versus market-basedpeasant
behavior (Popkin 1979; Scott 1976), work by Southeast Asianists has not been
informed by the theoretical concerns of political economy. This weakness has not
gone unnoticed. In the mid- 1980s, remarking on the Latin American origins of
work on dependency and corporatism, Clark Neher, for example, contrasted the
"lack of systematic, coherent Southeast Asian scholarship and the paucity of lasting
theoretical breakthroughs" with the "innovative perspectives on the study of Latin
societies that have transformed social science analyses of 'Third World' nations"
(1984:130). Similarly, Richard Higgot and Richard Robison have found it ironic
that "while the levels of capitalist development in Asia are certainly higher than
those in Africa, the level of analysis of these respective rates of development are
reversed" (1985:49).
This article will explore the ways scholars of Southeast Asia are now beginning
to make important contributions to the field of political economy. SoutheastAsianists
have continued the area studies tradition of confronting theorists with the "singular,"
the anomalies that compel theoretical examination (Johnson 1975). The case of
Indonesia, for example, has been used to show the problems of simple strong-weak
state dichotomies (Emmerson 1990) as well as the ways the implementation of
neoclassical economic policies involves political culture, ideology, and coalitional
politics (Liddle 1989).
Southeast Asia's combination of diversity in sociopolitical arrangements and
impressive economic performance therefore makes it an especially fertile area for
marrying the contextual sensitivity of area specialists to the more general assertions
of the political economy literature. My principal objective in this article is to provide
some guideposts for further mutually enriching research. I do so by using data from
East and Southeast Asia to evaluate three development frameworks: dependency,
statist institutionalism, and an inclusionary form of institutionalism. I also want
to demonstrate the theoretical superiority of the third framework. Unlike statism,
which has been emphasized in much of the recent literature on the East Asian NICs,
inclusionary institutionalism suggests the utility of arrangements involving less
domination and more cooperationbetween state and business and within the business
world itself.
Section II of this article defines political economy as a field of study and suggests
an explanation for the relative weakness of the field in Southeast Asian studies.
Section III highlights areas of dispute in the economic performance of capitalist
Southeast Asia. Section IV evaluates the dependency school and external influences

820 RICHARD F. DONER
on Southeast Asian growth. Section V focuses on domestic sources of economic

growth through an exploration of statist and inclusionary institutionalism.
II. Political Economy and Southeast Asia
The interaction of economics and politics is an old theme in the study of both
international and domestic politics (Spero 1990:1-3; Staniland 1985:12-13). Yet,
since the rise of liberalism in the eighteenth century, the logics of the two fields
have stood in sharp contradistinction to each other. Neoclassical economics assumes
that preferences are measurable and rationally derived from the desire to maximize
individual benefits; politics assumes that people's preferencesreflect (at least in part)
values less easily ascribableto rational, measurablecalculations of individual benefits.
Also, economics assumes a world of efficient markets in which all might gain; politics
depicts a more zero-sum world in which conflicts over justice and distributional
issues are resolved by actors with unequal power. In the West, the separationbetween
politics and economics became institutionalized in part due to academic specialization
and in part becauseof conditions after World War II. The Cold War both minimized
the importance of economic issues and encouraged the establishment of rules and
structures that diminished conflict over economic issues (Spero 1990:1-2).
The last twenty years or so have witnessed a growing critique of this separation.
A literature has emerged that spans the boundaries of politics and economics in
both domestic and internationalrelations.2But the two logics remain sharplydistinct.
The simple recognition of overlapand mutual influence between politics and economics
does not constitute a methodology or theory. Indeed, a central feature of political
economy is its "eclectic mixture of methods and theoretical perspectives" (Gilpin
1987:9). Thus, political economy is best understood not as a theory but as an agenda
or an "object of theoretical ambition" (Staniland 1985:198).
Acknowledging this eclecticism, we can neverthelessidentify at least three related
areas of research on the political economy agenda. One is the strict application of
neoclassical assumptions to nonmarket situations. Some political economists thus
examine the degree to which the behaviors of the electorate and elected officials
conform to the search for immediate individual gain rather than longer term, value-
based objectives.3A second area concerns the ways individuals, groups and/or nations
transformpolitical resourcesinto economic power and economic resourcesinto political
power (e.g., Gilpin 1981).
A third area of research, the one most pertinent to our present concerns, focuses
on the failure of markets to operate according to strict neoclassical assumptions.
The political economy frameworksexamined in this study are thus efforts to explain
market malfunctions, their consequences, and/or efforts to contend with them.
Neoclassical economics makes several important assumptions, the first of which is
that markets are perfectly competitive. Dependency theory, however, proceeds from
the recognition of market imperfections; the international capitalist system is seen
as facilitating the flow of foreign investment with monopoly or oligopoly power
over host-country firms to the detriment of host-country development (Hymer 1976;
Gereffi 1983).
2For reviewsof these critiques, see Staniland(1985:ch. 2); also Strange(1988:partI);
and Alt and Chrystal(1983:1-6).
For example, are voters' choices based on economic or noneconomicconditions?Do
officialsshow any concernfor citizen welfareor their own long-termreputations,or do they
"mortgagethe future for currentelectoraladvantage"?(Alt and Chrystal1983:104-05).

Institutionalism is a response to the violation of three other neoclassical

assumptions:the absenceof externalities,of public goods, and of significant information
or transaction costs (Alt and Chrystal 1983:22-24). Externalities are the benefits
(positive) or costs (negative) of one individual's activities that spill over to others
for which payment or compensation is not made (Davis and North 1971:15; Gilpin
1981:70). Negative externalities would include the costs of one firm's polluting
activities on the welfare of others. Positive externalities include unintended benefits
accruing to the economy at large when, for example, one firm trains large numbers
of engineers who then take jobs elsewhere. Public goods are goods or services such
as national defense or water systems characterized by nonexcludability (no one can
be excluded from consuming them), and joint consumption (use by one individual
does not affect the use by others).
Externalitiesand public goods are problematic for neoclassicaleconomists: because
they are difficult to price, the market does not provide the means to express demand
for them. Even when all parties explicitly recognize the importance of, say, better
technical training, actual provision may be blocked by collective action problems
the disincentive individuals have to pay an amount equal to the benefits they acquire.
In collective action problems, shirking individual contributionsleads to an undersupply
of goods necessaryfor national development. A lack of property rights or coordinating
arrangements means that the benefits of such goods may accrue to individuals who
pay little or nothing (free riders). Finally, joint production of a good or service may
be undermined by high transaction costs, i.e., individuals lack information and/or
cannot affordto bargainover and organize the productionof certaingoods (Williamson
1985).
Collective action problems are potentially resolvableby institutions-arrangements
that go beyond the arm's-length relationships of competitive markets to regularize
the processes of cooperation and competition (North and Thomas 1970:5). The state
is certainlyone such institution but not the only one capableof resolving the collective
4
problems associated with economic development.
Political economy studies in the area of market failure generally exhibit two
further characteristics worth noting. First, they incorporate interaction between
domestic and international variables. Even if we are seeking to explain domestic
phenomena such as national development, the growing interpenetration of national
markets requires us to take account of external forces. There has thus been a marked
"blurring of boundaries between the fields of international relations and comparative
politics" (Keohane and Nye 1987:753). Second, much of the recent work in political
economy has a sector- or industry-specific focus. Such a focus often provides a clear
view into both the tensions between allocative and distributive objectives and the
collective action problems of coordinating disparate interests.
How do we account for the relatively meager contribution of Southeast Asian
studies to the political economy literature? One contributing factor is the economics
profession'spreferencefor theoreticalover applied studies. ChalmersJohnson'sargument
that academic economists discriminate against the study of the Japanese economy
applies to the study of Southeast Asia as well (Johnson 1987). Second, the political
divisiveness of the Vietnam War in the U.S. academic community probably
discouragedthe development of some dependency-orientedscholarswhose work would
have contributed to a stronger political economy thrust in Southeast Asian studies.
4Thre is also an extensiveliteratureapplying the institutionalistapproachto interna-
tional relations, especiallythe study of internationalregimes in areassuch as trade and
monetaryrelations.See, for examaple,Keohane 1988.

Many activist scholars "either never secured any academic position, voluntarily left,
or were forced out of Asian studies" (Allen 1989:117).
The underdevelopment or at least low visibility of private entrepreneurship in
Southeast Asia also impeded the development of a political economy literature on
the region. For Western observers, the dependent position of local business vis-a-
vis state officials encouraged a static view of indigenous capitalists as "pariah
entrepreneurs"(Riggs 1966). Vertical, patron-client links obscured the processes of
capital accumulation, class formation, and private influence over economic policies.
With rare exceptions (e.g., Skinner 1957), few plunged below the bureaucratic
polity's official-centeredfocus to analyze the beehive of private commercial activities,
the seeds of subsequent capitalist growth. And few anticipated the incentives for
state officials' cooptation by business rather than bureaucratic domination of
entrepreneurs (McVey 1990:19). The result was a general neglect of dynamic
interactions within the private sector and between public and private interests.
The weak position of local business also undermined the development of
"producers"and "consumers" of a political economy literature within the region
itself.5 The impact of import substitution industrialization(ISI) merits special emphasis
in this regard. Unlike most of Southeast Asia, most of Latin America entered into
ISI during and even prior to WWII. This prompted strong economic nationalism,
broad, politically informed debates on development conflict and strategy, and an
increasingly sophisticated awarenessof state-market and foreign-domestic interactions
(e.g., Hirschman 1971; Prebisch 1950; Cardoso and Faletto 1979; and Goodsell
1974). It is perhaps not a coincidence that Southeast Asian postwar social science
and nationalist writings were the most developed in the Philippines, where ISI had
the strongest base during the interwar period (Yoshihara 1985; Golay 1961). 6
The link between the emergence of local capital, economic nationalism, and
studies of political economy is suggested by more recent work in English by Westerners
as well as Southeast Asians. In the wake of Indonesia's 1974 Malari Riots against
Japanese firms (and their IndonesianChinese partners), Indonesiansbegan to advocate
countering foreign firms through the organizationof big local capital into "nationally
integrated economic units" (e.g., Panglaykim 1974; Chalmers 1988:ch. 5). Richard
Robison's (1986) pathbreaking work on Indonesian capital can be seen as part
of this general affirmation of the role of local entrepreneurs. While differing in cer-
tain respects, the studies of Hewison (1989), Suehiro (1985), Thanamai (1985),
Phongpaichit (1980), Laothamatas(1989), and Chenvidyakarn (1979) on Thailand
and Sundaram (1988), Lim (1985), and others (Hirschman 1989) on Malaysia can
be viewed in a similar light. There is also a growing political economy literature
in Southeast Asian languages (Reynolds and Lysa 1983; Neher and Bowornwathana
1984; Anderson 1984). Work in Thai has been especially impressive, no doubt
bolstered by a growing Thai-language business press.7
5Harris(1988) discussesthe idea of "consumers"of political economy. Reynoldsand

Lysa (1983) make a similar point in noting the importanceof political struggles in gen-
eratinga Thai Marxistliterature.
6However, the depressionprovidedless stimulusto ISI manufacturingin the Philippines
than in LatinAmericadue to the former'scontinuedimport capacity(resultingfrom sugar
exportsto the U.S.) and its lack of tariffand exchangeautonomy(Brown 1989).
7Recentworksin Thai include Samudavanija1988; Pornvalai1989; and Thanapornpan
1990. For an exampleof the Thai-languagebusinesspress, see Phu ChaatKan (Manager).
Also worth note are in-depth case studies such as Thammasat(1987) and the M.A. theses
from the English-languageprogramof ThammasatUniversity'sEconomicsDepartment.

The region's economic growth is thus beginning to generate a literature that

describes and explains that development. Before evaluating these and other writings,
it is useful to assess the nature of that growth.
III. Economic Performance in Southeast Asia
Since we are concerned with explanations of Southeast Asian economic growth,

it is necessary to note divisions of opinion as to the depth of that performance.
Many studies have emphasized rising manufacturedexports, increasesin higher value-
added products (Simandjuntak1988), and the strengthening of local capital, measured
by equity ownership, in all areas of economic life (Hewison 1989; Robison 1986).
But others have pointed to important weaknesses. One is the region's tendency
to adopt capital-intensive growth strategies that create small pockets of highly paid
urban workers while leaving the rural or traditional sector behind (Clad 1990; Hay
1989:656; Lee and Naya 1988:S140). Unequal income distribution environmental
degradation (Hirsch and Lohman 1989; UN 1988), prostitution, and other negative
results of economic expansion also seem to be intensifying.8
It is also asserted that Southeast Asian growth remains overly reliant on and
vulnerable to external forces. With regard to trade, the region's export markets are
unstable and unlikely to provide the kinds of opportunities enjoyed by the East
Asian NICs (Clad 1990; Bello and Rosenfeld 1990:9- 11). Perhaps the most serious
criticism concerns the shallowness and dependence of the region's own economic
structures. Southeast Asian capitalism is viewed by some as "ersatz" (Yoshihara
1988; Suehiro 1985; Clad 1990). Local capitalists lack independent technological
capacity in areas outside the tertiary sector and light manufacturing. Entrepreneurs
favor opulence over excellence, rent seeking and speculation over long-term industrial
investment. They are, in sum, paper capitalists, compradors of foreign firms. The
region's shortage of technical personnel reflects and reinforces this inattention to
real industrial development (e.g., Tasker 1990a; 1990b). Unlike those in the
dependencytradition(discussedbelow), this critique emphasizesnot externallyimposed
obstacles but the inability of local capitalists to follow their Japanese and NIC
counterparts in taking advantage of external opportunities.
This line of criticism highlights the need for further empirical research. The
efficiency of local producers can be evaluated through tariff levels, export subsidies,
and the percentage of exports undertaken by local versus foreign investors (measured
through levels of interfirm transfers). Technological reliance on foreign capital can
be assessed through outward remittances of management fees, patent royalties, and
management fees (e.g., UN 1984).
Some notes of caution are in order, however. Studies of Southeast Asian capital
should avoid paying exclusive attention to large firms. There is considerableevidence,
from studies of Japan, the East Asian NICs, and Southeast Asia, that small and
medium-sized firms are an active and important component of recent economic growth
(Doner 1991; Phongpaichit 1989:345; Friedman 1988; Amsden 1989:ch. 7).
Future studies should also be cautious in drawing too sharp a contrast between
dependencyand self-reliance.Most less developed countries(LDCs)are best understood
not as one or the other, but as somewhere on a continuum between the two (e.g.,
Grieco 1984; Packenham 1983). Cumings (1984), for example, notes that South
8Fora critique of the East Asian NICs along many of the same lines, see Bello and
Rosenfeld1990.

Korea and Taiwan expanded their autonomy in the world at large while deepening
their reliance on Japan. As Hirschman (1989) argues in the Malaysian context, more
work is needed on the issue of foreign versus local control and benefits in Southeast
Asia.
Finally, we should avoid overly sharp dichotomies between rent-seekers or
commercialcapitalistson the one hand, and industrialistson the other. Some capitalists
are clearly more oriented toward short-term profits and tertiary activities than others.
Yet, throughout Asia, strong industrial firms have emerged from commerical
capitalists, speculators,and rent-seekersbenefiting from government-controlledimport
licenses. Research on the South Korean economy has shown that the large industrial
groups known as chaebol(actually meaning "financial clique") emerged from those
entrepreneurs known as " 'political capitalists,' plutocrats, or compradors" (Kim
1976:469; see also Amsden 1989:46-48; Jones and Sakong 1983).9
Despite these questions as to its depth and endurance, Southeast Asia's economic
growth has been quite impressive. Explaining this performance (as well as its
limitations) requires consideration of the opportunities and constraints provided by
its external environment.
IV. Dependency and the

External Context of Growth
Much of the recent academic emphasis on external conditions as influences on

LDC development (or its absence) has come from the dependency school. Three
central assertions characterize dependency literature. First, as noted earlier, LDCs
are confronted with international market imperfections: international capitalism is
presumed to be a "hierarchicallyordered system of dominance" of which LDCs are
found at the bottom or periphery(Haggard 1990:16). Second, this peripheralposition
undermines the opportunities for autonomous economic growth in the developing
world. More specifically, foreign investment (1) squeezes local entrepreneurs out of
the most dynamic sectors; (2) employs "inappropriate"capital-intensive technologies,
thus adding to unemployment; (3) worsens income distribution; and (4) modifies
consumer tastes and undermines local culture (Moran 1978). Finally, the political
link between the international capitalist system and the preceding distortions is
provided by a triple alliance among subservient local capitalists and states on the
one hand, and dominant foreign capital on the other (Evans 1979; Bennett and
Sharpe 1985; Gereffi 1983).
There have been several dependency studies of Southeast Asia (e.g., Steven 1988;
Weinstein 1976; Permtanjit 1982; Bell 1978; Elliot 1978), but apart from the early
to mid-1970s, the influence of dependency has been weak. Critics from both inside
and outside the region have noted a number of important flaws in the approach.
Methodologically, the school's fuzzy operationalization of dependence and its
presumption that even nationalist host country demands reflected the interests of
foreign investors made some of its hypotheses difficult to falsify (Packenham 1983;
9Thefact that originsdo not determineindustrialstrengthis illustratedby a comparison
of PhilippinebusinessmanRicardoSilverioand South KoreanbusinessmanPyong-cholYi.
Both expandedfromcommercialoriginsto createmajorindustrialgroupswith supportfrom
powerfulpolitical patrons.Silverio, however,becamea notoriousMarcos"crony"who was
forcedto flee the countrywhen his mismanagedand overextendedconglomeratefell apart
in the early 1980s. Yi, on the other hand, foundedSamsung,South Korea'slargestchaebol
basedon steadyexpansionfrom productionof consumergoods to basic industries.

Becker 1991:106). Empirically, LDC realities have been at odds with dependency
predictions. Industrializationhas occurred,albeit unevenly, and indigenous bourgeoisies
have emerged that confront as well as integrate with foreign capital (Higgott and
Robison 1985:37). The fact that this capitalist growth has been uneven suggests
that the dependency approach is also flawed by its ignorance of domestic factors,
accounting for different national responses to similar external constraints. t
But the dependency framework'smost serious flaw is its lack of a well-developed
theory or paradigm of international capitalism (Becker 1991:105). The fact that
LDC growth has occurred at all and is uneven suggests that the international system
is not a monolith blocking Third World development. It is rather a variegated and
dynamic structure that can influence development in two related ways: economically,
by providing external opportunities for, as well as constraintson, developing country
growth; and politically, by influencing the growth of national capabilities necessary
to contend with external conditions.
Studies of the East Asian NICs suggest that these processes can be understood
in part through the interaction of the product life cycle with global and regional
hegemony. The product cycle refers to the process by which standardization and
diffusion of technology promotes the gradual shift -of a product's manufacture out
of the innovating country to other countries with similar factor endowments but
less advancedtechnology (Wells 1986:200-1). As the Japaneseportrayit, the product
cycle resembles a "wild flying geese pattern" in which the leader of the inverse V
formation of geese is periodically replaced by a newcomer (Akamatsu 1961). The
product cycle's evolution is not automatic, however, but conditioned by the interests
and relative strength of dominant external powers.
Applied to Northeast Asia, the argument is that South Korea and Taiwan have
benefited from a Japanese-led product cycle embedded in a changing hegemonic
structure. Prior to 1945, unilateral Japanese colonialism not only strengthened the
two countries' physical and human infrastructure,1' it also promoted modern
manufacturing in Korea and Taiwan. Beginning in the late 1960s, heavy
industrialization efforts in these two countries encountered opposition from U.S.
economic planners who claimed that such plans violated the law of comparative
advantage. Yet South Korea and Taiwan obtained Japanese technology and financing
in part because their "new programs provided the structure necessary to receive
declining Japanese heavy industry" (Cumings 1984:76).
U.S. geopolitical objectives in the region first encouraged this move up the
product cycle by providing economic opportunities. The U.S. security blanket allowed
Japan to devote its full energies to economic restructuring, a process with beneficial
spillovers for Taiwan and South Korea. Also helping was the diffuseness of U.S.
hegemony relative to prior systems of domination. The open U.S. trade regimes
provided significant market opportunities for the East Asian NICs (Yoffie 1983).
The U.S. also helped to strengthen domestic structuresin Northeast Asia necessary
to internal policy changes. American aid was a critical source of domestic capital
formation in South Korea and Taiwan during the postwar period. These financial
flows also provided state officials with important leverage over business interests.
And through its support for land reform, the U.S. helped to erase a source of
political instability and to remove landed interests capable of obstructing state-
initiated economic reforms (Cumings 1984:54, 56). Research along these lines has
'0SectionV exploresthese domestic factors.
"1TheJapanesecolonial contributionto South Korea'sinfrastructure was reducedby the
fact that South Korea"hadalreadylost its colonialindustrialbase in the North when Korea
was divided"(Jong, 1990:100).

already begun to yield useful comparativeand theoretical results, whether in showing

how U.S. interests in Latin America were more antagonistic to locally initiated
development than in East Asia (Gereffi and Wyman 1989:38-40), or in showing
how Taiwan's experience challenges the hierarchical assumptions of Wallerstein's
world systems approach to development (Crane 1982).
In sum, while dependency theory is flawed as a theoreticalapproach,it highlights
the need for research on the influence of external variables on (1) the economic
opportunities available to Southeast Asia, and (2) the region's domestic capacities
to take advantage of these opportunities.
Economic Opportunities
Research on economic opportunities should focus on the expansion of a regional

product cycle, the structure of regional hegemony, and the interests of external
actors. Some argue that a product cycle has already begun in Southeast Asia, that
Indonesia, Malaysia, the Philippines, and Thailand have already begun to participate
in a "multiple catch-up" process through which Japan leads the Asian NICs and
then the other ASEAN countries through stages of comparative advantage. As the
NICs follow Japan into capital- and knowledge-intensive products, the ASEAN-
Four will move into exports from light industries such as textiles, food processing,
and simpler electronics. The region, in sum, is presumably shifting from Japan's
"garden"to its "tool shed" (Hay 1989; Meier 1986:15). Yet many Southeast Asians
argue that this process has been blocked by Japan's reluctance to share technology
and to open its markets to foreign (or at least Southeast Asian) manufactured goods
(e.g., Sundaram 1988).
Two specific research foci can help clarify the evolution of the region's product
cycle. First of all, sectoral studies can be invaluable. Linda Lim (1988), for example,
has helped to identify the extent and processesof manufacturingdiffusion in electronics
throughout East Asia. Also worth examination is the emergence of a regional (albeit
Japanese-led) division of labor in auto components production.12 A second focus
involves the expanding linkages between capitalist and socialist Southeast Asia.
Investments in Vietnam by Indonesia's Astra group and Thai acquisition of logging
concessions in neighboring countries may reflect an extension of the regional division
of labor in which foreign-exchange-poor Indochina becomes a source of raw materials
and cheap labor for its more developed neighbors (e.g., Buszynski 1989; Far Eastern
EconomicReview, March 23, 1989:95).
The product cycle's evolution is influenced by the structure of hegemony, i.e.,
the relative distribution of capacities among the larger external powers. 13 For some
(e.g., Stubbs 1989), the cooperativejoint hegemony of U.S. geopolitical and Japanese
economic power in the postwar period facilitated the region's prosperity. While this
arrangementchiefly promoted Japanese, not Southeast Asian interests (Borden 1984),
the openness of the U.S. market supplemented Japan's investment in and purchases
of primary commodities from the region. In addition, the presence of two major
powers provided Southeast Asia with alternate sources of capital, at times allowing
a country to obtain from one what the other refused (e.g., Robinson 1985).
But the postwar hegemonic structure is undergoing transformation. Reductions
are occurring in the U.S. geopolitical presence and in the level of U.S.-Japan
12Reportson this regionalproductionschemecan be foundin variousissuesof Economist
IntelligenceUnit,JapazneseMotor Business.
'3Fora discussionof structure,see Waltz 1979.--

cooperation.The degree and impacts of these shifts merit study. Cumings has suggested
that increasedU.S. -Japaneserivalryand Japan'smove toward greaterpolitical influence
in low-growth periods can spell trouble for smaller, weaker countries such as those
in SoutheastAsia. The analogy here is with the interwarperiod when Japan, "striving
toward core-powerstatus," attempted to limit the opportunities of less industrialized
countries in the region. Japan is portrayed here as resembling not a lead goose in
the product cycle but a moth moving toward a flame (Cumings 1984:82).
This hypothesis of increasing rivalry closing off opportunities for the ASEAN
countries seems overly general. First, the inflow of funds from Taiwan and South
Korea may reduce Southeast Asia's reliance on Japanese capital. Second, following
a pattern set in Northeast Asia, the erosion of American influence may reduce the
role of U.S.-supported agencies in Southeast Asian developmental coalitions, thus
increasing domestic economic autonomy (Deyo 1987a:240). Third, Thailand's
adaptation to Japanese dominance in the interwar period, as well as former Prime
Minister Chatchai's proposal of joint naval exercises with Japan, suggest that some
may be better positioned to benefit from external shifts than others. This highlights
the need for crossnational studies of foreign policy goals, a task facilitated by Wurfel
and Burton's The Political Economyof ForeignPolicy in SoutheastAsia (1990).
The opportunities for economic development reflect not only the distribution
(structure) of external powers but also the particular interests of those powers. One
area for further researchconcerns the impact of economic versus geopolitical interests
of Japan and the U.S. Identifying the U.S. as principally concerned with regional
stability is less and less valid. The increasing American concern with the defense
of its own domestic economic interests clearly spells trouble for Southeast Asian
countries long reliant on U.S. purchases of manufactured exports. This shift will
probably threaten what the U.S. perceives as an unfair division of labor: Southeast
Asia sells raw materials to and buys capital equipment from Japan, but sells
manufactured goods to the U.S. 14
This brings us to a related question: What are the features and consequences
of economic changes within Japan and the East Asian NICs? Recent work has shown
that conscious economic restructuring is occurring not only in Japan but in Taiwan
and South Korea as well (Unger 1989; Morris-Suzuki 1984). Undertaken in response
to trade frictions, exchange rate shifts, and rising labor costs, this restructuring has
generated significant flows of foreign investment from the NICs to Southeast Asia. 15
Of particular interest is the possibility that much of this recent investment comes
from small and medium-sized enterprises. Because these firms tend to employ labor-
intensive manufacturing techniques, this investment can help even out rural-urban
wage differences. It can also encourage a regional product cycle by introducing
industries whose financial and technical requirements are compatible with Southeast
Asian capacities (Phongpaichit 1988; Hay 1989; Dunne 1989).
These investments, through the provision of financing, export channels, and
technology may have the additional benefit of easing the transition from import
substitution to export promotion. Comparative studies of both the NICs and Latin
America suggest that this transition may be the central issue of development (e.g.,
14See Lim (1986) as well as various articles by Linda Lim in SoutheastAsia Business,pub-
lished by the Center for South and Southeast Asian Studies, University of Michigan, Ann
Arbor.
15For recent accounts see Nigel Holloway, "The numbers game," FEER, November 16,
1989, p. 71; N. Balakrishnam, "The south will rise," FEER, May 4, 1989, pp. 76-77;
Jonathan Moore, "The upstart taipans," FEER, April 19, 1989, pp. 84-87; and Paul
Handley, "Moneybags move in," FEER, April 19, 1989, pp. 87-88.

Haggard and Cheng 1987; Gereffi and Wyman 1989). In Southeast Asia, this
transition may be especially difficult (but typical of LDCs) because revenues from
natural resource exports have financed high rates of protection for inefficient local
producers of manufactured goods (e.g., Yoshihara 1988:118-19). The political
consequences of forcing local firms to contend with foreign competition through
tariff reductions and devalued exchange rate are often quite severe.
Whether foreign investment, in fact, benefits a Southeast Asian economy will
depend in part on the entry strategies of foreign investors which are themselves a
function of negotiations between foreign firms and local governments. For example,
initial moves into exports by Thailand and Malaysia during the mid-1970s were
facilitated by the small and medium-sized firms leading Japan's investment at that
time. The willingness of these firms to accept minority shares "made it easier for
the ASEAN governments to sell the idea of foreign investment and export-oriented
industrialization to domestic business interests" (Stubbs 1989:532-33). One study
has gone so far as to argue that foreign investment in East and Southeast Asia might
"represent the thin edge of the wedge in the eventual triumph of capitalism over
imperialism" (Lim and Pang 1991:231).
Whether this, in fact, is the case depends not only on the changing nature of
that investment but also on coalitions of interests and institutions internal to the
Southeast Asian countries. As shown in the remainder of this section, these factors
are influenced by the external environment. 16
External Influences on National Capabilities
External conditions can affect LDC abilities to respond to external opportunities

by influencing (1) the political strength and (2) the strategies and organizational
capacities of domestic interests.
Foreign actors can influence what one scholar has termed a country's "strategic
capacity"-its ability to develop a coalition supportive of "well-chosen development
strategies" (Deyo 1987a:228; 1986). The importance of foreign influence in this
regard is most striking with regard to the shift to export promotion. The core
argument of work on this issue, based on studies of the East Asian NICs, involves
the sequence of foreign-domesticlinkages and a state's initiation of economic changes:
in South Korea, Taiwan, and Singapore, geopolitically inclined external actors
suppresseddomestic forces (e.g., labor unions and landlords)likely to oppose changes
in economic policy beforesuch changes were initiated by the state. These same external
forces simultaneously strengthened the organizational capacities of the state, which
then had a relatively free hand to implement domestic economic changes while
restricting the role of foreign capital.
This process did not occur in the Philippines (or Latin America) where foreign
investment tended "to foster vested social and economic interests opposed to industrial
modernization" (Chan 1990:56). This was in part a function of U.S. objectives.
While geopolitics drove the U.S. policies toward domestic actors in Northeast Asia,
private firms were-the leading force in U.S. policy toward the Philippines. In their
drive for economic benefits, U.S. investors strengthened first the Philippines' agro-
based elites and then, after World War II, an expanding group of Philippine businesses
16It bearsemphasisthat domestic institutionsare influencedbut not determinedby ex-
ternalfactors.This is illustratedby differencesbetweenstates in South Koreaand Taiwan,
despite the fact that both underwentJapanesecolonial control (Cumings 1984, Hamilton
and Biggart 1988).

based on import-substitution industrialization.In addition, U.S. efforts were devoted

by and large to minimizing rather than strengthening Philippine state intervention.
The result, argues Deyo (1986), was "coalitional immobilism." Domestic actors
with crosscutting interests, foreign (private) backers, and claims to the nationalist
mantle were well entrenchedprior to economic reform efforts initiated by technocrats
in the Marcos regime.
Deyo's approachis statist in assuming that powerful societal interests will oppose
needed changes in economic policies. The emphasis is on the developmental utility
of suppressing societal actors so as to clear the decks for state-led economic reforms.
While valid in many cases, this emphasis may preclude something different but
equally beneficial for economic flexibility: external strengthening of indigenous
capitalists interested in economic changes and capable of implementing those changes.
In the late 1950s, for example, foreign investment provided political protection for
Sino-Thai entrepreneurs pressing for economic reforms (Hewison 1989:274-77;
Phongphaichit 1980).
A related hypothesis worthy of investigation is that external challenges can
encourage corporatist arrangements, i.e., the organizational strengthening of local
entrepreneurs and close public-private sector cooperation. Katzenstein (1985) has
argued that corporatist arrangements often develop in small, industrialized states as
a way of mobilizing resources to cope with the vulnerabilities of those economies
to external market shifts. Others have added that such corporatism will be most
common in trade-dependent countries with highly differentiated exports (Rogowski
1983:729). This pattern may have begun to emerge in Thailand where the need
for export-oriented economic policies encouraged stronger public-private cooperation
(Laothamatas 1988). It is likely that such collaboration will occur at the industry
level when developed country protectionism forces state and industry officials to
work out joint agreementson quota arrangements,quality control, product upgrading,
etc. (e.g., Douglas 1989:428).
External factors can influence the organizational resourcesas well as the political
strength of local firms and the state. Dependency studies argued that foreign capital
squeezes out domestic firms and that the Third World state is simply "a hinge
between internationalcapital and Third World social formations-in effect a staging
point in the syphoning of surplus"(Higgott and Robison 1985:47). Weinstein (1976)
provides compelling evidence of Japanese restraints on Southeast Asian firms. And
several authors have shown how external threats and constraints on fiscal powers
limited the organizational capacities and objectives of the Thai state during the
nineteenth and early twentieth centuries (Feeny 1988; Anderson 1978; Brown 1988).
Recently, however, analysts have noted more positive consequences of foreign
investment. A "postimperialism"literature has argued that collaborationwith foreign
capital can expand the technical capacities of LDC capitalists as a class (Becker et
al. 1987:180). Further studies are necessary to specify the firm-specific impacts of
foreign investment, but general support for the postimperialist view comes from
Hewison (1989) and Richard Robison's study of Indonesian capital.'7 Peter Evans
has made a similar argument with regard to the state-namely, that in the postwar
period, the transnationalization of economic relations can provoke an organizational
strengthening of government agencies in countries characterized by some prior
bureaucratic institutionalization and relative autonomy (1985:207). Illustrations of
17"'[TJhejoint venturedoes not lead inevitablyto the subordinationand decline of the
domestic partner.Integrationwith foreign capital through the joint venture may equally
be the mechanismwheredomesticcapitalmoves to a higher stage of capitalaccumulation,
corporateorganization,and technologicalcomplexity"(Robison 1986:197).

this pattern are beginning to emerge in Southeast Asia. Robert Muscat highlights
the ways in which U.S. aid promoted the development of Thai state institutions
(1990:esp. 284-87). Clark Neher's (1989) study of U.S.-Thai disputes over intellectual
property rights portrays a Thai bureaucracypushed toward increasing expertise and
activism to contend with U.S. protectionism. But as the Malaysian textile case
reminds us, protectionism and the attendant need for state involvement in quota
allocation can expand opportunities for corruption as well as increased efficiency
(Douglas 1989:435).
The external context can also strengthen a country's human and physical
infrastructure. The impact of international conflicts merits special note here (Stubbs
1989). Increasedcommodity prices due to the Korean conflict raised export revenues
for Malaya and Singapore. This windfall (combined with the need for colonial self-
reliance due to problems in England) led to improvementsin both tax administration
and physical infrastructure. The Vietnam war, with its heavy dose of U.S. aid to
Thailand, encouraged an expansion of the national transport system and the civil
engineering sector. The conflict also strengthened Thailand's fledgling consumer
goods sector, since "Vietnamwas forced to use United States aid to purchaseconsumer
goods from neighboring countries, particularly Thailand" (Stubbs 1989:528).
The impact of the international system on domestic interests and institutions
may be usefully addressed through case studies of specific types of foreign-domestic
interactions(in jargon:cases of "externallinkage mediation"). A first category involves
bargaining between foreign investors and host countries. Several studies of such
bargaining exist for Latin American and South Asian cases but, to my knowledge,
few for Southeast Asia (e.g., Doner 1991). Studies of trade conflicts are also useful.
In addition to the two studies already cited (Neher 1989; Douglas 1989), scholars
can refer to work on trade bargaining relations between the U.S. and the East Asian
NICs (Yoffie 1983; Odell 1984). Finally, relations between countries in the region
and foreign financial institutions constitute fertile research soil. Indeed, work has
already been done on the Philippines' external debt problem (Broad 1988; Bello et
al. 1982; Haggard 1988), on Indonesia and the IGGI (Robinson, 1985), and on
Thailand's encounters with the World Bank (Hewison 1987; Muscat 1990).
In examining the range of externalinfluenceson national interestsand institutions,
I have depicted a more complex and less constraining international system than that
portrayed by the dependency school. It is now necessary to examine domestic
institutions as independent variables, i.e., as potential contributors to development
in and of themselves. To do so we shall draw on an institutionalist framework that
explains why nonmarket arrangements are useful for development in the first place.
V. Institutionalism
An institutionalist approach to development begins with the assumption that

a country'sability to exploit external opportunitiesand avoid external dangers depends
in large part on its ability to mobilize and shift resources to new purposes. Certain
countries are less developed than others because their factors of production are less
mobile (Krasner 1985:40). At least three factors help explain this state of affairs.
First, routinized market mechanisms for factors of production such as labor and
capital are often inefficient in LDCs due to a lack of well-developed communications,
transportation, and legal institutions for contract enforcement, as well as the greater
vulnerability of LDC economies to change and uncertainty (Lee 1990:7-10; Leff

1979:47). Second, LDCs' long-standing pursuit of import substitution strategies

often results in protected, inefficient, and politically influential entrepreneurs who
are unwilling to promote activities that are risky (or not immediately profitable)
but beneficial for national growth.
Finally, poor countries must contend with a particularlydemanding set of market
requirements. They face the need to balance between: openness versus selectivity
over foreign investment; protection of new industries versus free trade (to obtain
inputs and expose those industries to competition from efficient producers); the
benefits of competitive markets (to encourageefficiency)versus the utility of oligopoly
or monopoly (to promote standardization and scale economies); and undervalued
exchange rates (to support exports) versus overvalued exchange rates (to minimize
the costs of inputs and foreign debt repayment) (Amsden 1989:13).
In sum, LDCs face collective action problems described earlier in this paper:
they must encourage entrepreneurs with often contrasting and entrenched interests
to undertake diverse activities for the benefit of the country as a whole; and they
must do so where uncertaintyis high and informationlow. The centralityof collective
action problems is highlighted by Southeast Asian case studies discussed at the end
of this section.
Statism
The collective action problems described above constitute the demand for
institutions, especially, argues one school, strong states. The statist view rests on
the virtues of the political and organizationalcomponents of state strength. Politically,
strong states are autonomous from powerful societal interests. They thus have the
leverage to extract resources,provide public goods, reconcile diverse needs, encourage
the most productive firms, and impose the short-term costs associated with efficient
economic adjustment (Haggard 1990:262; 1988a:264). They are also able to extract
benefits from foreign capital independently of powerful distributional coalitions.
Organizationally, such states are coherent, consistent and flexible (Moon 1990:24).
They are thus able to accumulate and act on information necessary to reconcile
diverse interests (e.g., Mardon 1990).
This statist approach has proven useful in several important respects. It has
taken us beyond the assumption that markets always operateefficiently (Wade 1988a).
It has helped to explain crossnational differences in economic performance. And it
has identified sourcesof economic success in the East Asian NICs that are not addressed
by neoclassical explanations (e.g., Lim 1983). 18 Statism has also begun to find
supporters among Southeast Asianists. Harold Crouch has argued that industry in
ASEAN is least developed where "the ties between business and government are
closest," and that technocrats have greater opportunities for rational policy-making
when the political and business elites are separate (1984:96, 94).
But the statist approach suffers from two general weaknesses. The first has to
do with its descriptive accuracy, even in the East Asian NICs. With regard to
organizational strength, the institutional structures of states in South Korea and
Taiwan seem cohesive, but case studies revealinternalpreferencedifferences,competing
coalitions, and decentralizationof decision-making (Moon 1990:24-27; Noble 1987).
18The"strongstate"label shouldnot obscureimportantdifferencesamongthe NICs with
regardto degreesof authoritarianism,economicdevelopmentof privatesectors, and state
implementationcapacity.See, for example,Johnson 1987; Haggardand Cheng 1987; and
Hamilton and Biggart 1988.

Crossnational variation also appears in NIC state structures leading to differences

in policy instruments and economic strategies (Chu 1989). Turning to the issue of
autonomy, even strong states are "creaturesof political exigencies"as well as institutions
with recurrent preferences (Haggard 1990:264). Thus, the South Korean state had
some capacity to construct a supportive coalition within the business community.
But its auto policies were not implemented when they conflicted with the broad
structure of big business interests (Jong 1990).
A second weakness is functional: an autonomous state may not always be best
suited for development tasks. Autonomously developed preferences may lead to
predatory behavior by state officials. Prior state commitments may be hard to break
because they have generated powerful societal interests demanding their maintenance
(Ikenberry 1986). State-initiated economic reforms may weaken the state's coalitional
base and impede subsequent efforts to impose its preferences (Moon 1988). And
while organizationalcohesion is certainly necessary, centralizationmay not be. Thus,
one study of bargaining with foreign investors in Southeast Asia found that
centralization led to the exclusion of some agencies and, as a result, poor
implementation (Encarnationand Wells 1985). Conversely, some intrastate conflicts
may be beneficial. Where the goal of industrial deepening pervades the bureaucracy,
as in Indonesia, interagency struggles can take the form of competitive nationalism
and lead to more effective bargaining with foreign firms (Chalmers 1988). Finally,
the expertise of state officials is rarely sufficient to resolve complex commercial and
industrial issues. As one review of Southeast Asia concluded, state officials may
know enough to formulate economic policies, but they may lack the capacity to
implement such plans (Crone 1988:256).
The implication of these functional weaknesses is not that we should ignore the
study of states as institutions. As shown by numerous studies, states in Southeast
Asia are important as developmental actors in their own right, as influences on the
developmental contributions of societal interests, and as reflections of broader
sociopoliticalarrangements(e.g., Halim 1982; Wong 1990; Wibisono 1989; Hewison
1989; Bowie 1991; Hawes 1987). Nor is the implication that institutions are
unnecessary. It is rather that, as the case of Hong Kong suggests, "developmentalist
organizations need not be confined to public or state sectors" (Deyo 1987a:243).
Inclusionary Institutionalism and the

New Institutional Economics
Based on their abilities to formulate and implement policy independently of

powerful groups, states in Indonesia, Malaysia, the Philippines, and Thailand are
not strong (Crouch 1984; Mackie 1988). Thus, unless we are to attribute their
economic growth solely to market conditions, we must explore the role of nonstate
institutions. Useful for this purpose is a body of literature known as the new
institutional economics (NIE). The important feature of this approach is its unit of
analysis. NIE begins with "the transaction, viewed as a relationship or contract"
(Yarbrough and Yarbrough 1990:241; Williamson 1985). Such relationships are
central to mobilizing and shifting resourcesfor development. Yet they are vulnerable
to the information and collective action problems described earlier.
Like statism, then, NIE begins with collective action problems. And like statism,
it suggests the utility of hierarchical institutions rather than competitive markets
tO resolve these problems. But unlike statism, NIE's explicit focus on transactions
allows it to acknowledge the importance of private and public-private institutions

as well as states. 9 This approach is only in its infancy as applied to development

in general and to Southeast Asia in particular (Nabli and Nugent 1989; Lee and
Naya 1988). It also contains important weaknesses, about which more later. But
it does draw our attention to several nonstate and nonmarket institutions important
to any explanation of both growth and problems in Southeast Asia.
BusinessGroups.The group is "a large-scale firm that invests and produces in
several product lines that involve vertical integration or other economic and
technological complementarities" (Leff 1979:52). Often, but not always, groups are
owned and staffed at the higher levels by individuals who are linked by a communal,
ethnic, or regional group (Leff 1990:7).
Groups merit further research by Southeast Asianists for two reasons. First, as
reflected by their importance in the East Asian NICs, they are potential institutional
solutions to the market failures so common in LDCs (e.g., Johnson 1987; Jones
and Sakong 1983; Mody 1990; Imai 1987-88). In the absence of a well-developed
20
capital market, they often allocate capital among diversified activities. In the face
of information shortages and political obstacles, they may link primary inputs and
intermediate goods within their firms. And their very participation in multiple
activities allows them to reduce uncertainty concerning investment and production
decisions. In sum, they may perform "many of the special functions required for
entrepreneurship in underdeveloped countries" (Imai 1987-88:53).
Groups also merit study because they dominate much of the private and
domestically owned advanced sector in Southeast Asia, as well as other developing
regions.2' Existing studies of Southeast Asian groups include Robison (1986) and
Yoon (1990) on Indonesia; Lim (1981, 1985) on Malaysia; Hewison (1989), Suehiro
(1985), and Phipatseritham (1982) on Thailand; and Yoshihara, (1985), and Bello
et al. (1987) on the Philippines. But work on these groups is just beginning. We
have no systematic studies of several important groups such as Thailand's major
industrial conglomerate, Siam Cement, or Malaysia's UMW. And while it is clear
that groups such as Thailand's Saha Union, Charoen Pokphand, and Siam Cement,
as well as Indonesia's Astra, do attempt to resolve market problems through vertical
integration, our knowledge of how they do so and with what successis still rudimentary
(e.g., Doner 1991; Christensen 1990:36).
Networks:Whereas groups attempt to overcome market failures by internalizing
transactionswithin a firm or group of firms under one ownership umbrella, networks
involve regularized linkages between and among independent firms or individuals.
As in the case of groups, research on Japan and the East Asian NICs shows the
potential contribution of network arrangements to economic growth.22 Work on
such arrangements in Southeast Asia might usefully seek to identify crossnational
networks in particular industries such as textiles, or electronics (Arpan et al. 1984).
19While not unrelated,the new institutionaleconomicsshouldbe distinguishedfromthe

"newinstitutionalism."Both schoolschallengethe neoclassicalassumptionof the firm as a
completelyrational,technologicalunit operatingin competitivemarkets.But NIE focuses
on ways of organizingtransactionsin ways that go beyond the impersonal,arm's-length
operationsof the free market.'The new institutionalismstressesthe relativeautonomyof
political institutionsand the way such institutionsinfluenceindividualpreferences(March
and Olsen 1984; Moe 1984).
20Unlessotherwisenoted, the following discussionis adaptedfrom Leff (1979).
2'For referenceson the operationof LDC groups, see Leff (1990:6, fn. 10).
22Researchon Pacific Rim businessnetworkshas been conductedunder the auspicesof
the InternationalProgramon East Asian Businessand Development(EABAD)at the Uni-
versityof California,Davis. This researchhas focusedon East ratherthan SoutheastAsia.

Of particular interest here is the degree to which Southeast Asian entrepreneurs

have gradually dislodged the foreign firms initiating such networks.
Research should explore the ways in which networks, both domestic and
crossnational, help to finance and organize economic growth. The Bangkok Bank's
active role in the Thai textile and apparel industries is an important case of such
activities (Doner and Ramsay 1991). But work on interfirm financing should not
be limited to large banks and companies. An important areaof analysis is the informal
financial sector-arrangements such as rotating credit associations, moneylenders,
and credit between borrowers and lenders linked to transactions in other markets.
Such institutions are widespread throughout the developing world and particularly
in Southeast Asia (accounting for over 40 percent of outstanding debt in Thailand).23
They are also now recognized as potentially useful for economic growth. Along with
general studies using the new institutional economics framework, recent empirical
work on Sino-Thai rice traderssuggests that rotating credit societies and other informal
links may help to resolve problems of information-scarcity, transaction costs,
monitoring, and free riders (Wongtada 1990; Hechter 1987; Varian 1990).
Associations
Business-Interest (BIAs). Formalassociationsof firms in the same product
area, industry, or sector are quite widespread in Southeast Asia. In many cases these
institutions grew out of communal, especially ethnic Chinese networks (e.g., Bowie
and Doner 1988). In addition to their impressive numbers, BIAs have fulfilled
important functions at industry, national, and regional levels in SoutheastAsia (Tiglao
1990:68; Laothamatas 1988; Maclntyre 1988; Wibisono 1989; Soesastro 1989).
They have attempted to promote a sense of class identification(e.g., Stifel 1963:173),
to influence public policy, and perhapsmost importantfor our purposes, to implement
policy. This latter function includes working out product standards,allocating export
quotas, monitoring prices, promoting the adoption of new technologies, coordinating
contracts, and supporting efforts to diffuse foreign protectionism (see especially
Laothamatas 1988). Note also that trade and producers' associations have grown
through participation in the industry clubs of the Association of Southeast Asian
Nations (Young 1981; Doner 1991). All of these activities require the reconciliation
of otherwise conflicting private interests.
Public-PrivateSectorConsultation:Regularized consultation between state officials
and local capitalists can help overcome problems of uncertaintyby encouraginggreater
coordination and sharing of information than would occur through the market (Lee
1990:21). Work on Japan, South Korea, and Taiwan has stressed the ways in which
these arrangements facilitate state leadership and coordination, especially in the
provision of industrial finance. Appreciation of such formations has emerged in the
literature on Southeast Asia, although the emphasis here is more on collaborative
than state-dominated institutions. Jamie Mackie has emphasized the importance of
"growth coalitions" involving the state and private sector (1988). Such arrangements
may exist on the national level and, as describedby Laothamatas(1988) for Thailand,
contribute to greater administrative efficiency and shifts out of import substitution
toward export promotion. Perhaps most common are sector- or industry-level
collaborationsto improve local responsesto shifting foreign markets and investments
(e.g., Siriwatpatara 1989:ch. 6). Hong Kong's ability to contend with U.S.
protectionism in textiles and apparel provides perhaps the best illustration of the
potential gains from public-private cooperation (Yoffie 1983:95, 118).
230n Southeastand South Asia, see Friedland1990:35, and Lee 1990:7-8. Hechter
(1987:107-11) providesextensivereferenceson rotating credit societies in the developing
world.

Problems of the Institutionalist Framework
Despite its utility, the new institutional economics has at least two important
weaknesses. The first is its general neglect of the redistributive and thus political
consequences of institutions. NIE advocates presume that institutions are necessary
responses to problems of market failure; they are efficiency-creating mechanisms.
But at the most basic level, institutions often define efficiency in ways that favor
some more than others (Bromley 1989). Groups may succeed in resolving factor-
market imperfections by mobilizing their own capital or producing their own
intermediategoods. For example, Thailand'sCharoenPokphand circumventedpolitical
conflicts among soybean farmers and millers by building its own soybean processing
mills and developing a contract-farming system (Christensen 1990:36). But such
moves may result in the weakening of smaller economic units. And, as Leffemphasizes,
these same groups may then create product-market imperfections, i.e., "a special
form of oligopoly capitalism"that reduces overall efficiency (Leff 1979:55). Similarly,
informalcredit markets in ruralareasmay be vehicles for exploitation of poor peasants
rather than the most efficient mechanism for local financing. And business interest
associationsmay be more than mechanismsto shareinformationand promote efficiency.
Indeed, if we are to follow Becker in viewing capitalists as social movements, we
must see business associations as mechanisms of class cohesion and propagation of
class ideology (Becker 1991:121). There is, in sum, the danger that the new
institutionalism becomes a "new apologia" for big business (Dugger 1983:107).24
The NIE is also flawed by its overemphasis on the demand for institutions and
its inattention to their supply. That is, this literature demonstrates how institutions
can resolve problems of uncertaintyand informationscarcity reflected in, for example,
the absence of developed capital markets. But the very creationof institutions requires
people to work together and thus involves collective action problems (Bates 1988).
With few exceptions, then, the NIE literature lacks a theory of institutional origins
(Feeny 1988).
How, for example, do we account for what seems to be a greater predominance
of large, vertically integrated firms in Indonesia than elsewhere? What accounts for
the strength of business associations in one country and not in another? One set of
explanations includes coercion and/or incentives provided by political elites. For
example, Japanese business associations, buttressed by state incentives, were quite
active in promoting the importation and diffusison of foreign technology into the
country's cotton spinning industry. Such institutions did not exist in colonial India
at least in part due to the indifference or opposition of dominant English firms
(Otsuka et al. 1988:73-89).
Still another set of explanationsfocuses on what Robert Bates has termed "softer"
factors such as "community, symbolism, and trust" (Bates 1988:398-99).25 Because
transactions in LDCs are often plagued by uncertainties, and because consensus must
usually precede contract, some type of normative consensus is often a necessary
precondition for the establishment of long-term relationships. According to John
Hall, the provision of such a consensuswas one of the Church'sprincipal contributions
24A relatedcriticism is that the very assumptionof marketfailureis not justified, that
it simply legitimates the expansionistgoals of big groups. Nevertheless,when evaluating
the welfareeffects of groups, the most relevantcomparisonis not the LDC with perfectly
competitiveproductand factormarketsbut the LDC without the groups. I am gratefulto
NathanielLefffor emphasizingthis point.
25Asimilar concernhas been expressedwith regardto the study of internationalinsti-
tutions (Keohane1988:391).

to European economic growth (Hall 1985:123-26). In Southeast Asia, ethnic and

communal ties among Chinese have clearly been important to the emergence of
business associations, credit networks, and powerful business groups (e.g., Lim and
Gosling 1983; Suryadinata 1988:265).26 The analysis of institutional origins in
Southeast Asia thus has the great virtue of incorporating, indeed requiring, the
study of culture and ethnicity.
Yet variation in institutional outcomes within similar ethnic or cultural contexts
reminds us that the contribution of "soft" factors to institutional growth is mediated
by the broader social, economic, and political environments noted earlier. These
environments, in which cultures and ethnic groups are embedded, can help explain
one of the critical issues of Southeast Asian development: crossnational and historical
variation in levels and forms of assimilation by overseas Chinese (e.g., Skinner 1973;
Mackie 1988; Lim and Gosling 1983). State efforts to coopt and control local firms
thus help to explain the expansion of associational activity under Indonesia's New
Order (MacIntyre 1988). The growth of Thai associations reflected official efforts
to obtain collective business support in policy implementation (Laothamatas 1988).
Sociopolitical factors can also help explain crossnationalvariation not in the existence
of institutions but in their levels of efficiency and commitments to industrialization.
The incentives provided by the Marcosregime to large "crony"conglomeratesdiffered
from those to which a more efficient conglomerate, such as Siam Cement, has been
exposed.
But culture, ethnicity, or political constraints would seem unable to account
for a still more microlevel of variation-namely, differences between firms of the
same nationality and ethnicity. How, for example, are we to account for the fact
that Indonesia's Astra is a more market- and industrial-oriented group than the more
commercial-, financial-, and political-favor-oriented Liem group? Similarly, how do
we explain the higher level of professionalization(measuredby staffing and willingness
to go public) exhibited by Thailand's Saha Union relative to the TBI group (Doner
and Ramsay 1991)? Explaining such variation will require that scholars explore such
factors as firms' economic origins, personalities of founders, regional opportunities,
and links to political elites (e.g., Mackie 1988a:245).
A Problem-Specific Research Focus
My emphasis on the weaknesses in the NIE literature is meant to strengthen,

not discourage, researchon the developmentalcontribution of institutions in Southeast
Asia. Such researchshould, however, be problem-specificand comparative. It should
begin with collective action dilemmas in order to avoid prejudging institutional
solutions. And it should examine these dilemmas and the institutional responses to
them in different countries, industries, and time periods. Comparative analysis can
clarify (1) the demand side of the equation-the range of functional requirements
that any institution will have to fulfill if problems are to be resolved; and (2) the
supply side-the kinds of institutions feasible in particular social, political, and
cultural contexts.
26JamieMackieimplicitlystressesthe roleof communalties in explaininghow Indonesian

Chinesebegan their shift into higher-leveleconomicroles duringa period(1957-66) when
anti-Chinesefeeling was quite high: the Chinese"wereable to adjust to the difficult con-
ditions of inflationand shortagesof key materials,foreignexchangeand capitalwith a much
greaterdegree of flexibility than the ponderouslybureaucraticstate enterpriseswhich took
over the formerDutch investments"(1988a:237).

The following developmental tasks constitute useful starting points for such
research. They are common in LDCs and they are politically difficult: each involves
reconciling disparate individual interests with national economic growth. They are
also tasks on which researchhas already begun with regard to Southeast Asia (Doner,
forthcoming).
1. StructuralAdjustment/Economic Reform:To promote efficiency and exports,
countries often attempt to implement a set of economic policies including monetary
and fiscal restraint, tariffreduction, and currencydevaluation. However, these measures
often encounter political resistance. They may, for example hurt those manufacturers
who rely on overvalued exchange rates to keep the prices of imported intermediate
and capital goods low. The implication, accepted by some Southeast Asianists, is
that implementation of such politically difficult reforms requires bureaucratic
authoritarianism or corporatism (Higgott and Robison 1985).
Yet broadcomparativeresearchhas cast doubt on a correlationbetween adjustment
and authoritarianism(Haggard 1986). Indeed, structural adjustment in South Korea
has led to a replacement of "unilateral administrative guidance" by "consultation
and consensus between the state and business" (Moon 1988:75). In Southeast Asia,
private business associationshave played an important role in Indonesia'sderegulation
process (Maclntyre n.d.; Soesastro 1989), prompting Richard Robison to note that
the link between adjustment and authoritarianism is more complex than originally
thought (Robison 1988). Thailand's recent devaluation suggests even more grounds
for skepticism as to the "functional" need for authoritarianism. This move did not
correlate with increased repressiveness. Much of the pressure for export promotion
in Thailand reportedly came from private firms suffering from domestic market
slumps (Laothamatas 1988; Phongpaichit 1989).
2. ReconcilingUpstreamand DownstreamFirms: LDC attempts to increase both
value added and efficiency can pit producers of a finished good (downstream) against
those supplying needed inputs (upstream). The externalities of firms at all stages
of the production process must somehow be captured by the national economy. The
textile industry can illustrate some of the specific dilemmas. Downstream producers,
such as garment makers selling to foreign markets, require cheap, high-quality inputs
from upstream firms, such as spinners, weavers, or dyers. In Southeast Asia, the
garment firms generally prefer (or are required by U.S. importers) to obtain such
inputs from more efficient, high quality foreign producers. The dual task is then
(1) to provide strong domestic demand for products of upstream industries, while
(2) enabling/forcing upstream firms to become more efficient. The South Korean
and Taiwan cases suggest that selectedprotection and subsidy by state officials is one
component of a solution to this problem (Weiss 1988:232-33; Wade 1988:50).
Also necessary are state measures that reduce the costs of inputs to the upstream
firms themselves (e.g., cutting tariffs on raw materials or capital goods for spinners).
All of this suggests the need for a capable, autonomous, and flexible group of state
officials. But private firms or associations may also play an important role. Business
groups may overcome upstream-downstream problems through vertical integration.
Credit allocation by private actors may be more efficient than those of the state.
Bulk purchasesto reduce input costs may be successfullyundertakenby large trading
concerns-the case for South Korean cotton spinners (Amsden 1989:61). Work on
this issue in the SoutheastAsian context has only just begun. Studies of the Indonesian
textile and Thai soybean industries illustrate both the centrality of such conflicts
and the importance of multiple actors in resolving them (Wibisono 1989; Maclntyre
1988; Christensen 1991). But with one partial exception, existing studies do

not identify upstream-downstream conflicts as the central problem (Robison

1988:66-67).
3. Standardization:The adoption of standard technologies leads to important
externalities: greater scale economies, more rapid cost reduction, and potentially
more rapid consumer acceptance. But convincing groups of firms to agree on a
single format is difficult, especially in situations where production designs come
from foreign, parent firms. While governments have a potentially important role
to play in this problem, even Japan's MITI was not highly successful in imposing
common technologies on electronics or auto firms (Noble 1989). Conversely, an
important "standardizing" role for large firms and associations of small firms is
suggested by research on the Southeast Asian auto industry (Doner 1991).
4. ExcessCapacity:Small markets and/or market slumps combined with large
numbers of producerslead to negative externalities:surplus capacity and inefficiency.
While all firms generally acknowledge this problem, each would prefer that some
other producer close down its operations. The South Korean electrical equipment,
shipping, and auto industry cases show that governments have an important role
to play in resolving this collective action problem. But in Japan the government
failed in its attempts to rationalize the auto industry, and in textiles it was the
Japan Cotton Spinners' Association that checked overproduction and uneconomic
competition (Amsden 1989:61). In Thailand and Indonesia, there is evidence that
such problems are addressed by banks as well as by trade associations (Ramsay 1987;
Wibisono 1989:34-37).
5. Investment Obtaining benefits from foreign capital requiresa gatekeeper
Screening:
capable of imposing conditions on foreign investors. Governments have played
important roles in this regard through the imposition of local content and export
performancerequirements, limits on technology licensing agreements, etc. (Mardon
1990). But evidence from the East Asian NICs as well as from SoutheastAsia suggest
that local capitalists have been active and sometimes decisive participants in
negotiations over these issues (e.g., Amsden 1989; Tang 1988). Private sector
participation seems especially important in Southeast Asia where state officials do
not possess high levels of technical expertise. Equally important is the tendency for
the private sector to demand improvement in governmental expertise.
6. Infrastructure:A major obstacle to further industrialization in Southeast Asia
is the lack of trained personnel and physical infrastructure. Clearly, states must play
a coordinating and financing role in providing such collective goods. The issue of
why some do and others do not is an important area of research (e.g., Malaysian
training seems the most advanced, perhaps due to ethnic pressures to expand ethnic
Malay economic participation). But so is the possibility that such goods and services
are provided through private sector efforts. As noted, for example, one study of
cotton textiles found that Japan's strength relative to India was in large part due
to the pooling of technology by members of the Japanesespinners'association(Otsuka
et al. 1988:87). These mechanisms are generally lacking in Southeast Asia, although
in-house training programs and the use of Chinese technicians from Hong Kong
and Taiwan may be partial solutions to the problem.
Conclusions: Political Economy and

Southeast Asian Studies
Political economy can be understood as that body of literature addressing the

sources of, and potential solutions to, market failure. Until recently, this literature

has been only minimally informed by or applied to Southeast Asian cases. This is
unfortunate. Students of political economy have generated frameworks, at least two
of which-dependency and institutionalism-are potentially useful for understanding
Southeast Asia's economic performance. Conversely, a grasp of regional and national
particularities is a helpful corrective to errors and oversimplifications in these
frameworks.
The dependency school attempts to explain one form of market failure, the
existence of monopolistic or oligopolistic foreign firms. Developments in Southeast
Asia and other regions have highlighted the conceptual and empirical limitations
of the dependency literature. Yet dependency has the virtue of drawing attention
to the influence of externalvariableson the region's growth. By tracing the interaction
of product cycles, structures of hegemony, and the interests of external powers in
East and Southeast Asia, I have described a more variegated regional and global
context than the hierarchical structure portrayed by dependency theorists. I have
explored the influence of this context on the economic opportunities facing the
countries of Southeast Asia and their domestic capabilities to profit from these
opportunities.
A second framework,institutionalism, addressesthe domestic requisitesfor growth
through its focus on collective action problems and nonmarket solutions. Southeast
Asianists have already begun to demonstrate the utility of this approach by showing
the centrality of collective action problems in economic policymaking. But students
of SoutheastAsia can potentially contributemuch more to the institutionalistliterature.
First, they can illustrate the potential utility of an inclusionary rather than a
statist form of institutionalism. In drawing attention to the activities of business
groups, business associations and public-private sector bodies, Southeast Asianists
can clarify the nonstatist sources of growth in the region. They can also help to
develop an inclusionary model that is relevant for the broad majority of LDCs whose
states are much weaker than those of the East Asian NICs. And they can compel
a reexamination and perhaps modification of the statist view of growth in the NICs
themselves.
Second, students of SoutheastAsia can help to provide a better sense of institutional
supply. As presentlyconstituted, institutionalism tells us why nonmarketarrangements
are needed, but it does a poor job of explaining or predicting variationin institutional
response. If we are to understand why certain arrangementsactually emerge we need
to supplement the functionalist explanation of demand for institutions with the area
specialist's grasp of the local variables that influence individuals' abilities to act
collectively. Southeast Asia's ethnic, religious, and political diversity makes the
region fertile ground for just such an integration of broad generalizations and finely-
grained contextual insights.
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Approaches to the Politics of Economic Growth in Southeast Asia

Author(s): Richard F. Doner

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THE PACIFIC RIM'S RECORD of impressiveeconomicgrowth over the past twenty

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This content downloaded from 128.104.46.206 on Tue, 17 Feb 2015 02:47:20 AM

on Southeast Asian growth. Section V focuses on domestic sources of economic

II. Political Economy and Southeast Asia

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Institutionalism is a response to the violation of three other neoclassical

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5Harris(1988) discussesthe idea of "consumers"of political economy. Reynoldsand

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The region's economic growth is thus beginning to generate a literature that

III. Economic Performance in Southeast Asia

Since we are concerned with explanations of Southeast Asian economic growth,

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IV. Dependency and the

Much of the recent academic emphasis on external conditions as influences on

This content downloaded from 128.104.46.206 on Tue, 17 Feb 2015 02:47:20 AM

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already begun to yield useful comparativeand theoretical results, whether in showing

Research on economic opportunities should focus on the expansion of a regional

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External Influences on National Capabilities

External conditions can affect LDC abilities to respond to external opportunities

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based on import-substitution industrialization.In addition, U.S. efforts were devoted

This content downloaded from 128.104.46.206 on Tue, 17 Feb 2015 02:47:20 AM

An institutionalist approach to development begins with the assumption that

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1979:47). Second, LDCs' long-standing pursuit of import substitution strategies

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Crossnational variation also appears in NIC state structures leading to differences

Inclusionary Institutionalism and the

Based on their abilities to formulate and implement policy independently of

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as well as states. 9 This approach is only in its infancy as applied to development

19While not unrelated,the new institutionaleconomicsshouldbe distinguishedfromthe

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Of particular interest here is the degree to which Southeast Asian entrepreneurs

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Problems of the Institutionalist Framework

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to European economic growth (Hall 1985:123-26). In Southeast Asia, ethnic and

A Problem-Specific Research Focus

My emphasis on the weaknesses in the NIE literature is meant to strengthen,

26JamieMackieimplicitlystressesthe roleof communalties in explaininghow Indonesian

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not identify upstream-downstream conflicts as the central problem (Robison

Conclusions: Political Economy and

Political economy can be understood as that body of literature addressing the

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AKAMATSU KANAME. 1961. "A Theory of Unbalanced Growth in the World

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ANDERSON, B. R. O'G. 1977. "Withdrawal Symptoms: Social and Cultural

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DOUGLAS, SARA U. 1989. "The Textile Industry in Malaysia: Coping with

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. 1988a. "The Politics of Industrialization in the Republic of Korea and