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The Beginnings of Crony Capitalism: Business,

Politics and Economic Development in Malaysia,
c. 1955–70

NICHOLAS J. WHITE

Modern Asian Studies / Volume 38 / Issue 02 / May 2004, pp 389 - 417

DOI: 10.1017/S0026749X0300115X, Published online: 21 April 2004

Link to this article: http://journals.cambridge.org/abstract_S0026749X0300115X

How to cite this article:

NICHOLAS J. WHITE (2004). The Beginnings of Crony Capitalism: Business,
Politics and Economic Development in Malaysia, c. 1955–70 . Modern Asian
Studies, 38, pp 389-417 doi:10.1017/S0026749X0300115X

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Modern Asian Studies 38, 2 (2004), pp. 389–417.

C 2004 Cambridge University Press
DOI: 10.1017/S0026749X0300115X Printed in the United Kingdom

The Beginnings of Crony Capitalism:

Business, Politics and Economic
Development in Malaysia, c.1955–70
NICHOLAS J. WHITE1

Liverpool John Moores University

Introduction: The Crony Capitalism Conundrum

The term ‘crony capitalism’ describes the close relationship between

the state and big business in contemporary Southeast Asia. Yoshihara
argued in 1988 that cronyism produced an entrepreneurially weak,
ersatz capitalism. Crony capitalists were ‘private-sector businessmen
who benefit[ed] enormously from close relations’ with leading
officials and politicians, obtaining ‘not only protection from foreign
competition, but also concessions, licences, monopoly rights, and
government subsidies’.2 Yoshihara’s thesis has been subject to some
criticism, but, in summarizing that debate, Ian Brown states that
‘there are . . . substantial areas of the South-East Asian political-
economic landscape where government and business remain bound to
the protection of inefficient vested interest, to the defence of monopoly
and preference, and where speculations and short-term profit-taking
are rife’.3 Entrepreneurial weaknesses in Southeast Asia appeared

1
An earlier version of this paper was presented to the Economic History Society
Conference, University of Birmingham, 7 April 2002. The author would like to
thank the Institute for Southeast Asian Studies Library, Singapore, the Arkib Negara
Malaysia, Kuala Lumpur, the Bank of England and the HSBC Group, London for
access to their records. Archival research for this article was made possible through
grants from the British Academy Committee for Southeast Asian Studies and the
Research Committee, School of Education, Community and Social Science, Liverpool
John Moores University.
2
Yoshihara Kunio, The Rise of Ersatz Capitalism in South-East Asia (Kuala Lumpur:
Oxford University Press, 1988), pp. 3–4, 71 cited in E. T. Gomez and Jomo K. S.,
Malaysia’s Political Economy: Politics, Patronage and Profits (Cambridge: Cambridge
University Press, 2nd edition, 1999), p. 25.
3
Ian Brown, Economic Change in South-East Asia, c. 1830–1980 (Kuala Lumpur:
Oxford University Press, 1997), p. 270.

0026–749X/04/$7.50+$0.10
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 390 NICHOLAS J. WHITE

fully exposed by the financial crisis of 1997, when the economies of

the region could not withstand the cruel buffetings of the international
economy.
In the Malaysian case, crony capitalism is usually assumed to
be a recent phenomenon. The close links between the state and
a group of most-favoured entrepreneurs has been portrayed as an
almost inevitable outgrowth of the New Economic Policy (NEP) of the
1970s. A massive exercise in social engineering, the NEP aimed to
‘correct economic imbalance, so as to reduce and eventually eliminate
the identification of race with economic function’.4 Specifically, a
Malay commercial and industrial class was to be manufactured and,
generally, the living standards of the bumiputera (the Malays and
other ‘indigenous’ peoples) were to be raised. A widely-held view is
that the high-level of government intervention inherent in the NEP
forced Chinese capitalists into close alliance with Malay politicians and
bureaucrats to guarantee business survival and success, while the rise
of quasi-state corporations pushed Malay politicians and bureaucrats
into the business world. Malaysia’s leading political economists,
Gomez and Jomo, find the crony capitalism thesis attractive because
‘patronage networks, especially in UMNO (the United Malays
National Organisation), grew under the NEP; it is through the NEP
that rents have been created, captured and disbursed, ostensibly as
part of the government’s policy of “restructuring”’.5
Despite liberalization of the Malaysian economy from the mid-
1980s, political interference in the private sector continued, and even
intensified. Privatized firms fell under the control of the politically
influential entrepreneur, rather than the autonomous, genuinely
talented and productive capitalist. The most influential and wealthy
Malaysian businessmen remained those closely associated with Prime
Minister Dr. Mahathir Mohamad.6 Gomez and Jomo argue that the
haemorrhaging of Malaysia’s economy during the financial debacle of
1997 can be explained by ‘imprudent financial liberalisation’ rather
than the system of crony capitalism per se. But, given that ‘much state
intervention in Malaysia has been motivated by non-developmentalist
considerations . . . “cronyism” . . . exacerbated the crisis in Malaysia’.7

4
Second Malaysia Plan, 1971–1975 (Kuala Lumpur: Government Printer, 1971),
pp. 1, 7.
5
Gomez and Jomo, Political Economy, p. 25.
6
Ibid., p. 99.
7
Ibid., p. 186.

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 THE BEGINNINGS OF CRONY CAPITALISM 391
Indeed, Gomez and Jomo generally concur with the argument of
Adam and Cavendish that the cronyism of the NEP hindered economic
growth.8
The present article takes a different tack from Gomez and Jomo
to unearth the origins of crony capitalism. There is an existing
secondary literature, as well as a set of previously untapped primary
sources, which point to the importance of the decolonization and
immediate post-colonial eras in forging links between indigenous
politicians and business leaders. The development of crony capitalism
was concomitant with, and almost a function of, Alliance-led national
intergration. In Malaya (today’s peninsular Malaysia), the compact
between Chinese big business and the Malay political elite was a by-
product of the electoral alliance between UMNO and the Malayan
Chinese Association (MCA) in the end-of-empire epoch. In East
Malaysia too, and particularly in Sabah, the drawing together of
politics and business was another side-effect of Britain’s scramble out
of Southeast Asia. Moreover, during the early years of independence,
the business careers of T. H. Tan, Nik Kamil, Robert Kuok and Tengku
Razaleigh reveal the importance of nationalist political connections
for business success a decade before the NEP. Emphasis is also
placed upon the politics of banking where state support was central
in the rise of new Malaysian-owned institutions. In the emergent
system of political business and money politics, the long-established
British agency houses found themselves marginalized and lacking in
influence. The final section of the paper, meanwhile, concerns the
degree to which cronyism held back Malaysian economic growth in
the immediate post-colonial period. Here, political manipulation, in
an era of nation-building, can be seen as a productive entrepreneurial
skill and not necessarily as a blight on economic development.

Political Business

The Peninsula

The ‘blurring of the distinction between corporate and political

power’9 in Malaya emerged from the opening up of the political process

8
Christopher Adam and William Cavendish, ‘Background’ in Jomo K. S. (ed.),
Privatizing Malaysia: Rents, Rhetoric, Realities (Boulder: Westview Press, 1995), p. 15.
9
Gomez and Jomo, Political Economy, p. 27.

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 392 NICHOLAS J. WHITE

in the last years of colonial rule. The Chinese towkay (community

and business leaders) entered the political arena through the alliance
of their party, the MCA, with UMNO during the 1950s. This pact
within the Sino-Malay elite ensured the defeat of Dato Onn Jaafar’s
Independence of Malaya Party (later Party Negara) in municipal,
state and federal elections and underwrote the winning of early
independence for the Federation of Malaya. Business leaders such
as H. S. Lee and Tan Siew Sin hoped to protect Chinese economic
and cultural interests through tempering what they saw as the
dangerous excesses of Malay nationalism. Co-operation between the
MCA and UMNO during the Kuala Lumpur elections of February
1952 came about essentially because the Selangor branch of UMNO
lacked sufficient funds to fight the election. The Selangor Chinese
leader and tin-mining baron, H. S. Lee, proposed, therefore, that the
MCA assist with UMNO’s election expenses as part of the coalition
agreement. UMNO’s president, Tunku Abdul Rahman, naturally
became attracted to formalizing the Alliance on a Federation-wide
basis. As the Tunku confided to T. H. Tan, chief executive secretary of
the MCA, ‘UMNO had no money’ and would benefit from ‘a share of
the MCA financial resources’. Tan subsequently became secretary-
general of the Alliance party and in a paper of November 1955
confirmed that the MCA had borne the bulk of the election expenses
for the MCA–UMNO coalition up to the federal elections of that
year.10 Hence, Chinese business money played a crucial role in the
trouncing of Onn’s Party Negara at the elections for internal self-
government, followed by the achievement of full independence in
August 1957 (when the Tunku became Malaya’s first prime minister).
MCA funds—to the tune of M$500,000—would also help secure the
Alliance’s electoral victory in the first elections for a fully-elected
assembly in August 1959.11
From the late-1940s, UMNO members had developed economic
plans which looked forward to state intervention to create a Malay
managerial and entrepreneurial class, particularly by promoting
marketing and finance co-operatives in rural areas and by enforcing

10
Heng Pek Koon, Chinese Politics in Malaysia: A History of the Malaysian Chinese
Association (Singapore: Oxford University Press, 1988), pp. 164–5.
11
HSBC Group Archives, London (hereafter HSBC), Chief Manager’s File:
Singapore & Malaya: Politics, May 1958–March 1963, Clark, Kuala Lumpur to
Turner, Hong Kong, 20 April 1959.

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 THE BEGINNINGS OF CRONY CAPITALISM 393
employment and equity quotas on non-Malay firms.12 Yet, the price of
the Malay aristocracy’s pact with the towkay (and later Indian business
leaders in the Malayan Indian Congress) proved to be a free enterprise
economic policy, a partnership of local and foreign capitals, a ‘sound
economy’ and balanced budgets.13 On coming to power, the MCA had
ensured that the Alliance, despite UMNO’s commitment to advancing
the kampung, had no national state-assisted scheme to give Malays a
greater share in the Malayan economy.14 A reciprocal relationship
was thus born—Chinese and Indian business leaders recognized that
Malay ministers and mandarins would hold ultimate political power.
But Malay special rights in government service and in education were
adopted in return for minimal interference in non-Malay business. The
reward for the financial support of the Chinese business politicians
proved to be a set of plumb posts in the cabinet from where economic
policy could be managed. H. S. Lee became Malaya’s first Minister
of Finance in 1956 in the quasi-independent regime. Tan Siew Sin,
who had inherited his father’s rubber and trading empire in Melaka,
became Minister of Commerce and Industry in 1957 and then Finance
Minister when Lee was moved upstairs to the Dewan Negara (the
Malayan senate) in 1959.
The cause of the Chinese business elite was further assisted by the
Tunku’s personality. The prime minister’s reputation as a ‘playboy
prince’ obscures his consummate skills as a politician. Even so, Bapa
Merdeka’s predilection for horseracing, and gambling generally, pushed
him into the company of rich non-Malays.15 And, once independence
had been achieved, the Tunku’s patronage was crucial in allowing
the towkay faction continued control of the MCA and the retention
of cabinet posts. The conservative business leaders were swept aside
in 1958 when Tan Cheng Lock was replaced as leader of the MCA
by the left-wing medic, Lim Chong Eu. Yet, the Tunku’s friend, Tan
Siew Sin, retained his portfolio as Minister of Commerce and Industry,

12
See Heng, Chinese Politics, pp. 151–2, 262–3; A. J. Stockwell, British Policy and
Malay Politics during the Malayan Union Experiment, 1942–1948 (Kuala Lumpur:
Malaysian Branch of the Royal Asiatic Society, 1979), pp. 110–11.
13
Institute of Southeast Asian Studies Library, Singapore, Tan Cheng Lock papers,
TCL XIII/43, ‘“The Road Ahead”. Memorandum on Finance and Economic Policies,
18 October 1954’.
14
N. J. White, Business, Government and the End of Empire: Malaya, 1942–1957
(Kuala Lumpur: Oxford University Press, 1996), pp. 153–4.
15
N. J. Funston, Malay Politics in Malaysia: A Study of the United Malays National
Organisation and Party Islam (Kuala Lumpur: Heinemann, 1980), pp. 16–17.

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 394 NICHOLAS J. WHITE

while Lim remained marginalized without a cabinet post and without

the friendship of the Tunku. A frustrated Lim left the Alliance and
hence the MCA in 1959. Two years later, the resumption of control by
the business faction was confirmed when Tan Siew Sin became MCA
president—a post he held until April 1974 when the Melaka baba
finally stepped down from the Treasury. After 1959, the MCA may
have lost support amongst the Chinese professional classes because
of its leaders’ compromises on language and educational issues. But,
in the cabinet, Tan Siew Sin proved adept at dampening down Malay
economic nationalism. The removal of the radical UMNO minister,
Abdul Aziz Ishak, from his agriculture portfolio in 1963 was an obvious
example. Aziz’s advocacy of co-operatives in the kampung cut across the
interests of Chinese rice and rubber traders.16
There is little evidence to suggest that Tan Siew Sin’s business
interests profited significantly from his political position and
connections. Tan, however, did become the chairman of the agency
house, Sime Darby, in 1977. This followed the removal of the British
directors from the board when Malay parastatals acquired a significant
shareholding. For Heng, Tan’s ‘proven record of business success
and effective interaction with Malay political and economic elites’
exemplifies the trend through which ‘those Chinese business leaders
who have attempted to carry out their enterprises in ways acceptable
to Malay power brokers have achieved greater success than other
businessmen’.17 H. S. Lee’s Nationalist Chinese links led to his
marginalization in the MCA during the purge of the ‘KMT diehards’
in 1958. In 1959 he did not stand for parliament. Yet, close links
to the Tunku meant that Lee was later appointed to the senate, and
from there, the former Finance Minister was able to secure a banking
licence to establish the Development & Commercial Bank which began
operations in 1966.18
In similar vein, T. H. Tan received commercial favours for his
allegiance and service to the Alliance government. Unlike Lee and
Tan Siew Sin, who both moved from business into decolonization
politics, T. H. Tan rose to commercial prominence via journalism and

16
Heng, Chinese Politics, pp. 256–9; G. P. Means, Malaysian Politics (London: Hodder
& Stoughton, 2nd ed., 1976), pp. 195–6, 205–6, 216.
17
Heng Pek Koon, ‘The Chinese Business Elite of Malaysia’ in Ruth McVey (ed.),
Southeast Asian Capitalists (Ithaca, NY: Cornell University Press, 1992), pp. 128 n. 3,
142.
18
Means, Malaysian Politics, pp. 202, 214; E. T. Gomez, Chinese Business in Malaysia:
Accumulation, Accommodation and Ascendance (Richmond: Curzon Press, 1999), p. 33.

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 THE BEGINNINGS OF CRONY CAPITALISM 395
end-of-empire statecraft. From 1936, he worked on newspapers in
Singapore, becoming editor of the Singapore Standard after the Pacific
war. A founder member of the MCA in 1949, T. H. Tan was hand
picked by Tan Cheng Lock to become its secretary in 1952. Conse-
quently, he became a close friend of Tunku Abdul Rahman. On the
Tunku’s view, Tan ‘played a great part in Malaya’s independence’—his
organizational and negotiating skills had made him indispensable not
only in mobilizing finances for the Alliance but also during the Tunku’s
successful mission to London in 1954 to argue for a larger elected
majority in the legislative council. T. H. Tan was also secretary to
the Alliance’s merdeka mission of 1956 in which British mandarins and
ministers conceded that Malayan independence would be achieved in
August 1957. On independence, Tan, according to the Tunku, ‘didn’t
want to be a Minister, though he could have been. He simply said he
liked “business better”’. ‘[H]e did quite well’ commented the Tunku
later, a point confirmed by Tan’s conspicuous consumption—the prime
minister ‘used to be able to tell his successes by the number of fine
cars [Tan] bought’.19 Tan’s business power-base after merdeka was his
presidency of the Associated Chinese Chamber of Commerce (ACCC),
but he remained deeply involved in the post-colonial political scene,
being appointed to the senate in 1959. In addition, Tan retained his
post as secretary-general of the Alliance, and hence played a key role in
the formation of Malaysia through organizing conferences of political
parties in Borneo and Singapore.20
T. H. Tan clearly exploited his political connections to feather his
own business nest. In 1956, he secured the support of the Tunku (then
chief minister) for an unofficial trade mission from the Federation to
Japan.21 In the immediate post-colonial period, this culminated in
Tan securing a number of pioneer certificates from the Ministry of
Commerce and Industry for joint ventures with Japanese manufactur-
ing concerns. The promotion of import substitution industrialization
(ISI) with Japanese capital and know-how was an important means
for the Tunku’s regime to defeat unemployment amongst a rapidly
expanding population while, at the same time, stressing an Asian

19
Tunku Abdul Rahman, Looking Back: Monday Musings and Memories (Kuala Lumpur:
Pustaka Antara, 1977), p. 31.
20
Edwin Lee, The Towkays of Sabah: Chinese Leadership and Indigenous Challenge in the
Last Phase of British Rule (Singapore: Singapore University Press, 1976), pp. 188–90.
21
Arkib Negara Malaysia, Kuala Lumpur (hereafter ANM), Tan Siew Sin papers,
SP 45/867, T. H. Tan to Tan Siew Sin, 20 June 1956.

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 396 NICHOLAS J. WHITE

identity as colonialism crumbled.22 A trusted political and business

figure was chosen for the important task of wooing Japanese capital
to Malaysia. It was Tan, therefore, who led the Malayan interests
which joined Japan’s Yawata Iron & Steel Company to establish an
integrated steel plant at Perai, opposite Penang island.23 Meanwhile,
Tan became a local partner in the Ajinomoto (Malaya) Company
which began building a factory to produce monosodium glutamate in
Kuala Lumpur during 1963. In the words of two Japanese historians,
T. H. Tan ‘played an important role in establishing a good relationship
between the [Japanese] company and the government of Malaya’.24
Tan also became a director of the state-controlled Central Electricity
Board (CEB) in 1959, when Malaysians came to outweigh British
board members for the first time. As Tate shrewdly comments, Tan
was ‘a politician to the finger-tips, who was clever to steer away from
holding any Government post, but at the same time developed a wide
range of business interests’.25
Even for those Malayan Chinese entreprenurs who did not dabble
directly in politics, close connections with Malay government figures
were often critical for the growth of their businesses in the post-
colonial period. The enigmatic Robert Kuok was the entrepreneurial
success story of the Tunku years—by the late-1960s, he had developed
vast financial interests in Malaysia, originally in the food industry
but extending also to timber, hotels and property development. Case
studies by Gomez and Rajeswary Brown illustrate that Kuok relied
on close ties to the Malay elite, long before the NEP, to secure
pioneer status for his sugar refining and flour milling ventures. He
was awarded these concessions despite that the Federation’s tax

22
See N. J. White, ‘Malaya and the Sterling Area Reconsidered: Continuity and
Change in the 1950s’, Paper presented to the International Economic History
Association XIII Congress, Buenos Aires, 22 July 2002.
23
Public Record Office, Kew, London (hereafter PRO), DO 189/405, copy of letter
from Sutton, British Trade Commissioner, Kuala Lumpur to Trenaman, Board of
Trade, 20 April 1964. Tan would seem to epitomize the triangular relationship
between the state, Japanese capital and Chinese entrepreneurship which Rajeswary
Brown recognizes as critical for business success in the Southeast Asia region in the
late-colonial and post-colonial eras. Chinese Big Business and the Wealth of Asian Nations
(Houndmills: Palgrave, 2000), pp. 277–8.
24
Shimizu Hiroshi and Hirakawa Hitoshi, Japan and Singapore in the World Economy:
Japan’s Economic Advance into Singapore, 1870–1965 (London: Routledge, 1999),
pp. 175–6.
25
Muzaffar Tate, Power Builds the Nation: The National Electricity Board of the States
of Malaya and its Predecessors: Vol. II: Transition and Fulfilment (Kuala Lumpur: Tenaga
Nasional Berhad, 1991), pp. 65, 171, 174.

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 THE BEGINNINGS OF CRONY CAPITALISM 397
holidays and tariff protection to encourage ISI tended to benefit British
multinational enterprises, and notwithstanding the concern amongst
Malay leaders that the grant of pioneer certificates to ethnic Chinese
would only exacerbate the economic divide between Malay and non-
Malay Malaysians. Additionally, Kuok secured nearly 15,000 acres
of land in Perlis to grow sugar cane during the 1960s—again, in a
period when the federal government, as Gomez notes, was ‘already
under some pressure from UMNO members to augment state inter-
vention in the economy to promote Malay economic interests’.
For Brown, Kuok’s ‘oligopolistic niches in sugar and flour milling
provided a secure capital base for diversification’ of his empire into
property and hotels. As Gomez also claims, ‘Kuok’s close links with
government leaders’ smoothed the path for his appointment to the
chairs of enterprises with a strong government equity participation—
in the late-1960s, Kuok became head of both Malaysia Singapore
Airlines (MSA) and the Malaysian International Shipping Corporation
(MISC). He additionally became a director of the national trading
corporation, PERNAS and the Bank Bumiputera—two government-
backed institutions specifically designed to enhance the Malay share
in the Malaysian economy.26
While leading Chinese entrepreneurs were associating themselves
with the new national government, senior Malay administrators-
cum-politicians were entering into the commercial arena before the
NEP. By the early-1960s, the Federation government was exerting
considerable pressure on foreign firms to allow senior Malays onto
their boards. One of those who took advantage of the new opportunities
of the post-colonial business world was Dato Nik Kamil. This
Kelantanese aristocrat suddenly emerged as a prominent entrepre-
neur in the 1960s. Yet, his career up to that point had been in
public administration and politics. He was his state’s menteri besar
(chief minister) between 1948 and 1953, and a quasi-minister (or
member) in the colonial government. Nik Kamil was a founding
member of UMNO in 1946.27 He subsequently followed Dato Onn
into Party Negara but shrewdly left after the party’s rout at the
1955 elections. Dato Nik was one of the rulers’ representatives at the
London constitutional talks in 1956 and was subsequently recruited
by the Tunku to be High Commissioner for Malaya, first in Australia

26
Brown, Chinese Big Business, pp. 93, 101; Gomez, Chinese Business, pp. 34, 40–1;
see also Heng, ‘Chinese Business Elite’, pp. 132–3.
27
Stockwell, Malay Politics, p. 70 n.

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 398 NICHOLAS J. WHITE

and then in the UK, and finally ambassador to the USA in 1959.
But government service did not financially satisfy Nik Kamil. From
Washington he wrote to his old acquaintance, Bill MacLeod (a British
businessman in Kuala Lumpur with extensive interests in Malaya,
particularly in the mining sector).28 Dato Nik desperately wished to
enter into partnership with MacLeod but unfortunately the Tunku
insisted that he continue ‘to serve the country for sometime to come’
given ‘how very thin we are on the ground’.29 Indeed, Nik Kamil’s
desire to move into business from public service, or combine business
with politics, was rational from a financial point of view. When the
former Minister of Commerce and Industry, Dr. Ismail bin Dato Abdul
Rahman, briefly left government in the later 1960s for a business
career, the Tunku discovered that Ismail was earning a salary ‘three
times that of a Minister’.30 By 1962, Nik Kamil had finally been
liberated from the shackles of the public sector and picked up a
series of lucrative directorships in the firms associated with MacLeod,
most notably the cigarette manufacturers, Rothmans of Pall Mall
(Malaysia). He became chairman of Rothmans in 1966. But it was
prudent for the Dato, and the interests he represented, to keep a hand
on the political tiller. Nik Kamil returned to the UMNO fold, winning
the seat for Kota Bahru Hilir in his native Kelantan at the elections
of 1964.31
Learning from the example of figures like Nik Kamil, those young
Malay entrepreneurs who aspired to become Orang Kaya Baru (the ‘new
rich’) during the 1960s embraced the popular adage ‘jadi ahli politik
untuk buat duit’ (‘be a politician and make money’).32 But, a frustrated
Mahathir Mohamad, expelled from UMNO in 1969, was scathing
about the entrepreneurial talents of Nik Kamil and his ilk:
Everyone knows that more often than not these Malay directors have neither
a single cent invested, nor probably have they the personal capacity to

28
MacLeod had also been treasurer of Party Negara. See White, Business,
Government, and the End of Empire, p. 143.
29
ANM, Nik Ahmad Kamil papers, SP 43/1/300, copy of airmail letter, n. d.
(c. 1959).
30
Tunku, Looking Back, p. 171.
31
ANM, SP 43/1/410, G. B. Godfrey, Singapore to Nik Kamil, 17 August 1963;
List of directorships in SP 43/1/408; The Straits Times Directory of Singapore and Malaya
(hereafter STD) 1963, p. 245; STD 1967, pp. 500–1, 592.
32
Shamsul A. B., ‘The Economic Dimension of Malay Nationalism: the Socio-
Historical Roots of the New Economic Policy and Its Contemporary Implications’, The
Developing Economies, XXXV, 3 (September 1997), pp. 240–61.

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 THE BEGINNINGS OF CRONY CAPITALISM 399
contribute to the all-important job of making profits for the company.
Everyone knows that some of these Malays are merely selling their names
and taking advantage of the policies of a government which wants to see a
more equitable distribution of wealth.33

Senior Malay public servants turned UMNO politicians, with limited

commercial experience, were to be found on the boards of the two
new Malayan banks established in 1960. J. L. Rampton, the financial
adviser to the British High Commission in Kuala Lumpur reported
on ‘some rather unusual features’ in the establishment of the United
Malayan Banking Corporation (UMBC). The Tunku himself blessed
the bank for ‘implementing in a positive way the spirit of our national
policy to provide fair participation in economic opportunities for
Malays’. Yet, as Rampton appreciated, ‘the idea that this new Bank
somehow gives special opportunities to Malays may prove to be true
of the Bank’s operations, but it is only polite fiction so far as the
control and staffing of the Bank itself is concerned’. Three well-known
Malays, including the Speaker of the Dewan Rakyat (the House of
Representatives), were co-opted onto the board, but the chairman,
managing director, general manager and all the executive staff were
Malayan Chinese. Yet, even the Chinese interests in UMBC were not
completely autonomous of the government. The managing director,
Kang Kock Seng was MCA MP for Batu Pahat in Johor.34 Moreover,
the ‘undesirable precedent’, as Rampton saw it, of associating Malay
politicians with banking enterprises was followed in the formation of
Malayan Banking Ltd. (known as Maybank). The British official had
learnt that, because Maybank, like UMBC, enjoyed political support,
the Federation’s central bank, the Bank Negara, was instructed that it
‘should make no difficulties’ concerning the authorization of a banking
licence. Furthermore, Rampton appreciated that, since the Tunku
and the government generally had blessed UMBC and Maybank,
‘a good deal of face’ would be lost ‘if [the new banks] were not a
success’. If necessary, positive measures would be taken to support the
local institutions—for example, by allowing them to hold government
moneys on deposit.35

33
Mahathir Mohamad, The Malay Dilemma (Singapore: Times Books International,
1970), p. 43.
34
Bank of England Archive, Threadneedle Street, London (hereafter BoE), OV
65/6, copy of letter to Smith, Commonwealth Relations Office, 18 July 1960; STD
1963, p. 327.
35
BoE, OV 65/6, letter to Smith, 18 July 1960.

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 400 NICHOLAS J. WHITE

Maybank quickly superseded UMBC, becoming known in financial

circles as ‘the Tunku’s bank’. By July 1962, the governor of the
Bank Negara, Bill Wilcock, reported to the Bank of England on
the ‘remarkable progress’ which Maybank had made—it already had
53 branches on the Malayan mainland, thus extending banking to
‘areas previously lacking banking services’. Deposits in the Federation
totalled M$110 million, loans and overdrafts M$65 million and bills
discounted M$6 million. Maybank was also gradually building up
business in Hong Kong, Singapore and Brunei and total deposits
stood at M$140 million. Moreover, it was set to become the first
Malayan bank to open an office in London.36 Its managing director,
Khoo Teck Puat, had defected from Tan Chin Tuan’s Singapore-based
Overseas Chinese Banking Corporation (OCBC), was a well-respected
banker, and was backed by wealthy Chinese industrialists who had
been repatriated from Sukarno’s Indonesia. But, as the Bank of
England appreciated, Maybank was making inroads into the business
of the British exchange banks as well as OCBC largely because of
the influential Malays on Maybank’s board. Maybank’s chairman was
Dato Abdul Rahman bin Mohamed Yassin, a Johor administrator and
veteran of UMNO’s struggle against British plans for a Malayan Union
in 1946–7. Dato Abdul Rahman did have some financial experience,
having been a state treasurer in Johor before the Pacific war. But his
appointment as chairman of Maybank probably had more to do with his
UMNO credentials, and the convenient fact that he was the father of
the Minister for Home Affairs, Dr. Ismail.37 By associating themselves
with Malay power-brokers, the Chinese interests in Maybank were
able to scupper OCBC’s plans to be the largest local banking group in
the peninsula. OCBC had less than 30 branches in Malaysia in 1966
against Maybank’s 104, and Maybank’s deposit base was equivalent
to OCBC’s despite the latter’s ‘30-year head start’.38 Tan Chin Tuan
lacked Khoo’s political connections and the OCBC was increasingly
seen as an alien, Singaporean institution in the charged political
atmosphere before and after the island’s divorce from Malaysia in
August 1965. Maybank’s move into Brunei in early 1961 was also
aided by Sultan Omar’s ‘known sympathies with the Federation’, and
the Malay names connected with the bank had undoubtedly brought

36
BoE, OV 65/7, letter to Haslam, 24 July 1962.
37
A. J. Stockwell (ed.), Malaya, Part One, London: HMSO, 1995, pp. 199 n, 259 n;
idem., Malay Politics, pp. 92 n, 117.
38
Gomez, Chinese Business, pp. 77–8.

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 THE BEGINNINGS OF CRONY CAPITALISM 401
‘some influence to bear on him’.39 The formation and expansion of
Maybank (and UMBC) is thus an early example of the ‘Ali Baba’
system, operating at the top echelons of the Malayan business world.40
Moreover, the overt state support for those Malayan financial
institutions which involved some form of Malay participation suggests
that the economic policies of the Tunku’s regime were not as laissez-
faire as is usually supposed.41 The prime minister’s multi-racial vision,
and friendship with Chinese business-cum-political leaders, did tend to
shun affirmative action in commerce and industry which preferenced
Malay economic interests. But, as Minister of National and Rural
Development after 1959, the Tunku’s deputy, Tun Abdul Razak,
paved the way for the more intensive ‘restructuring’ of the 1970s. The
influence of MCA business politicians notwithstanding, the leading
institutions of the post-1970 bumiputera economy actually emerged
in the 1960s. The lavishly financed rural development schemes of the
1960s, as Shamsul perceptively comments, ‘were really the NEP before
the NEP, especially for those [Malay entrepreneurs] . . . in UMNO’.42
Moreover, the government was keen that politically influential Malays
should head up new Malay investment and trading companies. Bank
Bumiputera emerged in 1965, and was intended primarily to inject
capital into business ventures undertaken by Malay entrepreneurs. It
was Malay-owned and run on a private basis, but was buttressed by
generous official financing.43 Moreover, Bank Bumiputera was headed
by elite figures who were far from independent of the government. Tun
Razak selected his young protégé, the UMNO leader in Kelantan,
Tengku Razaleigh Hamzah, to organize the first Kongres Ekonomi
Bumiputera (Bumiputera Economic Congress) in 1965, which led to
the establishment of the new Malay bank. Razaleigh declined the
chairmanship of Bank Bumiputera because he wished to focus on
wresting political control of Kelantan from the Pan-Malayan Islamic

39
BoE, OV 65/26, Note by Bennett for Parsons, 9 February 1961.
40
The ‘Ali Baba’ phenomenon principally affected medium- and small-size
businesses, such as bus companies, and involved a Malay, ‘Ali’, obtaining a business
licence on behalf of a Chinese entrepreneur, ‘Baba’. The business was covertly run
by Baba in which Ali remained a sleeping partner. The British High Commission in
Kuala Lumpur found the practice widespread by the late-1960s. PRO, FCO 24/250,
enclosure by Duncan in High Commissioner to Commonwealth Secretary, 2 April
1968.
41
Funston, Malay Politics, pp. 11, 13–14; Jomo K. S., A Question of Class: Capital, the
State and Uneven Development in Malaya (Singapore: Oxford University Press, 1986).
42
Shamsul, ‘Economic Dimension’, p. 248.
43
William Shaw, Tun Razak: His Life and Times (London: Longman, 1976), p. 136.

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 402 NICHOLAS J. WHITE

Party for UMNO. Even so, Razak appointed Razaleigh an Executive

Director with a salary of M$1500 per month (although by the Tengku’s
own admission, ‘I did not spend all that time at the bank’).44 The board
of Bank Bumiputera also included Robert Kuok. Hence, an association
between one ‘father of the bumiputera economy’ and a state-favoured
Chinese entrepreneur whose business interests both survived and
prospered under the NEP began some years before 1970. Razaleigh
and Kuok would be further brought together in PERNAS, the Malay-
dominated and state-controlled trading company which emerged from
the second Bumiputera Congress of 1968. By that time, one British
banker had come to appreciate that ‘money was not available for the
sort of thing that would help the Malays unless there was a big name
attached to it’.45

East Malaysia

During the 1950s and 1960s, crony capitalism was very much in
evidence in Sabah and Sarawak also. These Borneo territories joined
with Malaya to form Malaysia in September 1963, and a similar
process by which Chinese big business accommodated itself with
Malay–Muslim political power worked itself out in the last years of
British rule. From the mid-1950s, ‘indigenous’ political leaders in
North Borneo (Sabah), notably Donald Stephens and Dato (later Tun)
Mustapha, emerged ‘preaching the economic and social salvaging
of the indigenous peoples’ to ‘catch up’ with the Chinese. Both
advocated government intervention, along the lines of Tun Razak’s
rural development schemes in Malaya, to increase native wealth.46
By the early 1960s, Stephens and Mustapha became attracted to
merger with Malaya to form Malaysia because of the prospects for
local economic development. The towkay feared a business licensing
system whereby timber concessions would be awarded exclusively to
non-Chinese Sabahans. Influential entrepreneurs such as the leading
logging baron, Khoo Siak Chiew, formed political parties, which
eventually merged to become the Sabah Chinese Association (SCA) in

44
Ranjit Gill, Razaleigh: An Unending Quest (Petaling Jaya: Pelanduk Publications,
1986), pp. 58–9.
45
John Wilson (former Singapore manager of the Chartered Bank) in PRO, FCO
24/476, Notes of Confederation of British Industry meeting, 24 July 1969.
46
Lee, Towkays, pp. 53–4.

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 THE BEGINNINGS OF CRONY CAPITALISM 403
1965. The Chinese business politicians initially opposed the Malaysia
scheme, hoping to prop up the British raj as a means of protecting
their economic interests. Once, however, Malaysia became a fait
accompli, the towkay made their accommodation with the emergent
political elite, joining Stephens and Mustapha in the Sabah Alliance
to win the elections at the end of 1962. Khoo became the Member
for Communications and Works in the end-of-empire government,
and a full-blown minister following Sabah’s independence through
incorporation into Malaysia. Another towkay, Pang Tet Tshung became
Finance Minister. Meanwhile, Hong Teck Guan—the uncrowned king
of the copra barter trade with the Philippines and Sulawesi who
diversified into cocoa-planting and timber extraction in the 1960s—
became a federal MP in 1963 and a senator in May 1964.47
Khoo, in particular, edged closer and closer to Tun Mustapha,
Sabah’s first head of state in the post-colonial order. Mustapha had
been appointed honorary adviser to the Chinese-dominated Sabah
Timber Producers’ Association in the last months of colonial rule.
The towkay had again become wary of Stephens’s economic radicalism,
especially his plans to phase out the annual licence operations in favour
of long-term concessions to the large foreign, principally British,
companies ‘up country’. When Stephens became Chief Minister in
1963 he touted proposals for specified areas in the remote and
under-developed interior to be logged and subsequently converted
into agricultural land. The Chinese, generally lacking the capital
and mechanized production techniques of the big lumber cutters,
preferred to operate for quick, short-run profits in the more accessible
coastal and river areas. The timber lobby in the SCA and in Mustapha’s
party, the United Sabah National Organization (USNO), forced
Stephens to abandon his proposals for long-term development of
the interior—instead the annual licence system was intensified and
reinforced by the need to buy the support of Chinese big business.48 In
the first direct state elections in April 1967, the SCA and USNO,
formed the Alliance government with the Tun as Chief Minister.
The SCA was rewarded with three places in the cabinet, despite
winning just five seats overall, and Khoo became Deputy Chief
Minister. Stephens and his mainly Kadazan party were consigned
to the political wilderness.49 Through towkay influence in the Sabah

47
Ibid., pp. 68–9, 71, 80–1, 84, 146–7, 168, 212–3.
48
Means, Malaysian Politics, p. 376.
49
Lee, Towkays, pp. 212–3, 237–8.

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 404 NICHOLAS J. WHITE

Alliance government, many of the existing annual licences were

converted into long-term special licences in the first year of Malaysia.
Khoo Siak Chiew’s firm, United Timbers, thus came to eclipse or
match the British timber giants, such as the Bombay Burmah Trading
Corporation and Sabah Timber, as a concessionaire.50
By 1968, both the British and Australian High Commissions found
the public and business life of Mustapha’s Sabah to be monumentally
corrupt. The Mussolini-esque Mustapha had personally become
fabulously wealthy through his own timber concessions, managed by
Dato Khoo while the Tun engaged in regular womanizing junkets
in Kuala Lumpur, Singapore and London. In this ‘one party state
dominated by one man’, ‘wholesale bribery and nepotism are rampant.
Self-enrichment is the norm’. But it was appreciated by the UK
diplomats that ‘the British Colonial Government . . . started the rot’
when the governor, Sir William Goode, gave timber licences to
three selected Sabah leaders (Mustapha, Stephens and the Murut
chief and politician, Gunsanad Sundang). The aim here was to try
and control indigenous economic nationalism through the formation
of timber co-operatives. More specifically, Sabah’s leaders could
now finance political parties, so accelerating Britain’s withdrawal
from the embarrassing remnants of its Southeast Asian empire.51
Cronyism thus emerged out of the exigencies of British decolonization
strategy and unwittingly the timber co-operatives provided a conduit
for indigenous, and particularly Muslim, politicians to enter the
business world and to forge economic, as well as political, alliances
with the wealthy towkay. In 1963, three indigenous co-operative
companies began work. Stephens, Mustapha and Sundang acquired
shares in these firms. The Chinese timber barons, however, were
not excluded since the commercial inexperience of the Muslim
and Kadazan leaders pushed them into agreements with the towkay
whereby the latter would work as subcontractors to the indigenous
firms. ‘Ali Baba’ networks were rife in Sabah as well as Malaya,
therefore. Furthermore, influential Chinese became partners in
native companies. Hence, Mustapha’s firm featured professional-
turned-towkay, Peter Lo. As Lee notes, ‘The towkays . . . took advantage

50
Ibid., pp. 242–4.
51
PRO, FCO 24/155, copy of Duffy, Kota Kinabalu to Duncan, Kuala Lumpur,
12 February 1968; FCO 24/250, enclosure in High Commissioner, Kuala Lumpur
to Commonwealth Secretary, 2 April 1968; FCO 24/155, enclosure by Morrison in
Duncan to Mound, Commonwealth Office, 26 August 1968. See also Lee, Towkays,
p. 54.

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 THE BEGINNINGS OF CRONY CAPITALISM 405
of the developing indigenous enterprise in timber to develop a prof-
itable relationship of symbiosis . . . Mustapha would give the towkays
something like a blank cheque in timber in return for which the towkays
would rally to his support’.52
A similar situation prevailed in decolonizing and post-colonial
Sarawak. One Commonwealth Office mandarin in London appreciated
by 1967 that, ‘Timber concessions are highly profitable and are
usually obtained by bribes’. Through cabinet re-shuffles, Abdul Taib
Mahmud, the Muslim Melanau leader, gained control of both land
and timber policy, meaning that he was ‘well placed to line his own,
his friends, and the [Sarawak] Alliance’s pockets’.53 In parallel to
Sabah, the Sarawakian Chinese towkay, such as the timber and banking
baron, Ling Beng Siew, feared the swift ending of colonial rule.54 But,
Britain’s rapid retreat, through advocacy of Malaysia, forced the towkay
in the Sarawak Chinese Association into accommodation with Malay–
Muslim powerbrokers to protect their businesses.

British Firms and the New Malaysian Politico-Economic Order

The pervasiveness of cronyism before 1970 is further illustrated

by the experience of long-established British enterprises in the
Malaysian post-colonial order. Certain British business interests did
appreciate the importance of connections with leading business and
political figures in the new Malaysia. Before merdeka, the head of
the Anglo-Oriental/London Tin Corporation group in Malaya, Sir
Douglas Waring, developed a close relationship with H. S. Lee. Both
were legislative councillors and tin barons. According to one British
business leader in London, Waring ‘had cultivated Colonel Lee at every
opportunity and they were in each other’s pockets’.55 By associating a

52
Lee, Towkays, pp. 239–40, 245.
53
PRO, FCO 24/161, minute by Ellison for Mason, 3 February 1967.
54
In 1960, Ling had told Kenneth Simpson, a director of the British business group,
the Borneo Company Ltd., that ‘talk of Self-Government was at least twenty years too
soon . . . [A]s there are three main communities [Dayak, Malay and Chinese] there
must be a Government independent of all races which . . . automatically necessitates
the British remaining in Sarawak’. Inchcape Archives, Guildhall Library, London
(hereafter IA), Ms. 27417, Letter to MacEwen, Managing Director, 7 March 1960.
55
PRO, DO 35/9900, ‘Note of Talk with Mr. Shearn and Mr. Wallich of the Malayan
Commercial Association, 15 July 1957’ by G. W. Tory. Lee and Waring’s relationship
was also cemented by mutual support for Malaya’s participation in the International
Tin Agreement. See White, Business, Government, pp. 151–2; idem., ‘The Frustrations

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 406 NICHOLAS J. WHITE

leading Malay ‘administocrat’, Nik Kamil, with their interests, the

mining and industrial firms connected to Bill MacLeod had also
cannily comprehended the importance of political alliances in Kuala
Lumpur. Moreover, Nik Kamil, as a Kelantan administrator, was an
‘old friend’ of the Mercantile Bank, and in November 1963, Chief
Manager Charles Pow informed the Dato that he was ‘quite happy’ to
employ the services of his son in the British exchange bank.56
Generally, however, British firms had a somewhat squeamish
attitude towards engaging further with crony capitalism. The Borneo
Company Ltd. (BCL) had entered into kongsi (partnership) with towkay
in East Malaysia who would emerge as political as well as business
leaders. In Sarawak, after 1956, Ling Beng Siew was a partner with
BCL in the Rejang river system, operating a number of sawmills
which relied on loans and buying contracts from the British business
group.57 Ling was a member of the Sarawak delegation on the Malaysia
Solidarity Consultative Committee established by Donald Stephens in
the summer of 1961, and a nominated member of the last Supreme
Council of the colonial era. It was unfortunate for BCL, therefore,
when Ling failed to gain political office as a Sarawak Alliance candidate
in Sibu in the 1963 elections.58 But BCL’s relationship with this
well-connected towkay was never easy or particularly close given the
fundamental differences in business practice between the European
agency house and the Chinese family business. By March 1961, the
agreement with Ling to operate a new timber carrier along the Rejang
was not working smoothly. BCL was adamant that the management
must remain in the hands of its Sibu office and not with the Ling
brothers. Otherwise, the Rejang Transport Company would ‘cease to
be treated as a commercial venture’—Ling would merely run the firm
as an appendage of his family’s timber business with no thought to
the cost-effectiveness of the BCL subsidiary.59 Indeed, there existed a
general mistrust of Chinese business leaders amongst the expatriate
agency houses. This was a hang-over from colonial days, and inhibited
the development of a full community of interest between British and
Chinese business in post-merdeka Malaysia. Soon after independence

of Development: British Business and the Late Colonial State in Malaya, 1945–57’,
Journal of Southeast Asian Studies, 28, 1 (March 1997), pp. 113–14, 118 n.
56
HSBC, MB Hist 1045, Tape received from Mr. Pow, 22 November 1963.
57
IA, Ms. 27405.
58
IA, Ms. 27295, Pearson to the managing directors, 27 June 1963 and reply of
3 July 1963.
59
IA, Ms. 27281, Stovold, London to Kuching, 10 March 1961.

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 THE BEGINNINGS OF CRONY CAPITALISM 407
for the Federation of Malaya, the Ministry of Commerce and Industry
wished to see a business association formed in Kuala Lumpur which
would bring together European and Chinese interests as well as Indian
and Malay ones. The government could thus discuss matters affecting
the entire commercial and industrial community. However, the British
agency houses were sceptical about close involvement with Chinese
big business. A CRO official was told by A. R. Malcolm, long-serving
managing director of BCL and president of the Malayan Commercial
Association in London, that the leaders of the ACCC, ‘if let in, would
pay lip service to such an Association, but would behind the scenes so
manoeuvre as to use it solely for their own interests. This would be
particularly unfortunate to UK interests if the Chinese should have
successes at the next General Election of 1959’.60
In late-1950s Sabah, Malcolm’s pan-Malaysian investment group
still had only minor interests and, given an anticipated economic
stagnation in both Sarawak and Brunei, the BCL directorate was
anxious to expand into the north’s booming export economy. One
means of achieving this was to link up with well-established towkay.
Hence, in 1958 a partnership was formed with Hong Teck Guan
in Tawau.61 But, by the early 1960s, deeper involvement in the
increasingly politicized world of Sabah business was eschewed. On
the eve of Sabah’s accession to Malaysia, BCL’s general manager in
Kuching, J. P. Pearson, wrote to London on new opportunities arising
in North Borneo. Sizeable concessions in the Koyah Forest Reserve
on the right bank of the Kinabatangan river had been awarded to
Stephens and Mustapha. Stephens, in particular, was in need of finance
to develop these resources and with large sales expected in Japan, BCL
could offer a third share which would net half a million Malayan dollars
per year. According to Pearson, ‘Donald Stephens and Dato Mustapha
are well worth cultivating’. The response from London, however, was
not enthusiastic. Along the lines of the firm’s relations with Ling
Beng Siew, BCL wished to be in effective control in the running of
any timber venture; being mere shareholders had ‘no attraction’.
Moreover, there was the ‘political aspect’ to be considered which
‘[a]fter the honeymoon period’ could become ‘an embarrassment’.
As the London general manager emphasized, ‘[O]ur policy . . . is to

60
PRO, DO 35/9900, Minute by Chadwick for Snelling, 28 October 1957.
61
IA, Ms. 27416.

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 408 NICHOLAS J. WHITE

have at least 50 per cent share in local ventures and to steer clear as
far as possible from politics’.62
Such apparent financial and political prudence only served to
marginalize and reduce the influence of large British firms. From
1959 on the mainland, British companies did contribute to Alliance
party funds.63 But this political funding was very much an impost, an
additional political levy on ex-colonial businesses merely to remain
in the independent state, and the slush funds were delivered on
sufferance. The British exchange banks, for example, attempted to
resist paying ‘squeeze money’, fearing retaliation from a left-wing or
Islamic regime should the Alliance fall from power.64 The Chartered
Bank and the Hongkong and Shanghai Banking Corporation (HSBC)
finally, and with considerable reluctance, made contributions towards
the Alliance’s 1964 campaign. This, however, only followed veiled
threats from Tan Siew Sin that the Alliance might raise funds
through granting ‘concessions’, involving ‘discrimination which could
be deterimental to other people’s interests’.65
Moreover, these political donations did not guarantee an easy ride
in the post-colonial state. At the end of 1963, HSBC was disturbed
when it received no support from the central bank as state accounts
were lost to Maybank in Johor. Meanwhile, Charles Pow discovered
that the Mercantile Bank faced a loss of deposits in its traditional
preserve in the east coast states. According to Pow, this was not due
to any hostility towards the Mercantile from the Malay bureaucrats in
Kelantan, Terengganu and Pahang but arose from ‘political pressures’
at the centre.66 When Jake Saunders, HSBC’s Chief Manager, visited
Malaya in November 1963, he expressed disappointment to the
governor of Bank Negara, Ismail bin Mohamed Ali, that foreign banks
were precluded from opening offices except in the major towns. This
meant that HSBC could not establish small branches where its major

62
IA, Ms. 27295, letter to MacEwen, 19 June 1963 plus enclosures and reply from
Stovold, 28 June 1963.
63
IA, Ms. 27260, Malcolm to Donald, 28 April 1961 enclosing copy of Malayan
Commercial Association Confidential Circular No. 81, 26 April 1961.
64
HSBC, Chief Manager’s File: Singapore & Malaya, Letter to Turner, Hong Kong,
8 May 1959; Perry-Aldworth, London to Clark, Kuala Lumpur, 15 May 1959; BoE,
OV 65/6, Note for the Record by Haslam, 7 May 1959.
65
HSBC, Chief Manager’s File: Singapore & Malaya, copy of Mack, Chartered
Bank, Kuala Lumpur to Pullen, London, 8 February 1963; letter from London to
Saunders, Hong Kong, 8 March 1963.
66
Ibid., Draft Note on visit to Eastern branches, November 1963; MB Hist 1045,
tape received from Pow, 22 November 1963.

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 THE BEGINNINGS OF CRONY CAPITALISM 409
customers had planting or mining operations. But Ismail would not
give way, claiming that HSBC ‘had enough good business already and
indigenous banks must be given a chance’.67 Joe Lever, the HSBC
supremo in Malaysia and Singapore, ominously reported in January
1965 that ‘Ismail’s attitude to Foreign Banks has changed over recent
weeks . . . [H]e is having pressure put on him either from political or
possibly domestic Banking sources’.68 Later that year, legislation was
passed which prevented foreign-owned banks from opening additional
branches in Malaysia.
It has been argued that the allegedly laissez-faire attitude of the
Tunku Abdul Rahman governments led to Chinese and foreign
businesses benefiting equally, and at the expense of Malay interests.
Funston recounts an interview with an anonymous UMNO official and
cabinet minister who claimed that the Tunku reached an ‘unwritten
accord’ with British officials to protect Albion’s commercial interests
after independence.69 It is true that the British agency houses were not
taken into local ownership and control until the Tunku had fallen from
power. Yet, as in the discussion of banking policy above, several years
before the NEP, British firms were generally losing out to politically
influential local entrepreneurs in the post-colonial state. An example
is in the shipping industry. In 1961, the Singapore-based Straits
Steamship Company (SSC) had formed a subsidiary in the Federation
of Malaya known as the Kris Shipping Company. Given plans for a
regional shipping line as part of the Tunku’s Association of South
East Asia, SSC—part of the Liverpool-based Holts shipping empire—
was encouraged by British officials to offer Kris shares to the public.
The Ministry of Commerce and Industry in Kuala Lumpur might
thus recognize Kris as a local company and British shipping interests
would be preserved in a national line. As UK officials appreciated,
however, Holts ‘may be chary about making a public offer of shares
too quickly’.70 Indeed, the advice was not heeded in Singapore or
in Liverpool, and instead MISC was officially dubbed the national
shipping line when it was formed in late 1968. MISC involved a 30 per
cent government shareholding but was run on a commercial basis by a
locally favoured entrepreneur, Robert Kuok. MISC quickly purchased

67
HSBC, Chief Manager’s File: Singapore & Malaya, note on visit to branches.
68
Ibid., letter to Saunders, 19 January 1965.
69
Funston, Malay Politics, p. 12.
70
PRO, DO 189/345, copy of letter from T. L. Beagley, Ministry of Transport
representative in the Far East to R. D. Poland, Ministry of Transport, 30 October
1961.

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 410 NICHOLAS J. WHITE

a number of passenger and freight carriers and also benefited from

running the two cargo liners acquired by the Malaysian government
as part of Japanese reparations. By 1970, three MISC vessels were
already in service on the Far East-Europe run.71
As we have seen, the Muslim–Chinese political and business
coalition in Sabah, based in large measure on agreement regarding
timber licence policies, was at the expense of the ‘Big Four’ British
(and US) logging multinationals. W. L. Morrison, a counsellor in the
Australian High Commission, found that British companies by the
late-1960s were increasingly antagonized by Mustapha’s interference
in the business world for personal aggrandisement. According to
several British businessmen, proper tender procedures were no longer
followed. Any firm which could make suitable arrangements directly
with the Tun was assured of a contract irrespective of the tender board
recommendations. In this way, Mustapaha had become involved with
a group of Japanese firms ‘whose interests he was promoting’.72
Indeed, the Japanese general trading companies (sogo shosha) and
manufacturing concerns, which increasingly penetrated the Malaysian
economies from the early 1950s, appear to have been more attuned to
local political and business realities than their British counterparts.
Japanese enterprises were certainly more flexible and forward-looking
in their approaches to joint ventures with Malaysian interests. For
example, when Malayawata Steel at Perai incorporated in 1967,
3 million one-dollar shares were offered exclusively to Malays
and Malay interests, and the issue was over-subscribed some nine
times. This meant that local shareholders—including the Malaysian
government—held 57 per cent of the equity capital.73 The relatively
liberal attitude of Japanese interests towards financial control of
joint ventures was in stark contrast to the policies of the British
investment groups, such as BCL. Indeed, when BCL formed a new
holding company, Motor Investments Ltd., in 1964 to embrace all its
subsidiary motor group companies in Malaysia, a mere 25 per cent of
the stock was offered to the Malaysian public.74 The Japanese steel
interests involved in the Malayawata project also appreciated the need
to appoint well-placed Malays as directors. Given the rising tide of
Malay economic nationalism in the late-1960s, it was with particular
71
Second Malaysia Plan, p. 187.
72
Means, Malaysian Politics, p. 377. PRO, FCO 24/155, enclosure in Duncan to
Mound, 26 August 1968.
73
Bulletin of the Malaysia-Singapore Commercial Association, 51, December 1967, p. 5.
74
IA, BCL, Annual Report & Accounts, 1964.

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 THE BEGINNINGS OF CRONY CAPITALISM 411
foresight that Raja Mohar, the chief Malay bureaucrat in the Ministry
of Commerce and Industry, was appointed chairman. Meanwhile, the
leading Malay ‘ultra’, Syed Ja’afar Albar, a former UMNO secretary-
general who had played a key role in the expulsion of Singapore
from Malaysia, was made executive director and manager in Kuala
Lumpur.75 In contrast, it was only in 1971 that the British Barlow
Boustead plantation group actively sought a politically influential
Malay director—Dato Osman bin Talib, a former MCS officer, chief
minister of Melaka and chairman of the CEB. This was part of a
new strategy of meeting ‘local susceptibilities’, involving ‘increased
local participation’ while simultaneously avoiding the adoption of ‘a
“fortress” mentality of trying to hold everything in European hands
with control too obviously exercised from London’.76 Yet, the agency
houses had woken up to the business ambitions of senior Malays rather
too late. In October 1971, Raja Mohar, now secretary-general at the
Treasury, publicly rebuked expatriate companies for ‘circumventing
the Government’s requirements that Malaysians be trained and placed
in management positions and on boards of directors’.77

Cronyism and Economic Development

How, then, did this first phase of crony capitalism impact upon
Malaysia’s economic development? Noteworthy entrepreneurial weak-
nesses can be detected well ahead of the financial troubles of the
1990s. As early as 1961, there were suspicions in the Bank of England
that Maybank was ‘over-lending’.78 The ‘Tunku’s bank’ appeared to
be over-extending itself in other ways too—it was under pressure
from the federal government to establish offices in small towns
like Kuala Terengganu and Port Dickson and even in rural areas
where a ‘branch’ comprised little more than ‘two clerks, no counter
and a safe in the middle of the floor’.79 By November 1963, Tan
Chin Tuan told Charles Pow that Maybank was ‘riding for a great
fall’ and was ‘getting dangerous’.80 This, as events proved, was not

75
STD 1969, p. 386.
76
Cambridge University Library, Barlow papers, 53/739, Henry Barlow to Tom
Barlow, 5 September 1971.
77
Reported in Straits Times, 11 October 1971.
78
BoE, OV 65/26, Note by Bennett, 9 February 1961.
79
BoE, OV 65/7, Westwater, Bank Negara to Barker, 30 May 1962.
80
HSBC, MB Hist 1045, tape received from Pow in Singapore, 18 November 1963.

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 412 NICHOLAS J. WHITE

just sour grapes on the part of Khoo Teck Puat’s former boss.
In 1966, allegations of mismanagement of Maybank’s assets led
to a run on the bank, precipitating government intervention. The
Minister for Home Affairs, Dr. Ismail, stepped in as chairman,81
and a de facto nationalization of Maybank ensued. A similar fate
befell UMBC, the other ‘crony bank’ established in 1960.82 In
state-controlled companies there was additional mismanagement by
favoured entrepreneurs. In 1969, the British general manager of
MSA confided to Sir Michael Walker, the UK’s High Commissioner
in Kuala Lumpur, that relations with the new chairman, Robert
Kuok, were ‘very difficult’. Kuok, although he had practically no
experience of airline business, interfered in operational matters ‘which
are no concern of his’. An example was Kuok’s decision, without
any consultation, to change MSA’s insurance arrangements. This
proved ‘entirely unsuitable’ and had to be reversed at a cost of
M$500,000.83
Beyond the difficulties associated with individual crony firms and
entrepreneurs, crony capitalism can be held responsible at a macro-
level for uneven development in post-colonial Malaysia. Alongside
‘infrastructural bottlenecks’, and the higher costs of labour and
resources, the narrow focus of Chinese entrepreneurs on the quick
profits from logging proved a significant factor in the relative under-
development of East Malaysia (particularly in the failure to develop
secondary industries).84 Moreover, the nature of Sabah’s political
economy skewed timber development towards extraction along the
coastal plains. Tun Mustapha’s power-base was lodged within the
Muslim communities of the coast and the chief minister necessarily
sought to reward his followers. As we have seen, the Chinese timber
barons also preferred working the flatter forests of the rivers and
coast. This community of interest further cemented the alliance
between the towkay and Muslim leaders, while permitting Chinese
entrepreneurs new business opportunities as contractors and partners
with the Muslim companies.85 But, this search for quick profits on the

81
STD 1968, p. 350.
82
Gomez, Chinese Business, pp. 67, 78; STD 1966.
83
PRO, FCO 24/577, copy of minute by Walker, 2 October 1969.
84
J. H. Drabble, ‘The Study of Malaysian Economic History’, Ninth James C.
Jackson Memorial Lecture of the Malaysia Society of the Asian Studies Association of
Australia, 1996, p. 12.
85
Lee, Towkays, p. 245.

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 THE BEGINNINGS OF CRONY CAPITALISM 413
annual licence system meant that the interior, inhabited by Kadazan
and other non-Muslim groups, remained less developed.86
Yet, despite the high incidence of cronyism in the Tunku years, and
these developmental imperfections, Malaysia still achieved impressive
growth. GNP expanded by over 6 per cent per annum during the
1960s—a figure more than one per cent higher than anticipated in
government plans and higher also than the annual 5 per cent target
set for the developing world during the UN’s ‘development decade’.
Moreover, Malaysia’s rapid growth was sustained amidst declining
prices for its staple exports, rubber and tin.87 Notwithstanding
rampant venality and peculation in post-colonial Sabah, the Australian
High Commission found that the state’s economy continued to boom
in the late-1960s. Indeed, revenues—derived principally from timber
royalties—were increasing at such a sensational rate that the local
government was able to contribute more to the economic development
of Sabah than was anticipated in the first all-Malaysia five-year plan,
drawn up in 1965. There was no unemployment. Rather, a labour
shortage was holding back further expansion of the rubber, palm
oil and timber export industries. Despite a cost of living increase,
Sabah experienced the highest per capita income of all the Malaysian
states.88
Moreover, the promotion of politically influential Malays to business
positions was not necessarily damaging. Even the critical Mahathir
conceded that, ‘Good or bad, able or incapable, the presence of these
Malays on the various boards means that they must at least become
familiar with the ways of business. Most of them are not entirely
stupid . . . [E]vidence shows that most of them are now sufficiently
conversant with business methods to be able to actually impart
a lot of know-how to new ventures launched by Malays’.89 Before
being appointed to the board of Bank Bumiputera in 1965, Tengku
Razaleigh was at least secretly despatched to the City to study
financial markets and meet international bankers—experience which
his biographer regards as crucial in the building of the bumiputera
economy during the 1970s and 1980s.90 At the same time, the
payment of large salaries to Malay non-executive directors did not

86
Means, Malaysian Politics, p. 376.
87
Second Malaysia Plan, pp. 16, 18.
88
PRO, FCO 24/155, enclosure in Duncan to Mound, 26 August 1968.
89
Mahathir, Malay Dilemma, pp. 43–4.
90
Gill, Razaleigh, pp. 58–9.

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 414 NICHOLAS J. WHITE

hamper the performance of overseas firms. The Nik Kamil group of

companies was remarkably profitable. Mahathir noted that Rothmans
was ‘one of the most prosperous manufacturing firms in Malaysia’.91
Just as the involvement of Malay aristocratic administrators in
commerce and industry was not always unproductive, so those Chinese
business politicians who benefited from state patronage and subsidy
need not be seen as rent-seeking, phoney capitalists. Far from merely
picking up a directorial fee every month for lending his influence to the
CEB, T. H. Tan took an active part in the electricity board’s affairs,
scrutinizing the award of contracts and tenders, and often clashing
with the professional management.92 H. S. Lee received a banking
licence after his retirement from public office partly because of his
nationalist political credentials but also in recognition of his proven
track record as a successful entrepreneur, dating back to the inter-
war years. Tan Siew Sin became head of Sime Darby in the mid-1970s
due to his family’s long-standing shareholding in the Anglo-Malaysian
enterprise. He successfully steered the fully localized investment
group to become the largest transnational corporation in Malaysia
and Singapore through shrewd diversification from plantations into
secondary industry. Tan’s Sime Darby had an impressive market
capitalization of one billion US dollars by 1985.93 In Sabah, Edwin
Lee’s seminal study of the timber towkay rejects the idea that Khoo Siak
Chiew et al. were mere ‘pariah entrepreneurs’, dependent upon bribing
officials to secure concessions and protection. ‘They had a definite
place in the councils of Government. The inference of a definite right
to negotiate business matters is irresistible’.94
In the historiography of Japanese economic development after the
Meiji Restoration of 1868, it has long been recognized that the rise of
the huge zaibatsu, encompassing a vast range of activities in primary,
secondary and tertiary production, relied on the government’s
sponsorship of trusted entrepreneurs who consequently built up
oligopolistic preserves. At the same time, Meiji bureaucrats dipped
into the business world to initiate projects deemed desirable by the
national government. The comparison with Malaysia in a similar era
of nation-building and rapid economic development is compelling. It

91
Mahathir, Malay Dilemma, pp. 94–5.
92
Tate, Power Builds the Nation, pp. 192–4.
93
ISEAS, TCL/29/16, The Story of Sime Darby (Kuala Lumpur: Sime Darby Bhd.,
1985).
94
Lee, Towkays, p. 244.

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 THE BEGINNINGS OF CRONY CAPITALISM 415
would appear typical of late-developing economies in Pacific Asia that
government officials chose like-minded and politically well-connected
entrepreneurs to manage state-assisted economic development. Yet,
as Hunter reminds us, those business leaders who succeeded in
nineteenth-century Japan ‘were those who made the biggest profits
and proved themselves as entrepreneurs’. In the words of Franks,
Meiji business leaders ‘possessed . . . entrepreneurial qualities, such
as determination, the ability to take risks and, not least, the skills re-
quired in a bureaucratic state to manipulate the system in the interests
of their businesses’.95 As in Meiji Japan, political manoeuvring should
be viewed as a key entrepreneurial skill in post-colonial Malaysia.
While state patronage played a large part in corporate success,
Malaysian business leaders still had to be competent entrepreneurs to
reap the benefits from those government concessions and favours.96
We should also be careful of assuming that the Malaysian nation-
state was hijacked by crony entrepreneurs during the Tunku era to
the detriment of economic development. No less so than in post-
Tokugawa Japan, there were serious divergences of opinion between
officialdom and business leaders in post-colonial Malaysia, suggesting
that public and private sectors were relatively autonomous.97 On key
development issues, the state’s room for manoeuvre was not impeded
by the influence of the politically well-connected entrepreneurial elite.
The growing incidence of corporate taxation to fund development
schemes is a case in point. Despite protests from the United Chambers
of Commerce of Malaysia, in which T. H. Tan represented Chinese
business, Tan Siew Sin went ahead with increases in turnover tax in
his 1965 budget.98 Indeed, the holding of public office by Malaysian
entrepreneurs acted as a significant restraint on the reaping of
personal financial reward. As the Finance Minister pointed out to
one British agency house head in 1961, any modification of estate
duty rates would be politically embarrassing. ‘[O]ur political enemies’

95
Janet E. Hunter, The Emergence of Modern Japan (Harlow: Longman, 1989),
pp. 113–18; Penelope Franks, Japanese Economic Development: Theory and Practice
(London and New York: Routledge), pp. 36–7.
96
A point made in my review of Gomez, Chinese Business in Bulletin of the School of
Oriental and African Studies, 63, 3 (October 2000), pp. 455–6.
97
For example, Chinese capitalists were disturbed by the limited extent of Japanese
reparations payments in the 1960s, as well as the failure to create a common market or
maintain a common currency between Malaysia and Singapore following the island’s
separation in August 1965.
98
ANM, AE/97/A, The States of Malaya Chamber of Commerce Year Book 1965,
President’s Address, 29 April 1966, pp. 12–13.

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 416 NICHOLAS J. WHITE

could argue that ‘any reduction in rates . . . is designed for my personal

benefit’.99 There were limits to the influence of the towkay in Sabah
also. In the 1967 elections, Khoo Siak Chiew was attacked by his
Chinese opponents for failing to prevent the swift introduction of
federal taxes after the creation of Malaysia, and the SCA leaders,
despite their protestations, were faced with additional levies on timber
production.100

Conclusion: An Indonesian Perspective

The importance of the decolonization era in forging politico-economic

structures which continue to dominate contemporary Southeast Asia
has been recognized in Twang’s study of Chinese business during
the Indonesian revolution. Here totok Chinese risk-takers proved vital
for the Indonesian republic through exploiting overland and sea-
borne smuggling networks and so providing basic necessities for the
prosecution of the war of independence against the Dutch. Links
between Indonesian politicians and Chinese business leaders were
also intensified by the vagaries of Republican economic policy. The
ambiguous blending of socialism with economic indigenism, pushed
the Chinese into co-operation with the political and military leadership
to avoid sequestration of their businesses. The decolonization period
thus began the trend of exploiting high political office to accumulate
wealth, while those Chinese who aided republican powerbrokers
received further rewards in the post-colonial state.101 Moreover,
the general weakness of pribumi (indigenous) capitalists permitted
Chinese cronies to benefit from the localization of European enter-
prises from the mid-1950s onwards.102
As in Indonesia, Malaysia’s crony capitalism emerged from the
crisis of decolonization and the economic nationalism of the post-
independence regime. Malaya, Sabah and Sarawak in the 1950s
and 1960s lacked the violent and chaotic struggle for independence
experienced in Java and Sumatra during the 1940s. Yet, even in

99
Centre of South Asian Studies, Cambridge, Barlow papers, Private Foreign
Letters, 1959–75, Tan Siew Sin to Tom Barlow, 22 May 1961.
100
Lee, Towkays, pp. 235–6.
101
Twang Peck Yang, The Chinese Business Elite and the Transition to Independence,
1940–50 (Kuala Lumpur: Oxford University Press, 1998), especially pp. 5, 122, 140,
195–6, 221–2.
102
Brown, Chinese Big Business, p. 40.

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 THE BEGINNINGS OF CRONY CAPITALISM 417
the relatively peaceful transfers of power, Chinese business leaders
entered the political realm to protect their economic stake and
proved indispensable in the provision of finances for Malayo-Muslim
nationalists. Malaysia avoided the post-colonial nationalizations of
Indonesia, but those non-Malay entrepreneurs who had proved their
nationalist mettle were rewarded with concessions from the state,
often at the expense of expatriate firms. For the head of the Federation
of British Industries, barely eighteen months after merdeka, it appeared
evident that ‘Malaya will pursue a . . . policy of economic nationalism’
comparable with other Commonwealth countries in Asia. ‘[P]ressure
is already being exerted to accelerate “Malayanisation” and to direct
industrial and commercial influence from foreigners to nationals’.103
Too sharp a contrast should not be drawn therefore between the
allegedly free enterprise era of the Tunku and the state capitalism
that followed. Some years before the formal advent of the NEP,
Chinese (and European) capitalists were required to share business
opportunities with leading Malay bureaucrats and politicians. Political
savvy thus emerged as an additional, key entrepreneurial skill which
frequently assisted business success in the post-colonial state.

103
Modern Records Centre, University of Warwick, Confederation of British
Industry records, Mss. 200/F/3/D3/6/75, D/5528, Report by Sir Norman Kipping,
c. spring 1959.

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