State Structure, Policy Formation, and Economic Development in Southeast Asia

The Political Economy of Thailand and the Philippines

Antoinette R. Raquiza

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415617673
• eBook ISBN: 9781136505010
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Comparative Politics
• Index: Politics & International Relations

Why do some small, developing countries industrialize and others don't? What factors account for different economic performance among states that are vulnerable to external shocks, crony capitalism, and political instability? This book argues that the answer lies in the structuring of state power, specifically the way different sets of governing elites – political leaders and economic technocrats – are embedded in political organisations and state institutions, and the way these elites relate to each other in the economic development policy process. Conducting a comparative historical analysis of Thailand and the Philippines, the book argues that the institutional settings of governing elites influence economic outcomes. In Thailand, political power traditionally connects to state institutions in ways that has limited the impact of political turnovers and global downturns - conducive to long-term industrial activities. In contrast, Philippine state power derives from family networks that merge social and political power, suited to fast-moving, short-term commercial interests. In focusing on this political and institutional story, the author analyses the current development dilemmas of countries, weighed down by historical legacies of unstable regimes, dependency, and social conflict, and how they are likely to develop in the future.

1	Introduction Institutional settings of state power and the policy process

Why do some developing countries industrialize and others don't? What explains differences in economic performance among states that are vulnerable to external shocks, crony capitalism, and political instability? These questions have acquired heightened urgency over the past decade, a decade bracketed by financial meltdowns, exacerbating the existing weaknesses of dependent economies and troubled polities across the world. This book seeks to answer these questions by studying Thailand and the Philippines, two emerging economies in East Asia – a region that has rebounded with remarkable speed from recent global and domestic crises.¹ Ten years after the bruising 1997–98 Asian financial crisis, the region had not only recovered from that setback but had grown an average of 9 percent annually over the intervening years.² Indeed, the experiences of small, late–late developing countries in this region have much to teach the careful comparativist. East Asia contains both great opportunity and significant competitive pressures, not least because the region includes two of the world's biggest economies, China and Japan. The challenges that smaller states face as they attempt to take advantage of international economic opportunity and integrate in the world market, therefore, deserve careful scrutiny and analytical attention.

The narrative of crisis and recovery in Thailand and the Philippines is a story shared by other market economies in Southeast Asia that took off more than a decade after the newly industrialized countries (NICs) of South Korea, Taiwan, Hong Kong, and Singapore first did so. Malaysia, Thailand, Indonesia and the Philippines present a general pattern of late–late development – distinct from that of their northeastern neighbors. Whereas the economic rise of Japan, South Korea, and Taiwan has been associated with state-led industrialization, the subsequent economic take-off of Malaysia, Thailand, and Indonesia started in a later period of political and economic liberalization.³ Nevertheless, growth remains uneven among the region's emerging economies, and this variation suggests causal factors at the national level. For this work, I pay closest attention to state institutions.⁴ And perhaps no liberalizing economy more strongly invites an examination of the impact that domestic political institutions have made on development than the Philippines, which continues to struggle to keep pace with the region's growth economies.

This work, in fact, grew from my deep and persistent dissatisfaction with dominant explanations of Philippine economic underperformance. Filipinos sometimes indulge in a national pastime, in which we measure our contemporary distress against the progress of our neighbors: older generations once reflected nostalgically on the fact that, following World War II, Philippine industrial development was second only to Japan in Asia. Others lament that impressive growth in the past decade hasn't lifted the country's poor at the same rate as in neighboring Malaysia, Thailand, and Indonesia. Since the ouster of President Ferdinand Marcos in 1986, ending a regime that became virtually synonymous with crony capitalism, the dominant explanations of the country's difficulties have largely remained unchanged. Economic arguments typically point to the country's restrictive economy, but other Southeast Asian countries have set up nationalist economic controls that partially closed their economies in response to external and domestic crises. Many such cases produced robust subsequent growth. Why have Philippine measures been so apparently costly? In fact, successive Philippine governments since Marcos have liberalized different sections of the economy, ostensibly to free these from the corrupting influence of the state. Yet, the country continues to have so limited a productive base that export labor today is its major source of foreign exchange.⁵ Why should liberalization have produced such slender gains in the Philippines, but not elsewhere? Political arguments, on the other hand, stress the prevalence of rent-seeking and corruption. But virtually all countries surrounding the Philippines are judged to have less than transparent governments and significant high-level corruption. Why should Philippine rent-seeking be apparently more debilitating than other variants in the area? And so on: all sorts of explanations for the Philippines's weak economic performance, plausible when applied to the Philippines alone, grow less so in comparative perspective.

Explanations must situate Philippine economic difficulties against the experience of the region's high-growth countries. Discussions on East Asia's economic dynamism typically do not include the Philippines, long been an outlier in the region. Analysts look to the Philippines's weaker industrial development, lower foreign investment flows, and greater poverty incidence as reasons to focus on Malaysia, Thailand, and Indonesia.⁶ This case set is also fairly common in studies comparing Southeast Asia with the economically more robust Northeast Asian region. Yet, precisely because the Philippines has failed to keep up with industrializing Asia despite its location and liberal economy, it presents an opportunity for us to test hypotheses that stress market dynamics as drivers of growth. By comparing the Philippine political economy to those of nearby emerging economies, I seek to contribute to an understanding of the development dilemmas confronting many late–late developing countries – countries that seek to replicate the success of the first-generation NICs but do so in a period of greater economic liberalization, competitive pressures, and, therefore, market volatility. Ultimately, the pages that follow seek to clarify questions about the role of states and markets in countries weighed down by historical legacies of unstable regimes, dependency, and social conflict.

I begin with a discussion of the general circumstances confronting the Philippines and the high-growth economies in the region. Following the work of others, I look to particular elements of the late–late developing context for the broad parameters of the puzzles that matter most in the analysis to come. Late–late developers confront a different world than the tiger economies that grew when the world economy, emerging from World War II, was booming and the Cold War peaking. For Malaysia, Thailand, Indonesia, and the Philippines, playing catch-up meant grappling with intensifying international competition and severe global recessions, particularly the oil shocks of the 1970s and the 1980s’ debt crisis. But late–late developers also differed most from early NICs in their governing elites’ institutional settings. Variations in state configuration explain differences in the pace and structure of economic development, and I argue that particular and significant differences existed among late–late developing countries.

The book approaches the puzzles of late–late development by studying Thailand and the Philippines, two small liberalizing economies in the East Asian growth region, in a comparative historical manner. Alongside the Philippines, I examine industrializing Thailand to draw out tractable variations in late–late development processes, and so to illuminate some core dynamics of the Southeast Asian political economy of development. I argue that differences in economic performance among small countries, vulnerable to external shocks and internal instability, lie in how the institutional settings of the political leadership and economic technocracy vary. I study such variation along two dimensions: first, the embeddedness of the national political leaders and economic technocrats in state or political institutions, and second, the institutional arrangements between these two sets of governing elites. Differences in the way political leaders and economic technocrats are organized and come to power as well as whether they are institutionally differentiated from each other account for variations in the development policy process and, consequently, in economic outcomes. I argue that differences in the configuration of state power affect the type of policies made (their time horizons, consistency, and reflection of technocratic design) and, thus provide incentives for specific types of investments (particularly speculative and commercial vs. strategic and industrial). In concentrating on this political and institutional story, the book situates state activity at the center of the countries’ economic development.

The rest of this chapter is divided into two parts. The first provides an overview of the theoretical discourse on the changing context of development by comparing the experiences of Japan and the region's newly industrialized countries, identified with the classic developmental state model, to those of emerging economies in Southeast Asia, specifically Malaysia, Thailand, Indonesia, and the Philippines – collectively referred to as the ASEAN-4 countries.⁷ In order to draw out distinct elements of a pattern of late–late development (among Southeast Asia's liberal economies), the comparison focuses on three areas: historical legacies of state formation and state structure, different phases of globalization, and shifts in the policy tools used to effect industrialization. The second part -differentiates, within this portrait of late–late development, between the Thai and Philippine cases by focusing on the configuration of state power in the two countries.

The state in changing development contexts

The literature on late industrializing countries gives state agents the key role in the development process. States not only provided public goods and ensured the necessary rule of law for capitalist development, but also directly participated in capital mobilization and accumulation. But this participation was also influenced by timing: the later the country attempts industrialization, the more resources it will require to compete in the global market. In the global North, states needed to mobilize resources in order to jumpstart heavy industrialization (Gerschenkron 1962), protect an incipient manufacturing sector against cheap imports (Chang 2003), and retool the economy toward creating distinct market niches (Katzenstein 1985). Later, in non-western countries, the challenges were even greater and the burden on states correspondingly more onerous.

In order to determine key elements of the late–late development contexts, it makes sense to begin by differentiating them from their most proximate and influential precursors – the developmental states that were key to solving the problems of late development in Northeast Asia. Indeed, in part the effort to understand late–late developing Southeast Asia stems from the long shadow cast by the Japanese, South Korean, and Taiwanese experiences. Ideas about state roles in development, and what elements of state politics mattered most in shaping economic outcomes have extended from the experiences of these countries to color many of our expectations about how development is likely to work in Southeast Asia and under what conditions it is likely to fail. As will be shown, however, these expectations are in large part misplaced, and the lessons we draw from them misguided. I begin by clearly differentiating the Southeast Asian developmental experience from that of the earlier NICs and, having established these differences, I then elaborate their analytical significance in the study of late–late developing countries.

In Japan and the first-generation NICs, rapid and successful industrialization illustrated the role of states that, compared to others in the region, could effectively wield developmental resources available domestically and globally during the post-World War II global economic boom. In these countries, meritocracies undertook industrialization by centralizing and allocating resources to strategic industries (Johnson 1982; Amsden 1989; Wade 1990; Evans 1995; Woo-Cumings 1999). Developmental states, merging political authority and economic expertise provided the focus needed to build economic power. This is not to say that these states were immune to political wrangling or unmarred by corruption; other studies rightly examine how coalition politics (Haggard 1990; Gereffi and Wyman 1990),⁸ class representation (Kohli 2004), and even corrupt governmentbusiness practices (Gomez 2002; Kang 2002) influenced economic decision-making. Nevertheless, in contrast to other Asian developing countries, the political leaderships in Japan, Korea and Taiwan tenaciously used politics and rents to pursue industrialization.

The developmental state, however, did not emerge in a vacuum, but also reflected the influence of both regional and domestic factors. Grave threats to national security helped rally and unite their political leaders and populations behind a nationalist industrial agenda and redistributive programs that, under less contentious geopolitical conditions, might have polarized society (Stubbs 1999: 339–343; Onis 1991; Jomo et al. 1997). In particular, the threat of communism from across their borders and domestic insurgency compelled South-Korean and Taiwanese governing elites to implement sweeping agrarian reform. Anne Booth (1999) cites other historical factors working for these two tiger economies: the human resources left by the extensive Japanese colonial educational system, high ethnic homogeneity in both countries, and the inflow of entrepreneurs and resources, following communist victory in the 1950s, from northern Korea and China – a development that shifted the power balance away from a landed oligarchy and facilitated land redistribution (pp. 302–305). These factors increased social cohesion and human capital, and so set the stage for South Korea's and Taiwan's rapid economic growth.

The post-war global economy also proved auspicious for industrializing Japan, Taiwan, and South Korea, all of which were looking for markets for their manufactured exports (Stubbs 1999). Japan and the first-tier NICs benefited from increased international trade driven by pent-up global commodity demand and post-war rehabilitation and reconstruction aid after the war, as well as by increasing US spending in the context of heightened Cold War tensions (Cumings 1987). Both the Korean and Vietnam wars also triggered commodity booms that helped stimulate export production in the region. Moreover, increased dollar earnings from their early shift to export manufacturing and high domestic savings helped these countries recover from the oil price hikes and debt crisis in the 1970s and 1980s.⁹

Relatively high state capacity ensured that first-generation NICs could use a wide range of policy tools to effect industrialization. Some policy instruments, like trade controls, were part of the import-substitution industrialization strategy that they adopted in the 1950s–1960s, when even transnational corporations supported controls to gain first-entry advantage in these countries’ domestic markets (Maxfield and Nolt 1990). These NICs, however, could also use more discretionary policy tools (such as licensing that favored select businesses); here, domestic development officials took advantage of geopolitical considerations in negotiations with bilateral and multilateral financial institutions to pursue national industrialization. Taken together, these options provided Japan and the first-generation NICs with a broad range of policy tools. Among the most important: nationalizing or substantially controlling the financial system to shape savings and investments; selectively liberalizing trade to protect fledgling domestic industries; restricting foreign direct investments; adopting an industrial policy that identified priority sectors for subsidized credit, foreign exchange, and state investment funds; and, wielding fiscal and non-fiscal incentives in exchange for “state control on technology (e.g., production methods, product variety), entry, capacity expansion and reduction, and pricing” (Chang 2003: 116).

The developmental state model has since become an enduring tradition in political economic studies. For instance, the dramatic rise of China, India, and Brazil in the global economy has invited comparisons with the first-generation NICs (Baek 2005; Rodrik 2000); importantly, these later-day economic leaders have relatively strong central authorities and large economies – and these conditions may make comparisons with the classic developmental states more appropriate.¹⁰ In small, late–late developing countries, with different state formations, the model is less useful in explaining economic growth. In fact, attempts by governing elites in Southeast Asia to undertake state capitalism and replicate the success of their northeastern neighbors – notably, by Sukarno in Indonesia, Phibun in Thailand, Mahathir in Malaysia, and Marcos in the Philippines – ended instead in a highly indebted public sector.

What explains different economic performances between the first-generation NICs and the ASEAN-4 countries? Unlike their more homogeneous northeastern neighbors, Southeast Asian countries are a diverse group, among which different historical and colonial legacies led to particular state and social configurations (Anderson 1998: 3–6; Jomo et al. 1997). Nevertheless, early development processes shared at least three general challenges that made governing elites’ pursuit of high-speed industrialization a much more difficult proposition. First, colonial and other historical legacies allowed social dynamics to exert a greater influence on economic policymaking. Second, from the 1980s forward, the global context that these late–late developers confronted differed fundamentally from that which existed in earlier decades. Third, partly in consequence of the changing global context and partly reflecting limited state capacity, these countries had use of a far more limited repertoire of policy tools to expand their economies. To illustrate these points and set the context for the more focused paired comparison that will follow, the discussion below sifts through the experiences of the ASEAN-4 countries.

In most of Southeast Asia, colonial rule sped up the integration of agrarian economies into world markets and established relatively bare national states that depended heavily on trade for revenues. In Malaysia, Indonesia, and the Philippines, classic state-building activities, including the setting up of a central administrative bureaucracy occurred under the auspices of colonial administrations rather than indigenous rulers.¹¹ Thailand's experience differed from those of others in the region because it was never directly colonized. Yet, even here, the Chakri monarchy maintained political sovereignty by giving the British and other imperial powers freer rein over the domestic economy. Hence, all ASEAN-4 countries entered the world stage in the nineteenth century as virtual (economic) extensions of industrializing western powers. Moreover, since they were never frontline states in the anti-communist struggle, as were South Korea and Taiwan, their political elites approached the task of constructing highly centralized states capable of uniting the country behind a national project with less urgency (Doner et al. 2005). Rather, in these countries, rapid bureaucratic growth came on the heels of major political upheavals, as a way for emergent political rulers to reward loyal followers and consolidate their positions (Evers 1987).

Arising in conditions that were in many ways distinct, indigenous political elites took a different route to the construction of their states. Facing greater political pressure from their societies and often in competition with others who aspired to rule, these leaders undertook to build their states at the same time as they sought to develop their economies. From this perspective, development strategies that called for state corporations, import substitution, or export promotion cannot be separated from political objectives. Trade policies closely reflected the need for state financing; governments undertook to develop their infrastructures not only to build the national market but also in pursuit of counterinsurgency; industrial development, a source of rents, sought to expand a domestic entrepreneurial class aligned with emergent national political elites. While in the first-generation NICs, centralizing political elites built state capacities in order to more effectively pursue economic development, those who came after them undertook economic development to build state capacitie...

Table of contents

• Front Cover
• State Structure, Policy Formation, and Economic Development in Southeast Asia
• Routledge studies in the growth economies of Asia
• Title Page
• Copyright
• Dedication
• Contents
• List of figures and tables
• Acknowledgements
• Abbreviations
• 1 Introduction: institutional settings of state power and the policy process
• 2 Patterns of economic growth: narratives and realities
• 3 Building the modern state and economy
• 4 Comparative policy dynamics of trade and investment promotion
• 5 Liberalization: divergent paths, different outcomes
• 6 Conclusion: state configuration and the politics of economic development
• Notes
• Bibliography
• Index