Minns_(2001)

Minns(2001) - HISTORY AND CONTEXT Chapter Three World Economies Southeast Asia since the 1950s John Minns In 1994 the respected economist Song

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Unformatted text preview: HISTORY AND CONTEXT Chapter Three World Economies: Southeast Asia since the 1950s John Minns In 1994-, the respected economist Song Byung- nak predicted that by the year 2000 all the nations of Southeast Asia would have gradu- ated to the status of “newly industrializing countries” (NICS) and that the center of the world economy would have shifted to East Asia by then (Song p. 218). Another estimate made at around the same time, by Anne Booth, suggested that by 2020 Indonesia would be the fifth largest economy in the world, after China, the United States, Japan, and India, while Thailand would be eighth, with Germany and South Korea in between (Booth p. 28.) A few analysts were suspicious of these forecasts, pointing, for example, to inefficient forms of production and low levels of labor productivity (see Krugman), but most were carried along with the prevailing euphoria and predicted waves of Asian “miracles.” Barely half a decade later, with the experience of the crisis of 1997 intervening, these predictions now appear I grossly and falsely optimistic. Nevertheless, such optimism had some basis in fact. Some of the countries of Southeast Asia have per capita incomes among the highest outside the advanced industrial world, and Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand have all experienced significant economic growth since the mid- 19605 (Oshima p. 203). Indeed, economic expansion in some of these countries has been faster than almost anywhere else, apart from the “miracle” economies of South Korea and Taiwan. Sometimes, then, optimism was based on simple but illegitimate extrapolations from growth that had already been achieved. 24 Sometimes, however, it was based on a lack of knowledge of the region, its great diversity, the stark differences in living standards within it, and the ways in which Southeast Asia as a whole, and its component parts, have been positioned within the world economy To appreciate these questions we must begin with the structure and location of these economies as most of them became politically indepen— dent after World War II. The Colonial Inheritance The colonial powers oversaw economies in which primary production predominated. Although important local variations existed, it is broadly appropriate to view the late colonial economy as a triadic system. Long-distance, especially international trade, and the little manufacturing industry that existed, were largely in the hands of Europeans, along with plantation agriculture and mining. Most food for domestic consumption was produced by the native peoples, who also engaged in as well as small-scale handicrafts. Connecting these two economies was a class of merchants and moneylenders, often Chinese but occasionally Indian in background, who collected and traded produce, and provided small-scale credit to peasants (Wu and Wu p. 4-8). Trade and foreign investment connected colony to colonial power, rather than colony to colony: the tin and rubber of the Malay peninsula largely went to Britain in British ships and was sold there by British companies, and sugar went directly from the Philippines to the ., “dais: World Economies: Southeast Asia since the 19503 25 United States. Intraregional trade was limited, since the first destination for each of the cash crops and minerals produced in the region was the country that had colonized it rather than any more diverse range of advanced, industrialized markets. Foreign investment came largely from the same colonial power. These well-established patterns were disrupted by the advent of political indepen- dence, although to varying degrees. The French colonies in Indochina, in armed revolt against Paris, rapidly broke most of their economic ties with French firms upon declaring independence, or even beforehand. Many Dutch firms returned to Indonesia, although with reduced influence, after its war of independence, but most were then nation- alized in 1957. British companies fared some- what better in Malaya, and then Malaysia, until the early 1970s, when their interests in plantations and tin mining began to be acquired by the government. Burma cut its ties with British capital, and with the outside world as a whole, in a much more decisive way, even refusing to seek membership of the Commonwealth (Guyot et al. p. 190). More US companies survived and continued investment in and trade relations with the Philippines. Overall, however, few of the enterprises that had been dominant in the colonial period were able to make the transition to operating in the new environment after independence (Yoshihara p. 17). Among the reasons for this discontinuity was the new geometry of global economic power after World War II. Britain, France, and the Netherlands, the great colonial powers of the region, had entered into long-term rela— tive decline, and were displaced by the United States, a colossus that by 194-5 accounted for half of the manufacturing output of the world and one third of its trade. First the United States and then, from the 19605, Japan took over the dominant position in Southeast Asia’s economies, occupying the top tier of their triadic systems. Anticolonialism and postwar nationalism were propelled, at least in part, by economic motivations. As nationalism grew and suc- ceeded in its political aim of independence, its economic aspects came to the fore. In Latin America in the 1950s and 19605, theorists such as Raul Prebisch were beginning to develop a radical critique of the exploitative relationship that had long existed between advanced and underdeveloped countries (see Prebisch). These theorists suggested that trading and other connections between rich and poor were the cause of underdevelopment, not a solution to it. Andre Gunder Frank suggested in the 1960s that underdevelopment was not a state of existence but a process, coining the phrase “the development of underdevelopment” (see Frank). Underdevelopment was something that had been done to poor countries by rich ones and it continued despite political inde- pendence. The potentially revolutionary impli- cations of these ideas were made explicit in theories of dependency, its theorists often being known as dependistas in recognition of their ori— gins in Latin America (see Harris for a short outline of the rise and decline of these theories). However, not all those who were influenced by the ideas associated with dependency theory were revolutionary nationalists. Most leaders of newly independent states saw themselves as reforming nationalists, working to bring about a gradual upgrading of their countries’ posi— tions within the world system. Yet even they accepted that doing so required challenging the economic roles of primary producer and raw material supplier that the long colonial experi- ence had assigned to them. To some degree at least, they demanded a break with colonial systems of production. Industrialization and Urbanization The key element in the economic transforma- tion proposed by reformists and revolutionaries alike was to be a shift away from supplying primary products toward industrialization, which was widely seen as the hallmark of the wealthy former colonists. In some ways, espe— cially given the context of the 1950s and 1960s, the adoption of such a goal represented a radical defiance of the colonial and neocolo— nial world order. Since then, industrialization and its likely partner, urbanization, have become and remained the aims of all the capi- talist states of Southeast Asia. 26 A corollary of such ambitions was that, although agriculture occupied the vast mass of the workforce and dominated national produc- tion, it was considered to be secondary at best: its part in the economic strategies of the new governments was chiefly to subsidize manufac— turing industry. Planners hoped that, where possible, agriculture could keep food prices low and in some cases governments intervened to force them lower, thus reducing the costs of urban industrial workforces. In other words, agriculture was to be bled to animate industry (Dixon pp. 149*50). For most of the 19503, agricultural goods and minerals generally fetched good prices on the world market as a result of the commodity boom created by the Korean War, but by the end of the decade prices were falling rapidly relative to those of manufactured goods. Postwar capitalist production tended to use fewer inputs of raw materials (with the important exception of oil) and more inputs of capital-intensive tech— nology in its products. The invention of numerous synthetic materials, given a boost by the necessities of wartime production, also undermined demand for natural ones. Finally, from the 1950s, capitalist production tech— niques were being applied more intensively to agriculture in the advanced countries, which were increasing production and reducing prices. The United States soon became the world’s largest exporter of vegetable oils and by 1967 it was the world’s leading exporter of rice (Fryer p. 14). As a result of all these trends, the terms of trade turned against Southeast Asia and the bias against agriculture was reinforced. With such political considerations reinforcing worldwide economic trends, the proportion of the workforce employed in agriculture fell, while the proportion employed in manufac- turing rose almost everywhere. For the dependency theorists, the major means by which industrialization was to be achieved was state intervention and planning. There were many models to follow. State inter- vention had been crucial to “late development” in Belgium, Germany, and Japan in the 19th century, and had become so once again in the reconstruction of the Japanese economy after US bombs had reduced much of that country to cinders in the latter stages of the Pacific War. .... ,2. in, “MM.me v my», . History and Context W Perhaps the key model of state-led growth for poor countries in the 1950s and 19603, even though it was rarely acknowledged, was the experience of the Soviet Union. It seemed to many that the transformation of this once overwhelmingly agricultural country into an industrial power, capable of outproducing West Germany and then of rivaling the United States, and all within a generation, had blazed a trail, while the weaknesses in that growth were yet to become apparent (see, for example, Myrdal pp. 726—27). However, state planning and a degree of state ownership had not been ruled out by the capitalist West in this period. Many social scientists and policy-makers in the United States, as well as in international insti— tutions such as the World Bank, saw themselves as being engaged in developing a superior, democratic form of planning that was to underpin the mortal combat with Communist planning. In any case, colonialism had left behind little in the way of a domestic bourgeoisie that might have provided the dynamism necessary to industrialize Southeast Asia societies. To the extent that such a class existed, it was often predominantly Chinese and therefore not of those ethnic groups which were central to the new nationalisms. Statist planning, on the other hand, offered a central role in the transforma— tion of their countries to the nationalist intelli— gentsia and, sometimes, the armed forces, through their positions in the state apparatus. Thus it joined the material interests of these middle-class layers with an apparently high moral purpose: they could tell themselves and others that the advancement of their careers and the interests of the nation were inter- twined. While the nationalist movements of the late colonial period had largely middle-class or elite leaderships, they needed to appeal to a mass audience by suggesting that national inde- pendence would create better lives for all. Hence, planning and economic intervention by the state became associated with the apparently radical rhetoric of domestic equity (Owen p. 4-70), and the “forced march” to industrial- ization, involving state control of external economic links and mobilization of domestic resources, could be presented as helping to redistribute wealth, not only between rich and World Economies: Southeast Asia since the 19503 27 nor countries, but also between the few rich 1nd the many poor within each country. Expanding the managerial activities of the ;tate in the first two decades after independence was seen by some as part of a transition to social- .sm, combining greater equality (or at least Jaying lip service to it) with state management. [t was not just those in the Communist parties 3f the region who understood state intervention in this way. At various times, Ne Win of Burma, Norodom Sihanouk of Cambodia, Lee Kuan Yew of Singapore, and Sukarno of Indonesia all claimed to be “socialists” of some kind. Even so, for the most part the expansion of state activity did not involve major conflicts with private capital. There were exceptions, such as the nationalization of Dutch companies in Indonesia in December 1957, and for all prac— tical purposes the state monopolized markets and production in Burma after 1962, as well as in Vietnam, Laos, and Cambodia after the victories of their Communist parties over the course of 1975. Nevertheless, in general the states of Southeast Asia acquired enterprises or set them up to provide infrastructure and begin production primarily in industrial fields where private capital had not established itself. For example, Thailand experimented with state production monopolies under Phibun Songkhram, who was in power from 194-8 to 1957, and although subsequent governments reduced the scale of state enterprise, they retained much of the state’s role in the provi- sion of infrastructure. Similarly, while Singapore invited foreign private capital to develop manu- facturing industry after its separation from Malaysia in August 1965, the state also took a massive role for itself in providing public hous— ing, training, and education, with the result that about one third of all investment in the city state came from the public sector. In Indonesia under Sukarno, the slogans of “Guided Democracy” and “Guided Economy,” made it clear to all that the state was to be the guide in production as well as in politics. State planning remained in vogue throughout the 19705, even where full state ownership had never been widespread, as in the Philippines, or had been significantly reduced, as it was in Indonesia, under the “New Order” introduced after 1965, as well as in Thailand. Indonesia’s first five—year devel— opment plan was implemented from 1969 onwards, notwithstanding the commitment of the Suharto government to private capitalist development. The New Economic Policy was instituted in Malaysia in 1971 under a similarly pro-capitalist government. In Thailand, despite the turn away from public enterprise after Phibun’s fall from power, the National Economic Development Board was established in 1959 to maintain a degree of state planning, and key changes in the direction of the economy were introduced under the Third F ive~year Plan from 1973. The desire to main- tain state planning was also the reason for setting up the National Economic Develop- ment Authority in the Philippines in 1973. Even the tiny absolute monarchy of Brunei, which has long been completely reliant on oil exports, began implementing five—year plans as early as 1954-, building a state apparatus that has since become the largest single employer in the country (Ali pp. 282, 287). The nationalists of postwar Southeast Asia saw their key task as being to break away from the role of raw material supplier assigned to their countries by colonialism, in the belief that failure to do so was likely to lead to deepening poverty in a world dominated by industrial societies. Both nationalism and future pros- perity demanded industrialization. Yet the human and physical resources required to begin the process were in short supply, and the lack of a substantial indigenous bourgeoisie or significant amounts of capital drove every country in the region to make some attempt at state planning and/ or ownership between the 1950s and the 1980s. The location of the key nationalist leaderships within the state apparatus enhanced the argument for state economic tutelage. The attempt was made whether or not the government was committed to private capitalism, and whether or not a country was formally labeled “socialist” or “liberal democratic.” Import-substituting Industrialization The strategy to achieve industrialization adopted, to varying degrees, by the region’s 28 industrialization.” Processing and manufac— turing industries were to be developed to produce goods for the domestic market, and were to be protected from foreign competition by the state; over time, these industries would become strong enough to break out of the domestic market and begin exporting their products. At least in the early stages, domestic production was to center on satisfying mass consumer demand, for textiles and clothing, processed food, light and simple metal products, and other products that required relatively small amounts of capital investment and low levels of technology. Accordingly, states established a complex array of tariffs, controls on imports, and incentives and subsidies for manufacturers. The resulting higher prices of manufactured goods were considered to be a burden worth bearing if the outcome was an industrialized economy. The Philippines, which had the best indus- trial infrastructure in the region at the end of World War II, seemed to offer a model of successful import substitution during the 1950s and early 1960s. Its imports of consumer goods fell from nearly 31% of total imports in 1948 to less than 5% in 1965 (Cho and Williams p. 230), while the growth of GNP per capita averaged 3.6% a year in the 19505, the highest in Southeast Asia at the time (Oshima p. 75). Import substitution also appeared to work well in Malaysia, once it had brought production of all kinds back to the levels achieved before the war. Output from its manufacturing industries grew at a very respectable average annual rate of 17% between 1959 and 1968 (Cho and Williams pp. 236—37), and GNP per capita, which grew at a mere 1% a year in the 1950s, grew at 3.3% a year in the 19605 (Oshima p. 75). In the case of Singapore in the early 1960s, the exploitation of the small manufac- turing sector developed under British rule to supply consumer markets elsewhere in Malaysia led to an apparently unequal division of the gains from import substitution, and contributed to Singapore’s departure from the federation (Dixon pp. 157, 159). Thailand also pursued import substitution, with a heavy emphasis on supporting the private sector from 1961, when its first development plan began to History and Context W planners was known as “import-substituting be implemented (Jansen p. 15). Starting from a very low base as one of the poorest and most stagnant economies in the world in the 1950s, Thailand saw its GNP per capita increase by an annual average of 4.7% in the 1960s (Oshima p. 75). This growth was led by the building of infrastructure, but a significant import-substituting manufacturing sector had also begun to be developed (Warr pp. 29—30). Finally, Indonesia’s Eight—year Plan, published in 1960, was strongly based on the goal of import substitution, in the hope that the country would become capable of producing all its own food, clothing and other basics in just three years (Hill p. 2). lndigenism Making up around 6% of the population of the region, the Chinese of Southeast Asia have played a crucial role in its economy for gener- ations. Collecting local produce from farmers and marketing it, they were often the only group, apart from the colonists, with enough capital to be able to make loans to these same farmers. As a result, they were often accused of “taking their pound of flesh twice,” first in trade and then in interest (Wu and Wu p. 49). Of course, most Chinese were not rich, but they were far more likely to operate businesses, especially retailing, than the people they lived among were. As a result, during the colonial period the Chinese occupied an intermediate position between the colonists, to whom they were useful commercial intermediaries, and the “indigenous” peoples. Independence altered the situation. With their trading and moneylending activities under attack, and with many European firms having departed, the richer members of the Chinese communities attempted to shift their activities into manufacturing and mining (Wu and Wu p. 50), only to come up against the problem of economic nationalism, which was based, not on redistributing wealth and control among all residents within the boundaries of each state, but on favoring those ethnic groups whose elites had become politically dominant. Frank H. Golay and his co—authors are not alone in concluding that economic redistribu- tion along ethnic lines came to dominate World Economies: Southeast Asia since the 1950s 29 policy-making in these newly independent soci- eties (Golay et al. pp. 7—8). Such policies of “indigenism” attempted to transform the ethnic dimensions of the eco- nomies inherited from colonialism, and played an important part in economic restructuring, at least in Malaysia, Indonesia, Singapore, and Burma. Indigenism was a factor in the split between Singapore, where Chinese make up the majority, and Malaysia, where Malays are the largest group. The anti-Chinese riots of May 1969 prompted the Malaysian govern- ment to introduce the New Economic Policy, which explicitly sought to redistribute wealth along ethnic lines. Two main goals were proclaimed: the transfer of western-owned companies to Malays, so that they could control 70% of the economy by the year 1990; and the ownership by Malays and other “indigenous” peoples of at least 30% of the economy by the same date. Public enterprises were established to buy foreign businesses until the time came when they could be operated privately. The result was that state-owned companies came to dominate the domestic, import-substituting economy (Wong Tai Chee p. 106). Malaysia had been slower to make the shift toward a high level of state control than other countries in Southeast Asia. Now, driven by racism, the state was to play the leading role (Khoo p. 50). In Indonesia, discrimination against Chinese businesses was even more direct and began even earlier. In 1959, Chinese retailing in villages was simply declared illegal, and the systematic promotion and protection of the interests of “indigenous” (pribumz) busi- nesses became, and has remained, a crucial government policy (Wu and Wu p. 61). In post- colonial Burma, meanwhile, many Indian- owned businesses were forced to leave the country and anti-Chinese prejudices were often encouraged by successive governments (Owen p. 477). Chinese-owned businesses fared better in Thailand and the Philippines. Because Thailand was never formally colonized, the Thai elite had been able to retain its political power and had not felt so threatened by Chinese commercial activity (McVey p. 19). After World War II, Chinese businessmen in Thailand managed to consolidate their position by forming close links with the mili- tary and bureaucratic elites (Falkus p. 28). As for the Philippines, while there is often popular resentment against Chinese business, the landowning class had become tied up with Chinese merchants from an early period and felt less need to challenge them after indepen- dence (McVey p. 19). Where “indigenism” resulted in action against Chinese or other minorities, it rein- forced postcolonial tendencies toward state control of economic activity. In addition, however, because it discriminated against the most internationally or regionally oriented sections of capital, it propelled policy-makers even further in the direction of autarky than the concept of import substitution alone might have taken them. In the extreme case of Burma, near—total isolation ensued. The way in which the new states of Southeast Asia approached the world economy after World War II can thus be seen as a complex mixture of the economic heritage left by colonialism, the nationalist ideologies developed in response to that heritage, and the interests of the ethnic elites that predominated in the newly inde- pendent states. Boom and Cold War The world economy experienced boom condi- tions in the 19503 and 19603: each year, the industrialized economies grew by around 5% and world trade increased by around 10%. Such sustained high rates of growth were unprecedented. The boom might have created the ideal circumstances for a poor commodity- producing region such as Southeast Asia to begin to transform itself, but the fruits of the boom were not evenly spread across the world system. While all the economies of Southeast Asia benefited from it in some way, in the long term the boom tended to marginalize them further. Sophisticated production expanded, but it was overwhelmingly based in the United States, western Europe, and Japan. The newer methods of manufacturing, employing high inputs of capital and technology, were expen- sive and beyond the reach of developing economies. What little manufacturing capacity existed in Southeast Asia became even more 30 outdated and uncompetitive in world markets. Import substitution, with its emphasis on the domestic economy, was further entrenched as a result. Further, the expansion of world trade was largely a result of increases in trade between the wealthy countries. Even in 1965, at the height of the boom, Southeast Asia still supplied the United States with only 3.7% of its imports and took just 2.8% of its exports. In other words, the whole of Southeast Asia was of less economic importance to the United States than Mexico was. Western Europe had even fewer economic connections with Southeast Asia: in the same year, the six member states of what was then the European Economic Community together took around 1.5% of the region’s exports and accounted for roughly the same proportion of its imports (Fryer p. 1 1).]apan was beginning to pay more attention to the region as its own economy recovered and moved ahead, but overall Southeast Asia remained something of a back- water, of scant economic interest to the advanced countries. However, while advanced capitalism cared little for the economies of the region, it was obsessed with its politics. The anticolonial struggles in Dutch Indonesia, British Malaya, and French Indochina gave way to clashes that had major ramifications for superpower conflict. Until 1975, the most important link between the countries of Indochina and the rest of the world was through war. Nor was conflict absent from the rest of the region: Communist revolts were sustained in the Philippines from 1946 to 1954, and in Malaya from 1948 until the “emergency” was formally ended in 1960, while the largest Communist Party outside the Soviet bloc and China made its presence felt in Indonesia until most of its members were massacred in 1965 and 1966, As a site for Cold War contestation, Southeast Asia attracted massive Western mili- tary forces and military-related funds. Apart from Korea and Indochina, where US troops became directly embroiled, other countries effectively became “frontline” states. Thailand received vast amounts of military assistance, amounting to nearly 60% of the national defense budget, between 1950 and 1975, as inrmmmmtmamw is“ History and Context well as US$1 billion in subsidies for US bases and Thai troops in Vietnam, and another US$650 million in economic aid (Owen p. 479). The economy of the Philippines also came to depend in part on direct US aid and the installations at Clark Air Base and Subic Bay Naval Base. Both Malaysia and Singapore received substantial amounts of Cold War funding, and aid was crucial to Indonesia’s stabilization program, implemented under the “New Order” regime between 1966 and 1968. In addition, most countries in Southeast Asia, as well as several beyond the region, benefited from contracts associated with the war in Vietnam. The End of National Economic Independence All three countries in Indochina were devas- tated throughout the 1950s, the 1960s, and the first half of the 1970s: their peoples were barely able to survive, let alone undertake a process of industrialization. Meanwhile, the real incomes of most of the other countries in Southeast Asia went on growing, but not nearly as rapidly as the nationalists demanded, the masses expected or the leaders had promised. The apparent success of import substitution reflected the extremely low industrial base from which the new states began, since the addition of small amounts of manufacturing to economies where there had been very little could produce spectacular growth rates, at least for a time. In addition, the first phase of import substitution was bound to be easier than later stages of industrialization because it concen- trated on finding substitutes that could most readily be produced domestically, with basic technology and small capital investments. Further success required much more of both, making the maintenance of high grth rates ever more difficult. In any case, the structure of manufacturing had not developed in line with the original hopes of the policy—makers. The production of consumer goods tended to dominate, while the production of capital goods had barely begun, which meant that expensive machinery had to be imported, along with the raw materials that each economy lacked. The nature of the World Economies: Southeast Asia since the 1950s 31 W import pile had changed, but balance of payments problems remained. There was little sign that any of the industries developed behind protective walls was capable of expan- sion into the world market. Thus, throughout the 19605 and 19705 exports from South- east Asia were still overwhelmingly primary products, as they had been under colonialism, and each country’s exports tended to be domi- nated by just two or three primary items, making them extremely vulnerable to changes in world prices. By 1973, timber, copper, and sugar still accounted for 51.2% of exports from the Philippines, rice, rubber, tin, and corn for 40.9% of Thailand’s exports, rubber and tin for 46% of Malaysia’s exports, and wood, rubber, oil, and petroleum products for 81% of the value of Indonesia’s exports (Wu and Wu p. 21). The oil price “shocks” of 1974 and 1979 brought crises to the oil importers, Thailand and the Philippines, even as they assisted the economies of Indonesia, Brunei, and (to a degree) Malaysia. Signs that import substitution was not succeeding, and pressure to switch away from it, were already apparent in the early 19605. By the end of that decade, most countries in Southeast Asia had begun to shift toward “export-oriented industrialization.” Neither strategy was ever implemented in pure form, and elements of each coexisted in reality, but by the early 19705 the new focus on exporting was predominant in the region and had become closely linked to promoting openness to foreign capital investment. Singapore, with its tiny domestic market, was the first to shift to an export-oriented strategy, starting soon after its attainment of full independence in 1965. It also opened its doors to foreign companies, providing them with extremely generous tax concessions, state- provided infrastructure, land, and relatively cheap labor. Thailand had been among the most open of the region’s economies since the late 19505 and had not gone so far down the road to import substitution (Falkus p. 15). In the Philippines, the problems associated with import substitution in a small and impov- erished economy had begun to make them- selves felt by the 1960s, when the economy slowed down. However, pressures to expand exports were resisted by powerful domestic manufacturing interests and although eco- nomic growth picked up a little in the 19705, to average 3% for most of the decade, the Philippines became one of the least successful economies in the region. Government and private debt accumulated alarmingly, especially as a result of the second oil shock, and income per capita contracted by 20% between 1980 and 1986 (Owen p. 489). Malaysia made a long-term attempt to develop heavy industry, including steel, shipbuilding, petrochemicals, and cars, from the 1970s onwards, much of it on the basis of state ownership. The country’s balance of trade was somewhat cushioned by the richness of its resource base, but at the same time the need for manufacturing exports was beginning to make itself felt. Government policy began to provide more generous conces- sions for exporters from the early 19705. In Indonesia, which pursued one of the most ambitious import substitution strategies in the region, the attempt to become self-sufficient in consumer goods collapsed within four years of its introduction in the Eight-year Plan of 1960. In fact, the economy failed to grow at all in real terms between 1961 and 1964 (Hill p. 2). The New International Division of Labor The new emphasis on export promotion was associated with a major shift in world capital investments that had a dramatic effect on Southeast Asia. In the 19505 and 19605, foreign capital had mostly entered the region either to extract its raw materials or to use low tech- nology to manufacture products for domestic consumption. That pattern began to change in the late 19605, as some firms from advanced countries began to relocate parts of their more labor—intensive operations to the region. Japanese companies led the way in taking advantage of the cheap labor of Southeast Asia. These investments were different from earlier ones, in that they were designed to produce manufactured goods to be exported back to advanced countries. Becoming more estab- lished in the 19705, by the late 19805 and early 19905 they had created massive manufacturing booms in several economies in the region. This 32 rearrangement of world production, involving the partial transfer of labor—intensive produc- tion from the advanced industrial countries to some of the developing countries, became known as the “new international division of labor.” An obvious manifestation of this trend was the proliferation of free trade zones and export-processing zones in Southeast Asia. The spread of export-oriented manufac- turing based on foreign capital investment was given a dramatic boost in the 19805 by an important restructuring of the world economy. The key element in these changes was the long—term growth of theJapanese economy. By the mid-1980s, as a result of its success in exporting, Japan had piled up massive trade surpluses and foreign currency reserves. The response from its major competitors in the United States and western Europe was to demand that Japan reduce its exports and begin to take more imports from them. They raised protectionist barriers to Japanese goods and demanded an adjustment of international currencies. The ensuing Plaza Accord of 1985 helped produce an appreciation of the yen by about 50% in the following two years. The high yen made exports fromJapan less compet- itive but also made assets elsewhere extremely cheap for Japanese buyers. The obvious strategy for Japanese companies was to buy productive assets overseas, in many cases in Southeast Asia, and use them as an export plat- form. The strategy was reinforced because of another consequence of Japan’s industrializa— tion: its transformation into a high-wage economy. Since relatively low—skilled, labor- intensive production processes could no longer be undertaken competitively in Japan, it made even more sense to transfer them. A similar process unfolded in the United States and western Europe, though with less impact on Southeast Asia. Japan had already relocated some of its production to the “tiger” economies of South Korea, Taiwan, Hong Kong, and Singapore in the 19705. By the 19805, however, labor costs in these countries were also too high and Japanese capital went looking for other destinations. At first, some of this investment was in textiles, but the bulk of the capital entering the region from Japan was invested History and Context in the production of electrical components, machinery, and appliances. The resulting transformation of some of the economies in Southeast Asia was dramatic. By 1988, manufactures had replaced raw materi- als as Malaysia’s largest source of foreign exchange, and by 1990 it was the third largest producer of semiconductors in the world, after Japan and the United States (Wong Tai Chee p. l l l). The Asian “tigers” themselves launched a smaller wave of investment in Southeast Asia from the late 1980s, generally following the Japanese pattern. By 1988, total investments by Taiwanese firms in Malaysia were second only to those of Japanese firms; the third most important investor was Singapore, followed by the United States and Hong Kong (Wong Tai Chee p. 112). The transformation was even more dramatic in Thailand. By 1985, there was general pessimism about the Thai economy, especially as growth had fallen to just 3.5% (Falkus p. 14-), but during 1986, and for the first time, manu- facturing outstripped agriculture in its impor— tance to the country’s GDP, stimulated by large-scale expansion of light, export—oriented industries and funded by foreign investment. By 1992, manufactured goods made up 77.8% of exports (Falkus p. 17), and extremely rapid growth continued for the rest of the decade. The long—term pegging of the baht to the US dollar was also a factor in this rapid growth, since it caused a significant depreciation of the currency against the yen, stimulating capital inflows and enhancing the export competitive- ness of Thai—owned firms (\Narr p. 34-). In the case of Indonesia, the steady decline in the price of oil, which, as we have seen, was a major source of export income, forced the government to liberalize its foreign investment guidelines in the late 1980s, a shift in policy that helped to speed the inflow of foreign cap- ital (Djidin pp. 16—1 7, Tzeng p. 375). Although foreign capital never became dominant in such labor-intensive manufacturing industries as textiles, clothing, and footwear, these and oth- ers began to take off, with the result that man- ufactured goods rose from just 2.3% of exports in 1980 to 47.5% in 1992 (Hill p. 164). The Philippines too attracted some foreign capital, despite its bouts of political instability. World Economies: Southeast Asia since the 19505 33 Nevertheless, the poor economic performance of the Philippines meant that one of its most important links to the rest of the world econ- omy continued to take the form of exports of people. By 1993, around six million Filipinos were working overseas as “products” of an export trade that, for the most part, was sanc— tioned by the government, although around 30% of these migrant workers were undocu- mented and illegal (Gonzalez and Holmes p. 301). By contrast, Burma clung consistently to its established policy of economic isolation. Following the events of 1988, when the military refused to recognize the overwhelming electoral victory of the National League for Democracy led by Aung San Suu Kyi, the military dicta- torship, calling itself first the State Law and Order Restoration Council and then the State Peace and Development Council, has used high levels of repression and forced labor for infra- structure projects. Since the late 19803, the regime has made attempts to reopen links with the rest of the world, and has sought foreign capital for ventures in tourism, resource exploitation, and manufacturing for the domes- tic market. There has been foreign investment in tourism in particular, but the level of military control and resistance to the dictatorship has meant that Burma has not developed the same kind of export-oriented manufacturing as other countries in Southeast Asia. By 1995, manu- facturing made up only 9.1% of Burma’s GDP (Wong, J., p. 345). From the mid-1970s, Indochina, emerging from war with the United States and its allies, faced the task of repairing its devas— tated economies. Continuing conflicts between Vietnam and China, between Vietnam and Cambodia, and within Cambodia itself made the task even more difficult. By the mid-1980s, Vietnam was still heavily dependent on aid from the Soviet Union, but otherwise it remained in an isolation enforced by US sanc— tions. Declining living standards had already pushed the government to introduce liberal market reforms in the late 1970s; then the collapse of the Soviet bloc in 1989 forced it even further in this direction. The reform process known as doi moi opened the country to market competition and, increasingly, to foreign investment. By 1990, Vietnam had one of the most liberal investment codes in Asia (Cho and Williams p. 232) and in 1998 the government decided to allow foreign firms to operate alone, without Vietnamese joint venture partners (Nathan p. 342). Massive cuts have been made in the public sector: between 1988 and 1992, for example, around 1.5 million public sector jobs were abolished (Dollar p. 174). Laos and Cambodia, which are even poorer than Vietnam, have also begun to move in the same direction, introducing greater freedom for markets and autonomy for state enterprises. “Miracle” Economies? These changes in Southeast Asia, coming in the wake of the success of the four Asian “tigers,” continue to challenge the notion that the world economy can be divided simply between rich exporters of manufactured goods and poor exporters of primary products. The new and complex division of labor within the world economy has undoubtedly changed the lives of millions in Southeast Asia, transforming them into industrial workers and urban dwellers. Yet the longer-term implications for the future of the world system remain a matter of dispute. For some observers, the changes associated with this new international division of labor represent a triumph of the free market and have the potential to raise living standards and reduce inequality, both within each country in Southeast Asia, and between the region and the richer countries of the West. Others paint a less rosy picture, arguing that the new forms of industrialization introduced since the late 19805 are reliant on extreme exploitation of labor and loose or nonexis- tent government controls on pollution. The supporters of open markets reply that these are merely transitional phenomena, and that higher—value production will follow as invest- ment continues, possibly involving subcon- tracting to firms based in the region, the training of the region’s workers to higher levels, the continuing transfer of ever more advanced technology, and the upgrading of the manu- facture goods produced in Southeast Asia. 34 History and Context However, it is still uncertain whether such upgrading, involving the eventual relocation of sophisticated production, can take place, in general or throughout the region. Some foreign firms clearly prefer to remain in enclaves, using cheap labor and government subsidies but importing most of their other inputs and establishing few if any other links to the host economy. Further, since the process of change has occurred in part because more established manufacturing centers have faced rising labor costs, there are obvious questions to be asked about what happens when wages rise in those countries that receive foreign investment. Capital is now highly mobile and is likely to move on in search of even cheaper labor, notably in China, which has already become a major competitor for labor—intensive, export- oriented manufacturing. In particular, if workers begin to organize themselves success— fully in the new industries, as began to happen, for example, in the textile industry in South Korea in the 19705, footloose manufacturing capital may move on in search of less assertive workers. It follows that at least some of the industrialization that has taken place in Southeast Asia may well be transient, and is unlikely to be sustained if profits are squeezed or wages rise. Finally, in the face of the rhetoric about the “miracle” economies of the region, it is worth emphasizing that the new ways in which Southeast Asia is connected with the rest of the world economy do not benefit all the inhabitants of the region. There is no doubt that the average wealth of the region’s people has significantly increased, whether measured over the whole period since 1945 or over the past decade and a half, the period that engen— dered the optimism mentioned at the begin- ning of this chapter. Yet averages do not tell the whole story. The jobless in the slums of Jakarta, the temporary workers in the sweated trades in Thailand, the forced laborers in Burma, and the children scouring the garbage tips of Metro Manila are not better off, and certainly do not feel better off. The wealth produced by the new industries and the new export markets does not necessarily trickle down at all. r- "-21% um i .ai‘al. '75 " i“ - JW-pffwflwvv‘mr'v‘ "warmsm... g. ,. 'c a .: Further Reading Ali, Arneer, “Brunei Darussalam: An Oil Economy in Search of an Alternative Path,” in Asian Prqile, Volume 25, number 4, August 1997 Ali details Brunei’s attempt to diversify its economy and reduce its dependence on oil. Booth, Anne, “Southeast Asian Growth: Can the Momentum be Maintained?” in Southeast Asian Afiizirs, 1995 Booth discusses the basis for optimism about Southeast Asia before the crash of 1997 and outlines some of theproblems the region may face in the long term, especially those associated with efforts to replicate the model of growth prevailing in Northeast Asia. Cho, George, and Stephen Wyn Williams, “Trade, Aid and Regional Integration,” in Denis Dwyer (editor), Southeast Asian Development: Geographical Perspectives, Harlow: Longman, and New York: Wiley, 1990 This paper looks at the region’s trade from a geographical perspective, employing concepts derived from world systems theory. Dixon, Chris, Southeast Asia in the World Economy, Cambridge, New York, and Melbourne: Cambridge University Press, 1991 Dixon offers several ways in which the region might be seen: as part of the periphery of the world economy, as part of an Asia-Pacific econ- omy dominated byjapan, as part of an economy centered on the four Asian “tigers,” and as a regional economy centered on Singapore. The book deals particularly well with questions of foreign direct investment and the “new inter- national division of labor.” Djidin, Des Alwi, “The Political Economy of Indonesia’s New Economic Policy,” in Journal ty’ Contemporary Asia, Volume 27, number 1, 1997 This article is an assessment of the major reforms introduced in Indonesia in the late 19805 in response to the impact of declining oil prices. Dollar, David, “Economic Reform, Openness and Vietnam’s Entry into ASEAN,” in ASE/1N Eco~ nomic Bulletin, Volume 13, number 2, November 1996 Dollar assesses the progress of Vietnam’s liberal reforms and the effect that the recent stalling of the reform process has had on foreign investment and economic growth. World Economies: Southeast Asia since the 1950s 35 Falkus, Malcolm, “Thai Industrialization: An Overview,” in Medhi Krongkaew (editor), Thailand ’s Industrialization and Its Consequences, New York: St Martin’s Press, and London: Macmillan, 1995 This comprehensive survey of the reasons for Thailand’s rapid economic growth suggests that there is a need for caution in predicting contin— uing growth at these levels. Frank, Andre Gunder, “The Development of Underdevelopment,” in Andre Gunder Frank (editor), Latin America: Underdeoelopment or Revolution, New York: Monthly Review Press, 1969 This key article in the school of dependency theory (first published in 1966) argues that underdevelopment is not a state of being but a process, and that the “development of underde- velopment” continues through market relations between metropolitan and satellite economies. Fryer, Donald W, Emerging Southeast Asia: A Study in Growth and Stagnation, New York: McGraw-Hill, and London: George Philip, 1970 This overview of the economies of Southeast Asia suggests that two subregions were beginning to emerge at the time it was written: one outward looking and prosperous, the other inward~ looking and relatively poor. Golay, Frank H., Ralph Anspach, M. Ruth Pfanner, and Eliezer B. Ayal, Underdevelopment and Economic Nationalism in Southeast Asia, Ithaca, NY: Cornell University Press, 1969 Golay and his co-authors deal with the concept of economic nationalism in Southeast Asia and argue that “indigenism” is an important element motivating public policy in newly independent states in the postwar period. Gonzalez, Joaquin, and Ronald Holmes, “The Philippine Labor Diaspora: Trends, Issues, and Policies,” in Southeast Asian Aflairs, 1995 In this overview of the history and current prac— tice of labor export from the Philippines, the authors assess the management of the labor export program, its benefits, and its costs. Guyot, James, “Burma in 1997: From Empire to ASEAN,” in Asian Survey, Volume 38, number 2, February 1998 An account of Burma’s entry into ASEAN and recent changes inside its military junta Harris, Nigel, The End of the Third World: Newly Industrializing Countries and the Decline of an Ideology, London: I.B. Tauris, 1986; New York: Meredith, 1987 Harris argues that the concept of the “Third World” implied a form of nationalist economic and political thought, and suggests that the rapid rise of the Asian “tigers” in particular has under— mined this ideology. Higgott, Richard, and Richard Robison, Southeast Asia: Essays in the Political Economy ry’ Structural Change, London, Boston, and Melbourne: Routledge and Kegan Paul, 1985 This book gives a broad overview of the trans- formation of Southeast Asia’s economies, surveying major changes including industrializa- tion and increased integration with world capital and commodity circuits. Hill, Hal, The Indonesian Economy, second edition, Cambridge, New York, and Melbourne: Cambridge University Press, 2000 This major and comprehensive work on the Indonesian economy begins with the turn away from import substitution in the 19605, and includes a section on the causes and effects of the crisis of 1997. Jansen, Karel, “Thailand: The Next NIC?” in journal of Contemporary Asia, Volume 21, number 1, 1991 Jansen suggests that the rapid growth of the Thai economy has been, in part, a consequence of favorable international circumstances but also of government policies emphasizing exports. He argues that gradual, rather than sudden, policy shifts are the most appropriate means of changing policy settings. Khoo Kay Jin, “The Grand Vision: Mahathir and Modernization,” in Joel S. Kahn and Francis Loh Kok Wah (editors), Fragmented Vision: Culture and Politics in Contemporary Malaysia, Sydney: Asian Studies Association of Australia in aSsociation with Allen and Unwin, 1992 An analysis of the internal politics of Malaysia’s ruling party and its implications for government economic policy Krugman, Paul, “The Myth of Asia’s Miracle,” in Foreign Afi‘airs, Volume 73, number 6, 1994 Krugman argues that the Asian “miracle” is based on “perspiration, not inspiration,” in other ...
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Minns(2001) - HISTORY AND CONTEXT Chapter Three World Economies Southeast Asia since the 1950s John Minns In 1994 the respected economist Song

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