Political business in east asia (politics in asia)

It is a must-read for all interested in the political economy of East Asia.” Professor Kevin Hewison, Director, Southeast Asia Research Center, City University of Hong Kong When the fina

Political Business in

East Asia

“With a good mix of well-considered theory and appropriately detailed casestudies, this book provides a unique, comprehensive and authoritative account ofbusiness–state relations in East Asia This is an important and wonderfully richbook in the best traditions of political economy It is a must-read for all interested

in the political economy of East Asia.”

Professor Kevin Hewison, Director, Southeast Asia Research Center,

City University of Hong Kong

When the financial crisis occurred in East Asia in 1997, it drew attention to theneed to institute important structural reforms in business and politics The crisisraised questions about the quality of government intervention in the economy,the mode of enterprise development, and the form of democracy emerging inEast Asia However, in spite of the political upheavals following the financialcrisis, there have been few fundamental structural changes in politics and in

business, particularly involving the links between the two In Political Business in East Asia two important questions are examined:

● Why was the opportunity for reform in business and in politics not takenadvantage of after the crisis?

● What is it about the nature of politics and of business in East Asia that hasrestrained the fundamental changes shown to be necessary?

The authors argue that the process of consolidation of democracy has beenmarred by massive corruption of politics, portending little hope of genuinepolitical and economic reform In particular, it has been hindered by the manner

of funding of political parties, which is heavily influenced by ties developedbetween politicians and businessmen

Political Business in East Asia provides challenging new insights for students of

politics, Asian studies, economics, and government–business relations

Edmund Terence Gomez is Associate Professor in the Faculty of Economics

and Administration, University of Malaya His publications include Malaysia’s Political Economy: Politics, Patronage and Profits (with K.S Jomo, Cambridge University Press, 1999) and Chinese Business in Southeast Asia: Contesting Cultural Explanations, Researching Entrepreneurship (with Michael H.H Hsiao,

Curzon Press, 2001)

Politics in Asia series

Edited by Michael Leifer

London School of Economics

ASEAN and the Security of South-East Asia

Michael Leifer

China’s Policy towards Territorial Disputes

The Case of the South China Sea Islands

Chi-kin Lo

India and Southeast Asia

Indian Perceptions and Policies

Mohammed Ayoob

Gorbachev and Southeast Asia

Leszek Buszynski

Indonesian Politics under Suharto

Order, Development and Pressure for

Political Change in Southeast Asia

Trimming the Banyan Tree

Michael R.J Vatikiotis

Hong Kong

China’s Challenge

Michael Yahuda

Korea versus Korea

A Case of Contested Legitimacy

B.K Gills

Taiwan and Chinese Nationalism

National Identity and Status in International

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Christopher Hughes

Managing Political Change in Singapore

The Elected Presidency

Kevin Y.L Tan and Lam Peng Er

Islam in Malaysian Foreign Policy

Shanti Nair

Political Change in Thailand

Democracy and Participation

Kevin Hewison

The Politics of NGOs in South-East Asia

Participation and Protest in the Philippines

Gerard Clarke

Malaysian Politics Under Mahathir

R.S Milne and Diane K Mauzy

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The Politics of a Troubled Relationship

Rizal Sukma

Arming the Two Koreas

State, Capital and Military Power

Taik-young Hamm

Engaging China

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Edited by Alastair Iain Johnston and Robert S Ross

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Constructing a Security Community in Southeast Asia

ASEAN and the Problem of Regional Order

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Roger Kershaw

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Edited by Tsuneo Akaha

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Edited by Sally N Cummings

Political Business in East Asia

Edited by Edmund Terence Gomez

London and New York

Political Business in East Asia

Edited by

Edmund Terence Gomez

First published 2002

by Routledge

11 New Fetter Lane, London EC4P 4EE

Simultaneously published in the USA and Canada

by Routledge

29 West 35th Street, New York, NY 10001

Routledge is an imprint of the Taylor & Francis Group

Selection and editorial matter © 2002 Edmund Terence Gomez; individual chapters © the contributors

All rights reserved No part of this book may be reprinted or

reproduced or utilized in any form or by any electronic,

mechanical, or other means, now known or hereafter

invented, including photocopying and recording, or in any

information storage or retrieval system, without permission in writing from the publishers.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

A catalog record for this book is available from the Library of Congress

ISBN 0–415–27148–7 (hbk)

ISBN 0–415–27149–5 (pbk)

This edition published in the Taylor & Francis e-Library, 2004.

ISBN 0-203-16633-7 Master e-book ISBN

ISBN 0-203-26096-1 (Adobe eReader Format)

who give meaning to the effort and for Sharm

2 Political business alliances: the role of the state and foreign and

J O H A N N E S D R A G S B A E K S C H M I D T

3 Political business in Malaysia: party factionalism, corporate

viii Contents

8 Democratization and economic crisis in Thailand: political

8.5 Non-performing loans (NPLs), November 1999–January 2000 2789.1 Major holdings of Temasek Holdings Ltd, 2000 3059.2 Sectoral distribution of industrial enterprises in Singapore,

3.1 Daim Zainuddin’s common directorship in his triple capacity

as trustee for the government, UMNO, and his family

3.2 Tajudin Ramli’s control of the corporate sector, 1997 943.3 Wan Azmi Wan Hamzah’s control of the corporate sector, 1997 954.1 Organizational structure of the Kuomintang, 1994 125

James Babb is Lecturer in Japanese Politics at the University of Newcastle

upon Tyne His major publications include Tanaka: The Making of Postwar

Japan (2000) and Business and Politics in Japan (2001).

Stefan Eklöf is a Ph.D candidate at the Department of History, Lund

University, Sweden His publications include Indonesian Politics in Crisis:

The Long Fall of Suharto (1996–98) (1999) and Colonialism in the 1990s: The Use of History in Dutch–Indonesia Relations (1999).

Karl J Fields is Chair of the Department of Politics and Government, former

Director of Asian Studies, and Associate Professor of Politics andGovernment at the University of Puget Sound in Tacoma, Washington His

published volumes include Enterprise and the State in Korea and Taiwan (1995), and his forthcoming book is entitled KMT, Inc.

Edmund Terence Gomez is Associate Professor at the Faculty of Economics

and Administration, University of Malaya He is the author of Politics in

Business: UMNO’s Corporate Investments (1990), Political Business: Corporate Involvement of Malaysian Political Parties (1994), and Chinese Business in Malaysia: Accumulation, Ascendance, Accommodation (1999);

co-author of Malaysia’s Political Economy: Politics, Patronage and Profits (1997) and Ethnic Futures: The State and Identity Politics in Asia (1999); and co-editor of Chinese Business in Southeast Asia (2001).

Stephan Haggard is Professor at the Graduate School of International

Relations and Pacific Studies at the University of California, San Diego

He is the author of Pathways from the Periphery (1990), Developing

Countries and the Politics of Global Integration (1995), and The Political Economy of the Asian Financial Crisis (2000) He is the co-author, with

Robert Kaufman, of The Political Economy of Democratic Transitions (1995), and with David McKendrick and Richard Doner of From Silicon

Valley to Singapore: Location and Competitive Advantage in the Hard Disk Drive Industry (2000).

xii Contributors

Linda Low is Associate Professor at the Department of Business Policy,

National University of Singapore Her numerous publications include The

Political Economy of a City-State: Government-Made Singapore (1998), Singapore: Towards a Developed Status (1999), and The Economics of Information Technology and the Media (2000).

Johannes Dragsbaek Schmidt is Associate Professor, Research Center on

Development and International Relations, Aalborg University, Denmark

His co-edited publications include Globalization and Social Change (2000),

Social Change in Southeast Asia (1997), and The Aftermath of “Real ing Socialism” in Eastern Europe: Between Western Europe and East Asia

Exist-(1996)

Peter Wad is Associate Professor at the Department of Intercultural

Com-munication and Management, Copenhagen Business School, Denmark

He has served as guest editor to several journals, including the Copenhagen

Journal of Asian Studies, and has contributed articles to a number of edited

volumes

Andrew Wedeman is Associate Professor of Political Science at the University

of Nebraska, Lincoln His recent publications include From Mao to Market:

Rent Seeking, Local Protectionism and Marketization in China (2001).

Tom Wingfield was formerly a lecturer with the Department of East Asian

Studies, University of Leeds Before taking up this academic appointment,

he was a journalist covering business and politics in Thailand, Indochina,Burma and Indonesia His publications include “Myanmar: Political Stasis

and a Perilous Economy,” published in Southeast Asian Affairs 2000.

Since it is well known that links between politics and business are common inEast Asia, when a financial crisis occurred in 1997, it was partly attributed tothe impact of systemic development of this nexus on the corporate sector.This financial crisis, which eventually evolved into economic and politicalcrises, exposed many problems that had been camouflaged by the impressiveeconomic growth registered by most East Asian countries since the late 1980s.The impact of the financial crisis raised questions about the quality ofentrepreneurship and of the burgeoning democracy in this region

In this volume, through the use of the concept of political business, wepropose to trace the inter-relations between politics and business to drawconclusions on their influence on enterprise development, corruption, andthe consolidation of democracy in East Asia To achieve this objective, weattempt here to provide a critical historical account of the evolution of stateand capital in the region

While not all countries in East Asia have democratized, we are concernedthat in countries that have achieved this transition from authoritarianism, theprocess of consolidation of democracy has been marred by massive corruption

of politics portending little hope of genuine political and economic reforms

We argue that one factor hindering the consolidation of democracy in EastAsia has been the manner of funding of political parties, which is heavilyinfluenced by ties developed between politicians and businessmen Suchpolitical business ties are also hindering important structural reforms and thedevelopment of a more transparent and accountable form of governance

In order to understand the nature of the ties between politics and business,

we argue that there is a need to understand how capital has been developed inEast Asia, mainly because of the role of the state in promoting the rise of bigbusiness While the rise of capital has been heavily influenced by the state,with the emergence of democracy, the practice of politics has been greatlyaffected by money emanating primarily from big business The impact of bigbusiness on domestic politics has contributed to growing corruption and

“money politics,” bringing into question the quality of democracy emerging inEast Asia

Terence Gomez

The idea for this project on a comparative study of the links between politicsand business in East Asia was first conceived in June 1998, when I presented apaper entitled “Political Business in Malaysia” at a workshop organized bythe Manchester Business School This workshop was convened to discuss theproblems in the East Asian economies that had been exposed by the financialcrisis that broke in 1997 I am indebted to Jeffrey Henderson, convenor of thisworkshop, for inviting me to present this paper and to the participants whoraised searching questions and provided important feedback on my paper.

In November 1998, I approached Robert Cribb, then Director of NordicInstitute of Asian Studies (NIAS), to fund a workshop to bring togetherscholars who had been researching the links between politics and business inEast Asian countries I am extremely indebted to NIAS for providing me withsome funds to start this project

Peter Wad of the Copenhagen Business School contacted a number ofresearch institutes in the Nordic countries about the possibility of hosting aworkshop on politics and business before receiving a positive response fromJacques Hersh and Johannes Schmidt of the Research Center on Develop-ment and International Relations at Aalborg University, Denmark ThisCenter agreed to absorb all expenses to host the workshop I intended toconvene The workshop was held on June 4–5, 1999, and I am very grateful tostaff of this Center for their efficient organization of the workshop I thankJacques Hersh for his keynote address, which he used effectively to draw ourattention to key issues we needed to consider during our discussions at theworkshop I am also beholden to Johannes Schmidt, who went the extra mile

by offering to prepare a chapter for this volume His chapter helped fill animportant void in this project, which became evident during the workshop.Among those present at the workshop and who contributed to the discussionswere Robert Cribb, Eric Lonergan, Flemming Christiansen, and JamesPutzel The insights they provided were crucial in helping us develop theperspective we eventually adopted in the volume

I am deeply indebted to Tom Wingfield, my colleague at the University ofLeeds, where I was working when this project was conceived Tom helped meidentify and contact academics who could be approached to work on thisproject

Acknowledgments

xvi Acknowledgments

I thank all the contributors to this volume who needed little persuasion towork with me on this project I was pleasantly surprised at their willingness tosupport this project, since I had not met some of them, like James Babb andStefan Eklöf, when they were approached to write a chapter for this volume.Karl Fields, who could not attend the workshop, was very supportive when Iasked him to make numerous revisions to his article, to help his analysis tie inwith the main themes of the volume

Some of the contributors to this volume came on board after the workshop.Stefan Eklöf agreed to write the chapter on Indonesia after the researcheroriginally identified for this project was called to participate in a peace-keeping mission in East Timor I thank Stephan Haggard and Linda Low foragreeing to write the chapter on Singapore At the workshop in Aalborg, theparticipants had felt that there was a need to incorporate a chapter onSingapore, to facilitate the comparative dimension of the project Singapore isthe exception to the rule in that the negative aspects of political business, as

we conceive the concept here, are non-existent in this country

I wish to mention my deep debt to Andrew Wedeman who agreed to writetwo chapters for this volume Andrew was incorporated into this project toprepare an article discussing the concept of corruption, but was subsequentlypersuaded to write a country chapter, on China

I thank the late Michael Leifer of the London School of Economics who, asEditor of Routledge’s Politics in Asia series, was very keen on publishing thisvolume when I mentioned the project to him Michael had promised to writethe Foreword for this volume, and it is unfortunate that we will not benefitfrom the insights of this doyen of Southeast Asian Studies

Finally, but not least, I am very obligated to Sharm, who provided stinting support when I was preoccupied with organizing and completing thisproject, even though she was then working on her doctoral dissertation Toher, and our children, Evie, Eric and Eshward, who shared my enthusiasm forthis study in our conversations about life, social change, democracy, andjustice in Asia, I dedicate this volume We hope that this volume will contri-bute in some small way to the debates now taking place among reformers

un-in Asia, on how to develop truly democratic nations

Terence Gomez

March 2001

Political business in East Asia

Edmund Terence Gomez

Financial crisis and political change

In 1997, a financial crisis occurred in East Asia1 seriously impairingeconomies that had generated half the world’s economic growth since 1990.Such economic growth had led to the rise of a large middle class that had, insome countries, contributed to the promotion of greater democratization.The impact of the crisis has drawn attention to a need for an inquiry into anumber of important issues in the areas of business and politics, including thequality of state intervention in the economy, the mode of enterprisedevelopment, and the form of democracy emerging in East Asia, involving inparticular the question of funding of political parties

Our concern here is not an in-depth analysis of the factors that contributed

to this crisis, that is the impact of currency speculation, unregulated capitalflows (specifically portfolio investments), and imprudent financial liberal-ization and weak supervision of the banking sector, all issues that have nowbeen well documented.2 Our key focus is on the links between politics andbusiness and the implications of this nexus on enterprise development anddemocratization in East Asia

These links forged between politicians in power and businessmen haveunquestionably facilitated the rise of a number of major companies in theregion, aided through the use – and in many cases, abuse – of the domesticfinancial sector Such links led to the development of some factors thatcontributed to the crisis, including lax supervision of the financial sector and

an unsustainable form of corporate growth through debt The ties betweenpolitics and business have also influenced the form of creation and distri-bution of state rents, contributing to the rise of a “new rich,”3 as well asallegations of cronyism, corruption, and nepotism Wanton corruption andcronyism, in various forms, had transpired long before the onset of the crisis,suggesting that the ties between politics and business had not precipitated thefinancial crisis in 1997.4 These links, however, had influenced governmentpolicies that contributed to the crisis and affected responses in ways thatexacerbated the crisis

2 Edmund Terence Gomez

Following the financial crisis, it was evident that the repercussions arisingfrom the links between politics and business had emerged as a primary factorcontributing to political tension and/or change in a number of countries inEast Asia In Southeast Asia, Indonesia’s long-standing president, Suharto,was forced to resign, Malaysian Prime Minister Mahathir Mohamad cameunder unprecedented open public dissent, while Thailand’s Chavalit Yong-chaiyudh government was replaced by a coalition forged by Chuan Leekpai

In Northeast Asia, Japanese Prime Minister Ryutaro Hashimoto had to stepdown in favor of Keizo Obuchi, while South Korea’s out-going president KimYong Sam was so tainted by a scandal that exacerbated the financial crisis that

it facilitated the election of the long-standing government critic Kim DaeJung In all these countries, the close ties between politicians and business-men have influenced the form of economic development and, following thefinancial crisis, have been a factor that has contributed to political upheaval.However, in spite of the political upheavals following the financial crisis,which eventually became an economic crisis, there have been little funda-mental structural changes in politics and in business, particularly involving thelinks between the two In Japan, the banking crisis remains unresolved in spite

of a change of political leadership, Korean chaebols appear reluctant to

reform their pattern of corporate growth, while the influence of big businessover the Philippine state appears to be growing In Malaysia, Mahathircontroversially sacked Deputy Prime Minister Anwar Ibrahim, consolidatingmore power in the office of the executive and yet secured an overwhelmingelectoral victory during the 1999 general elections In Thailand, in spite ofpromises by politicians of greater devolution of power to the people throughamendments to the constitution, there have been no significant politicalreforms During the 2001 general election, mired in allegations of corruption,including vote-buying, the party that secured the largest number of seats inparliament was the newly formed Thai Rak Thai Party, formed by ThaksinShinawatra, reputedly to be the richest person in Thailand Why has thepossibility of reforms in business and politics that appeared imminentfollowing the crisis not occurred? What is the nature of politics and business

in East Asia that has the capacity to restrain fundamental changes that wereshown by this crisis to be necessary? This volume is an attempt to answer thesequestions by tracing the form of development of capital in East Asia as well asthe evolution of the links between politics and business

Defining political business

The favoring of particular business interests by politicians in power has beenbroadly and popularly referred to as “cronyism.” This term, however, carriesdissimilar meanings in different contexts and is not an effective tool forconceptualizing the variety of issues that have shaped the links betweenpolitics and business in East Asia The issues that have to be incorporated in

an analysis of the links between politics and business in a country can range

from corruption, nepotism, insider trading, and political patronage to theabuse of the financial sector for vested political interests as well as covertfunding of political parties or presidential candidates Other issues, however,that may also require analysis in this discussion of politics and business is theneed for the state to implement policies that involve positive discrimination

to rectify social and economic imbalances, create or promote indigenouscapital, or encourage industrialization For this study, the concept, “politicalbusiness,” has been developed, which will be applied to analyze the variousforms of links between politics and business that can have positive or negativeimpact on local economies and political systems

In order to understand the form and implications of political business ties inEast Asian countries, two key issues need to be analyzed in greater depth.There is a need to understand the politics of the state, that is to establish theinstitutions or actors in whom power is centered, including determining ifpolitical power has been secured through the aid of capital Second, ananalysis is required of the development of the corporate sector, particularlythe rise of big business, to determine the nature of the relationship betweencapital and the state For example, the rapid growth of some major East Asiancompanies, whether privately owned or a state enterprise, was due to politicalconsiderations and aided through much state support Moreover, followingdemocratization in a number of East Asian countries, the influence of capitalover politics has increased appreciably The changing pattern in the balance

of power between capital and the state in democratized countries also appears

to have affected the dynamics of policy-making and policy implementation,the form of corporate development, as well as the flow of funds from businessinto politics Political funding by business has contributed to a significant rise

in the phenomenon of “money politics,” that is the use of money in thepolitical arena to secure control over the state in order to influence the distri-

bution of state-generated economic rents Since political contests are being

extremely influenced by access to money, this brings into question the quality

of democracy that is emerging in East Asia

Figure I.1 provides a model of the practice of political business and theoutcomes of the nexus between politics and business on the corporate andfinancial sectors Politicians holding office in government use their power todistribute to party members or select business associates state-created rents

in the form of licences, contracts, subsidies, and privatized projects Funds toacquire these rents are secured through favorable loans from banks and otherfinancial institutions owned or controlled by the state and well-connectedbusinessmen Distribution of such rents to party members, in turn, helps partyleaders secure or promote their positions in the party and in government.Many recipients of these rents use numerous corporate maneuvers, mostcommonly shares-for-assets swaps and reverse takeovers, to capture control

of public-listed companies, usually characterized by concentration (large firmsize) and conglomeration (multi-sectoral diversification) These companies,

in turn, are used for other types of corporate maneuvers, including mergers,

4 Edmund Terence Gomez

acquisitions, and takeovers, to develop their business interests As shareprices escalate, corporate equity is used as security to secure more loans frombanks for further acquisitions Such corporate strategies contribute appreci-ably to the increase in the stock exchange’s market capitalization

Political patronage, sophisticated but unproductive corporate maneuversand the rise in market value of quoted equity contribute to the emergence of apolitically well-connected new rich The emergence of this new rich leads to

a concentration of corporate wealth, while selective distribution of stateconcessions results in corruption, business scandals, and conflicts-of-interestinvolving senior government leaders Companies controlled by well-connected

Figure I.1 Model of the practice of political business.

Political Leaders / Political Parties control over

Government distribution of

state-controlled concessions:

government funding, licences, contracts, various types of privatized projects funds to secure these concessions come from

government-owned or politically-controlled banks

and other financial institutions used by clients for

shares-for-assets swaps, reverse takeovers, mergers, and acquisition of public-listed companies results in

creation of politically-linked “new rich,”

insider trading, manipulation of share prices, conflict of interest situations, corruption, politicization of the economy brings about

access to substantial funds

part of which are chaneled back as political funds to government

businessmen are involved in insider trading and manipulation of stock prices.Political patronage also creates avenues for politicians to gain access to largesums of money for political activities, particularly to fund campaigns duringparty and general elections In some cases, as companies grow large enough toachieve much autonomy from the state, they channel funds to political parties,

or factions within ruling parties, in an attempt to influence state policies Inother instances, business elites form political parties or participate directly inpresidential elections in an attempt to secure control over the state

On the other hand, certain positive outcomes can arise from political ness ties For example, state patronage through positive discrimination can beused to rectify social problems such as wealth and income disparities betweenethnic communities, while the need to promote domestic entrepreneurshipand create indigenous businessmen can be dealt with through political busi-ness ties Selective rent distribution can also help to promote industrializationand diversification of the economy

busi-In many cases, however, financial institutions, usually those that are owned, have been an avenue for politically well-connected companies tosecure funds on favorable terms to generate growth, primarily throughacquisitions, contributing to the rise of huge enterprises within a relativelyshort period This has led to the problem of huge gearing ratios among many

state-of these firms, though such loans are manageable with continued supportfrom financial institutions and the state In a number of countries, the stockmarket, and a variety of corporate maneuvers, including shares-for-assetsswaps, takeovers, reverse takeovers, and bonus and rights issues are employed

to pursue a conglomerate style of growth In many instances, huge, butnormally short-term, loans from abroad, as well as significant foreign port-folio investments, are crucial for promoting the growth of these companies aswell as grossly increasing their market capitalization on local stock exchanges.Such forms of loans and portfolio investments, however, contribute tofinancial crises when large numbers of investors withdraw their funds fromthe stock markets

In other words, the business style of many of these large-scale companies,and of the manner of their growth – that is, whether a vertical, horizontal ordiversified pattern of growth was employed – appears to be a factordetermining their capacity to deal with economic crises Most politicallywell-connected firms tend to focus their investments on services and othernon-tradeables, such as real property, construction, infrastructure, and import-substituting manufacturing Politically well-connected enterprises tendfrequently to be involved in unproductive business ventures, usually adopting

a conglomerate style of growth, with limited focus on developing expertise in aparticular industry or with little attention on research and development.Another facet of political business is that funds raised in the corporatesector are channeled into the political arena, for activities such as fundingparty and general election campaigns or for buying the support of partymembers to create and maintain power bases These links between politics

6 Edmund Terence Gomez

and business lead to differences among political elites, as well as widespreadcorruption, nepotism and conflicts of interest; in a number of cases, disclosure

of such improprieties precipitates profound political change and form ofgovernance

Political business ties are widespread in almost all countries in EastAsia, although the form that such links take differs In Taiwan and Malaysia,the Kuomintang (KMT) and the United Malays’ National Organization(UMNO), respectively, each have direct or indirect control over a vast array

of corporate assets In Japan, major corporations fund particular factionswithin the ruling Liberal Democratic Party (LDP) In the Philippines,although capitalists lost their inordinate influence over the outcome ofpresidential elections through their capacity to fund the rise of politiciansduring the authoritarian era of Ferdinand Marcos (1966–86), they are againbeginning to secure influence over the state through similar means In Thai-land, businessmen have established political parties as a means to capturecontrol of the state Similarly, in South Korea, one leading capitalist made anunsuccessful bid for the office of President during the 1992 campaign InIndonesia, the emergence of a number of conglomerates during the Suhartoregime (1966–98) was attributed to the close personal ties established by theirowners with leading politicians

The dynamics of political business within each East Asian country has alsoevolved with political or regime change Even though systemic development

of political business ties contributed to the scale of the financial and politicalcrises after 1997, very little is known of the dynamics involved in the linksbetween politicians and businessmen and of the reasons why the lattersecured rents from the state Since the rationale for the award of state rents tobusinessmen influenced the pattern of development of enterprises owned bythese capitalists, this had a bearing on the extent to which these firms wereaffected by the crisis, both economically and politically

Contextualizing political business in East Asia

Most debates on the links between the state and business, adopting either astatist or a market (rational choice) perspective,5 tend to focus on the state as

a monolithic unit, analyzing its capacity to promote economic development.Although an institutional perspective provides an alternative to society-centered and state- and/or system-centered explanations of politics, it has notprovided an adequate theory of change Moreover, while an institutionalperspective recognizes that institutions can collapse in times of crisis, it doesnot explain, or deal with, the political factors contributing to the breakdown.6More specifically, the debate on the developmental state has centeredattention on a bureaucracy dominated by technocrats driving economicgrowth (see, for example, Johnson 1982, 1987) Another body of literaturehas drawn much focus to business groups that organize themselves to actindividually or collectively to secure rents from the state (Domhoff 1967;

Heidenheimer and Langdon 1968) This concentration on technocrats andcapitalists has diverted attention from the machinations within the politicalsystem, usually occupied by politicians who have overwhelming influence overthe various arms of the state, including the bureaucracy There is growingevidence that politicians work through the state to procure rents for them-selves – or their families and allies – to develop huge corporate enterprises.East Asian history, however, has also shown that politicians who securedcontrol of the executive were simultaneously driven by a desire to promoteeconomic development, usually as a means to justify their rule This hascontributed to contradictory actions by government leaders, that is thepromotion of growth-generating policies while also permitting corruption,political patronage or unproductive rent distribution.

The institutional and organizational structure of a government and rulingparty has a bearing on the form of rent distribution by politicians to business-men An analysis of institutional control of government, that is of howpoliticians control the state, for example, the bureaucracy or the legislature,

to formulate and implement policies affecting business, can provide insightsinto how capital develops A study of the organizational structure of a partyinvolves an analysis of where power is centralized; this will help indicate whypoliticians distribute rents to specific businessmen or why capital channelfunds to particular politicians or factions In most analysis, since no distinc-tion is made between state and political parties or politicians, there is littleinsight into the nature of a political system, which helps explain the nature ofrent distribution

One objective here is to deconstruct the concept of the state, with thecentral analytical focus on particular political parties, factions,7 or politicianswho have hegemony over the state The inadequate focus on the links betweenpolitical parties or politicians and the corporate sector in East Asia issurprising given that the states in this region had played a significant role inpromoting the development of public and private enterprises and new capital-ists For example, in South Korea, Taiwan, Malaysia, Indonesia, Singapore,Thailand, and the Philippines, politicians in government have heavilyinfluenced rent creation and distribution in the corporate sector throughvarious policy mechanisms On the other hand, in Japan and China, powerfulfactions in the ruling parties, the LDP and the Chinese Communist Party(CCP), respectively, have been able to influence how state economic rentsshould be distributed

How, and why, factions are created and controlled also differ betweencountries A faction, a system of cooperation among a number of recognizedleaders within a political party for the purpose of influencing the decisionsand conduct of the party organization as a whole, is usually short-lived This,however, has not been the case of the five major factions in the LDP, whichappear more institutionalized In Malaysia, UMNO is fraught with factionsthat are loosely based which tend to have a shorter life-span, depending on thelongevity of their leader; inevitably, these factions have differing access to

8 Edmund Terence Gomez

rents depending on the influence of their leader.8 In Japan, Taiwan, andMalaysia, factional disputes within the ruling parties have been a major factor

in precipitating political crisis or change.9 In Thailand and the Philippines,factionalism has contributed to incessant party-hopping and “turncoatism,”

as influential leaders move, usually with their supporters, between partiesthat provide them with the best hope of securing a place in the executive arm

of government In both authoritarian and more democratized countries,factionalism has also influenced the volume of fund flow into the politicalarena, especially during party elections as politicians distribute money, cor-porate equity, and other rents to buy support to accelerate their ascendancy inthe party hierarchy In some cases, the volume of funds disbursed duringcontests for posts in the ruling party can be considerably more than theamount of money used during campaigns in general elections

One reason for the growing use of money in politics is that with theemergence of democracy in East Asia the state is increasingly being captured

by capital, mainly through the latter’s capacity to influence electoral comes in party and general elections by channeling substantial funds into thepolitical arena Such capture of the state by capital has taken various forms InJapan, when the businessman, Tanaka Kakuei, became Prime Minister, aprofound change occurred in the LDP, involving the growing importance ofmoney in party affairs Even though Tanaka’s government was eventuallyrocked by a series of corrupt financial dealings, the practice of extensivedistribution of funds to buy party support that he actively promoted becameinstitutionalized in the LDP.10 In Thailand, businessmen have actively begun

out-to use political parties as vehicles out-to seek public office and secure control overthe state to gain access to rents that can facilitate the growth of their business.Banharn Silpa-archa of the Chat Thai Party, who had served briefly as PrimeMinister in 1995, had first established himself in business in the 1970s InSouth Korea, Chung Ju Yung, the chairman of the conglomerate, Hyundai,established the United People’s Party during his unsuccessful bid to securevictory in the 1992 presidential election.11 In the Philippines, major capitalistshave been funding politicians as a means to secure access to the presidency orsecure seats in the cabinet

Since political elites who have control over the state determine the form ofrent distribution, this would suggest that most rents have been unproductivelydeployed, inevitably inhibiting growth This, however, has not been the case inmost countries in East Asia as the state has been led by politicians who have adevelopmentalist agenda As government leaders strive to create an industrialorder capable of self-sustaining growth or international competitiveness,

“selective intervention” by the state and the desire to “pick winners” topromote their industrial drive have been used to justify preferential treatment

in the distribution of rents (Lall 1996) The importance of cultivatingdomestic entrepreneurs in industry, to ensure that a country is not overlydependent on foreign corporations for technology development, is anotherreason used to legitimize selective rent distribution Through control over the

financial sector, the state had also been able to influence business ownershippatterns and reform managerial style, both of which have had an impact on theform of capital development.

Most authoritarian regimes in East Asia, specifically in Malaysia, pore, and Indonesia, had also recognized that one way to justify their form ofpolitical control was to ensure economic growth Economic growth hadhelped quell discontent over suppression of political rights Moreover, inMalaysia and Indonesia, there was a legitimate need to develop indigenouscapital, correct equity imbalances along class and ethnic lines, and promoteinter-ethnic business cooperation The ability of the government to imple-ment policies involving patronage favoring select ethnic communities orindividuals has been attributed to the existence of a strong state, one that hasbeen independent of capital

Singa-Strong state, political autonomy, and big business

It has been widely argued that the presence of a strong state in East Asia hasbeen beneficial in promoting social reforms and economic development,including implementing land reform, advancing industrialization, developingdomestic entrepreneurship, and undertaking wealth and income redistribu-tion (see, for example, Johnson 1987; Haggard 1990) An essential feature of

a strong, developmental state has been its autonomy from sectoral interests,enabling it to dispense with the need to reconcile diverse differences in itsattempt to develop a strategy for promoting rapid economic development(see, for example, Evans 1995)

In Korea, Taiwan, Singapore, Malaysia, and Indonesia, the high levels ofeconomic growth recorded by these countries had been attributed to thepresence of a strong state These strong states, according to Johnson (1987:156–7), could resort to “authoritarian means” to pursue policies thatinvolved, among other things, nurturing or disciplining business to achievetheir objectives as they were occupied by politicians who had much autonomyfrom capital For example, while KMT’s ownership of companies provided itwith financial independence from Taiwanese enterprises, Korean politicianshad other sources of income than contributions from big business InThailand, the transition to a modernizing economy has been attributed to thepresence of a bureaucratic state that had been relatively indifferent to thedemands of social groups and hence could act independently in the long-terminterests of the nation’s economy.12 In Singapore, in the immediate post-colonial period, big business had not been able to secure any influence overthe state, and eventually the former’s economic influence was also weakenedappreciably with the promotion of government-owned enterprises

In the Philippines, on the other hand, a weak state had partly contributed

to the difficulties the country had faced in developing its economy Putdifferently, one reason why the Philippine economy did not develop as rapidly

as that of its East Asian counterparts was that the Filipino state was not

10 Edmund Terence Gomez

autonomous enough from the vested interests of the business elite.McVey (1992: 27–9) stresses this point, arguing that the development ofthe Philippine economy was hindered by the fact that the state “was

‘penetrated’ or ‘colonized’ by social forces that could bend the state for theirparochial ends.”

State support of enterprise development in some countries contributed tothe rise of big business where much wealth was concentrated In South Korea,

the top five companies, or chaebols, Hyundai, Samsung, Daewoo, Lucky

Goldstar, and SK, accounted for 29 percent of assets and 32 percent of allcorporate sales All these companies were well diversified Samsung, forexample, controlled 61 subsidiaries involved in ten industries ranging fromelectronics to newspapers In Thailand, by the early 1980s, large firmsamounted to only 1 percent of all industrial enterprises but they owned

54 percent of all industrial assets and accounted for 41 percent of industrialemployment Fifty of Thailand’s largest 100 manufacturing enterprisesbelonged to one of 16 large diversified enterprises; together, these con-glomerates accounted for 90 percent of the total assets of Thai enterprises(Doner and Ramsay 1997: 255–6)

The rise of big business with government patronage has not only enabledtheir owners to achieve much autonomy from the state, but has also contri-buted to a desire by capitalists to seek some influence over policy-making,particularly following democratization Since a number of these capitalistshad been privy to numerous rents in the form of bank loans, tax exemptions,privatized contracts, etc., this contributed to a desire by capitalists to achievesome leverage over the executive as a means to maintain their access to staterents In more authoritarian East Asian countries, however, in spite of thegrowing role of the private sector in the economy with the retreat of theinterventionist state, politicians still seem to have an inordinate influenceover the corporate sector For example, in Malaysia and Singapore, whichremain under authoritarian rule, capital is still very subservient to the state.There are, however, significant differences in political business links in thesetwo countries In Malaysia, UMNO’s easy access to funds from business tends

to be abused by influential leaders to consolidate power, while the number ofpoliticians who have ventured into business because they have been privy tostate rents has increased considerably This is not the case with the rulingPeople’s Action Party (PAP) which does not depend on business for funds,while corruption is rather limited in Singapore

In this regard, it is important to note that the scale – and form – of tion is growing with the emergence of democracy in East Asia, particularly inPhilippines, Thailand and South Korea In these three countries, businessmenhave made attempts to, or have secured, control of the executive, throughdirect involvement in politics or through the funding of particular parties orpoliticians Growing corruption in these countries appears to be due to theneed for politicians, having captured office through funding from capitalists,

corrup-to pay back such support by channeling rents corrup-to the latter

In democratized Taiwan and Japan, funds raised from the private sector bypoliticians are used by them primarily to consolidate their power within theruling party or in parliament In a multi-party system, where party-hopping ispermitted or when coalitions need to be forged to form a government, this hascontributed to an increase in the use of money to buy over politicians; muchevidence of this is has emerged in the Philippines as well as in post-SuhartoIndonesia.

Business development and corporate debt

East Asian history has indicated that state control over the financial sectorhad been important in terms of determining the growth of particulareconomic sectors and certain corporate enterprises There were, however,notable policy differences among East Asian countries that influenced form

of corporate development

In Taiwan, the government provided tax breaks and high depreciationallowances, rather than access to bank loans, to promote investment inparticular sectors When bank lending was used as a mechanism of shapingpolicy objectives, it corresponded closely with government sectoral targets(Johnson 1987: 148–9; Waldner 1999: 191) In Singapore, while incentives toupgrade and develop high technology were provided primarily to multi-national corporations (MNCs), large public enterprises were created to entertargeted economic sectors (Lim 1994) The Malaysian government activelycultivated MNC investment in manufacturing, especially in more techno-logically sophisticated, export-oriented industries, while simultaneouslydeveloping local capitalists by providing lucrative rents, along with bankcredits on favorable terms, to a select well-connected business elite (Gomezand Jomo 1999) The Korean state exercised enormous influence over privatefirms through control of domestic and foreign credit and investment capital(Amsden 1989) Apart from access to bank loans on favorable interest rates,other policy instruments used by the Korean government to encourage thedevelopment of big business included the award of contracts in major sectors

of the economy and protection of industries from foreign competition (Lee1997) In Japan, state restrictions on the involvement of foreign companies inthe domestic economy helped large enterprises develop their own base forinnovation, though many firms also grew to depend heavily on bank loans tofacilitate growth Between the period 1972 and 1981, for example, most largeJapanese firms obtained approximately 75 percent of their funds throughloans from banks and only about 19 percent from shares (Johnson 1987: 148).This pattern of corporate growth through debt was, however, to prove un-sustainable

The impact of the financial crisis on some of the largest enterprises drewattention to a number of important issues on state policies, specifically on thecontrol and use of the financial sector to promote corporate expansion Sachs(1998) noted that the five countries most affected by the crisis, Malaysia,

12 Edmund Terence Gomez

Thailand, Indonesia, South Korea, and the Philippines, owed about US$175billion in short-term debt to international banks as of mid-1997, but had onlyabout US$100 billion in foreign exchange reserves In most of these countries,

a considerable portion of this corporate debt had been accumulated by a smallnumber of – usually well-connected – publicly quoted companies The accessthat these private firms had to such a large volume of loans was facilitatedthrough the huge inflow of foreign funds into these countries, especially fromthe early 1990s Between late 1991 and 1996, private inflow of funds intodeveloping countries had risen from US$44 billion to US$304.5 billion; EastAsia received a high proportion of such funds.13 This enormous inflow offoreign funds, as loans and portfolio investments, had also occurred duringthe period of another notable development during the 1990s in Asia – therapid growth of stock markets

One reason for the growing impact of the stock exchange in East Asia wasthat public listing had emerged as an effective means for raising funds forfurther corporate expansion Since the owner of a public-listed companycould use the firm to buy other quoted and private enterprises, this relievedthe owner of the burden of holding the stock in his own name, yet gave himcontrol over a vast diversified corporate empire Control of a public-listedcompany permitted the rise of intricate crossholdings involving other quotedand private firms, facilitating rapid growth of an enterprise Since publiclisting of a firm increased the number of shareholders, dispersing ownership

of the company’s equity, the majority shareholders of these quoted prises could reduce substantially their shareholdings yet retain control overthe company An increase in market capitalization of quoted firms enabledcompanies to secure more loans from foreign and local banks with equity ascollateral An inordinate increase in foreign portfolio investment (FPI) alsocontributed to the appreciable increase in market capitalization of quotedstock in the region Unproductive corporate acquisitions of this nature, facili-tated through inordinate access to foreign and local bank loans, contributed

enter-to significant wealth concentration

In South Korea, for example, between 1990 and 1996, the volume of FPIincreased from a mere US$9 billion to a massive US$121 billion! By 1990, theKorean stock market had become the ninth largest in the world in terms ofstock market capitalization In Malaysia, stock market capitalization relative

to GDP was the highest in Southeast Asia; between 1989 and 1993, equitymarket capitalization as a percentage of GDP increased from 105 percent to342.1 percent By 1997, Kuala Lumpur Stock Exchange (KLSE) had emerged

as the 15th largest in the world in terms of market capitalization In Indonesia,

a year after the deregulation of the financial sector in 1988, which led to hughinflow of FPI and a marked increase in the listing of local firms, the JakartaStock Exchange (JSE) became the fastest growing bourse in the world(Schwarz 1994: 156–7) During the period 1989 to 1993, equity marketcapitalization as a percentage of GDP increased from a mere 2.4 percent to22.8 percent in Indonesia In Thailand, during the same period, a similar rate

of increase in equity market capitalization as a percentage of GDP was noted– from 35.5 percent to 104.5 percent.

The rise in market capitalization of listed equity facilitated access to bankloans, with such stock used as collateral, contributing to a rapid rise in debt–equity ratios of large enterprises in East Asia In South Korea, in 1998, the top

30 South Korean conglomerates’ debt–equity ratios averaged 519 percent,

while the top five chaebols, Hyundai, Samsung, Daewoo, LG, and SK, alone accounted for 30 percent of total debt (Far Eastern Economic Review 19/11/

98).14 In Malaysia, in 1997, the foreign borrowings of the largest quotedcompanies were estimated at around RM35 billion (or about US$14.6 billionbefore the crisis), with the three biggest firms accounting for three-quarters ofthese loans One company, the highly-diversified public listed, Renong, a firmclosely associated with UMNO, had accumulated debts totaling about 5

percent of all loans accumulated in the Malaysian banking sector (Asian Wall

Street Journal 12/10/98) In Indonesia, the value of the private and publicly

listed business assets owned by the Suharto family in 1996 was estimated atUS$5 billion Following the crisis, the companies owned by Suharto’s children

reportedly had debts amounting to US$4 billion (see Far Eastern Economic

Review 4/6/98).15 In the Philippines, it has been alleged that the biggest debtors

to state-owned financial institutions were companies owned by tycoons closelyassociated with former president, Fidel Ramos For example, the state-ownedDevelopment Bank of the Philippines’ three largest debtors were the powerand media giant Benpres, with loans of 6 billion pesos (US$143 million),Alson’s Cement, with 1.2 billion pesos, and Philippine Long Distance Tele-

phone, with 500 million pesos (see Far Eastern Economic Review 15/6/99).

In Taiwan and Singapore, whose economies had not been as badly affected

by the crisis, the rise of big business was not actively encouraged by the state.Corporate debt in Taiwan was among the lowest in East Asia, while theSingaporean government had been quite prudent in checking the inordinateflow of loans into the corporate sector While corporate debt of South Koreancompanies was sometimes four times the value of assets, the average overall

debts of Taiwanese firms was only about 30 percent of equity (Newsweek

2/11/98) This drew attention to another aspect of corporate development: thepattern of enterprise growth

Unlike other East Asian countries, Taiwan’s economy is dominated bysmall and medium scale enterprises (SMEs) While almost 80 percent of

South Korea’s GNP is generated by just about 30 family-owned chaebols, in

Taiwan nearly 98 percent of all enterprises are considered SMEs (Hsiao 1994:83) The reason for the different approach adopted by these states toenterprise development is linked to issues of political concern In Taiwan, theKMT’s fear of the impact the rise of big business would have on the party’shegemony over the state contributed to strict control by the government overthe financial sector Inevitably, most Taiwanese SMEs have grown not todepend on loans to generate growth, while conglomerate-style developmentthrough bank loans was not encouraged

14 Edmund Terence Gomez

There is much evidence to substantiate this argument that style growth is ultimately unsustainable and does not help increase efficiencyand expertise in particular industries Following the financial crisis, the FirstPacific group, the Hong Kong-based conglomerate controlled by Indonesia’sLiem Sioe Leong, found itself laden with debts that it managed to reduce bydivesting some companies in the group First Pacific has since begun adopting

conglomerate-a more focussed conglomerate-approconglomerate-ach to business, concentrconglomerate-ating on conglomerate-a few mconglomerate-ajor tries because, as its management has argued, “We’re determined that theconglomerate approach will go out of favor as a result of the Asian crisis.We’ll have to invest in fewer, larger businesses where we’ll be in for the

indus-long-term” (quoted in Far Eastern Economic Review 17/12/98) In Thailand,

the Charoen Pokphand (CP) Group, which also found itself burdened withhuge debts following the financial crisis, resorted to divesting its peripheralbusiness activities to raise cash The CP Group’s chairman, Dhanin Chearava-nont, is also quoted as stating, “CP is resolved to safeguard its core businesses”

(quoted in Far Eastern Economic Review 28/5/98) Samsung, South Korea’s second largest chaebol, also divested assets to trim debts and announced that

it would concentrate on maximizing its strengths, in electronics abroad andfinancial services at home, where it is a market leader in insurance and

securities industries (see Far Eastern Economic Review 19/11/98).

This change to a more focussed approach to business is important becausethe impact of the financial crisis suggests that selective intervention seems tohave failed, though not because these big firms did not get enough supportfrom the state and financial institutions The strategies developed by com-panies are being brought into question by this crisis, particularly extensivediversification through acquisitions as opposed to long-term growth plansbased on product development and market penetration Short-term financialgains as well as growth through debt, rather than through equity andreinvestment of profits, were not the best basis on which to develop modernindustry

Corruption, democracy, and the evolution of political business

Following democratization in Thailand, South Korea and the Philippines, thescale of corruption and money politics has increased appreciably (seePhongpaichit and Piriyarangsan 1996; Chang 1998; Hedman 1998) Corrup-tion took various forms in different countries following democratization,reflecting the changing nature of political business The different manner inwhich money is used in politics in East Asian countries also necessitates that adistinction be made between the nexus between politicians and businesselites, money politics practices within ruling parties, and the use of fundsduring general elections, involving numerous parties and the electorate.Within political organizations, during party elections, aspiring leadersdistribute money to members to secure ascendancy in, or control over, thehierarchy Politicians with a strong grassroots base usually hold much

influence over party leaders During general elections, money is distributed tothe electorate as a means to secure victory After a general election, a partymay buy over parliamentarians to enable it to form a majority in parliament;this encourages party-hopping which in numerous cases causes the demise ofsmall or fledgling parties.

In Thailand, under authoritarian rule, the influence that capital had hadover the state had been minimal During this period, political business tieshad been characterized by businessmen seeking out patrons among govern-ment leaders to secure access to state rents Following democratization,businessmen began moving into the political arena, eventually even securingcontrol of the executive The capture of the executive by capital contributed toallegations of corruption involving previously clean and independent stateinstitutions, including the central bank, while numerous questionableactivities involving the stock exchange were also exposed However, as Donerand Ramsay (1997: 238–9) have noted, during both the authoritarian anddemocratized periods in Thailand, the nature political business links had been

“diffuse, particularistic, personalized and thus clientelist,” and “intra-eliterivalries [had] led to a competitive rather than a monopolistic market forstate-supplied goods and services.”16 The emergence of businessmen inmainstream politics was a major contributory factor to the rise of moneypolitics during general elections, involving extensive vote-buying with fundsraised from the private sector According to one estimate, during the 1995general election, Thailand’s political parties spent the equivalent of US$670million on buying votes.17 Inevitably, businessmen captured control of theexecutive.18 When Chavalit became Prime Minister in 1996, Pasuk and Baker(1998: 266–7) noted that “three party financers were given potentiallylucrative ministerial posts” and “cabinet posts seemed distributed acrossministries according not to workload but to potential income.”

In the Philippines, elite families had independent power bases that allowedthem to influence presidential elections (McCoy 1993) That changed with therise of authoritarianism under Marcos who, after securing control of the state,moved to check the influence of elite families in politics, distributing rents toselect individuals The “crony capitalism” sponsored by Marcos led to theemergence of new tycoons, like Lucio Tan, who is still involved in banking andcigarette manufacturing With the rise of democracy, the Ramos governmentmoved to expand the political clout of middle-class businessmen and pro-fessionals, and actively promoted privatization and other liberalizationmeasures, ostensibly to check protectionism and promote competition andefficiency.19 In spite of this, a new set of business groups emerged with closeties to Ramos Under the Estrada government, business tycoons who hademerged before and during the Marcos regime were appointed to the newcabinet, suggesting that with the return of a more democratic system, bigbusiness was re-asserting its control over the executive by influencingpresidential and general elections through the channeling of funds to selectcandidates (Kervkliet and Mojares 1991; Hedman 1998)

16 Edmund Terence Gomez

In Indonesia, during the long Suharto regime, different types of politicallyconnected enterprises emerged, that is Chinese conglomerates, state-owned

enterprises, pribumi (or indigenous) firms and the corporate empire of the

president’s relatives, especially his children Capitalists in each of these fourgroupings were privy to state rents, but there was little cohesion andcooperation in business between members, especially among Chinese and

pribumis; moreover, not all capitalists had direct links with Suharto For

example, among the Chinese firms was the Salim Group, controlled by LiemSioe Leong whose links with Suharto preceded the latter’s ascendance to theoffice of President Other leading Chinese capitalists, like the Riady family ofthe Lippo group, were not closely associated with Suharto or his family buthad also managed to develop huge conglomerates There was also little intra-ethnic cooperation among the leading Chinese capitalists, many preferring to

establish links with well-connected politicians or pribumis Similarly, there was little evidence of significant intra-ethnic business ties among pribumi capitalists A number of capitalists who were part of the Chinese and pribumi

business elite, as well as members of Suharto’s family, secured control ofbanks in an attempt to develop their corporate base, in the process accumu-lating huge debts Political change, with the collapse of the Suharto regime,did little to curb such political business ties and money politics, while therewere little attempts to deal with the huge debts accumulated by a number ofthe conglomerates During the ethnic crisis that subsequently erupted,

pribumi capitalists attempted to get the state to allow them to take over the

assets of Chinese capitalists, while the latter tried to forge new alliances with

leading pribumi capitalists.20 During the general and presidential electionsheld in 1999, there were numerous allegations of money politics Somepolitical parties alleged that the ruling Golkar had distributed funds to buyvoter support during the general election, while in the run-up to the presi-dential election B.J Habibie was implicated in a scandal involving the transfer

of funds from a bank to his party for use during his campaign A discreditedHabibie failed in his bid for the presidency, but members of the old regime,including Golkar and army leaders, were appointed to President Abdul-rahman Wahid’s new cabinet, bringing into question his capacity to institutereforms in politics and the corporate sector

In South Korea, under the authoritarian rule of Park Chung Hee, funds hadflowed from business to politicians and bureaucrats in power, but there had

been little distinction in the way in which the chaebols were accorded

preferential treatment by the government During the tenure of Kim Yong

Sam, democratically elected to power in 1992, some chaebols, in particular

Samsung, reportedly came to be closely associated with the new president (seeChang 1998) The Kim government was embarrassed when it was revealed

that the president’s son had an interest in another chaebol, Hanbo, a new

enterprise that benefited from state patronage but went bankrupt during thefinancial crisis The Hanbo scandal indicated that allegations of nepotismwere just as rife in a democracy as it was in authoritarian Malaysia and

Indonesia Chang (1998) made another observation regarding the changingnature of political business following the transition to democracy Underauthoritarian rule, “[fund] flows were often tied to particular projects in areaslike urban planning and government procurements, but they were rarelydirected to particular projects in the main manufacturing sectors Underthe Kim government, there was a fundamental transformation in the state–business relationship in Korea, which meant that the major manufacturingsectors were now not as insulated from corrupt political exchanges as before.”

In Taiwan, since there was little distinction between the KMT and the stateduring the almost 40-year period of martial law, the pattern of development ofthe party’s corporate assets had been intertwined with the promotion of stateenterprises It was, for instance, not uncommon for KMT- and state-ownedenterprises to have joint ownership of a company or to collectively implement

a takeover of another firm Delinking the ties between politics and business inthe face of public scrutiny by the opposition and growing public demands foraccountability in government was to prove difficult to implement in terms ofrestructuring KMT’s ownership of its corporate assets.21 Moreover, and moreimportantly, since election campaigns had become very expensive in the post-authoritarian period, the KMT’s corporate assets were believed to havebecome a major source of funding for the party (see Shiau 1996) While it hasbeen difficult to quantify the exact amount of funds used during elections,Shiau (1996: 221–2) estimated that during the 1989 legislative election, thecampaign expenditure of some candidates amounted to between US$1.2 andUS$3.2 million A survey undertaken during the 1995 legislative election

revealed that some candidates had spent up to US$10 million (Guo et al 1998:

209–10) Karl Fields, in Chapter 4 in this volume, also quotes a KMT staffmember as saying that the party spends many times more than its annualoperating expenditure of US$40 million during election campaigns at the

national, provincial, and local levels Shiau (1996), Guo et al (1998), and

Fields concur that the funds used in these elections came not just from owned enterprises but from key business figures

KMT-In Japan, in spite of major scandals in the 1970s and 1980s involvingattempts by big business to influence the LDP, and even though the partybriefly lost power in 1993 – after having been in power since 1955 – the tiesbetween politics and business still exist There are two levels at which fundsare channeled into the political arena: through individual firms to particularpoliticians and through individual firms to a faction, presumably because aparticular leader leads the faction This pattern of political business links hasnot changed significantly since the 1970s.22 Money politics during LDPelections persist as state rents are distributed according to the strength of aparticular faction Although such factionalism remains a key factor in bring-ing about a change in government leadership, the replacement of one LDPleader with another has not led to reforms in government and the economy.Changes in political business linkages were also prevalent in more auth-oritarian states In Malaysia, as UMNO came under increasing criticism for

18 Edmund Terence Gomez

conflicts of interest in the award of lucrative state rents to its holding panies in the late 1980s, control of party assets was channeled into the hands

com-of private individuals who were accountable only to senior party leaders Thispersonalized the nature of political business links, consequently exacerbatingthe impact of money politics as individual politicians cultivated personal tieswith businessmen Businessmen also began capturing key posts in the UMNOhierarchy as a means to secure a position in government to gain more access tostate rents Given the easy access of UMNO politicians to funds, the volume

of money distributed to members to secure support grew appreciably, withvote-buying being practiced at all levels of the party during elections

Does the increased use of money in politics in democratized countriessuggest that participatory politics can contribute to the rise of corruptionand impair the quality of economic development?23 Not necessarily, sinceamong the countries most badly affected by the crisis include Indonesia andMalaysia, both of which had yet to undergo a transition to democracy beforethe onset of the crisis Singapore, on the other hand, was not as badly affected

by the crisis, and even though power is concentrated in the hands of one party,the government has consistently acted to check corruption Since there arewidespread allegations of corruption in Malaysia and Indonesia but not inSingapore, this suggests that it is not a question of form of governance, that iswhether it is democratic or authoritarian, that determines levels of corruptionand unproductive or questionable forms of rent distribution Rather, it is anissue of political will and independence from capital The emphasis onpolitical will indicates again the importance of focussing on the executive orparties in power, as well as the capacity of the electorate to check such abuse

of power Since the outcome of political competition is being significantly

swayed by access to money, most of which come from business, unfair petition in the elections has arisen because of unfair access to money bypoliticians This suggests that there is a need for electoral reform, especially

com-on matters pertaining to electicom-on financing and funding of political parties.24

Electoral reform: funding political parties

The growing abuse of money in politics in East Asian countries reflects aphenomenon that is already of some debate in the western democracies Theissues that require further consideration here are of a more universal nature:the necessity for disclosure of sources of funds to parties, the need to regulateelection spending during electoral campaigns, and the requirement that fundsare channeled equitably to parties contesting elections This is importantbecause, as Paltiel (1970) has surmised, funding of political parties is usually

an attempt to “surmount the democratic constrains of ‘one man one vote’ togain disproportionate influence in the decision making process” (quoted inMendilow 1992)

In most democracies, as election campaigns become increasingly cated and expensive, political parties and politicians depend on funds from

sophisti-leading corporate figures and business entities Contributions to a party bybusiness are normally calculated in relation to the anticipated political benefitsecured in return for the funding Politicians thus become indebted to certainbusiness interests, or only candidates selected to represent particular businessinterests are actively funded to pursue the causes of the former through thestate Inevitably, political parties in government are prevented from pursuingpolicies in the public good because of their financial dependence on bigbusiness.

Two suggestions have emerged as a means to check excessive use of money

in electoral campaigns The first is the need for legislation on disclosure ofsources of funds, requiring political parties to publicly publish a detailedannual statement of accounts, providing detailed information on its sources offunding Another view is that state funding of elections should be imple-mented, to ensure fairness in fund distribution as well as to curb wastage ofmoney during election campaigns State funding of political parties to financetheir activities25 has also been suggested to enable politicians to dispense withthe need to approach outside sources, especially influential individuals andbig business, for money

In an attempt to circumvent unequal access to funds by political parties,countries like Costa Rica, Austria, Argentina, Germany, Sweden, Italy,Austria, and Israel, have introduced the practice of funding political partiesfrom the national budget, either by subsidizing electoral campaigns or byallocating funds on a regular basis to parties Three main reasons have beencited to consider public funding of parties First, membership fees, the maintraditional source of a party’s funds, have declined appreciably, mainly owing

to the decline in political party membership Second, the growing expenses inelection campaigns, owing to the availability of modern campaign technolo-gies that are far more expensive than a labor-intensive form of campaigning.Third, since escalating campaign costs has contributed to political scandals,public funding can help curb corruption as politicians need not look foravenues to fund their campaign (Alexander 1989) A number of criteria havebeen used in drawing up legislation to curb exorbitant electoral expenditure.All parties should have access to state funding to contest the general election

To ensure that only serious and legitimate parties and candidates contestelections, they are allowed to recoup their expenses based on the popular votethey obtain after an election

Among East Asian countries, all countries have legislation to limit theamount of funds that can be used by a candidate during an electoral campaign;the legislation also includes the need for parties to file with the relevantauthority a campaign budget after the election In most countries, however,electoral candidates are not required to disclose their sources of funding.Most political analysts in East Asian countries agree that electoral candidatesseldom ensure that their campaign expenditure remain within the stipulatedbudget, suggesting that there have been little attempts to control distribution

of funds during electoral campaigns (see Sachsenroder and Frings 1989)

20 Edmund Terence Gomez

Legislation has, however, been introduced in some East Asian countries tochannel funds from the state budget to political parties Japan appears to havegone furthest among East Asian countries in terms of reforming financing ofpolitical parties and checking flow of funds into the politics Under thePolitical Funds Control Law (1994), all Japanese political parties are entitled

to state subsidies to fund their activities The subsidy was introduced to curbthe need for politicians to seek funding to finance electoral campaigns thatwere becoming increasingly expensive.26 This legislation, introduced as ameans to reform the political system, particularly to check corruption, alsostipulates the types of political organizations that are permitted to receivefunds from the private sector or individuals: political parties, political fundorganizations specified by a political party and a fund managing organization

of a politician, of which he is only permitted one Public disclosure of suchfunding is also required (Shinoda 1998: 117)

The Public Officials Election and Recall (POER) Law in Taiwan regulatesfunding involving a politician or a political party during an election Whileindividual candidates are entitled to government subsidies to fund electoralcampaigns, political parties are not provided funding by the state Under thislegislation, contributions from an individual to a candidate in an electioncannot exceed more than US$700, while the maximum amount an individualcan make to a party cannot exceed more than 20 percent of his annual income

or US$7,400, which ever is less The maximum donation an enterprise canmake to a candidate in an election is US$11,000, while the total sum by a firm

to a party cannot exceed more than 10 percent of its annual income or a

maximum of US$111,000 (Guo et al 1998: 208–9).27 Taiwan was the onlycountry in East Asia where there was legislation requiring companies todisclose political donations made to political parties or politicians untilSingapore introduced a similar regulation in early 2000.28

In South Korea, the Political Funds Act entitles political parties to fundsfrom the state to finance their activities, but there is no requirement forparties to disclose their other sources of their funding; nor is there stringentregulation over distribution of funds during election campaigns In Indonesia,during the Suharto regime, the only three political parties permitted tocontest in general elections were funded by the state budget This, however,was primarily a means to control the activities of the two opposition parties

In Singapore, where there had been little information on the funding ofpolitical parties, and where the state does not subsidize party activities, thePolitical Donations Act was introduced in 2000, primarily to prevent partiesfrom receiving foreign donations and to curb the receipt of donations fromanonymous sources Donations, including those from anonymous sources,could only be received from Singaporeans above the age of 21 or fromSingaporean-controlled companies that undertook their business solely in thecity state A political party could not accept an anonymous donation unless itamounted to less than S$5,000 in any one year While opposition parties didnot oppose the ban on foreign funding of parties, they objected to the need to

identify anonymous sources of small-scale funding since this meant that theyhad to keep track of all sources of funding, even small collections receivedduring their public activities The opposition also feared that many Singa-poreans would be reluctant to contribute any funds to them if a record had to

be kept of all donors

In Thailand, monetization of politics had been so severe necessitatingconstitutional reforms to deal with the problem A number of articles werewritten into the new constitution to introduce greater transparency in theelectoral system, curb vote-buying and party-hopping as well as limit change

of government owing to factional disputes To create greater transparency inpolitics, an upper house comprising members who are not politicians is to bedirectly elected to monitor the activities of parliamentarians and legislationpassed through the lower house To discourage vote-buying and improve theaccountability of elected members, multi-member parliamentary constitu-encies were broken up into single-member units To curb MP-buying,politicians are barred from switching parties less than 90 days prior to anelection The Prime Minister will be chosen by an open vote in parliament Tostem factional rivalry, the right to call a vote of no-confidence is limited toonce a year and ministers who leave or are dismissed from the cabinet mustrelinquish all their political positions An independent Election Commission(EC) was established to monitor elections with the power to disqualifycandidates guilty of vote-buying or fraud Interestingly, no new regulation wasintroduced requiring disclosure of party funding nor were there attempts toregulate abuse of funds during elections During the first elections held afterthe introduction of this new constitution – the election of members of theupper house – vote-buying still was rampant.29

In spite of the legislation introduced in some East Asian countries on partyfunding, no country has imposed the regulation that political parties publishtheir annual accounts In this regard, it is noteworthy also that in Japan andTaiwan, the extensive use of funds during elections persists or has grown inspite of legislation on state funding of parties and the need for disclosure ofsources of funds during elections This suggests the significance of intra-partyfactionalism within the main parties, that is the LDP and the KMT Politicians

or factions appear to have covert access to funds from big business, mainly asthey are in a position to influence policy decision through their position in theruling party

This suggests that if a more genuine form of democracy is to emerge in EastAsia, the influence that capital can acquire over the state has to be curbed bypreventing politicians or parties from seeking funding from business Thedesire for businessmen to enter politics only because they have the means tocapture control of the executive will also be checked Political insulation orautonomy from business will help to improve the state’s coordinatingcapacity For example, business–government dialogue and cooperation can

be undertaken on a more equal footing, and conducted in a transparent andaccountable manner, helping to reduce corrupt rent-seeking while ensuring

22 Edmund Terence Gomez

that the outcomes of such state–capital proximity will serve public interests.30State intervention in the economy, for instance, to encourage economicdevelopment in particular sectors or to re-shape the character of domesticcapital, can be pursued without fear of consequences, and may enhancecommitment to competitive behavior among capitalists The financial crisishas revealed that structural reforms are required if a more genuine form ofdemocracy is to emerge, and if endemic corruption is to be weeded out.Significant reforms in the nature of political business links are first required

as the history East Asian political economy is as replete with examples of thestate’s predatory tendencies as it is of its developmental capacity

The structure of the book

While our main concern here is to understand the nature of political businesslinks in East Asia, there are two important issues that require furtherdiscussion before we deal with the country studies: the role of the state and theimpact of corruption on economic development In Chapter 1, AndrewWedeman deals with the theme of corruption, arising from the nexus betweenthe state and capital Wedeman’s main concern is to explain how a country’seconomy can register growth in spite of the prevalence of extensive corruptionand rent-seeking Through a review of the history of African, Caribbean andLatin American countries, he draws attention to the different forms of corrup-tion in play in these states, making a distinction between “degenerative” and

“developmental” corruption This discussion on “degenerative” and mental” corruption in these three regions provides us with a constructivecomparative perspective for differentiating the types corruption found in EastAsia and the differing impact it can have on an economy The conclusion thatWedeman draws from his comparison is that in the long term even “develop-mental” corruption will eventually impair economic growth “Developmen-tal” corruption is, therefore, not justifiable as it will not help promotesustainable economic development in the long run

“develop-In Chapter 2, Johannes Schmidt deals with the role of the state inpromoting economic growth and corporate development in East Asia as well

as in the ASEAN countries, that is Malaysia, Thailand, Indonesia, and, to amuch lesser extent, the Philippines One important difference between EastAsia, comprising Japan, South Korea, and Taiwan, and the ASEAN econo-mies, is the prominent role of foreign capital in the latter to generateeconomic growth The prominence of foreign capital in the ASEAN econo-mies had a bearing on the quality of domestic enterprise that emerged in thesecountries; a large number of foreign firms also established collusive ties withthe politically well-connected or politicians in order to develop their influenceover these economies Schmidt also argues that contrary to conventionalwisdom that economic liberalization and democracy are effective curbs oncorruption, unproductive political business ties continue to thrive in spite ofthe growing democratization in East Asia Schmidt draws our attention to the

universal nature of political business, tracing the development of the nexusbetween state and capital from the late eighteenth century The attempt by thestate to develop capital through political patronage and the implications ofthe rise of big business on control over the political process in developedcountries is an important lesson for East Asian economies More importantly,

an argument is made for enhancing the autonomy of the state, with particularemphasis on an efficient, insulated and stable bureaucracy concernedspecifically with protecting public interests

The subsequent chapters, the country studies, indicate that there aresignificant variations in this nexus between politics and business among EastAsian nations, as well as different implications on the economies of thesecountries In some countries, the links between politics and business havebeen used to foster the rise of big business, contributing in the process tocorruption and other social costs In other countries, the links have servedprimarily as a means to raise funds for party activities, contributing to similarsocial costs In one country, Singapore, in spite of extensive state intervention

in the economy through government-owned enterprises, the dichotomybetween politics and business has been stressed and corruption is limited butruling politicians have undermined the development of domestic entre-preneurial talent in an attempt to retain hegemony over the state

Since in each country the links between state and capital have beenestablished for different reasons and have led to different outcomes, we beginour country studies with a focus on Malaysia and Taiwan, two countries wherepolitical parties have had a long tradition of direct involvement in business InMalaysia, Gomez (Chapter 3) traces how the mix between politics andbusiness has had direct significance for the rise of big business, especially thatowned by indigenous Malays and the ruling UMNO Attention is drawn tohow state control over the financial sector has permitted the rise of bigbusiness, but much to the detriment of both banks and these firms when the

1997 crisis occurred The rise of big business, leading to considerableconcentration of wealth, has repeatedly contributed to severe factionalismwithin UMNO and, more recently, intra-ethnic differences among Malays,contributing to instability within the political system In Chapter 4, the case ofTaiwan, Karl Fields provides an original insight into the hitherto nebulousconcept, “KMT, Inc.” Fields presents detailed information of how and whythese KMT-owned enterprises were formed and function The impact of therise of KMT, Inc on the party, leading ultimately to fall of the KMT frompower, is also dealt with in this chapter Fields and Gomez argue that given thelevel of embeddedness of KMT (through KMT, Inc.) and UMNO (throughindividuals) in the Taiwanese and Malaysian corporate sectors, in spite ofpublic desire for the dismantling of the nexus between politics an business,instituting such reforms could be extremely difficult, if not detrimental, tothese economies This may have significant implications on the quality ofdemocratization that will emerge in Taiwan and Malaysia

In Chapter 5, this theme of control by politicians over business through