Third World Quarterly, Vol 24, No 2, pp 339Ð355, 2003

Embedded and open regionalism: the crisis of a regional political project

KANISHKA JAYASURIYA

ABSTRACT This paper advances the argument that moves towards regional integration need to be understood as ‘regional governance projects’ undertaken by domestic actors and coalitions. Regional political projects—such as open regionalism—have roots in domestic structures, and it is this which defines the broad configuration of the regional political . On the basis of this frame- work the paper suggests, first, that the strategy of open regionalism was con- tingent on a particular configuration of power and in the domestic and external economy (embedded mercantilism). Second, this system of embedded mercantilism depended on a set of domestic coalitions between tradeable and non-tradeable sectors of the economy. The non-tradeable sector in Southeast Asia was entrenched within a particular system of political patronage. Third, the Asian crisis and other structural changes in the international economy have made these domestic coalitions less sustainable, thereby creating opportunities for new forms of regional governance projects.

Strategies of regional integration as political projects Open regionalism, in terms of the conceptual framework advanced in this paper, is not so much a strategy of economic liberalisation as a regional regime of that encompasses a set of institutions, domestic coalitional structures and international strategies. The nature of regional integration in East Asia, it will be argued, needs to be understood in the context of the manner in which domestic structures have underpinned a particular project of regional integration that goes under the rubric of open regionalism. The coherent moves towards regional integration need to be seen as ‘political projects’ undertaken by domestic actors and coalitions. In other words, regional political projects have roots in domestic structures, and these domestic structures in turn have come under increasing pressure in an era of globalisation. The neglect of the domestic foundations of foreign economic and security policies warrants critical analysis, as there is an important lacuna in the literature on multilateralism in East Asian policies. Much of the literature—whether realist, liberal or constructivist—use an ‘outside in’ methodology to understand foreign

Kanishka Jayasuriya is Associate Professor in the Department of and Social Administration at the City University of Hong Kong. E-mail: [email protected].

ISSN 0143-6597 print/ISSN 1360-2241 online/03/020339-17 ᭧ 2003 Quarterly DOI: 10.1080/0143659032000074628 339 KANISHKA JAYASURIYA economic and security policies.1 In contrast, this paper seeks to develop an ‘inside out’ framework to understand the dynamics of regional economic order (see my introduction to this special issue). More specifically, it attempts to explore the role of domestic coalitions in underpinning a range of outward- orientated policies. It is argued that a particular set of arrangements between the tradeable and non tradeable sectors—which, borrowing from Pempel (1998), we term ‘embedded mercantilism’—drove the domestic engine of regionalism.2 Adopting this different perspective, regional strategies such as ‘open regional- ism’ need to be analysed and understood within the broader framework of what may be termed ‘regional governance projects’. Such ‘governance projects should be seen as being composed of four central elements: 1. a stable set of international economic strategies; 2. a distinctive set of governance structures which enables regional economic governance; 3. a set of normative or ideational constructs that not only makes possible a given set of regional governance structures, but also makes possible the very definition of the region; 4. a convergence of domestic coalitions and political-economy structures across the region, which facilitates the coherent construction of regional political projects. On the basis of the above framework, this paper will endeavour to show that the governance project that characterised the East Asian region before the crisis was underpinned by the following features: ● the dominance of open regionalism as a strategy of international liberalisation; ● the presence of a set of informal rather than rules-based governance structures; ● an ideational framework that places emphasis on a cultural definition of the region, which depends on what Beeson and Jayasuriya (1998) term a ‘cameralist political rationality’; ● the emergence of a form of embedded mercantilism and domestic political economy divided between the tradeable and the non tradeable sector. Applying this regional governance framework to strategies of regional integra- tion in East Asia, the nub of the argument advanced here is that the domestic configuration—identified as ‘embedded mercantilism’—has created the dis- tinctive forms of multilateralism exemplified by the APEC in the Asia Pacific. This embedded mercantilism rested on a specific set of -offs between the tradeable and the non-tradeable sectors. But, in the wake of the Asian crisis, these domestic foundations appear to be more brittle and more diverse. As a consequence, there are important fissures between those states dominated by reform-orientated coalitions and others where nationalist coalitions still remain deeply entrenched.

Open regionalism: economic technique or political project? Open regionalism is basically a strategy of unilateral trade liberalisation with the 340 EMBEDDED MERCANTILISM AND OPEN REGIONALISM extension of its benefits to non-APEC member countries on the basis of the General Agreement on Tariffs and Trade (GATT) principle of Most Favoured Nation (MFN) status (viz that concessions offered by one country to any other GATT member should be offered to all). The rationale behind ‘open regionalism’ is that a greater access to within a designated area will increasingly produce positive trade liberalising effects on other trade blocs and countries through the GATT’s MFN principle. It is argued that this has the virtual effect of avoiding —a standard effect of a (a trade area with common external restrictions). Open regionalism, therefore, extends the benefits of free trade to a greater proportion of the international than just the member countries of APEC. In short, it is a trade liberalising strategy, the aim of which is to create lower trade barriers across the international economic system. The competing notion of ‘bloc regionalism’ is based on the assumption that unilateral trade liberalisation is not likely to be effective. Non-APEC members, it is suggested, are able to gain a free ride on trade liberalisation while holding back on their own domestic trade liberalisation agendas. From this perspective, for APEC to be an organisation of effective economic co-operation it is necessary that there should be reciprocal trade concessions from non-APEC members. APEC’s huge and rapidly developing would provide a further carrot for non- members. This vision for APEC is premised on the more political APEC principle of reciprocity. An even stronger version of bloc regionalism would suggest that APEC develop a well regulated customs union along the lines of the European Community. However, this strong form of block regionalism is economically and politically untenable: economically, because of the vast differences in levels of and the fact that most East Asian trade (if the USA is excluded) is more inter-regional than intra-regional; politically, because in the light of the problems faced by the North American Free (NAFTA), it would be well nigh impossible to gain political acceptance for such a position in the USA, and more importantly, it would require a successful resolution of USÐJapanese trade issues. But, politically, the critical issue relating to open regionalism is not just its technical rationale as a set of economic strategies, but rather that this rationale reflects an underlying set of politically constituted set of relationships between market sectors. Open regionalism is not about regional market making but about maintaining markets; and also about helping to cement the dominant coalition between domestic cartels in the non-tradeable sector and the tradeable sector. For these reasons, open regionalism may be seen as denoting a particular political project of regional integration undertaken by powerful domestic actors. One of the attractions of open regionalism for powerful domestic coalitions lies in its informal and flexible nature of regional economic governance, which eschews formal rules-based regional integration. In East Asia, where the position of ruling elites is closely bound up with the existing economic structure, the possible formation of markets beyond the state’s influence as a self-regulating and autonomous sphere strikes at the heart of the kinds of segmented political , characteristic of East Asia. Indeed, such a transformation represents a direct threat to dominant patterns of political and economic power. 341 KANISHKA JAYASURIYA

More generally, these points underscore the fact that multilateral strategies are deeply intertwined with domestic economic and political projects. During the boom years, the APEC strategy of trade liberalisation within the ambit of open regionalism fitted well with the political projects of state driven . Open regionalism is the preferred international strategy of the embedded mercantilism that defined Southeast Asian political economy. Nevertheless, during the Asian economic crisis domestic structures and coalitions that underpinned open regionalism were under severe pressure; hence the APEC response to East Asia’s economic problems has been a conspicuous failure.

Embedded mercantilism, segmented political economies and domestic coalitions An understanding of regional governance strategies as a political project, driven for the most part by entrenched domestic actors, renders problematic a view of economic strategies—both domestic and international—as a rational response to the imperatives of market forces. But, in terms of the argument offered here, these strategies are intrinsically political because any given set of economic strategies needs to be underpinned by a coherent dominant coalition, the members of which benefit from the pursuit of a given regime. We discuss these elements in more detail below, but what needs to be underlined here is the fact that economic reform implies a dramatic change in previously dominant or influential configuration of interests, institutions and ideas, and, therefore, any shift in economic strategies will bring forth serious resistance from political and social forces that have benefited from previously dominant economic strategies. For this reason, while the crisis has unsettled previously dominant coalitions, this is a necessary—albeit not a sufficient— cause to challenge the prevailing structures of interests (Beeson & Robison, 2000: 19Ð24) Central to our analysis is a consideration of the role of domestic coalitions in shaping economic policy trajectories. Coalitional analysis of this sort has a long tradition in political science. There is a number of important studies that have used a coalitional framework to explain and account for a range of political outcomes and events (Gourevitch 1978; 1986). Barrington Moore (1966), in a ground-breaking study of the sources of democratic change, used a coalitional analysis to explore the varying social foundations of dictatorship and democracy. Indeed, this study follows the classic work of Gerschenkron (1962) on the marriage of iron and rye in laying the foundations of German . More recently, Solingen (1998) in an innovative work has sought to extend these coalitional frameworks to encompass international as well as domestic economic and security strategies. She has suggested that there is a basic and underlying cleavage between internationally and nationally orientated coalitions, and argues that, while international coalitions favour economic strategies, nationalist coalitions will seek to protect and insulate the economy from global influences. These coalitional cleavages pivot around preferences towards economic liberalisation. As she points out:

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external affects individuals and groups in different sectors through changes in status, labor incomes, and returns on assets, through changes in prices of and services consumed, and through the provision of public services. (Solingen, 1998: 22) However, a clear-cut distinction between nationalist and internationalist coalitions has been much more problematic in Southeast Asia during the boom years. Indeed, what is striking in Southeast Asia is the presence of a strong inter- nationalist orientation that is conjoined with a politically protected domestic economic sector. In fact, rather than a cleavage, Southeast Asian political economies seem to accommodate both nationalist and internationalist coalitions. And this is the critical point of our thesis: domestic coalitions in Southeast Asia were structured around a series of trade-offs between the domestic and inter- national economies, which in turn were nested within certain types of inter- national strategies. In a nutshell the international strategies of East Asian states were based on a political economy of embedded mercantilism. We borrow the term ‘embedded mercantilism’3 from Pempel (1997; 1998) who uses a coaltional framework to understand the dynamics of regime shifts in Japan. In an insightful analysis of institutional and coalition transition in advanced industrial societies, he defines a ‘regime’ as consisting of three key elements—a set of dominant socioeconomic coalitions, a set of institutional arrangements, and a stable set of policy strategies. He notes that: a regime is composed of three essential elements: socio-economic alliances, political economic institutions and public policy strategies. These three overlap and reinforce one another; they resemble the three legs of a tripod that collapses when anyone is removed. They interact in complex ways, developing and responding to a discrete internal logic. (1998: 20) He goes on to suggest that shifts in regimes are prolonged and may involve, as in the case of Japan, a period of long-term transition where the old regime is dying but a new regime struggles to find its coalitional and institutional anchors. For Pempel, one of the defining characteristics of the postwar Japanese regime was a system of embedded mercantilism. In other words, embedded mercantilism captures the way in which a set of coalitional and institutional structures entrenched a form of political capitalism at home while pursuing a relentlessly internationalist strategy abroad. According to Pempel: equally integral to the conservative regime’s economic policy profile were policies that had a political rather than economic rationale. These involved side payments to the country’s less economically advanced sectors: rice farmers, the small sector, geographical regions lacking high growth industries, and, increasingly, industries in decline. (1998: 60) In essence, embedded mercantilism relied on a series of trade-offs and compensa- tion for the domestic sector, thereby creating a kind of dualistic economy. While much of this analysis of the embedded mercantilist regime in Japan is dictated by the nature of Japanese institutions as well as the key strategic role of the Liberal Democratic Party (LDP), it is nevertheless a model that can be useful for understanding the role of domestic alliances and coalitions in Southeast Asia. 343 KANISHKA JAYASURIYA

Abstracting from its ‘Japanese distinctiveness’, the system of the embedded mercantilist model has the following characteristics: ● segmentation between the export-orientated and domestic economic sector, creating a kind of dualistic economy; ● overlapping of these divisions with distinctive sections of ; ● a set of public policies to ensure that side payments from the more efficient export sectors facilitate a broad set of alliances between the two segments of the . In essence, embedded mercantilism enabled the East Asian developmental states to put together policies that compensated non-export sectors of the political economy, and compensatory policies were critical in securing the political coalitions required for the pursuit of export-orientated industrialisation strategies. These issues will be examined in more detail in the next section, but it is important to mention here that one of the principal features of the political economy of the developmental state has been the constitution of a segmented political economy. On the one hand, there are internationally competitive export industries, and on the other hand, key elements of the domestic economy are inefficient and politically entrenched through close relationships with political and bureaucratic elites. In the Japanese context, Pempel (1998) and Calder (1988) have argued that compensatory public polices for farmers, small business and domestic industries, such as construction, have co-existed, and indeed, provided the political wherewithal for efficient competitive export industries. Woodall (1996) has pointed out that there exist two distinct forms of states in Japan: one developmental, and the other clientalist. In this context, political clientalism is: an interaction characterised by the selective allocation of distributive benefits by elites in exchange for the promise of solidarity and mutually beneficial inputs from interests. This exchange may involve governmental subsidies, official price supports and import quotas, targeted tax breaks, regulatory favours in the allocation of trucking routes, and other policy benefits. (Woodall, 1996: 9Ð10) Similar examples of compensatory policies may be found in other East Asian developmental states. For example, Korea, like Japan, grants extensive subsidies to its farm sectors (Moore, 1988). However, these rent seeking or clientalist structures are widespread in much of Southeast Asia. In Malaysia, for example, a relatively efficient export sector exists alongside industries characterised by widespread patronage and rent seeking. For instance, the heavily protected national car industry provides direct benefits to Malay elites closely associated with the ruling party (Bowie, 1991; 1994). In this instance is a means of ensuring the political survival of the Malay-dominated UMNO coalition, with rent-seeking structures central to the political consolidation of the Mahathirist political project in Malaysia. Herein is the nub of the argument: these domestic developmentalist projects were accommodated by the regional governance project of open regionalism. The regional governance project of open regionalism and the 344 EMBEDDED MERCANTILISM AND OPEN REGIONALISM embedded mercantilism that it promoted enabled the consolidation of a segmented political economy composed of an open tradeable sector and a protected non-tradeable sector. In short, open regionalism went hand in hand with the domestic developmentalist political projects of East Asian governments.

The international political economy of open regionalism Over and above these elements, but equally important for the operation of the system of embedded mercantilism, was a permissive set of regional and inter- national economic structures. Cumings (1987) has drawn attention to the role of cold war structures in creating the kind of developmental states that emerged in East Asia. However, it needs to be added that there was a more specific set of international forces entrenched in embedded mercantilism in Southeast Asia. In particular, the expansion of Japanese foreign direct and the very distinctive open regionalism favoured by the APEC process helped to consolidate the politically protected domestic economic sector. In fact, the whole gamut of economic reform policies pursued in the late 1980s and 1990s served to consolidate the political economy of embedded mercantilism. From this perspec- tive, domestic and international strategies are mutually constitutive of domestic coalitions and alliances around a system of embedded mercantilism. In fact, the system of embedded mercantilism in East Asia may well be the counterpart of Ruggie’s notion of ‘embedded ’. In a highly influential article Ruggie (1983) introduced the notion of embedded liberalism as a way of understanding the emergence and development of the internationalisation of political authority in the postwar period. He starts off with two key assumptions: international political authority requires the fusion of power and authority; and the explanation of the nature, emergence and functioning of international regimes4 requires that equal attention be given to the role of power and social purpose.5 For Ruggie the essence of the postwar economic order lay in the funda- mental reconciliation of two distinct objectives: the need to provide a framework for a liberal international trading order and the requirement to create the conditions for domestic social stability. For example, the restrictions, exceptions and of the GATT were designed in such a manner as to allow for the protection of domestic stability while at the same time benefiting from the advantages of liberal free trade. At the global level, embedded liberalism reflected the dominance of a kind of social liberalism. The essence of this embedded liberal compromise was twofold: ‘unlike the of the thirties, it would be multilateral in character; [and] unlike the liberalism of the and free trade, its multilateralism would be predicated upon domestic interventionism’ (Ruggie, 1983: 209). In part Ruggie argues that this reconciliation of domestic stability and liberal free trade was at the cost of because the reduction of domestic adjust- ment it permitted ‘had inflationary consequences by sacrificing economic efficiency to stability’ (Ruggie, 1983: 231). Another crucial factor that has been essential to the sustenance of the regime of embedded liberalism is that it was able to combine a liberal trade system with the of capital markets (Bell, 1997). In retrospect, it appears that the regulation of capital structure 345 KANISHKA JAYASURIYA played a major role in protecting domestic, social, and economic programmes. It is the removal of these capital controls that has unleashed a fundamental restructuring of all forms of as well as of the developmental state. But, more crucially, the regional production and financial structure which emerged in Southeast Asia in the mid-1980s served to buttress the dualistic and segmented political economies of Southeast Asia. As we have suggested, a critical feature of the Southeast Asian political economy during the boom period was the presence of two distinct economic segments: one, an international segment which was export-orientated and predominately driven by foreign direct investment (FDI), and the other, a highly cartelised domestic segment. These economic segments or sectors were also composed of distinct capitalist groupings with differing linkages to the state. Whereas foreign predominantly drove the tradeable sector, the non-tradeable sector was largely in the hands of enterprises or corporate groups closely linked to the apparatus of political power. The growth generated by the tradeable sector was effectively compensated through an implicit and explicit set of bargains between the capital in the tradeable sector and the non-tradeable sector. Of course, how this was achieved depended on the particular institutional configuration of each state. An elabora- tion of this is beyond the scope of this paper, but for the purpose of the present argument it suffices to underscore the fact that these domestic coalitions were structured through a set of bargains which in the final analysis rested on the generated by the tradeable sector of the economy. This, in essence, laid the domestic foundations for the system of embedded mercantilism that defined the basic contours of the regional political economy in the period leading up to the Asian crisis of 1997Ð98. In this context there can be no doubt that the formation of the segmented political economies of Southeast Asia was accelerated by the rapid growth in Japanese FDI. From 1987 Japanese investment in Asia increased dramatically, particularly after the Plaza Accord (Stubbs 1994) which raised the of the yen, thereby prompting Japanese manufacturers to seek overseas manufacturing plants. Singapore and Thailand were the initial beneficiaries of these but Japanese FDI shifted to Malaysia and Indonesia over the next few years (Jomo et al, 1997). As Table 1 indicates, Malaysia and Singapore remained heavily dependent on the inflow of FDI. Japan was not the only major source of FDI. Other East Asian Newly Industrial- ising Countries (NICs) were also important investors in Southeast Asia. Just as appreciating forced Japanese manufacturers to relocate, a similar set of pressures were being felt in some NICs, eg South Korea and Taiwan. Taiwan is a significant in Malaysia, and South Korea made substantial investments in Indonesia (Stubbs, 1994). In addition, the emergence of the Growth Triangle linking Singapore with the Malaysian State of Johor and the Indonesian province of Riau underlined significant Singaporean investment in the neighbouring region. In short, from the late 1980s Southeast Asia was the beneficiary of significant FDI from Japan and East Asian NICs. However, this was not simply a question of market forces creating a ‘flying geese’ model of investment. Such investment was driven by a set of political forces that served to entrench the dominant coalitions in East Asia. It was 346 EMBEDDED MERCANTILISM AND OPEN REGIONALISM

TABLE 1 Asia: ratio of FDI inflows to gross domestic capital formation, 1971Ð93 (annual average)

Country 1971Ð75 1976Ð80 1981Ð85 1986Ð90 1991Ð93

China 0.0 0.1 0.9 2.1 10.4 Hong Kong 5.9 4.2 6.9 12.9 5.7 India 0.3 0.1 0.1 0.3 0.4 Thailand 3.0 1.5 3.0 6.5 4.7 Korea 1.9 0.4 0.5 1.2 0.6 Malaysia 15.2 11.9 10.8 11.7 24.6 Philippines 1.0 0.9 0.8 6.7 4.6 Singapore 15.0 16.6 17.4 35.0 37.4 Taiwan 1.4 1.2 1.5 3.7 2.6 Indonesia 4.6 2.4 0.9 2.1 4.5

Source: Jomo (1997: 14). political in a number of ways. First, investors were driven by home country pressures to move offshore in order to internationalise production strategies. Second, these strategies were underpinned by export markets in the USA, which in turn were dependent on a broader, more political relationship between the USA and Japan. Finally, Japanese FDI was enmeshed in the political strategies of local dominant coalitions through equity investment or joint ventures. For example, significant Japanese investment in Proton, the Malaysian car , helped cement an enterprise which was both economically and ideologically pivotal to dominant sectors of the Malaysian political economy. The growth of FDI in Southeast Asia was driven not just by the market forces but also by a complex array of political pressures, foremost among which were the economic and political interests of the domestic coalitions.

The domestic foundations of open regionalism The inflow of foreign investment was paralleled by the political and economic power of the non-tradeable sector in Southeast Asia. As will be argued, much of the enhanced power for this domestic sector was fuelled by the policies of and liberalisation introduced in the late 1980s—the so called ‘Washington consensus’. Far from helping to curtail the growth of powerful politically linked domestic cartels, the Washington consensus policies helped to consolidate the considerable shift of power to politically linked cartels. In fact, in Southeast Asia, outward-orientated economic policies helped to entrench a dual economy and its mainsprings, the constellations of power and interests in the domestic economy. This economic and political consolidation of what could be termed ‘nomen- klatura capitalism’ was reflected, for example, in the rapid growth of infra- structural development in countries like Malaysia, which was fuelled by the export-orientated sector (Jomo, 1998). Moreover, the high capital inflows generated by the rapid growth of Southeast Asian economies fed directly into the 347 KANISHKA JAYASURIYA politically connected non-tradeable sector (Khoo, 2000: 218Ð20). In fact, much of the recent discussion of capital inflows overlooks the fact that most of the debt incurred has been with politically connected domestic cartels. In addition, the increased assertiveness of domestic cartels in the non-tradeable sector has been clearly illustrated in the pegging of local to the US dollar before the crisis—an action that effectively overvalued most local currencies. One of the main triggers of the Thai crisis was the failure of the Thai economic authorities to make effective downward adjustments to the Thai baht (Jomo, 1998). However, these policies cannot simply be dismissed as policy failures just because the distributional benefits of an overvalued currency accrued to the non-tradeable sector; they must be seen as a reflection of the relative political dominance of the non-tradeable over the tradeable sector (Frieden, 1991). But, more significantly, the distinctive character of embedded mercantilism in Southeast Asia is reflected in the growth of a type of nomenklatura capitalism in Southeast Asia. The term ‘nomenklatura capitalism’ is used to highlight the close connection between political elites and insulated domestic cartels. But in the Southeast Asian context these connections are welded deeper than the clientelism of Northeast Asian developmental states, because the management and control of business groups are closely intertwined with the state and party apparatus. Nomenklatura capitalism here points to an important shift in Southeast Asian economies as agents or enterprises within the state, and, indeed, in dominant parties, which have become key players in the domestic economy Indonesia provides a neat illustration of the development of this nomenklatura capitalism. During Indonesia’s oil boom phase (1973Ð82) state intervention in the economy was widespread. It was reflected in the rapid growth of state enterprises in areas such as steel, fertilisers, cement and paper. The rapid increase in state intervention was accompanied by a range of highly interventionist policies in areas such as trade and banking. For example, the new foreign investment laws introduced after 1974 required all foreign investors to take on local equity partners. In the trade area a system of import for private and public firms was introduced, thereby providing a lucrative system of rent for well connected state enterprises (Robison & Rosser, 1998). However, by the mid-1980s these systems had become much more tenuous. Internationally there was great pressure to deregulate the economy, particularly in the wake of the collapse in oil prices, but there were also significant domestic pressures because beneficiaries of the previously regulated economy began to chafe at state restrictions. Many of the cartels which were dependent on political connections were locked out of lucrative state monopolies, and were now intent on getting a slice of the action. In the light of these twin pressures the Indonesian government began to pursue a more market-orientated approach to the economy in the mid-1980s. While these reforms were much lauded by the international community, it is important to note that they occurred within the context of the emergence of a powerful group of nomenklatura capitalists. In this context the economic reforms shifted power away from state enterprises towards this group. As Robison and Rosser (1998) point out:

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deregulation created the opportunity for sudden and extensive growth in the private sector and for the economic dominance of large predominantly Chinese owned conglomerates as well as business groups owned by powerful political families, notably the Suharto family. (Robison & Rosser, 1998: 1598) In short, far from the emergence of liberal markets, deregulation served to entrench domestic cartels (in the non-tradeable sector) whose defining attribute remained their connections to the dominant apparatus of political power. In the Indonesian situation this meant the political and social coalitions surrounding the Suharto family. In essence, the market reforms that were at the heart of the kind of open economic strategies pursued by Indonesia served to entrench a segmented political economy composed of a foreign-owned tradeable sector and domestic-owned non-tradable sector, comprising politically connected cartels. In Malaysia, as with Indonesia, a dual economy is clearly apparent: a tradeable sector largely owned by foreign capital, and a domestic sector composed of enterprises with strong linkages to the ruling UMNO party. Of course, central to understanding the Malaysian political economy is the adoption of the New Economic Policy (NEP), designed to promote greater Malay in the domestic economy, which was largely in the hands of Chinese capital. It is beyond the scope of this paper to document the working of the NEP (see Jomo, 1986), but two significant effects need to be noted. First, the NEP created strong incentives for powerful Chinese capitalists to enter into alliances and relationships with Malay politicians. This nexus, which has become increasingly important over the past decade, has blurred the distinction between Chinese and Malay capital and formed the basis for a broad-based dominant coalition (Gomez & Jomo, 1997). Second, the NEP initially rested on an ambitious state-driven indus- trialisation policy led by large state enterprises. These enterprises were controlled by powerful bureaucrats with close ties to the dominant political apparatus. However, after the economic of the late 1980s, Malaysia embarked on a programme of extensive privatisation and deregulation. This privatisation resulted in a shift of ownership from the public to the private sector, but control over the newly privatised assets were still dependent on linkages to the dominant political party, the UMNO. Therefore, in Malaysia ownership of key strategic enterprises shifted from state to party. As Bowie points out, these developments have led to the ‘erection of a corporate empire blessed with unrestricted access to state-issued licences and Malay preferences that is under the direct control of the governing party, UMNO, and is used to raise funds for constituent and electoral purposes’ (Bowie, 1994: 182). In other words, Malaysia created its own brand of nomenklatura capitalists who are a key component of the dominant coalition. While the crisis has severely undermined the viability of these enterprises, it is clear that the linkages between the UMNO and key sectors of the domestic economy are so strong that any attempt to introduce market-orientated reform will be strongly resisted. The development of nomenklatura capitalism allows little political space for the emergence of an alternative reform-orientated coalition. Nonetheless, it needs to be pointed out that there are significant pockets of domestic capital that may well form the basis of a future reform coalition. The recent electoral setbacks for the ruling party suggest that this could be a plausible scenario. 349 KANISHKA JAYASURIYA

More strikingly, Malaysian economic policies have a strongly nationalist orientation. However, ‘[Malaysia] aspires to find its fulfilment in an equally committed Malaysian nationalist goal of competing equally with the advanced nations of the world. Mahathir himself has alluded to all this before’ (Khoo, 1995: 329). Elements of this pervasive dualistic economy—though with a much higher degree of economic efficiency—is also evident in Singapore’s political economy which, like Malaysia’s, has two distinct elements: one, a tradeable sector largely controlled by foreign capital, the other, a powerful domestic sector composed of government-led (GLCs) which have a strong presence. The effective political and policy segmentation of the economy between the external and the domestic sector reduces (but does not eliminate) potential conflicts between the two sectors. However, the powerful government-led and domestic enterprises are the core components of Singapore’s dominant coalition. Any analysis of the policy reform in Singapore over the past decade or so needs to take into account the critical economic and political role of GLCs. Indeed, even as privatisation and deregulation were proceeding apace, the government used key holding companies—eg Tamesek, Singapore Technology and Health holdings—to retain control over some of the biggest corporate entities in Singapore (Rodan, 1997; see also Vennewald, 1994). In fact, as Rodan (1997) points out, one of the distinctive features of the Singaporean political economy over the past decade and half has been the gradual movement of state enterprises into the private sector without a concomitant shift in control of these enterprises. These examples illustrate that, contrary to much of the prevailing economic orthodoxy, trade liberalisation or open economic policies have served to con- solidate a particular economic and political bargain between a politically connected non-tradeable sector and an open-orientated export sector. From the late 1980s the state-led developmental projects gave way to a system of nomen- klatura capitalism: powerful domestic cartels connected to the ruling apparatus of political power. To be sure, the precise nature of these connections (as well as the degree of economic efficiency) was dependent on the distinctive institutional configuration in each country, such as the ‘presidential cronyism’ in Indonesia or party-led companies in Malaysia. Relevant for our argument here is the manner in which this model of nomenklatura capitalism, and domestic coalitions that sustained it, were enmeshed within a particular set of internationalist strategies.

Globalisation and the crisis of the regional political economy

International competitiveness and open regionalism There was increased competitiveness of the international economy. It is clear that the segmented political economies of the politically connected non-tradeable sector and the dynamic, efficient tradeable sector required high levels of to feed the voracious rent-seeking appetites of the domestic cartels. Moreover, the high capital inflows which fuelled this non-tradeable sector were dependent on the continued high growth rates and profitability of the tradeable sector. Over time, these inflows have been unable to provide the resource transfers to sustain 350 EMBEDDED MERCANTILISM AND OPEN REGIONALISM the political capitalism in the non-tradeable sector. East Asian export and economic growth are becoming increasingly sluggish thanks in no small part to the competitive export pressure of the Chinese economy, as well as to overvalued exchange rates.6 Moreover, this reliance on exports and the tightening competitive situation has contributed to a significant over-capacity in East Asia. Additionally, the availability of cheap and unrealistic expectations as to future profitability have contributed considerably to over-investment in the region. Although over- investment in the tradeable sector was caused in part by systemic factors in the global economy, the highly significant over-capacity in non-tradeables was the result of this sector’s magnetism for mobile capital. Once again, this alerts us to the role played by the curious marriage of ‘hot money’ and ‘’ in the operation of East Asia’s embedded mercantilism. No amount of tinkering with trade policy is likely to alter these structural constraints on the region’s political economy. It is clear that the presence of over-capacity in the region is an attribute of the political economy of open regionalism.

Open regionalism and the balance between the tradeable and non-tradeable sector The balance between the tradeable and the non-tradeable sector was dependent on the existence of agencies such as central banks and financial ministries, and the like, which were able to monitor and effectively regulate the flow of rents from the export to the non-tradeable sector. The effective maintenance of this regulatory autonomy was especially important in the context of the financial liberalisation policies being implemented across the region. In some respects this bears comparison with Wade and Veneroso’s (1988) analysis of the financial crisis. However, what they regard as a series of policy errors by technocrats should be seen as a more deep-seated transformation of the state in East Asia, in which policy makers effectively lost autonomy in key areas within the state. In short, there has been a diffusion of power within the state as key domestic cartels managed to influence and even capture sections of the policy-making apparatus of the state. In this context economic liberalisation within a system of nomenklatura capitalism inevitably weakened the capacity of policy makers to respond to crisis. Indonesia provides a clear illustration of this argument. First, deregulation in Indonesia led to the consolidation of powerful politically connected con- glomerates (Robison & Rosser, 1998; Pincus & Ramali, 1998). Second, succes- sive rounds of liberalisation left technocrats with very few instruments through which to control the economy. As Pincus and Ramali point out: Paradoxically, although successive rounds of liberalisation failed to achieve their stated objective of reducing the level of rents in the system, they had the unintended effect of limiting the technocrats’ capacity to intervene in a meaningful way to adjust to external shocks. (1998: 724) Globalisation, or more particularly financial liberalisation, served over the short term to reduce the capacity of the technocrats to regulate the economy. But the 351 KANISHKA JAYASURIYA potentially incendiary element was the fact that regulatory institutions (such as the Indonesian ) were captured by domestic cartels, and this, combined with strategies of liberalisation, further entrenched the power of politically connected domestic cartels. In Thailand, for long the ‘teacher’s pet’ of the for its conservative macroeconomic and , there has been a continual shift in political power away from central state agencies to business groups and politicians (see Laothamatas, 1992; Hewison, 2000). Here, the close relationship between politicians and business groups was at the expense of central economic agencies such as the Ministry for Finance. Laothamatas (1994) maintains that: with electoral politics in full gear in the later 1980s and early 1990s corrupt dealings between government and business have again picked up. In a country where vote- buying is often needed to win an election and funding for party activities and election campaigning comes mostly from covert donations (rather than legitimate government sources or publicly acknowledged donations), corruption becomes a crucial means for politicians to draw money from . (p 209) The important point that needs to be recognised here is that the deregulation of the financial sector in the context of segmented political economies provided the circumstances for the inevitable collision between global economic forces and the dominant coalitions solidly entrenched in the nomenklatura capitalism arrangements of Southeast Asia. From this perspective, while the depth of the economic crisis was no doubt a contributing factor, the mainsprings of the crisis lay in structures of the Southeast Asian political economy. Economic liberalisa- tion within a system of nomenklatura capitalism inevitably weakened the capacity of policy makers to respond to crisis. Hence, over the long term, an economic crisis of the magnitude of the economic shock of 1997Ð98 was inevitable because the hitherto carefully regulated institutional balance between the tradeable and non-tradeable sector was now firmly tilted in favour of the non- tradeable sector.

International trade policy and open regionalism On top of these pressures the system of embedded mercantilism came under increasing strain from US trade policy, which began to place a premium on issues of market access and fairness as well as liberalisation. Consequently, the insulation of domestic cartels from global pressure that formed the nexus of the nationalÐinternational bargain—so pivotal to the stability of the system of embedded mercantilism—was being increasingly undermined by US trade policy. Further, the advent of the (WTO), and the strongly juridical cast of trade law and regulation, were deleterious to the pursuit of the embedded mercantilist policies that had provided significant political and economic dividends for dominant coalitions in East Asia. In essence, the bargain between domestic autonomy and international openness, which took the particular form of open regionalism, was being eroded by a combination of US and global trade policy.

352 EMBEDDED MERCANTILISM AND OPEN REGIONALISM

Conclusion: the new regional disorder Clearly, the 1997 economic crisis has unsettled the dominant coalitions within the region and it has been difficult to sustain the embedded mercantilism of the boom years. However, this does not necessarily mean the dismantling of the systems of nomenklatura capitalism in Southeast Asia. Indeed, the clear evidence of the post-crisis period suggests that the most arresting feature of post-crisis develop- ments in Southeast Asia has been the diversity of responses to the crisis. While in the pre-crisis ‘boom’ period there was a fundamental commonality underpinning both economic strategies and the domestic coalitions, this was no longer the case in post-crisis Southeast Asia. What is most evident is the extent to which some states have embarked on reform, others resisting, and yet others remaining stuck in a kind of stalemate. It is this diversity that will significantly alter the shape and form of multilateralism in Southeast Asia. The overriding point to emerge from this analysis is the extent to which regional integration is a deeply political process. Regional integration strategies such as open regionalism are not mere technical procedures aimed at enhancing but economic strategies deeply embedded in the configura- tion of power and in the domestic political economy. From this perspec- tive, regional integration needs to be explained in terms of the political projects undertaken by domestic coalitions rather than deriving from the kind of external pressures identified by the market model. Moreover, this ‘inside out’ model of regional integration is more adequately able to explain the mutation of foreign economic policy. In other words, changes in foreign economic policy or broad shifts from multilateralism to bilateralism need to be located in the context of the operation of broader structural forces. The market model of regional integration assumes that policies of regional integration can be assessed on the basis of some preferred technical efficiency of one course of policy. The analysis in this paper has demonstrated that these policy options are not mere technical choices but are the product of the evolution of a complex regional political economy. In short, regional integration cannot be divorced from wider contests over the distribution of economic power. In the East Asian context our analysis suggests that there has been a significant unravelling of the regional political economy. This emerging disorder is manifest in the fact that the post-crisis period is marked by a significant diversity of reform trajectories. In the boom years of growth in the 1990s there was a remarkable similarity of economic strategies and policies. But it is this very convergence of domestic coalitions around domestic political projects of statist that enabled the kind of strategy of open regionalism, associated with APEC, to remain the dominant regional governance project. From this vantage point open regionalism was a strategy of internationalisation that meshed with the internal configuration of power and interests embedded in Southeast Asia’s domestic political economies. The economic crisis has under- mined the domestic foundations of ‘open regionalism’, ushering in new political projects centred around the emergence of new regulatory states, which have important implications for regional organisations like APEC. It is the emergence of this new regulatory state that will drive regional governance in East Asia.

353 KANISHKA JAYASURIYA

Notes 1 For a good overview of these theories see Higgott (1993) 2 But clearly this does not exhaust all the different modalities of domestic influences on foreign economic policy; indeed this essay complements and follows on from the work of Beeson and Jayasuriya (1998) on the role of political rationality—if you like, the contribution of the East Asian normative order—in shaping the distinctive configuration of regionalism in East Asia. 3 See Stubbs (1999) on the relationship between war and export-orientated industrialisation in East and Southeast Asia, which probes the foundation of this embedded mercantilism. 4 For an introduction to the concept of international regime see Krasner (1983). 5 Ruggie argues that hegemonic stability theorists (such as Gilpin, 1987) focus on the stability of inter- national regimes but are unable to account for the content of these regimes. 6 For an account of these general trends in a more global context see Brenner (2002).

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