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Political business in east asia (politics in asia)

Political Business in
East Asia

“With a good mix of well-considered theory and appropriately detailed case
studies, this book provides a unique, comprehensive and authoritative account of
business–state relations in East Asia. This is an important and wonderfully rich
book 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 the
need to institute important structural reforms in business and politics. The crisis
raised questions about the quality of government intervention in the economy,
the mode of enterprise development, and the form of democracy emerging in
East Asia. However, in spite of the political upheavals following the financial
crisis, 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 taken
advantage of after the crisis?
What is it about the nature of politics and of business in East Asia that has
restrained the fundamental changes shown to be necessary?

The authors argue that the process of consolidation of democracy has been
marred by massive corruption of politics, portending little hope of genuine
political and economic reform. In particular, it has been hindered by the manner
of funding of political parties, which is heavily influenced by ties developed
between 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
Michael R.J. Vatikiotis
The State and Ethnic Politics in Southeast

David Brown
The Politics of Nation Building and
Citizenship in Singapore
Michael Hill and Lian Kwen Fee
Politics in Indonesia
Democracy, Islam and the Ideology of
Douglas E. Ramage
Communitarian Ideology and Democracy in
Beng-Huat Chua
The Challenge of Democracy in Nepal
Louise Brown
Japan’s Asia Policy
Wolf Mendl
The International Politics of the AsiaPacific, 1945–1995
Michael Yahuda
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
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
Indonesia and China
The Politics of a Troubled Relationship
Rizal Sukma
Arming the Two Koreas
State, Capital and Military Power
Taik-young Hamm
Engaging China
The Management of an Emerging Power
Edited by Alastair Iain Johnston and
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Singapore’s Foreign Policy
Coping with Vulnerability
Michael Leifer
Philippine Politics and Society in the
Twentieth Century
Colonial Legacies, Post-Colonial
Eva-Lotta E. Hedman and John T. Sidel
Constructing a Security Community in
Southeast Asia
ASEAN and the Problem of Regional
Amitav Acharya
Monarchy in South-East Asia
The Faces of Tradition in Transition
Roger Kershaw
Korea After the Crash
The Politics of Economic Recovery
Brian Bridges
The Future of North Korea
Edited by Tsuneo Akaha
The International Relations of Japan and
South East Asia
Forging a New Regionalism
Sueo Sudo
Power and Change in Central Asia
Edited by Sally N. Cummings
Political Business in East Asia
Edited by Edmund Terence Gomez

Political Business in
East Asia

Edited by
Edmund Terence Gomez

London and New York

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
This edition published in the Taylor & Francis e-Library, 2004.
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 0-203-16633-7 Master e-book ISBN

ISBN 0-203-26096-1 (Adobe eReader Format)
ISBN 0–415–27148–7 (hbk)
ISBN 0–415–27149–5 (pbk)

For Evie, Eric, and Eshward
who give meaning to the effort
and for Sharm


List of tables
List of figures
Notes on contributors
Introduction: political business in East Asia



1 Development and corruption: the East Asian paradox



2 Political business alliances: the role of the state and foreign and
domestic capital in economic development



3 Political business in Malaysia: party factionalism, corporate
development, and economic crisis



4 KMT, Inc.: liberalization, democratization, and the future of
politics in business



5 State predation and rapid growth: politicization of
business in China



6 The political business of development in South Korea



7 Politics, business, and democratization in Indonesia




8 Democratization and economic crisis in Thailand: political
business and the changing dynamic of the Thai state



9 State, politics, and business in Singapore



10 Politics, business, and the inescapable web of structural
corruption in Japan






1.1 Comparison of regional growth rates and levels of
corruption, 1960–93
2.1 State intervention in East Asia before liberalization
3.1 Malaysia: ownership of share capital (at par value) of limited
companies, 1969–95
3.2 Reputed political connections of some prominent business
3.3 Loans by government-owned banks to UMNO companies, 1990
3.4 Changing nature of companies linked to UMNO politicians,
1970s and 1990s
4.1 Leadership of KMT, Inc., 1945–2000
4.2 Public-listed KMT enterprises, 1992
4A.1 KMT, Inc.: firms invested in by the Kuomintang, 1928–96
5.1 Distribution of forms of enterprise, China, 1985–96
5.2 Gross value of industrial output by ownership, 1985–96
8.1 Election results by political party, 1975–92
8.2 Professional background of elected assemblymen, 1933–92
8.3 Election spending, 1986–96
8.4 Senate candidates, March 2000
8.5 Non-performing loans (NPLs), November 1999–January 2000
9.1 Major holdings of Temasek Holdings Ltd, 2000
9.2 Sectoral distribution of industrial enterprises in Singapore,
9.3 PAP share of popular vote, general elections, 1959–97
9.4 Sectoral distribution of promising local enterprises,
May 1997
10.1 Zoku MPs and factions (Upper and Lower House MPs),



I.1 Model of the practice of political business
1.1 Corruption and growth, 1982–96
3.1 Daim Zainuddin’s common directorship in his triple capacity
as trustee for the government, UMNO, and his family
companies, 1990
3.2 Tajudin Ramli’s control of the corporate sector, 1997
3.3 Wan Azmi Wan Hamzah’s control of the corporate sector, 1997
4.1 Organizational structure of the Kuomintang, 1994
5.1 State subsidies and SOE losses, 1985–96
5.2 Political business fund flows, China, 1998




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 and
Government 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 Existing Socialism” in Eastern Europe: Between Western Europe and East Asia
Peter Wad is Associate Professor at the Department of Intercultural Communication 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
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 in
East Asia, when a financial crisis occurred in 1997, it was partly attributed to
the impact of systemic development of this nexus on the corporate sector.
This financial crisis, which eventually evolved into economic and political
crises, exposed many problems that had been camouflaged by the impressive
economic growth registered by most East Asian countries since the late 1980s.
The impact of the financial crisis raised questions about the quality of
entrepreneurship and of the burgeoning democracy in this region.
In this volume, through the use of the concept of political business, we
propose to trace the inter-relations between politics and business to draw
conclusions on their influence on enterprise development, corruption, and
the consolidation of democracy in East Asia. To achieve this objective, we
attempt here to provide a critical historical account of the evolution of state
and capital in the region.
While not all countries in East Asia have democratized, we are concerned
that in countries that have achieved this transition from authoritarianism, the
process 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 East
Asia has been the manner of funding of political parties, which is heavily
influenced by ties developed between politicians and businessmen. Such
political business ties are also hindering important structural reforms and the
development 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 in
East Asia, mainly because of the role of the state in promoting the rise of big
business. While the rise of capital has been heavily influenced by the state,
with the emergence of democracy, the practice of politics has been greatly
affected by money emanating primarily from big business. The impact of big
business on domestic politics has contributed to growing corruption and
“money politics,” bringing into question the quality of democracy emerging in
East Asia.
Terence Gomez


The idea for this project on a comparative study of the links between politics
and business in East Asia was first conceived in June 1998, when I presented a
paper entitled “Political Business in Malaysia” at a workshop organized by
the Manchester Business School. This workshop was convened to discuss the
problems in the East Asian economies that had been exposed by the financial
crisis that broke in 1997. I am indebted to Jeffrey Henderson, convenor of this
workshop, for inviting me to present this paper and to the participants who
raised searching questions and provided important feedback on my paper.
In November 1998, I approached Robert Cribb, then Director of Nordic
Institute of Asian Studies (NIAS), to fund a workshop to bring together
scholars who had been researching the links between politics and business in
East Asian countries. I am extremely indebted to NIAS for providing me with
some funds to start this project.
Peter Wad of the Copenhagen Business School contacted a number of
research institutes in the Nordic countries about the possibility of hosting a
workshop on politics and business before receiving a positive response from
Jacques Hersh and Johannes Schmidt of the Research Center on Development and International Relations at Aalborg University, Denmark. This
Center agreed to absorb all expenses to host the workshop I intended to
convene. The workshop was held on June 4–5, 1999, and I am very grateful to
staff of this Center for their efficient organization of the workshop. I thank
Jacques Hersh for his keynote address, which he used effectively to draw our
attention to key issues we needed to consider during our discussions at the
workshop. 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 an
important void in this project, which became evident during the workshop.
Among those present at the workshop and who contributed to the discussions
were Robert Cribb, Eric Lonergan, Flemming Christiansen, and James
Putzel. The insights they provided were crucial in helping us develop the
perspective we eventually adopted in the volume.
I am deeply indebted to Tom Wingfield, my colleague at the University of
Leeds, where I was working when this project was conceived. Tom helped me
identify and contact academics who could be approached to work on this



I thank all the contributors to this volume who needed little persuasion to
work with me on this project. I was pleasantly surprised at their willingness to
support this project, since I had not met some of them, like James Babb and
Stefan Eklöf, when they were approached to write a chapter for this volume.
Karl Fields, who could not attend the workshop, was very supportive when I
asked him to make numerous revisions to his article, to help his analysis tie in
with 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 researcher
originally identified for this project was called to participate in a peacekeeping mission in East Timor. I thank Stephan Haggard and Linda Low for
agreeing to write the chapter on Singapore. At the workshop in Aalborg, the
participants had felt that there was a need to incorporate a chapter on
Singapore, to facilitate the comparative dimension of the project. Singapore is
the 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 write
two chapters for this volume. Andrew was incorporated into this project to
prepare an article discussing the concept of corruption, but was subsequently
persuaded to write a country chapter, on China.
I thank the late Michael Leifer of the London School of Economics who, as
Editor of Routledge’s Politics in Asia series, was very keen on publishing this
volume when I mentioned the project to him. Michael had promised to write
the Foreword for this volume, and it is unfortunate that we will not benefit
from the insights of this doyen of Southeast Asian Studies.
Finally, but not least, I am very obligated to Sharm, who provided unstinting support when I was preoccupied with organizing and completing this
project, even though she was then working on her doctoral dissertation. To
her, and our children, Evie, Eric and Eshward, who shared my enthusiasm for
this study in our conversations about life, social change, democracy, and
justice in Asia, I dedicate this volume. We hope that this volume will contribute in some small way to the debates now taking place among reformers
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 impairing
economies 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, in
some countries, contributed to the promotion of greater democratization.
The impact of the crisis has drawn attention to a need for an inquiry into a
number of important issues in the areas of business and politics, including the
quality of state intervention in the economy, the mode of enterprise
development, and the form of democracy emerging in East Asia, involving in
particular 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 capital
flows (specifically portfolio investments), and imprudent financial liberalization and weak supervision of the banking sector, all issues that have now
been well documented.2 Our key focus is on the links between politics and
business and the implications of this nexus on enterprise development and
democratization in East Asia.
These links forged between politicians in power and businessmen have
unquestionably facilitated the rise of a number of major companies in the
region, aided through the use – and in many cases, abuse – of the domestic
financial sector. Such links led to the development of some factors that
contributed to the crisis, including lax supervision of the financial sector and
an unsustainable form of corporate growth through debt. The ties between
politics and business have also influenced the form of creation and distribution of state rents, contributing to the rise of a “new rich,”3 as well as
allegations of cronyism, corruption, and nepotism. Wanton corruption and
cronyism, in various forms, had transpired long before the onset of the crisis,
suggesting that the ties between politics and business had not precipitated the
financial crisis in 1997.4 These links, however, had influenced government
policies that contributed to the crisis and affected responses in ways that
exacerbated the crisis.


Edmund Terence Gomez

Following the financial crisis, it was evident that the repercussions arising
from the links between politics and business had emerged as a primary factor
contributing to political tension and/or change in a number of countries in
East Asia. In Southeast Asia, Indonesia’s long-standing president, Suharto,
was forced to resign, Malaysian Prime Minister Mahathir Mohamad came
under unprecedented open public dissent, while Thailand’s Chavalit Yongchaiyudh government was replaced by a coalition forged by Chuan Leekpai.
In Northeast Asia, Japanese Prime Minister Ryutaro Hashimoto had to step
down in favor of Keizo Obuchi, while South Korea’s out-going president Kim
Yong Sam was so tainted by a scandal that exacerbated the financial crisis that
it facilitated the election of the long-standing government critic Kim Dae
Jung. In all these countries, the close ties between politicians and businessmen have influenced the form of economic development and, following the
financial 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 fundamental structural changes in politics and in business, particularly involving the
links 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 business
over the Philippine state appears to be growing. In Malaysia, Mahathir
controversially sacked Deputy Prime Minister Anwar Ibrahim, consolidating
more power in the office of the executive and yet secured an overwhelming
electoral victory during the 1999 general elections. In Thailand, in spite of
promises by politicians of greater devolution of power to the people through
amendments to the constitution, there have been no significant political
reforms. During the 2001 general election, mired in allegations of corruption,
including vote-buying, the party that secured the largest number of seats in
parliament was the newly formed Thai Rak Thai Party, formed by Thaksin
Shinawatra, reputedly to be the richest person in Thailand. Why has the
possibility of reforms in business and politics that appeared imminent
following the crisis not occurred? What is the nature of politics and business
in East Asia that has the capacity to restrain fundamental changes that were
shown by this crisis to be necessary? This volume is an attempt to answer these
questions by tracing the form of development of capital in East Asia as well as
the evolution of the links between politics and business.

Defining political business
The favoring of particular business interests by politicians in power has been
broadly and popularly referred to as “cronyism.” This term, however, carries
dissimilar meanings in different contexts and is not an effective tool for
conceptualizing the variety of issues that have shaped the links between
politics 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

Introduction 3
from corruption, nepotism, insider trading, and political patronage to the
abuse of the financial sector for vested political interests as well as covert
funding of political parties or presidential candidates. Other issues, however,
that may also require analysis in this discussion of politics and business is the
need for the state to implement policies that involve positive discrimination
to rectify social and economic imbalances, create or promote indigenous
capital, or encourage industrialization. For this study, the concept, “political
business,” has been developed, which will be applied to analyze the various
forms of links between politics and business that can have positive or negative
impact on local economies and political systems.
In order to understand the form and implications of political business ties in
East 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 the
institutions or actors in whom power is centered, including determining if
political power has been secured through the aid of capital. Second, an
analysis is required of the development of the corporate sector, particularly
the rise of big business, to determine the nature of the relationship between
capital and the state. For example, the rapid growth of some major East Asian
companies, whether privately owned or a state enterprise, was due to political
considerations and aided through much state support. Moreover, following
democratization in a number of East Asian countries, the influence of capital
over 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 business
into politics. Political funding by business has contributed to a significant rise
in the phenomenon of “money politics,” that is the use of money in the
political arena to secure control over the state in order to influence the distribution 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 the
outcomes of the nexus between politics and business on the corporate and
financial sectors. Politicians holding office in government use their power to
distribute to party members or select business associates state-created rents
in the form of licences, contracts, subsidies, and privatized projects. Funds to
acquire these rents are secured through favorable loans from banks and other
financial institutions owned or controlled by the state and well-connected
businessmen. Distribution of such rents to party members, in turn, helps party
leaders secure or promote their positions in the party and in government.
Many recipients of these rents use numerous corporate maneuvers, most
commonly shares-for-assets swaps and reverse takeovers, to capture control
of public-listed companies, usually characterized by concentration (large firm
size) and conglomeration (multi-sectoral diversification). These companies,
in turn, are used for other types of corporate maneuvers, including mergers,

Edmund Terence Gomez

Political Leaders / Political Parties


control over
distribution of
state-controlled concessions:
government funding, licences, contracts,
various types of privatized projects

government-owned or politically-controlled banks
and other financial institutions

funds to secure these concessions come from

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,
politicization of the economy
brings about
access to substantial funds
part of which are chaneled
back as political funds to

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

acquisitions, and takeovers, to develop their business interests. As share
prices escalate, corporate equity is used as security to secure more loans from
banks for further acquisitions. Such corporate strategies contribute appreciably to the increase in the stock exchange’s market capitalization.
Political patronage, sophisticated but unproductive corporate maneuvers
and the rise in market value of quoted equity contribute to the emergence of a
politically well-connected new rich. The emergence of this new rich leads to
a concentration of corporate wealth, while selective distribution of state
concessions results in corruption, business scandals, and conflicts-of-interest
involving senior government leaders. Companies controlled by well-connected

Introduction 5
businessmen are involved in insider trading and manipulation of stock prices.
Political patronage also creates avenues for politicians to gain access to large
sums of money for political activities, particularly to fund campaigns during
party and general elections. In some cases, as companies grow large enough to
achieve much autonomy from the state, they channel funds to political parties,
or factions within ruling parties, in an attempt to influence state policies. In
other instances, business elites form political parties or participate directly in
presidential elections in an attempt to secure control over the state.
On the other hand, certain positive outcomes can arise from political business ties. For example, state patronage through positive discrimination can be
used to rectify social problems such as wealth and income disparities between
ethnic communities, while the need to promote domestic entrepreneurship
and create indigenous businessmen can be dealt with through political business ties. Selective rent distribution can also help to promote industrialization
and diversification of the economy.
In many cases, however, financial institutions, usually those that are stateowned, have been an avenue for politically well-connected companies to
secure funds on favorable terms to generate growth, primarily through
acquisitions, contributing to the rise of huge enterprises within a relatively
short period. This has led to the problem of huge gearing ratios among many
of these firms, though such loans are manageable with continued support
from financial institutions and the state. In a number of countries, the stock
market, and a variety of corporate maneuvers, including shares-for-assets
swaps, takeovers, reverse takeovers, and bonus and rights issues are employed
to pursue a conglomerate style of growth. In many instances, huge, but
normally short-term, loans from abroad, as well as significant foreign portfolio investments, are crucial for promoting the growth of these companies as
well as grossly increasing their market capitalization on local stock exchanges.
Such forms of loans and portfolio investments, however, contribute to
financial crises when large numbers of investors withdraw their funds from
the 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 or
diversified pattern of growth was employed – appears to be a factor
determining their capacity to deal with economic crises. Most politically
well-connected firms tend to focus their investments on services and other
non-tradeables, such as real property, construction, infrastructure, and importsubstituting manufacturing. Politically well-connected enterprises tend
frequently to be involved in unproductive business ventures, usually adopting
a conglomerate style of growth, with limited focus on developing expertise in a
particular industry or with little attention on research and development.
Another facet of political business is that funds raised in the corporate
sector are channeled into the political arena, for activities such as funding
party and general election campaigns or for buying the support of party
members to create and maintain power bases. These links between politics


Edmund Terence Gomez

and business lead to differences among political elites, as well as widespread
corruption, nepotism and conflicts of interest; in a number of cases, disclosure
of such improprieties precipitates profound political change and form of
Political business ties are widespread in almost all countries in East
Asia, 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 factions
within the ruling Liberal Democratic Party (LDP). In the Philippines,
although capitalists lost their inordinate influence over the outcome of
presidential elections through their capacity to fund the rise of politicians
during the authoritarian era of Ferdinand Marcos (1966–86), they are again
beginning to secure influence over the state through similar means. In Thailand, businessmen have established political parties as a means to capture
control of the state. Similarly, in South Korea, one leading capitalist made an
unsuccessful bid for the office of President during the 1992 campaign. In
Indonesia, the emergence of a number of conglomerates during the Suharto
regime (1966–98) was attributed to the close personal ties established by their
owners with leading politicians.
The dynamics of political business within each East Asian country has also
evolved with political or regime change. Even though systemic development
of political business ties contributed to the scale of the financial and political
crises after 1997, very little is known of the dynamics involved in the links
between politicians and businessmen and of the reasons why the latter
secured rents from the state. Since the rationale for the award of state rents to
businessmen influenced the pattern of development of enterprises owned by
these capitalists, this had a bearing on the extent to which these firms were
affected 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 a
statist 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 societycentered and state- and/or system-centered explanations of politics, it has not
provided an adequate theory of change. Moreover, while an institutional
perspective recognizes that institutions can collapse in times of crisis, it does
not explain, or deal with, the political factors contributing to the breakdown.6
More specifically, the debate on the developmental state has centered
attention on a bureaucracy dominated by technocrats driving economic
growth (see, for example, Johnson 1982, 1987). Another body of literature
has drawn much focus to business groups that organize themselves to act
individually or collectively to secure rents from the state (Domhoff 1967;

Introduction 7
Heidenheimer and Langdon 1968). This concentration on technocrats and
capitalists has diverted attention from the machinations within the political
system, usually occupied by politicians who have overwhelming influence over
the various arms of the state, including the bureaucracy. There is growing
evidence that politicians work through the state to procure rents for themselves – or their families and allies – to develop huge corporate enterprises.
East Asian history, however, has also shown that politicians who secured
control of the executive were simultaneously driven by a desire to promote
economic development, usually as a means to justify their rule. This has
contributed to contradictory actions by government leaders, that is the
promotion of growth-generating policies while also permitting corruption,
political patronage or unproductive rent distribution.
The institutional and organizational structure of a government and ruling
party has a bearing on the form of rent distribution by politicians to businessmen. An analysis of institutional control of government, that is of how
politicians control the state, for example, the bureaucracy or the legislature,
to formulate and implement policies affecting business, can provide insights
into how capital develops. A study of the organizational structure of a party
involves an analysis of where power is centralized; this will help indicate why
politicians distribute rents to specific businessmen or why capital channel
funds to particular politicians or factions. In most analysis, since no distinction is made between state and political parties or politicians, there is little
insight into the nature of a political system, which helps explain the nature of
rent distribution.
One objective here is to deconstruct the concept of the state, with the
central analytical focus on particular political parties, factions,7 or politicians
who have hegemony over the state. The inadequate focus on the links between
political parties or politicians and the corporate sector in East Asia is
surprising given that the states in this region had played a significant role in
promoting the development of public and private enterprises and new capitalists. For example, in South Korea, Taiwan, Malaysia, Indonesia, Singapore,
Thailand, and the Philippines, politicians in government have heavily
influenced rent creation and distribution in the corporate sector through
various policy mechanisms. On the other hand, in Japan and China, powerful
factions in the ruling parties, the LDP and the Chinese Communist Party
(CCP), respectively, have been able to influence how state economic rents
should be distributed.
How, and why, factions are created and controlled also differ between
countries. A faction, a system of cooperation among a number of recognized
leaders within a political party for the purpose of influencing the decisions
and 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, which
appear more institutionalized. In Malaysia, UMNO is fraught with factions
that are loosely based which tend to have a shorter life-span, depending on the
longevity of their leader; inevitably, these factions have differing access to


Edmund Terence Gomez

rents depending on the influence of their leader.8 In Japan, Taiwan, and
Malaysia, 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 parties
that 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 political
arena, especially during party elections as politicians distribute money, corporate equity, and other rents to buy support to accelerate their ascendancy in
the party hierarchy. In some cases, the volume of funds disbursed during
contests for posts in the ruling party can be considerably more than the
amount of money used during campaigns in general elections.
One reason for the growing use of money in politics is that with the
emergence of democracy in East Asia the state is increasingly being captured
by capital, mainly through the latter’s capacity to influence electoral outcomes in party and general elections by channeling substantial funds into the
political arena. Such capture of the state by capital has taken various forms. In
Japan, when the businessman, Tanaka Kakuei, became Prime Minister, a
profound change occurred in the LDP, involving the growing importance of
money in party affairs. Even though Tanaka’s government was eventually
rocked by a series of corrupt financial dealings, the practice of extensive
distribution of funds to buy party support that he actively promoted became
institutionalized in the LDP.10 In Thailand, businessmen have actively begun
to use political parties as vehicles to seek public office and secure control over
the 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 Prime
Minister in 1995, had first established himself in business in the 1970s. In
South Korea, Chung Ju Yung, the chairman of the conglomerate, Hyundai,
established the United People’s Party during his unsuccessful bid to secure
victory in the 1992 presidential election.11 In the Philippines, major capitalists
have been funding politicians as a means to secure access to the presidency or
secure seats in the cabinet.
Since political elites who have control over the state determine the form of
rent distribution, this would suggest that most rents have been unproductively
deployed, inevitably inhibiting growth. This, however, has not been the case in
most countries in East Asia as the state has been led by politicians who have a
developmentalist agenda. As government leaders strive to create an industrial
order capable of self-sustaining growth or international competitiveness,
“selective intervention” by the state and the desire to “pick winners” to
promote their industrial drive have been used to justify preferential treatment
in the distribution of rents (Lall 1996). The importance of cultivating
domestic entrepreneurs in industry, to ensure that a country is not overly
dependent on foreign corporations for technology development, is another
reason used to legitimize selective rent distribution. Through control over the

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