Have government interventions in the economies of independent Southeast Asian countries been a force for stability or instability? Essay
Government intervention in the economies of Southeast Asian countries became necessary after independence as early as 1945, due to the historical context that they faced, and formed an intimate relationship between politics and the economy, both directly and indirectly.
Economic stability depends not only on the meeting of certain economic requirements, but also on the prior development of certain social and political frameworks, chiefly a strong and stable government, an honest, efficient, and technically trained bureaucracy, imaginative entrepreneurial talent with freedom to operate and a cohesive social community1 - Have government interventions in the economies of independent Southeast Asian countries been a force for stability or instability? Essay introduction. Hence, it can be said that only by meeting the preceding terms, government intervention can contribute towards shaping a stable economy – having low inflation and uninterrupted economic growth – and achieving social stability, through the diminution of rural discontent and unrest. Yet, it is also imperative to note that an unstable economy can still experience gradual growth and should not be critiqued too hastily.
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Speak about the economies of post-war SEA, and corruption and cronyism, as a result of governments inducting them into the economy, would immediately come to mind. It was by large the biggest factor that caused economies that were both prospering and declining to wane further. However, cronyism was also a force for social and economic stability, in that the lack of social capital led to the absence of horizontal interest groups, thus insulating economic policies from parochial pressure on the conduct of economic management. This proliferation of cronyism also developed a constructive social structure, in which the mutual reliance of the patron-client relationships led to satisfaction in the part of both the government and the involved companies, thus resulting in social stability. Hence, cronyism could conceivably be regarded as the price that had to be paid for stability.
Another case in point would be Malaysia, where political and economical favours were reciprocated by financial and electoral support for government officials. Government leaders exploited the New Economic Policy (NEP) to award contracts to UMNO-linked enterprises2, creating a large, influential group of indigenous ethnic groups that in fact simply augments UMNO political dominance. This in turn ensures social stability through mutual subsistence. Furthermore, the Chinese in Malaysia, who were victimised, were able to forge alliances with UMNO leaders to stay ahead in the economy and exploit their expertise to facilitate economic growth and hence stability.
A better case to illustrate this would be Indonesia. Suharto disbursed concessions to his cronies as a means of consolidating his political control and economic reforms were instigated in the interests of domestic capitalists3. This relationship removed other powerful horizontal interest groups, and hence Suharto and his economists were able to revive the once-devastated economy of Sukarno. Newly introduced corporatist structures served effectively to contain the industry politically, minimizing the scope for collective action. Consequently the monetary authorities engineered a steady depreciation of the currency while avoiding excessive inflation, and hence maintained an average surplus of 0.7% in the early 1990s4. Therefore, the inefficient representation of broader societal interests enabled the government to keep economic policies in check and thus develop the economy progressively, and despite the inefficiency of the local companies and government policies, the mutual satisfaction gave rise to a stable social system.
Governments also played an active role in ensuring economic growth which contributed to stability through the efficient promotion of investment and exports. These injections stimulated market activity and contributed to a progressively more efficient economy.
In newly independent Singapore, the Economic Development Board (EDB), set up to attract foreign investment, assumed control of the investment drive. It provided tax concessions to investors, giving management, technical, and financial assistance, and developing industrial estates. Statutory boards were also established to oversee economic development in specialised areas such as the Neptune Orient Lines which expedited foreign trade and ensured lower freight charges for locally manufactured goods. As such, these export-oriented policies led to a growth in GDP, reaching a highest of 13.7% in 1970.
Likewise, Sarit’s pro-domestic and foreign investment policies in Thailand allowed the economy to grow at an alarming rate. The Promotion of Investment Act in 1960 also provided tax exemptions and opportunities for profit repatriation, with the aim of attracting investment. Hence, while the annual foreign inflow of around 1.25b baht between 1965 and 1975 was undoubtedly substantial, it contributed only 12% of the total gross capital formation, illustrating the massive growth of the economy.
Furthermore, the introduction of proficient technocrats who received foreign technical training by the SEA governments also contributed to the stability in these countries. These technocrats believed in modernisation and government planning towards the ultimate goal of development5, and also provided links with modernised countries and their financial institutions and resources6.
In Indonesia, Suharto relied heavily on a small group of Western-trained economists – the “Berkeley Mafia” – to restore both economic progress and Western confidence and willingness to invest in the local economy due to the perception of these technocrats in the eyes of the Westerners. As a result of the skilled economic management of the economy, average annual growth gradually increased and was above 6% for over 25 years.
Similarly in Thailand, technocrats in the Ministry of Finance and Central Bank provided macroeconomic policies conducive to export, investment, and the growth of a strong private sector7. The stable macroeconomic environment, marked by low inflation and a stable exchange rate, encouraged foreign direct investment and a shift away from exporting light manufactures.
However, government interventions were also at times cause for instability in the SEA countries. For one, corruption and cronyism as regulatory shortcomings contributed to policy uncertainties and exacerbated the structural imbalance in the economy. The economic and social costs of cronyism are paid by society in the form of reduced business opportunities, inflated consumer goods prices, inefficient business investment cycles, and the diminution of economically productive activity. These problems led to a net GDP deficit and social unrest resulting from a lowered standard of living.
For example in newly independent Philippines, a politically well-connected oligarchy dominated the ISI and hence the economy, perpetuating social inequalities which the government failed to address. Thus, this led to the Huk Rebellion and rural unrest. By the 1970s, the numerous crony-run industries which were economically inefficient caused 40% of the rural population to slip under the poverty line, while in contrast the Marcos family amassed nearly US$10b.
A clearer illustration of this would be Indonesia, where by the 1990s, companies were allowed to obtain credit beyond legal lending limits and at lower interest rates, while the Suharto government simply ignored these underperforming companies instead of charging them with financial mismanagement. Hence this increase in non-performing loans contributed to Indonesia becoming Asia’s largest debtors at around US$58b.
In addition, nationalisation in SEA served as a double-edged sword. While it was beneficial initially, as the government was the only eligible actor, the government came to play a diminishing role in the economy in the long run, albeit trying to privatise to gain control towards the 80s. Their reluctance to reduce intervention brought about an inefficiency which in due course led to the Asian Financial Crisis.
In Thailand, ISI had reached its limits despite its past successes. Yet the government, which had a vested bureaucratic and business interest in it, was resistant to moving away from protectionism towards EOI, and even continued to increase tariff levels. This led to an increase in current account deficit, especially with the rise of the baht due to the oil crisis.
Mirroring this situation in the Philippines, the reluctance of the government since the 1970s to privatise, liberalise and shift to EOI, coupled with the lack of openness and foreign investment since the Marcos era, led to capital flight of about US$5b and a massive outflow of labourers, hence reducing local investment. External public debt more than tripled from US$822m to US$2.586b as a result from 1970 to 1975.
Government intervention through pursuing economic nationalism was also a point of instability due to the inherent conflict between economic growth and nationalism. The lack of openness to foreign investment and expertise was a major deprivation of certain SEA economies in helping to achieve economic stability.
It was the main concern of the Indonesian government to preserve the territorial integrity of the country in the late 1950s. This was the reason for policies such as the expulsion of Dutch-owned enterprises, which were to have an adverse effect on the country’s international relations and hence on its economic development. The absence of an elite capable of managing the local economy hence contributed to a foreign debt of US$2.4b, largely due to the decline in foreign exports.
In contrast, in Sarit’s Thailand, the openness to foreign investment (from East Asia) and rejection of anti-Chinese economic nationalism as compared to Phibun’s government allowed the economy to flourish. Following the dominance of Chinese in the banking sector, total deposits in the system grew from 8m to 299m baht between 1962 and 1981, stimulating the rest of the economy and financing emerging businesses.
After a thorough evaluation, it is apparent that government interventions in the economies of independent Southeast Asian countries have been a force for instability more than contributing to economic and social stability, due to evidence of failure of the policies implemented in the long run. The primary reason for the downturn of the economy, especially towards the AFC, could be associated with the catastrophic changes the government effected, such as the devaluation of the Thai baht. These actions were short-sighted and achieved stability only in the short run, while causing gradual changes which caused instability in the long run.
Yet, the most crucial mistake which the SEA governments made was the endorsement of crony capitalism in their economies. This only contributed to capital and growth deficits in the long run, despite initial successes and whatever political sovereignty they managed to achieve. The disorganised and inefficient economy not only caused a debt crisis, but also prevented countries from progressing towards more economical structures.
While the lack of a stable, honest and efficient government produced instability, it is also imperative to note the freedom of the imaginative entrepreneurial talent to operate and a cohesive social community brought about by other government policies. This certainly pointed to economic and social stability, albeit only in the short term, and hence failed to contribute towards progress of the SEA states.