Governance in East and Southeast Asia: What’s New? A M I YA B A G C H I The question of good governance in East and Southeast Asia, as elsewhere, is linked to the degr ee of autonomy of the state, and the objectives it pursues. While the economy can never be fully disembedded fr om society , social transformation ending private powers of non-market coercion can promote both state autonomy and good governance. Both governance and autonomy ar e r elational concepts and their quality and content ar e shaped by external influences and the ability of the ruling class to face up to the challenges. Autonomy of domestic policy has been badly er oded by the rise of licentious global finance but can be still defended as several countries and regions of East Asia have demonstrated. I. GOVERNANCE AND THE ISSUE OF THE DISEMBEDDEDNESS OF THE ECONOMY

In the context of the financial and economic crisis in East and Southeast Asia that erupted in 1997, many commentators focussed sharply on the issue of governance. It was claimed that one major flaw of these economies was the lack of transparency in policy-making and its implementation and in the way corporations and firms in general functioned. Associated with those allegations was the further char ge that these economies were characterised by ‘crony capitalism’. By that term the commentators usually designated a structure under which particular businessmen and firms were favoured with policies, regulations and public funds sometimes in violation of the law – but often with the aid of legislation providing for protection of, and patronage for , domestic firms. In return the businessmen engaged in ventures that the politicians gave a high priority to. They also financed the parties of the latter , their election campaigns (where elections were held at all) and generally , but not always, helped enrich the friends and families of the politicians dishing out favours. Amiya Bagchi, Centre for Studies in Social Sciences, Calcutta, India. [email protected]. The author is indebted to participants in the GlobAsia Conference, held at Arresødal, Denmark, 3–5 October , 2001, and especially to John Degnbol-Martinussen, Laurids Lauridsen and Kristen Nordhaug for illuminating comments on an earlier version of the article. None of them, of course, share any blame for its blemishes. The European Journal of Development Research, Vol.14, No.1, June 2002, pp.200–218 PUBLISHED BY FRANK CASS, LONDON

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The irony is, of course, that very often the same commentators and organisations that had attributed the ‘East Asian miracle’ (the title of the highly publicised World Bank study of 1993) to the special market and businessfriendly governance structures now held those identical structures responsible for the ills that put an end to the miracle. There is no agreement about what constitutes good governance the norms of which the East Asian countries are supposed to have departed from. The substance of the mainstream discourse about good governance runs as follows. Well-performing markets are the foundation of a prosperous economy and civil society. However , when are the markets ‘free’ or well-regulated, or ‘competitive’? Are they to be free of all no restrictive practices? Or are they free only in the sense of being ‘contestable’ by sufficiently well-prepared new entrants? In any case, those markets must be governed by good institutions, such as ironclad protection for private property rights, universal respect for law and the legal apparatus, and transparency of public transactions and institutions. The fulfilment of these conditions, according to the mainstream view has made Western Europe and North America the dynamic centre of the world economy , and the lack of such institutions has condemned most countries of the third world to poverty and underdevelopment [ Williamson, 1985; North, 1990]. Paradoxically enough, an ideally liberalised private-enterprise economy demands almost an all-powerful state, except that the very structure of the state should limit its operation within strictly constitutional limits. The Leviathan should watch over but not manipulate the operations of the society of individuals. The only distinguishing characteristic of the individuals that would come to the attention of the state is their possession of property or the lack of it. Life itself is to be protected as the personal property of an individual [Macpherson, 1962]. Governance, however, is not simply a matter of government regulations or lack of them. Nor is it a matter simply of the internal composition of the ruling class or its relation to the bureaucracy and the interface of the latter with the general public. Governance comprises the relations of each cell of society with the institutions that make economic decisions, with the way it is positioned in public space, and the interrelations between all the social units. One way of approaching the interrelations and the related issue of autonomy of the state is to lay out the conditions under which states, societies and markets can be treated as analytically separable entities. One of the most powerful and most misleading ideas seeping into the discourses of anthropologists, sociologists, political scientists and economists was Polanyi’s hypothesis [ Polanyi, 1944/1957 ] that under capitalism, unlike all other preceding modes of production, the economy is disembedded from society. Connected with that, but perhaps in a less insidious manner , was his

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further dichotomous view of trade as being market-based in capitalist societies and non-market-based in many pre-capitalist societies. These two ideas were used to set up an ideal of governance under which in a truly modern society , the social processes would be completely insulated from market processes, and a fortiori, the political sphere would only act as the umpire and observer of social and economic decision-making. The politicians, of course, would be expected to redefine the rules of the game. But once the rules are laid down, they would simply ensure that the executive branch takes the necessary routine decisions and the judicial branch performs its function of dispute settlement. Polanyi recognised better than most of his followers that the thrust towards creating a society that would have no place for the security of individuals or for the collective good was faced by the counter-thrust of social and political forces fighting that thrust and that the half-life of unfettered liberalism was short in duration [Polanyi, 1944/1957: Chs.11–18]. If ‘the disembeddedness hypothesis’ of Polanyi actually holds, we do not have to worry too much about the internal constitution of the three macroentities, – the state, the economy, and the society – that are under examination. All we have to do is to see that the state behaves in a rational-bureaucratic manner, and ensure that it interacts with the economy and the society in the hands-off manner prescribed. In reality, however, the nature of the interaction between the different macroentities will dif fer according to the way in which those entities are constituted, and the hypothesis will be falsified. This initial exploration indicates that we have to guard against the two extremes of a purely state-centred and a purely market-centred approach to the governance of any country and in particular , that of a typical country of East and Southeast Asia. Discussion of governance must imply an analysis of typical interaction processes between the state, the market, and the society . In the following, I will not attempt to explain developments in the People’s Republic of China or in the countries of South Asia. Between those two regions we are dealing with more than two-fifths of the world population, and neither India nor China can be regarded as a ‘typical’ developing economy even though they may share many of the characteristics of a developing economy. II. SOCIAL AND POLITICA L B A S ES O F E C O N O M I C G R O W TH I N E A S T AND SOUTHEAST ASIA

The World Bank [ 1993] famously styled the growth performance of Japan, Taiwan (China), Hong Kong (China), the Republic of Korea, Indonesia, Singapore, Malaysia and Thailand as the ‘East Asian miracle’. I will use the acronym ESEA to designate these eight countries or regions. In the

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introduction to the volume, Lewis Preston, the then President of the W orld Bank, wrote ‘The authors conclude that rapid growth in each economy was primarily due to the application of a set of common, market-friendly economic policies, leading both to higher accumulation and better allocation of resources’ [World Bank, 1993: 91]. However, the authors of the W orld Bank book never ask how ‘marketfriendly economic policies’ are put in place, and implemented. Practically all the economies had started their post-second World War career with agriculture employing a major fraction of the population, and Thailand and Indonesia continued to have the majority of their population engaged in agriculture even in 1980. But the section on ‘Dynamic agricultural sectors’ [World Bank, 1993: 32–7] has not a word on land reform, and the index does not carry an entry on land reform. Y et it was well known that it was land reform that had freed peasants from feudal oppression in the People’ s Republic of China, South Korea and Taiwan, tapped the ener gy of peasants for improving productivity and accessing markets, released manpower and other resources for nonagricultural production and led to the high rates of growth which were the focus of the World Bank study. I would still ar gue, as I had ar gued, in the 1980s [ Bagchi, 1982: Ch.6; Bagchi, 1984, 1987a; Bagchi 1987b: Ch.2] that three basic requirements – abolition of exercise of non-market coercion by private groups, universalisation of literacy and nationalism – are necessary for any polity to emer ge as a developmental entity . Non-market power can be exercised by individual landlords, landlords’ lineages, upper caste groups, minelords, haciendas and plantations, and politicians, military men, and policemen and bureaucrats in collusion with traditional powerholders. Non-market coercion can also be exercised by communities and their leaders. Non-market power is usually combined with subjection of women to men’s authority at home and outside. But in a situation in which the primary locus of non-market power is landlord control, pro-peasant land reforms accompanied by universalisation of literacy will go a long way towards the freeing of the energy of peasants and mobilisation of resources, incentives and innovations for development. In many poor countries in which agriculture has become the occupation of a minority of the people, the landlord–peasant relations have been transformed into patron–client relations, and landlord or patron power is exercised through the state apparatus. The introduction of pro-peasant land reforms can not only free the peasants to become subjects working for their own destiny but also endow them with the collateral with which they can negotiate a highly imperfect credit market. Such reforms also can improve the purchasing power of the poor and they extend the domestic market and productivity at the same time. The second social requirement for effective developmentalism is education – starting with universalisation of elementary education and then progressing

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towards diffusion of secondary and tertiary education among wider and wider circles. It has been suggested that ‘learning how to learn’ should be a necessary accompaniment of education, and conventional education does not always deliver this [Bagchi, 2000]. However, for ‘learning how to learn’ to be widely diffused, it has to be embedded in the consciousness of a people to act as a collectivity, – a form of consciousness which is very crudely and approximately captured by the word ‘nationalism’. Learning how to learn applies particularly to the ruling class. In a geopolitical system in which all territories are organised in states endowed with a coercive apparatus meant for both offence and defence, it is critically important that the rulers recognise the peculiar strengths of the other states and their economic and social organisation and try to emulate them or surpass them through innovation. Two of the most successful examples of such learning by the rulers occurred in Europe and in Asia, in the two island nation-states of Britain and Japan [Wilson, 1965; Bagchi, 2000 ]. Japan’ s rise to the position of the second industrial nation of the world in the post-1945 period is also based on learning from the USA and Europe, but, of course, they made their own innovations as they learned. The other countries of East Asia not only learned from Japan but also introduced programmes similar to Japanese policies of learning how to learn from foreigners, friendly or otherwise. There are at least three aspects of an ef fective collectivity , namely , collective assurance, collective insurance, and collective action which are relevant if we want to put any positive content into the idea of nationalism. In a very lar ge number of situations, individuals face some form of Prisoner ’s Dilemma, or what Sen [ 1967/1984] styled as Isolation Paradox. T o take a particular case, if you know that your consuming a little less today will be matched by others in your society or polity also consuming a little less, then you may be assured that aggregate saving will go up, and you are prepared to make the sacrifice. But if you have no such assurance, you may simply decide that your consuming a little less will not matter at all, and that gluttons will take advantage of your abstinence, and therefore you will not make the sacrifice. The relevance of this kind of example can be seen clearly when you consider the wartime patriotism of the British, and the high rate of saving they managed to notch up during the Second World War, and contrast that with their pre-war or post-war record. There are other areas in which an agency enforcing co-operation can enhance welfare, productivity or growth, such as control of urban congestion, the sequencing and determination of scale of investment projects and so on. Without co-ordination, the latter might become infructuous or unprofitable through non-co-operation or strategic behaviour of the agents involved, and so on. The second function of an ef fective collectivity is to insure against certain common ills, namely, defence against external attack, sickness, unemployment,

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starvation, illiteracy, and impoverishment caused by aging. Of course, states as collectivities did not assume all the functions listed here until the coming of the welfare state or the socialist state. But even earlier , many states and religious establishments in Europe and Asia had tried to stabilise prices and prevent or ameliorate the consequences of, famines. (For an account of the eighteenth-century Chinese imperial practice in this regard, see Davis, [ 2001: 280–5]). A third function of an effective collectivity is the ability to act collectively. This is most clearly seen in the sphere of military defence against external enemies, and the function of keeping internal law and order performed by the police and the judiciary . The economic policy Japan pursued since the Meiji Restoration can also be regarded in the same light [Morishima, 1982; Johnson, 1982; Yamamura and Y asuda, 1987 ]. As I have ar gued elsewhere [ Bagchi, 2000], thorough-going land reforms and democratisation of Japanese society were required before Japan could really take of f on a path of fast economic growth. In theory, any collectivity can perform the three kinds of functions sketched above. In practice, the nation state has become the widest circle of ‘we’, that is, the collective of individuals that the modern world has so far produced. An effective collectivity, ideally speaking, should be a voluntary association of free individuals. Although in many phases of history and many contexts, governments have been able to override the interests of many individuals and groups, in the long run, it is the willing co-operation of individuals and abjuring of narrow self-interest in particular spheres that has made a collectivity effective. The fact that a democratic Britain was able to mobilise its resources for war far more ef fectively than Nazi Germany is a powerful illustration in support of my contention. Nationalism, even inclusive and egalitarian nationalism, can easily turn into imperialism. But in most cases the roots of modern imperialism will be found in the self-interest of a fraction of the ruling class – financiers, industrialists, arms merchants – and politicians dependent on their patronage. These groups then can drag the whole ruling class into international conflicts and precipitate wars.s. III. AUTONOMY OF THE STAT E , T H E M A RK E T, TH E S O CI E T Y, O R ALLOYS PRODUCED B Y TH E I R I N TERA C T I O N ?

Since the days of Jean Bodin and Thomas Hobbes, the functions and the degree of autonomy of the state have been a matter of lively debate. In the post-Second World War period, Ralph Miliband, Nicos Poulantzas and other followers of Althusser claiming a Marxist lineage debated the issue of how autonomous a state can be in a capitalist society (see, for example, the debate

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between Miliband and Poulantzas in Blackburn, [ 1972: 238–62 ]). In more recent years, Almond [ 1988], Nordlinger [ 1988] and Mitchell [ 1991] have again debated very similar issues. Some of these discussions had a clear ideological bias: the more conservative political scientists sought to prove that the US state apparatus was totally above sectional and class interests – a claim that Mitchell [1991] demonstrated to be untenable. As Mitchell [1991: 78] put it: The distinction [between state and society] must be taken not as the boundary between two discrete entities, but as a line drawn internally within the network of institutional mechanisms through which a social and political order is maintained. The ability to have an internal distinction appear as though it were the external boundary between separate objects is the distinctive technique of the modern political order. Many participants in the debates on the autonomy of the state in the context of East and Southeast Asia (ESEA) seem to have lost sight of this basic craftiness in the statecraft of a capitalist social order . While economists espousing the free market ideology claimed that the success in ESEA was itself the result of the adoption of market-friendly policies as contrasted with the blunder of interventionist policies in Latin America, Africa and South Asia, a closer scrutiny revealed that such a simple-minded contrast could not be sustained. States from Meiji Japan to T aiwan (China) and the People’ s Republic of China had intervened almost on a continuous basis in the working of markets. Ironically enough, among the countries of ESEA, the Philippines had embraced the free market ideology more wholeheartedly than others, and in terms of economic growth, it has performed worse than most other countries of the region. In the context of developing countries, the debate on state autonomy has branched in several directions [ Martinussen, 1997: Chs.10–19]. We can pick out two of them for our purpose, namely , how autonomously the state can pursue goals of economic development, and what permits the emer gence of such autonomy. One way of approaching the state autonomy question is to look at the basic objectives pursued by the state and the resources the state can mobilise in pursuing those objectives. The state apparatus of a colony under an imperialist government, ironically enough, can be pretty autonomous, and in some ways, the degree of autonomy possessed by such an apparatus defines the strength of the imperialist government. The stated objectives of the British Indian government were to preserve law and order in the colony and to introduce the ‘natives’ to the benefit of western civilisation. But the maintenance of the ruling apparatus in India and London required the systematic removal of at least three to five per cent of the Indian GDP to Britain every year . Moreover,

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in years of crisis in the international economy caused by depression or by war, the Indian government found it impossible to pursue any long-term investment projects that did not have some overriding military component attached to them. Thus the British Indian government was autonomous with respect to the pressures of the Indian people whose welfare demanded state expenditure on a larger scale, but not autonomous when it came to the pursuit of the kind of economic objectives that were being promoted contemporaneously by , say , Germany, France, the USA or Meiji Japan. This apparent digression into history reveals that the question of state autonomy cannot be separated from the issue of the explicit and implicit objectives of the rulers. If we examine the history of governance in ESEA, we can see that the pursuit of economic growth was a common objective practically for all of them. But could all the states be equally autonomous in pursuit of those objectives? The clearest answer in the negative comes in the case of the Philippines. Even after its formal independence from US rule, the US authorities continued to exert enormous pressure on ruling groups, not least because of US naval and military installations in the Philippines. But a bigger problem was the interest of the extremely oligarchical planter and landlord class, and the willing and unwilling complicity of the traders in planterlandlord rule [McCoy, 1992]. There were also serious problems of integrating many sections of the Philippine people in the collectivity called the Filipino nation. In Bagchi [ 1987a], I treated the Philippines as an outlier to the highperforming economies of ESEA, and I had regarded Thailand, Malaysia and Indonesia as being on the periphery of the core high-growth economies of Japan, Taiwan (China), South Korea, Hong Kong, Singapore and the People’ s Republic of China. I was glad to see MacIntyre [ 1994] making a similar classification seven years later. The problems of slow growth and periodic political and balance of payments crises faced by the Philippines illustrate the point that attainment of higher levels of education as such, without accompanying reforms in agrarian and social relations, does not allow a country to get on to a high performance trajectory. The continuation of a landlord–planter–minelord oligarchy wastes enormous amounts of resources for the maintenance of a status-ruled society . Moreover, in any society in which landlord power extends to the use of private coercion, the effective power of the central state apparatus becomes limited. In terms of the contrast stressed by Migdal [ 1988], we witness the phenomenon of a strong society and weak state. The continuation of private powers of coercion through networks of landlords and dependent peasantry , or the emergence of new patron–client relations also contributes to the ‘softness’ of the state that Myrdal [ 1968] had focused on. But when we talk about a strong society in this context, that society must be seen as a hierarchical order that resists the penetration of legality, equally or norms that go against the implicit

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principles (such as caste, or Ladino-Amerindian relations) holding up the hierarchy. Moreover , if such an oligarchy has close links with imperialist powers – which it usually has – then continual hankering after newer vintages of expensive consumer durables while trying to preserve the local hierarchy will further drain away the resources of a country . In the extreme case, the oligarchy itself becomes a vehicle of continuous capital flight from the country, as has happened in most countries of Latin America. We have already indicated some of the ways in which a state can pursue development-oriented goals with some degree of autonomy . One basic requirement is that traditional bases of rent-seeking in the form of landlordism, or planter or minelordism must be destroyed or substantially eroded, and peasants must be freed from non-market bondage. Then in economies with private property rights, peasants, traders and industrialists will seek ways of augmenting their bases of earning through extension of output, markets and credit networks. But this is not a once-for-all step: an ef fective nation state would have to monitor the process so as to prevent the recrudesce of stagnationist rent-seeking as against rent-seeking in the way of exploiting productive innovation. The emer gence of ef fective nationalism is also a product of particular trajectories of history. It is not accidental that Korea had been an independent country down to the 1890s, with long histories of resistance against Chinese and Japanese attempts to conquer it. It is also not accidental that the Guomindang rulers of Taiwan carried with them the recent memory of having been treated as almost a great power , until their defeat by the Chinese communists. In both the cases, while being abjectly dependent on the Americans for military and economic aid, the ruling class pursued its own agenda. That agenda included a determination to lessen their dependence on the USA as much as possible. It is that determination that led to the unexpected re-invention of the Guomindang as a party – a party that learned the lessons of rural mobilisation from the communists. For their own reasons, the USA and its allies decided not to interfere too much with the economic strategies pursued by the South Korean and Taiwanese rulers. In the cases of South Korea, T aiwan (China), People’s Republic of China, and V ietnam security considerations in an international state system also strengthened the resolve of the rulers to retain control over major levels of economic policy along with, of course, an armed preparation to meet any external threat [ Cumings, 1984 ; Woo, 1991, Chs.2 and 5 ; Nordhaug, 2001 ]. The nationalism which was an integral part of the Chinese communists’ resistance to Japan and eventual victory over the US-backed Guomindang does not need commenting upon. But most commentators have failed to realise that the South Korean and T aiwanese regimes were also intensely nationalist in their own way, except that it was a double-edged nationalism. One aspect of it

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was staunchly anti-communist but the other aspect was defence against domination by foreign capital. In this respect also these regimes were more similar to the post-war Japanese regime than has often been realised. To get back to the necessary conditions I had set out above, by the beginning of the 1960s, both Taiwan and South Korea (along with the city state of Hong Kong) had far outdistanced other countries of ESEA (except, of course, Japan again) and the Third W orld in respect of education. Unlike Thailand, Indonesia and Malaysia the four dragons were able to build on their early lead in elementary education and push on to get higher and higher proportions of their young people educated at secondary and tertiary levels. IV. ‘CRONY CAPITALISM’ , R E N T- S E E K I N G A N D A L L T H AT

Accusations of crony capitalism pervading ESEA were probably most vociferously hurled during the last years of the Marcos regime in the Philippines. More soberly voiced but essentially similar accusations were made against virtually all the economic formations of ESEA by journalists such as James Clad [ 1989] and analysts such as Y oshihara [1988]. Yoshihara characterised the Southeast Asian formations in particular as ersatz capitalism (for critiques of these and similar naive and static notions of departures from pristine models of capitalism, see Robison, Hewison and Rodan [ 1993], and Searle [1999: Ch.1]. These doubts about the authenticity and sustainability of capitalism in ESEA melted away with the high growth performance of these economies. But they resurfaced again after the Asian financial crisis of 1997–98. Even South Korea, which had been seen by many as an example of ‘embedded autonomy’ of the state apparatus [ Evans, 1995 ] was accused of cronyism that sheltered the over-extended and inef ficient chaebol. The call went out in the international press for restoring transparency to the relations between the state and the economy, and between financial institutions and their clients, the corporate giants. The close links between the political and administrative establishment in South Korea are not new . While Park Chung Hee directed the South Korean economic policies, as from the general Headquarters of an army [Bagchi, 1999], the chaebol towed the line laid down by the government (invest massively in export-oriented, and later , heavy and chemical industries, continuously upgrade your technologies and conquer foreign markets). But after Park, the relationship between the chaebol and the politicians came far more to be that of mutual dependence. Corruption crept into the highest reaches of decision-making authorities, including leading banks, as enquiries into the bankruptcy of the Hanbo group clearly revealed. But that South Korean growth was not powered by just crony capitalism was demonstrated clearly within a year and a half of the IMF bailout package

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negotiated by the South Korean government. Exports sur ged, imports were severely compressed, and South Korea recorded a rate of growth of nine to ten per cent in 2000. By July 2001, the foreign exchange reserves of the country had gone up to US $94.3 billion, and South Korea ranked third (after China, including Hong Kong, and T aiwan) in respect of such reserves among all the so-called ‘emerging market’ economies ( Economist, 21 July 2001). Many of the South Korean firms were allowed to go bankrupt, and in some cases, such as that of the Daewoo Motor Corporation, the government almost deliberately withheld a bailout package that might have rescued the firm (for a short list of major bankruptcies up to the end of 2000, see EIU [ 2001: 7–8]). There are other economies in ESEA, which can be accused more justly of crony capitalism. The Suharto regime of Indonesia typified the worst of these cases of crony capitalism: capitalism grew under the command of the military and the first family , and the leading groups in association with their foreign patrons enriched themselves [ Robison, 1986 ]. The Suharto regime was also severely repressive [HRW, 1994], and natural resources were plundered to feed exports and profit, but most economists [e.g., Hill, 1996 ] neglected these issues when they celebrated an economic miracle in Indonesia as well. In Thailand, while there were links between the military , the top bureaucrats, traditional controllers of land, and businessmen, democratic pressures succeeded in breaking down overly repressive and inef ficient military–bureaucratic regimes. Moreover , unlike in Indonesia, the most dynamic section of the local business community , namely , the Chinese bourgeoisie had almost, but not quite, mer ged with the lar ger Thai populace. Popular revolt rarely took the form of anti-Chinese demonstrations as contrasted with Indonesia, where the regime often treated the Chinese as hostages both to its enrichment and to any reverses it suf fered. Analytically the most challenging political-economic regime has emer ged in Malaysia. Malaysia had some of the same ingredients that have rendered the governance of Indonesia a dif ficult and complex af fair. There is a substantial minority of Chinese origin, a smaller segment of Indians who had come over as plantation labourers, and the indigenous Malays who are again divided into the mainlanders and the Sarawak residents. Y et Malaysia has managed not only to grow fast but has weathered the crisis of 1997 far better than Indonesia, and also better than Thailand. One factor , of course, is that for its size, Malaysia has more abundant natural resources than the other two countries. But such endowment could prove to be a curse, as has happened in Indonesia, Nigeria or Zaire for that matter. One main reason is that from the beginning, the Malay ruling class was composed of a plurality of interests, so that authoritarianism could not be totally repressive as in Indonesia. Added to that has been the success of the socalled New Economic Policy in fostering a business class composed of Malays

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– a class that has often found more in common with the Chinese business community than with the so-called ‘administrocrats’ who had presided over the destiny of the country up to the 1970s [ Gornez and Jomo, 1997; Searle, 1999]. Under the leadership of Mahathir Mohammad, the coalition of United Malays’ National Or ganisation and the Malaysian Chinese Association was able, despite some colossal blunders and wastage through cronyism, to pursue an effective policy for building up national competence in many areas. Unlike South Korea or T aiwan, Malaysia depended on lar ge inflows of foreign investment for moving into sectors with a high export potential – sectors which often required the import and absorption of frontier or at least live (as against obsolescent) technologies. As Searle [1999] has ar gued, and as Gomez and Jomo [1997: 178] have had to agree reluctantly, Rents have … been created and allocated in ways that encourage investments in new productive activities which have contributed to the diversification of the economy from its colonial inheritance, as well as various industrialisation campaigns, including export promotion, import substitution and heavy industrialisation. Investment in agriculture and tourism has also been induced. Cronyism has certainly polluted some of the policies of industrial targeting in every country . Despite this pollution, such policies have worked well in South Korea and Taiwan (see, for South Korea, Amsden [ 1989] and Stern et. al. [1995]; for T aiwan, Wade [1990], and Noble [1998]). But the close relationship between government and business, and the increasingly permissive attitude of politicians towards business firms contributed to the policies favouring financial liberalisation, especially in Thailand and South Korea. Loosely regulated financial opening up to the rest of the world ultimately precipitated the financial crisis in ESEA in 1997. For most of their career as developmental states, the four dragons followed a policy of keeping a fiscal balance, and never running up large budget deficits. Moreover, they made sure that their requirements of foreign exchange were met through either assured help from the USA, Japan and ta guarantee of macroeconomic stability. But the Mexican crisis of 1994–95 and the Asian crisis of 1997 demonstrated, yet again that the profligacy of private capital – domestic and international – can completely overturn the assurance of stability supposedly guaranteed by fiscal orthodoxy (see in this connection, Bagchi, [1998/2001]; and Lauridsen [1998].

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V. C O R P O R AT E G O V E R N A N C E A N D F I N A N C I A L R E G U L AT I O N A S PA RT O F T H E D I S C O U R S E O F G O V E R N A N C E O F S T AT E S

The quality of governance of a state is bound up with the issue of the financial soundness of its governance. In Europe the Dutch and the British governments pioneered the system of public credit. It was partly the ability of the British to finance its wars more frugally and on a more sustainable basis than the French that ultimately decided that economic and political hegemony would be exercised by the British than the French. In the case of ESEA also, it is the states such as T aiwan and South Korea which managed their fiscal balances well and kept their balance of payments either in surplus or within manageable limits of deficits to be financed by foreign loans or foreign aid that were able to exercise real autonomy , until the financial crisis of 1997 overwhelmed it. Financial crises have repeatedly wrecked the autonomy of states in developing and transition economies in the 1980s and 1990s.Y et curiously enough, the pattern of regulation of financial markets has not been part of the mainstream discourse of governance of states. Financial markets are notoriously imperfect: asymmetric information as between lenders and borrowers, the fact that they necessarily involve judgements about the future and those judgements vary between dif ferent economic agents and can be very wide of the mark, and their susceptibility to manipulation and herd behaviour , the irrationality of expectations and reactions of investors, the contagion ef fect of failure or success of one or several agents such as banks, mutual funds or non-financial firms on the fortunes of others make them eminently suitable for public regulation (for a concise exposition of the relevant issues, see Stiglitz [ 1993]; see also Gertler [1988]). Y et partly because of fallacious reasoning that treated financial markets as analogous to commodity markets (as in McKinnon [ 1973] and Shaw [1973]) and that based a theory of options pricing on the assumption that values in stock markets were regulated by easily ascertainable fundamentals in an economy (as in the models of Black and Scholes [ 1973] and Merton [1973]). Most of the economies in ESEA, especially those in East Asia were doing well up to the beginning of the 1990s. However , from 1993, South Korea went in for financial liberalisation and opened its debt and equity markets to foreign investors and also allowed domestic firms to borrow abroad. Thailand, Indonesia and Malaysia had already been travelling down that road. Accumulation of enormous foreign debts ultimately caused a currency and banking crisis in these economies. The major force behind the crisis was the opening of the capital account and allowing free inflow into and outflow of capital from, these economies [ Bagchi, 1998/2001; Lauridsen, 1998]. As Wade [1998: 704] put it, ‘However the explanation is parsed, capital account

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opening is central. It exposed domestic financial structures – that had been strong enough to allocate huge domestic savings to generally productive and profitable investments over many years – to unbearable strain.’ While the usual IMF medicine of severe fiscal repression and monetary squeeze enabled these economies to service their debt, this was achieved at an enormous cost to income, employment and standard of living of the people in these countries. It is to be noted that T aiwan, and the People’ s Republic of China, which had not permitted financial liberalisation in the sense of deregulating bank interest and borrowing patterns, had escaped the crisis. Many economists have noted that the medicine prescribed by the IMF was unduly restrictive; they have also noted that the usual prescriptions of increasing the capital base of banks and bringing the debt-equity ratios of corporations to Anglo-Saxon standards are also inappropriate (for a recent exposition of the orthodox view , see Scott [ 1999]; for critical views see Crotty and Lee [2001], and Stiglitz [2001]). The case for financial liberalisation is generally linked to the recommendation that firms depend primarily on equity rather than bank loans for their financing, that shareholders be recognised as the sole stakeholders of firms, and that banks should have a high capital-to-liabilities ratio (ranging from eight to 12 per cent). The assumptions behind these recommendations are deeply flawed logically and have been repeatedly falsified by the performance of firms and banks in many countries. For a start, workers, technicians and managers, and the chief suppliers of the firm are also stakeholders in a firm: all of them suf fer when the firm does badly. Moreover , up to the end of the 1980s, at least two countries, namely, Germany and Japan, which had structures of governance that totally differed from the Jensen-Meckling recommendations based on the dominant Anglo-American governance structure [ Jensen and Meckling, 1976 ], performed better than either the USA or the UK (for a critique of the JensenMeckling recommendation, see Bagchi, [ 1997]; see also Singh and W eisse [1998]. As Stiglitz [2001] has also been pointed out, equity markets even in the No end of the 1980s, at least two countries, namely, Germany and Japan, which had structures of governance that totally dif fered from the JensenMeckling recommendations based on the dominant Anglo-American governance structure [ Jensen and Meckling, 1976 ], performed better than either the USA or the UK [for a critique of the Jensen-Meckling recommendation, see Bagchi [ 1997]. As Stiglitz [ 2001] has also been pointed out, equity markets even in the North Atlantic economies provide only a fraction of the investible funds of a corporation. Turning firms into primarily equity-financed organisations and allowing a market for corporate control to operate in an unhindered fashion will make the value of the firm entirely dependent on the stock market. This will have

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the effect, especially in poor countries with ‘thin’ stock markets, of rendering the firms highly vulnerable to speculative attacks, and will, therefore, render the incumbent owners and managers risk-averse and myopic in their investment decisions. There is also a fallacy involved in just increasing the capital adequacy of banks as a nostrum against financial fragility or bank failure. In a world in which most collaterals have been securitised, a decline in the profits of the client firms will also reduce the value of the collaterals, and in a panic situation, more than proportionately to the reduction in the longterm worth of those collaterals. Moreover , increasing the ratio of capital adequacy norms also means raising the value of the equity capital on which banks will have to earn profits, and hence the required net profit rates will also go up. It is ironical that even as the Basle committees on banking supervision and monetary policy try to define risk-weighted asset values more stringently and raise capital adequacy norms, the General Manager of the Bank for International Settlements warns us about the systemic risk against which purely microeconomic precautions may be of little help [Crockett, 2001]. When financial liberalisation is combined with capital account convertibility, noisy stock and money markets interact with noisy currency markets. Currencies of all developing countries, whether they operate a floating exchange rate, or with exchange rates on fixed or adjustable pegs become vulnerable to unforeseen shocks and they can completely wreck the prudent management of the fiscal balances by the government if private operators at home and abroad can move capital into or out of the economy without let or hindrance. Domestic and international pressures – such as those of the fastexpanding chaebol in South Korea, and the ambition of the Korean government to become a member of the OECD, the pressure of the US Treasury exerted to further the interests of American banks and other large corporations, and the diktats of the W orld Bank and the IMF to countries facing international liquidity problems – have generally combined in the past to force financial liberalisation on an economy [ Bagchi, 1998, 1999]. The discourse of the governance and autonomy of the state thus has to incorporate an analysis of the management of the fiscal and international balances of a state, the patterns of regulation of money and stock markets and also issues of financing of economic enterprises. A state, which manages its fiscal situation prudently , regulates the raising of money by companies at home and abroad with an eye to the stability of its foreign currency and does not allow the contagion of stock, money and currency markets to take place will have greater autonomy than a state that does not these precautions. The

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contrast between T aiwan and South Korea is perhaps the most striking illustration of this proposition. VI. CONCLUSION

The autonomy (and hence the governance pattern) of a state is necessarily a relational concept. It can be defined only with respect to the objectives pursued by it. It is also structurally conditioned by the social situation within which it operates. If it operates in a society in which private powers of coercion – based on landlordism, patron–client relations, clan lineages or caste groupings, or communal or religious af filiation – are widespread, then autonomy suf fers to that extent. At the same time, a strong civic culture, based on political mobilisation for a more egalitarian society , can strengthen the quality of governance of a state [ [ Putnam, 1993]. Finally, autonomy is also a relational concept because every state is part of an international state system, and every society (and state) is linked with an international economic system. Hence security considerations and external influences will determine how autonomous a state can be.

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