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September 1998

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SOUTHEAST ASIA CRISIS:
Background and Current Assessment

By Ronald D. Palmer



Southeast Asia encompasses ten nations, from Burma on the mainland in the west, to the 17,500-island nation of Indonesia to the southeast. Need more be said to stress the area’s significance in the formulation of American foreign policy? Amb. Palmer, a veteran observer of Asian affairs, after taking a retrospective look at the region, assesses the recent impact of globalization.

~ Ed.

What financier George Soros calls global capitalism has developed rapidly since the end of the Cold War. However, political, economic, social, cultural, and international relations institutions that will need to support global capitalization are not yet in place. The institutions put in place after World War II from the United Nations to the IMF appear inadequate to cope with the post-Cold War anarchy that has followed the Long Peace and relative order imposed by the bipolar international relations structure between 1945 and 1990.

It is ironic that narrow nationalism and ethnic rivalries have broken out over territories when the very concept of national sovereignty may be losing its meaning as the era of electronic cash and massive hedge funds, the Internet, and other wonders of the Information Age transport foreigners across borders into the board rooms of formerly isolated and insulated national economies.

The case in point today is the Southeast Asian region. Once upon a time, the wall of U.S. containment established barriers against communism and encouraged market economies. These economies took off after the Vietnam War under conditions of favored access to the U.S. market and massive investment in the region by Japan. Southeast Asia’s growing prosperity demonstrated that its economic fundamentals were sound.

I shall contend in this paper that the political systems that promoted that growth are not now sound and the era of post-independence patrimonial capitalism has ended. Popular desire for greater civilian participation forced adoption of a new constitution, and greater controls on military, political intervention in Thailand in September 1997. (Thailand has had seventeen military  coups d’état since 1945.) Singapore authorities are coping with young people questioning the lack of democracy and the overwhelming rule of Lee Kuan Yew’s People’s Action Party since 1958. There is subdued grumbling in Malaysia over the seventeen years of rule by Prime Minister Mahathir. Determined public resistance prevented Philippine President Fidel Ramos from tampering with the constitution and seeking a second term. There is obvious dissatisfaction in Indonesia over the rule since 1966 of President Suharto. “The times, they are a-changing.”

The era that is ending in Southeast Asia was compounded of many factors, but I believe a very important feature was the persistence into the post-colonial era of pre-colonial values, beliefs, and attitudes, namely, the political culture that has been broadly characterized in recent times as having “Asian values.” Asian values were said to promote solidarity and general acceptance of the need to subordinate political goals, including democracy, to economic uplift and achievement. I shall examine this concept more closely but it seems to me that the Southeast Asian states presently have the worst of both worlds — deferred political gratification and only limited access to the real rewards of capitalist free enterprise. Political power was largely reserved to an elite, and that same elite was the principal beneficiary of the extraordinary growth this region has enjoyed since World War II.

I hope you will indulge me as I attempt to identify this region somewhat more carefully. Norton Ginsburg’s 1958 geography, The Pattern of Asia, reminds us that Southeast Asia is that onshore mainland Asian region encompassing Burma, Thailand, Cambodia, Laos, Vietnam, and Malaysia. Singapore is, of course, an island and can be classified with offshore Southeast Asia, which includes Indonesia, the Philippines, and Brunei. Southeast Asia lies between India and China and has been influenced by both.

Its gross area, including seas, compares to that of the United States, but its land area is only half that of the United States — roughly 1.75 million square miles. The distance from east to west is about that between Boston and Seattle. The north-south distance is approximately that between Miami and Peru , some thirty-seven degrees of latitude. The region has great variety and diversity; indeed, it was not thought to have the characteristics of a region at all until World War II, when it got the name as a theater of war.

Climate is tropical. However, rainfall varies greatly, dependent on the monsoon winds which blow north-south and then reverse themselves. Most of Southeast Asia is outside the typhoon zone, except the Philippines which lies directly in the path of typhoons blowing west to the Asian mainland. Soils vary in richness but can be highly productive when fertilized and irrigated. Mineral resources abound.

Populations have almost tripled since World War II. Indonesia had 78.2 million people in 1951, of whom 53 million were on Java. Indonesia now has over 200 million people, of whom over 100 million are on Java. Java had only 45 million people when I served there from 1960 to 1962. Indeed, Java had only 5 million people in 1815. Malaysia had about 8 million people in 1951. It has 20 million now. The Philippines had 20.6 million people in 1951; it has 60 million now. Thailand had 19.2 million in 1951; it has 60 million now. Vietnam had 22.6 million people in 1951; it has over 60 million now.

Lucien Pye writes that power in ancient times was generally associated with the role of authority in upholding the cosmic order. This was most explicit in China where disruptions of social order, incursions of barbarians from the periphery, natural disasters, etc., were signs that the dynasty of the era was losing its magical power — the Mandate of Heaven. The key element of this analysis is the persistence of traditional concepts of power, authority, and legitimacy into the modern world.

Hindu scholars and priests of the ancient world brought a more explicit concept of the sacred power of leadership to the region. Local leaders gladly accepted the concept these Brahmins brought of devaraj — the concept of the god-king. This idea imbued the ruling élite with still-persisting magical qualities. One has only to observe the court rituals of the Cambodians, the Javanese, the Malays, and the Thais to see the persistence of the most ancient associations of man and the supernatural. One political manifestation of these deep-seated ideas is the deference that leadership enjoys in the region. These are hierarchical societies with clear ideas of status, rank, and deference. There is little of the individualism and nonconformity evident in Western societies.

The seeds of individualism that developed in Western societies were flourishing in 1511 when the West, through the agency of Portugal, came to Malacca. The Malay empire was crushed, but rich and complex cultures based on Southeast Asian culture already existed. Southeast Asia was not a blank slate when the West arrived. There were long traditions of kingship, power, and authority. Indeed, power had been pushed out from centralized autocratic kingdoms to the peripheries of the developing Southeast Asian state system. In 1511, there was the Siamese Ayudthya Empire, the Burmese Empire, the Malay Empire at Malacca, and the Sri Vijaya Empire in Sumatra which had superseded Javanese Empires. There was the Sulu Sultanate in the Southern Philippines; there were the remains of the Khmer Empire at Angkor Vat; and the proud Vietnamese Empire at Hué was in its Golden Age.

In the age before the Western advances in weapons technology, the Vietnamese had defeated the Chinese. The Javanese had thrown back Mongol fleets. The Burmese, Cambodians, and Siamese were feared warriors. The Moros of the southern Philippines were fierce adversaries, as the Americans learned later in putting down what they called the “Philippine Insurrection.” But by 1886, only Siam had been able to maintain its independence against the superior force the West was able to project into the area.

Nevertheless, it was not force of arms alone or superior shipping technology that enabled the West to implant itself in Southeast Asia. It was the joint-stock company, double-entry bookkeeping, modern bureaucratic techniques, and the wider dispersion of education in the West that gave it a critical edge in overcoming Southeast Asian resistance.

Southeast Asia became enmeshed in the globalizing web of Western modernization, institutionalization, and bureaucratization which grafted political, economic, cultural, linguistic, social, and other changes onto the ancient societies. Four hundred years of secularizing impact ensued. These changes had the effect of strengthening and deepening existing centralized local power and making colonial state power even more effective. This was especially true of police and coercive power.

To recapitulate, Southeast Asian states were stronger after colonialism, but
independence brought a new legitimization of traditional values as the search for nationalist and state power intensified. Contemporary Southeast Asian political systems are continuations of the political systems that were deeply rooted when the West arrived only a few hundred years ago. Direct and indirect colonial rule rested on ancient foundations. When independence came for former colonies and protectorates, they reconnected with their pasts when they could and adapted their past experiences to the realities of the post-colonial world. Thailand had been spared colonization, but it too had studied and learned the lessons of Westernization and modernization.

These were the structures inherited by the post-independence Southeast Asian states. Their independence occurred in the Cold War and Thailand, Malaya, the Philippines, Indonesia, Vietnam, Laos, Cambodia, and Burma all became potential prizes in the Cold War. Most of these new states benefited from American spending in the Korean and Vietnam wars, as well as American military and economic assistance. Burma remained neutral and was largely isolated from direct Cold War intervention by either side. Indonesia’s slide toward a pro-communist stance was arrested in 1965, and thereafter it benefited also from association with the West.

The Southeast Asian financial crisis beginning in the summer of 1997 has raised many questions. What happened? Why did it happen? How can we seek to understand it? Was it a unique phenomenon or a result of globalization? If so, what does it portend for the world economy? How will the Southeast Asian financial crisis affect the booming U.S. economy?

What happened is clear enough. The Thai currency dropped 40 percent in value; the Indonesian rupiah dropped 80 percent; the Malaysian ringgit by 30 percent; the Singapore dollar by 15 percent; the Philippine peso by 50 percent. Stock markets contracted by similar percentages.

How could this happen? There are cultural, historical, security, economic, and globalizing reasons. The market-economy countries of Southeast Asia appear modern. These are Thailand, Malaysia, Singapore, Indonesia, and the Philippines. However, the apparent modernity of the airports, skyscrapers, freeways, and toll roads, the malls, factories, hotels, apartment and condominium developments, the franchises of Famous Amos cookies, Kentucky Fried Chicken, Coke, and all the other glittering symbols of the late twentieth century — all these are only a superficial coating of still ancient cultures. Go to the countryside, go behind the façade, and you will see that traditional Asia is alive, well, and unchanged in many ways.

That unchanged Asia retains stubbornly traditional elements. Even in the modern cities, once can see strong evidence of traditional culture. Jakarta may have ten million people, but it is still said to be a city of villages. Grinding poverty is present in the slums of Manila, the sex bars of the Patpong of Bangkok, and throughout Southeast Asia, where formerly rural people are attempting to make the transition to modern life. Indeed, go to the east coast fishing villages of Malaysia, the northeast and northwest regions of Thailand, the central plains of Luzon or the feudal  estancias of Sugarlandia in the Negroes Islands of the central Philippines or the crowded rice lands of Java and you will see how close to its past Southeast Asia is.

The great masses of people in Southeast Asia still live in rural settings and in cultures deeply influenced by values and beliefs that are pre-modern. In political science terms, these nations have patrimonial political cultures with strong biases toward patron-client relationships. Patrimonial cultures are dominated by strong authority figures who dispense influence and largess to a relatively thin élite which owes the authority figure virtually feudal fealty or loyalty for favors received. These types of traditional cultures are hierarchical and characterized by deference to authority. Such ties are intensely personal; there are few so-called self-made men (or women). Power descends from the top of such a culture; it does not ascend from the masses.

The Western concept of popular sovereignty is foreign. The consent of the governed is assumed. The governed are there to be led and governed.

At the beginning of the independence era, there was virtually no middle class in Southeast Asia. The 1500 to 1900 period saw the steady growth of a middle class culture in the West. It was tough and strong enough to compete for power with the ancient aristocracies. By the end of World War I, the middle class and its political and economic liberalism values were triumphant in Europe and North America.

This was not the case in Southeast Asia. Modern education of élites was begun only late in the nineteenth and early twentieth centuries. Even now, only about ten to twelve percent secondary students go on to tertiary education. Thailand and Malaysia have announced plans to educate up to forty percent of the secondary school cohort, but progress has been slow. The number of students in higher education has actually declined somewhat in Indonesia.

Malaysia is a useful example of the development of élite education. Such education was begun only in 1905 to produce a Malay aristocratic élite, which would be male and of noble birth — a vigorous and intelligent race of young men, in the description of the time, “who will be in touch with modern progress, but not out of touch with old traditions; who will be liberally educated but not educated out of sympathy with their own own families and people; who will be manly and not effeminate, strong-minded but not strong-willed, acknowledging a duty to others instead of being a law unto themselves and who will be fit to do something in the world instead of settling down into fops, spendthrifts or drones.” This was the mission of the Malay College for Boys in Kuala Kangsar. It was to be a re-creation of Eton or Rugby or Winchester. There was a total of 150 boys in 1941. The total was only 660 by 1965. A Malay school for girls of noble background was established only in 1948.

Meanwhile, the education of Malay commoners proceeded from primary to secondary levels, but few commoners were able to go on to tertiary education. The University of Malaysia was established only in 1963 and on deliberately élite, Oxford-Cambridge lines and with instruction in English. Malay was made a compulsory school subject in 1957, but only became the official language in 1967. By 1971, all Malaysian schools (except Chinese and Tamil schools) were compelled to convert to Malaysian as the main medium of instruction. The National University of Malaysia was formed in 1973 with instruction entirely in the national language.

This emphasis on national language followed terrible race riots in 1969 between the lagging, traditional Malays and the progressive modern-minded Chinese. Dr. Mahathir Mohamed, who had been denied education in England and had obtained his medical degree instead at King Edward Medical College in Singapore, was exposed to the virulent post-World War anti-British and anti-aristocratic attitudes of that city; he entered local politics in Malaysia when he finished his medical studies. He soon was elected to Parliament in Kuala Lumpur, where he was a radical ultra Malay back bencher and outsider. He wrote his  Malay Dilemma in 1969, demanding that Malays leave the rural background and become urban, progressive, and modern. The Malay leadership adopted his ideas and formulated the New Economic Policy (NEP) in 1971, a 20-year policy of affirmative action quotas for Malay uplift in every field of education, industry, etc. The NEP aim was to create Malay millionaires. It was successful use of state power from above to create a new élite. Mahathir was the center of this activity. He created the modern Malay élite. He is the patrimonial figure. And he has far more power than the surviving nine Sultans in their ancient sultanates.

The Thai élite formation was naturally different, but its aims were similar. However, the Thai monarchy and nobility dominated their system more thoroughly than the Malay nobility. However, from 1932 the nobility shared power with the military. The Thai military intervened in Thai society in 1932 to claim a larger role for themselves and formed alliances with both aristocratic and commoner business groups, which were mainly Sino-Thai. There was a military dictatorship from 1945 to 1973 in which Thailand benefited greatly from U.S. aid and U.S spending related to the Vietnam War. Significant economic growth occurred, accompanied by massive corruption. Student riots in 1973 brought down the military-business autocracy and a period of democracy ensued until 1976 when the military brutally took power again. A bloodless military counter-coup in 1980 brought the regime of General Prem Tinsoulaland to power; he led Thailand to steady economic growth and a return to civilian control by 1988 when he resigned to permit new elections. Unfortunately, the successor regime of retired General Chatechai Choonavan was characterized by such extraordinary corruption that the military was encouraged by popular revulsion against Chatechai to intervene again in 1991. A caretaker regime of technocrats was installed to restore fiscal order, lay the foundation for future economic growth, and prepare the way for elections in 1992. The military asserted it had no intention of remaining in politics; it was merely acting as the protector of the kingdom. However, the temptation to stay in power and reap the advantages of corruption proved too strong.

Thus, the military effort to remain in power aborted the scheduled May 1992 elections. Civilians resisted the military effort; bloody and murderous clashes resulted, and a near-breakdown in order was averted only by the intervention of the king. The military returned to their barracks and new elections were held in 1992 in which the Sino-Thai Chuan Leekpai became Prime Minister. Chuan remained in power until 1995, when new elections brought another Sino-Thai, Banhorn Silpa, to power in what was called the ATM election.

The Banhorn government set new records in corruption and money politics. By 1996 retired General Chavalit was able to form a cabinet to replace the disgraced Banhorn cabinet. However, Chavalit’s fate was to inherit the mess created by his predecessors. The Thai Central Bank and ministry of finance officials had lost control of the banking situation. Private debt to foreign lenders had ballooned to a level where virtually no one knew how much it was. Such capital denominated in dollars was available at lower interest rates than local capital. Foreign lenders were willing also to accept assets, especially property, that local bankers knew were overvalued and would not accept. Finding local capital unavailable, local businessmen obtained short-term foreign capital to finance long-term projects. This merry-go-round attracted the attention of the currency market and speculators began gambling that the Thai currency would weaken and have to be decoupled from its fixed exchange rate to the dollar. The Thai Central Bank valiantly but unsuccessfully tried to defend the value of the baht. By mid-1997 when the baht was devalued, the Central Bank had spent $12 billion vainly on this effort. The baht has lost 50 percent of its value.

Thailand is a useful example of the unexplainable psychological dimension of economies: breathless expansion and fearful contraction of lending. Domestic banks were able to lend aggressively largely because foreign banks and other investors eagerly provided the rapidly expanding economy with liquidity, assuming high growth rates would continue. They did not. What was — is — the means to exit from this problem?

Not only the market provides feedback on right and wrong decisions. Blind reliance on free market concepts, as George Soros has written, poses at least three threats to open society: economic instability, social injustice, and impaired international relations. The result is a tendency toward Social Darwinism. Wealth accumulates in the hands of its owners and inequities can become intolerable. But he was even more explicit in a recent [January 1998]  Atlantic Monthly article, “Toward a Global Open Society.” He grouped the deficiencies of the global economy, what he called the global capitalist system, into six categories:

1) The benefits of global capitalism are unevenly distributed. Capital is more mobile than labor. Those at the center of the system, especially international portfolio investors, have an advantage over those at the periphery. “This accounts for the ever increasing size and importance of financial markets.”

2) “Financial markets are inherently unstable, and international financial markets are specially so. International capital movements are notorious for their boom-bust patterns. During a boom, capital flows from the center to the periphery, but when confidence is shaken, it has a tendency to return to its source.”

3) “Instability is not confined to the financial system, however. The goal of competitors is to prevail, not to preserve competition in the market.” There is a natural tendency for monopolies and oligopolies to arise. The momentum of globalization will create a need for world-wide regulation of capital movements.

4) The state will have the duty of preventing undue concentration of power and preserving stability in financial markets. However, the capacity of the state to do so has been impaired by globalization of the capital system which allows capital to escape taxation more easily than labor. “Capital will tend to avoid countries where employment is heavily taxed or heavily protected, leading to a rise in unemployment.” This is true where the safety net is high as in Europe.

In countries deficient in local capital as in the Southeast Asia region, capital allies itself with local business interests and helps them accumulate capital. Autocratic regimes are more favorable to the accumulation of capital, and prosperous countries potentially have the capacity to make transition to democracy, but this is far from assured: “Those who are in positions of power cling tenaciously to their power.”

5) Thus, there is a problem in the question of values and social cohesion. Market values cannot serve that purpose; everything is “commodifed.” We can have a market economy but not a market society. In addition to markets, society needs institutions to serve such social goals as political freedom and social justice. There are such institutions in individual countries but not in the global society. The development of a global society has lagged behind the growth of a global economy. Unless the gap is closed, the global capitalist system will not survive.”

The summer of 1997 issue of Foreign Policy was entitled “Globalizations: The Debate.” Six of the eight major articles debated this issue. Only one made a positive case and this was for American “Cultural Imperialism” — the more the global culture resembles America’s, the better off America and the rest of the world will be, that is.

In contrast, the other articles expressed varying degrees of gloom about the possible dangers globalization represented to national autonomy and to democracy. Indeed, French intellectual Jacques Attali provocatively entitled his article “Warning Against American post-Cold War Triumphalism; The Crash of Western Civilization: The Limits of the Market and Democracy.”

I will leave to you to judge whether Attali and George Soros are right or wrong but it is noteworthy that at least some of these ideas seem to have relevance for Thailand.

And how about Indonesia? Andrew Brimmer has pointed out, in an address made at Chicago on January 4, 1998, severe strains in the banking industry had arisen in the past decade:“[T]he major banks have competed aggressively to raise funds which they have used to finance increasingly risky private ventures.” They used short-term deposits and channeled them into long-term projects “which ordinarily been funded with equity capital.” Significant portions of the banks’ funds were raised abroad. Between 1990 and 1997, the banks domestic demand deposits rose by 123 percent — while their foreign liabilities rose by 267 percent. Non performing loans have risen sharply. They were 15 percent of total loans at state banks in 1996 and nearly 20 percent in 1997.

During 1997, Indonesia lost one-third of its foreign exchange reserves; the rupiah dropped by 80 percent against the dollar; stock prices fell more than 60 percent and inflows of foreign capital had virtually dried up. Recourse to the IMF became urgent.

Clearly Southeast Asian economic and financial difficulties are not over. Malaysia must overcome looming banking problems caused by property overbuilding. Indonesia faces gigantic problems. Thailand is edging back from the deep trouble in which it almost sank.

How the United States responds to existing and unforeseen problems may affect how these nations view their hitherto close ties to the United States. China could be the beneficiary of the U.S. response. If so the dominant U.S. position in Asia will be weakened. This may create significant instability if the Asian region should become essentially one of contesting Chinese and Japanese power aspirations.

Is the Southeast Asian financial crisis a portent of the beginning of a diminution of U.S. superpower status? Is an era ending?




Adapted from a speech by Ambassador Ronald D. Palmer at Dickinson College, Carlisle, Pennsylvania, March 26, 1998.
The author has supplied the following supplemental observations: His skeptical view of the Indonesian and Malaysian patrimonial crony capitalism systems was borne out in the student-led demonstrations in May 1998 that led to the end of the Suharto regime. Such demonstrations appear to be resuming with unknown possible effects on the successor regime of B.J. Habibie. As for Malaysia, the recent sacking of Deputy Prime Minister
Anwar Ibrahim represents the apparent determination of Prime Minister Mahathir Mohamed to retain the regime as is. This may lead to greater political and economic problems in the future.

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