Studwell History

The contemporary economic landscape of Thailand, Malaysia, Indonesia, the Philippines, Singapore and Hong Kong was shaped by the interaction of two historical forces: migration and colonialism. Migration came first. Long before European colonists arrived in south-east Asia, Arabs, Indians and Chinese were settling in the region. The latter, hailing from what was the world’s biggest economy until the nineteenth century, were the most numerous.
The early history of these immigrants is sketchy at best.1 What we know is that, landing in a patchwork of small, feudal states (where Thailand was the only unified state approximating to its current geographical footprint), the new arrivals engaged in much more than arm’s-length trade.2 In Thailand, where historical records are more complete than elsewhere in the region, immigrants were employed in a range of court-sanctioned roles from at least the sixteenth century. Persians and Chinese (the latter hailing from Thailand’s main international trade partner) operated trading monopolies and tax farms – paying an agreed, fixed sum to the royal household for the right to collect a given tax in a given locale. As of the eighteenth century, Chinese are recorded working for the Thai court as administrators and accountants. In many cases – perhaps most – however, Persians, Arabs and people from the Indian subcontinent were preferred as administrators; the Bunnag clan, which is still prominent in the Thai civil service and politics3, were Persian Muslim immigrants who from the late eighteenth century ran the entire greater Bangkok region. Chinese dominance in court-sanctioned commercial monopolies in Thailand became overwhelming in the nineteenth century. On the island of Java, in today’s Indonesia, there is evidence that Chinese entrepreneurs entered into administrative and monopoly management arrangements with Javanese aristocrats before the arrival of Europeans in the sixteenth century.
What developed, in the early stages of state formation in south-east Asia, was a pattern that has never disappeared: a racial division of labour in which locals were the political entrepreneurs – focused on the maintenance of political power against indigenous rivals and, later, in partnership with European and American colonists – and outsiders who became economic, and as a corollary bureaucratic, entrepreneurs. Political power, of course, trumps all other power, and so the arrangement made perfect sense to indigenous aristocracies.
That immigrants know their place is attested by the direction of acculturation – the process of cultural adjustment. South-east Asian aristocracies did not become clones of their immigrant employees; instead, the immigrants acculturated to them. This was as true of Chinese as Persians, despite the reputation of the former as having an unbiddable cultural identity. Pre-modern Thai history, for example, is a story of Chinese who were successful in the country turning rapidly into Thais. The Thai kings encouraged this, ennobling their ethnic Chinese revenue farmers and officials. All Chinese were required to choose between a Thai and a Chinese identity on reaching adulthood; if they opted for the former they cut off their Manchu queues. The vast majority of families did so within two or three generations. The Thai élite was the place to be; it took a fat slice off the top of commercial profits for no risk, while unassimilated Chinese traders received a secondary cut in return for all the risk. It was hardly surprising that, given the choice, Chinese immigrants preferred to be political rather than economic entrepreneurs. A similar trajectory occurred in Java, where successful Chinese sought to marry into the Javanese aristocracy.
Despite the attention lavished by historians on the impact of Chinese culture throughout Asia, migration to the south-east of the region – Chinese, Persian, Arab and Indian – really highlighted a different lesson: that migration into existing societies is less about the export of a culture, and more about the migrants’ willing approximation to dominant local forms. Moreover, the most rapid acculturation occurs among the most ambitious, go-ahead individuals who recognise that economic progress is all but impossible without integration into local élites. This was a lesson that proto-godfathers learned early, and it was not difficult to follow because south-east Asia was a broadly ecumenical and tolerant place with sparse populations that meant limited competition for resources. Put simply, in an agricultural era, south-east Asia was blessed with natural abundance, particularly when compared with China and India.
Out for a Burden
The arrival of European colonists, present from the sixteenth century but not aggressively expansionist until the nineteenth, both reinforced and realigned the tendencies that were already apparent. Reinforcement occurred because colonialism in the countries with which we are concerned was not backed by heavy allocations of personnel. As a result, the colonials sought to rule through existing élites, both political and economic. Realignment occurred because colonial power created triangular relationships where before there had been simpler bilateral ones. The Europeans now represented ultimate power and local political and economic leaders needed to have relations with them as well as with each other. This had profound effects. For ambitious migrants, it meant they began to acculturate towards the Europeans because they represented dominant power. The local political élite also moved some way towards European cultural norms, while its relationship of cultural superiority to immigrants – most notably the Chinese – was shattered. The exception was Thailand, which was not formally colonised. There, the process of Chinese turning into Thais continued apace until the early twentieth century, when a rapid increase in the pace of immigration (driven by economic and political breakdown in China and the availability of new passenger ship services), the arrival of more Chinese women and a surge of Thai nationalism temporarily interrupted the assimilation process.
It was the Dutch in Java, and subsequently the rest of Indonesia, who most ruthlessly built on the division between political and economic activities. Control of the bulk of the population was exercised through the local priyayi aristocracy, who continued to govern their provinces and districts, with small numbers of Dutch colonial ‘residents’ in the background. Key economic roles went to the Chinese. They were revenue farmers for all kinds of taxes and monopolies, ranging from fees on the slaughtering of animals to the right to operate licensed markets. The biggest revenue farm was that for the manufacture and sale of opium. It became a mainstay of government income in each of the territories we are concerned with, but it was particularly important in Indonesia because indigenous people were also big consumers; elsewhere opium smoking was largely a Chinese pastime.
As well as cementing the Chinese economic role, the Dutch exalted a small number of powerful Chinese community leaders (immigration from China increased markedly in the seventeenth century) who were loyal to them. These men became some of the region’s original tycoon godfathers. The Dutch picked up on a tradition begun by the Portuguese – the first European power in south-east Asia – to give the foremost person in the Chinese community the military title of captain. This was expanded into a complete officer system of Majoor, Kapitan, Luitenant – a hierarchy that persisted for two centuries. The Chinese officers kept a Chinese census, levied Chinese taxes and fines, issued permits, and their opinions were important in court cases. They were extremely powerful and, simultaneously, usually held the big revenue farms and worked as compradors – intermediaries – for the Dutch. Moreover, ordinary Chinese were compelled to live in designated Chinese quarters of approved towns and travel only with permission. These restrictions did not apply to the Chinese élite and their revenue farm employees. The cabang atas, or ‘highest branch’, as the Chinese élite came to be known, had the run of the country at the same time that their compatriots – and potential competitors – were theoretically confined to urban ghettos. The pass laws were often ignored, but the officers had more than enough power, including quasi-legal authority, to make life deeply unpleasant for anyone who crossed them.
Chinese society at large continued its process of acculturation in Indonesia, with successive generations of immigrants losing command of their different Chinese languages and becoming habituated to local customs. But as the Dutch expanded their power through the archipelago there was less incentive for ambitious migrants to seek employment in the households of Javanese kings or marriage into the priyayi aristocracy. On the other hand, white northern European society would not tolerate intermarriage and assimilation to the Dutch group. Unlike Thailand, where complete integration with the ruling élite was possible, what happened was that a ‘halfway house’ identity developed. By the nineteenth century the Chinese who spoke Malay (the indigenous language of trade), followed a culture comprised of both southern Chinese and Javanese elements, while looking to the Dutch colonials for favour and advancement, were a large and definable group called peranakan. It was the leading peranakan who were the leaders of Chinese society: they worked with the Dutch as officers to keep the Chinese population in line; they tendered for revenue farms; and they worked with the local priyayi to protect their farms – which were often challenged by smugglers, especially in the case of opium. The most successful entrepreneurs were almost inevitably the least purely ‘Chinese’ ones. They required a position of cultural equilibrium between Dutch residents, priyayi aristocrats and an evolving mix of almost exclusively male Chinese immigrants.
A similar state of affairs developed in the Philippines, where the Spanish arrived from across the Pacific via their Latin American colonies in the late sixteenth century. Unlike Dutch and British colonists, who were represented by monopolistic trading corporations – the Dutch Vereenigte Oost-Indische Compagnie (VOC) and the British East India Company – the Spanish colonial mission was an overtly political and religious one. It sought to convert Filipinos to Catholic Christianity. In this respect the Chinese, who were already trading in the Manila region when the Spanish arrived, were irksome. The Spanish needed the Chinese to provision their garrisons and trade Chinese luxury goods; but the Chinese were initially resistant to Christianity. There followed an uneasy stand-off punctuated by a series of bloody pogroms in the course of the seventeenth century. At the same time, the Spanish rewarded Chinese who did convert to Christianity, and who married local women, with lower taxes, freedom of movement and an ability to join the local political élite. A process of acculturation began and by 1800 there were an estimated 120,000 Chinese mestizos – equivalent to the Indonesian peranakan – versus 7,000 Chinese and 4,000 blancos, or whites, in the Philippines; they accounted for around 5 per cent of the population. Strict controls on the number of pure Chinese who were allowed residence further encouraged the development of mestizo society.
The mestizos dominated internal trade in the islands and moved increasingly into landholding. The Spanish always feared they would lead the native indios in rebellion, but in reality the Chinese mestizos were at least as attached to the Philippine version of Spanish culture as were the urbanised indios, and gave up most attachment to Chinese culture. As in Indonesia and Malaysia, they acquired their own dress forms and customs that reflected a hybrid culture.
The Era of Mass Migration
From the mid-nineteenth century, the pattern of low-volume migration and a heavily assimilated resident Chinese population began to change. There were two reasons for this. First, the number of immigrants increased exponentially. And second, the objectives of the ruling colonial powers both changed and broadened.
Technology facilitated a migration boom. The first steamships came into use in the 1840s and were widely deployed on passenger routes in Asia by the 1860s. The so-called Opium Wars of 1839–42 and 1856–60 forced open the principal ports of the Chinese coast, particularly the traditional migrant centres of the south, and these were quickly connected by steamer link to the major ports of south-east Asia. Much migration was determined by nothing more complex than the destination of the local steamship link. The opening of a service from Haikou in Hainan island to Bangkok, for instance, is a key reason that there are lots of people of Hainanese ancestry in Thailand.
Best estimates suggest that by 1850 there were half a million people of Chinese extraction, mixed race and not, in the territories we are following. The largest concentrations were in Thailand and Indonesia, with Hong Kong, Singapore and Malaysia (not yet formally incorporated into the British Empire) just taking off. By the time of the First World War, there were 3–4 million ethnic Chinese in the region, the vast majority of them first generation. There was an increasingly long list of reasons for people to get out of China. The country came under serious population pressure from the eighteenth century. Rebellions occurred with increasing frequency, building up to four major conflagrations in the mid-nineteenth century: Muslim-led rebellions in the south-west and north-west of China, and the Nian and Taiping rebellions in the central provinces. The latter, led by a man who believed himself to be the younger brother of Jesus Christ and a deputy who claimed to be the Holy Ghost, was the most disruptive; it cost the lives of several tens of millions of people in the 1850s and 1860s.
With regular steamships to transport them from what one historian dubbed their ‘grimly Malthusian setting’,4 the southern Chinese found south-east Asia’s underpopulated and relatively peaceful destinations most attractive: labour rates were often a multiple of those at home.5 In the mid-nineteenth century there were just 5 million people in Thailand, 2.5 million in Malaysia and 23 million in Indonesia (Java was the one place in south-east Asia that was relatively densely settled) – around one-tenth of today’s levels. The more fortunate migrants were assisted, both financially and with job-seeking, by relatives or kinsmen who had already travelled abroad.
The rising tide of migrant workers coincided with the dawn of so-called ‘high imperialism’ from the middle of the nineteenth century, and a sustained, labour-intensive commodities boom that continued into the twentieth century. From the 1830s the monolithic Dutch and British trade monopolies were dismantled and the European states took over colonial management in southeast Asia. An agreement between Holland and Britain in 1824 to delineate their respective areas of interest in the region presaged a Dutch campaign to control the complete Indonesian archipelago and, later, the rolling-out of the British presence in peninsular Malaysia. Direct colonial control was sometimes the prerequisite for the development of vast new plantations or mines and sometimes – as in peninsular Malaya, where small Chinese mines were well established – it occurred after the fact. There was to an extent a contradictory political impetus in Europe – on the one hand to extend the limits of colonial power, on the other to deregulate many aspects of international trade and investment. In an era informed by the writings of David Ricardo and Adam Smith, both Singapore (1819) and Hong Kong (1842) were established as free ports without restrictions or taxes on trade. (These colonial acquisitions also reflected the British imperial appetite to control strategic islands.)6 A Hong Kong governor persuaded the Thais to deregulate trade with the eponymous Bowring Treaty in 1855. Even the Spanish Philippines moved in this direction, ending the trading monopolies of provincial governors in 1844 and opening up to foreign business; since the industrial revolution had passed Spain by, trade came to be dominated by British and American firms with little more than the flag to remind merchants that they were on Spanish soil.
By the second half of the nineteenth century, the pieces were in place for a globalisation-driven boom which in certain respects pre-figured the one that began in the 1990s. The demand impetus was the developed world’s hunger for agricultural and mineral commodities which were either buried in the ground in south-east Asia or could be grown there; vast tracts of land were available for the establishment of plantations. Technological facilitation came with the opening of the Suez Canal in 1869 and the concurrent development of steamships that allowed for low-cost bulk shipping throughout the year.7 The final component was abundant, cheap, imported Chinese and Indian labour.
As a general distinction, it is fair to say that the great majority of Indians were imported to work in estate agriculture in the British colonies and parts of Indonesia, with minority subsets of manual labour for public works projects and colonial civil servants; a tiny élite of Indian entrepreneurs – including Parsees, Sindhis and Chettiar – was spread around the region. Chinese immigrants dominated mining, but were also widely dispersed across trading, retailing, what would today be called logistics services, agriculture and more. This reflected the fact that the average Chinese had relatively greater freedom of choice in making migration decisions. The vast majority of Indian emigrants between 1850 and the First World War were indentured agricultural labourers, meaning that they signed contracts to work on plantations, were transported to those plantations and housed in barracks and – if they survived – were usually sent back to India.8 The southern Chinese used credit ticket systems, which meant that migrants were bound to employers until they had paid off their passage, with interest, but subsequently they were relatively more likely to stay on in south-east Asia and merge into the established, mainly urban communities of overseas Chinese that had roots going back centuries. A United Nations report on migration published in 2004 makes a brave attempt to pull together historical records from India and concludes that 30 million Indians left for destinations around the world between 1834 and 1937, but 24 million came back.9 We do not know the returnee proportion among Chinese because China has no state records comparable to those maintained by the British in India, but it was certainly much lower.10
This is an important point. There were huge numbers of Indians around in colonial south-east Asia but they did not become more important to local economies in the long run because most of them did not hang around long enough to become embedded in society.11 They were also, relative to the Chinese, a more downtrodden and unhappy group of people. The Indian arkatia – or recruiters – who organised indentured labour for export focused much of their attention on minority groups at the bottom of the caste ladder (which has no sociological equivalent in China), like Tamils from the south or hill tribesmen from the north-east. These people suited plantation owners and colonial governments because – unlike the more uppity Chinese – they created no trouble. Sir Frederic Weld, governor of the Straits Settlements from 1880 to 1887, recommended an increase in the importation of Indians when leaving the job with the words: ‘Indians are a peaceable and easily governed race.’12 He probably did not realise he was used to a rather atypical cross-section of Indians.
The original agricultural produce that had drawn Europeans to southeast Asia was spices, used largely for curing meat in the era before artificial refrigeration. But the nineteenth century brought a host of other cash crops, among which sugar from the Philippines and Thailand was the most important. Then came tin, first mined by Chinese gangs in Indonesia but later found in far greater quantities in Malaysia and southern Thailand. At the turn of the century there was rubber – in whose production Indian labour was thoroughly dominant – which was an essential input in the dawning age of the automobile and for many other consumer products. There was also a rolling cycle of commodity booms in the region in which technological advances further increased the scale of trade. In mining, for example, new technologies transformed the activity from an essentially manual undertaking with mattocks to a large-scale mechanical one involving dredges.
Change, Change, Change
From the perspective of the established south-east Asian godfather the end of the nineteenth century was an era of both greater uncertainty and greater opportunity. Traditional assimilated Chinese Thai, Indonesian peranakan, Malaysian baba13 and Philippines’ mestizo élites were challenged by the arrival of wave after wave of hungry immigrants, who were not always easy to control. At the same time, as the Thai state and the different colonial regimes became stronger, they had less need of freelance revenue farmers and monopoly holders and gradually dismantled these arrangements, beginning in the 1880s. None the less, the economic pie was becoming much bigger. And the tripartite split between colonial power, indigenous political élite and economic élite of now overwhelmingly Chinese origin continued to reward the tycoon who could most effectively work his external relationships while maintaining authority within a burgeoning immigrant community. (Indian labour was usually imported direct by colonial plantation owners and hence threw up fewer Indian godfathers.) A look at the salient characteristics of stand-out tycoons at the turn of the century highlights this.
Oei Tiong Ham was the richest man in Indonesia. Based in Semarang in central Java, home to the island’s dominant peranakan opium farmers in the nineteenth century, Oei was the son of an established merchant who had been appointed Majoor of the Semarang Chinese. The son, however, was able to multiply his father’s already considerable wealth through cosmopolitan expansion from a traditional base. In the 1880s, when revenue farmers were hit by an economic downturn, he tendered for and won important tax farm concessions. He spoke no Dutch, but understood the language of colonial formality better than most Europeans. One of his daughters recalled in her autobiography: ‘I used to stand on the wide veranda of our palace, waiting for the sight of Papa’s carriage racing through the valley below … By the time it swept through our entrance gates, a Malay servant had appeared from nowhere carrying a hot towel soaked in eau de cologne on a silver tray. Papa, impressively handsome in immaculate white trousers and a smart, Western-style white jacket, would wipe his hands and face with the scented towel before he stepped down from the carriage and approached me. It was like a ballet.’14 Oei was a lavish entertainer and gift-giver to colonial officers. Like his father, he was Majoor of the local Chinese, but he lived on a large estate in the European quarter of town; he spoke Javanese and Malay better than any Chinese dialect.
In business, Oei followed a diversification strategy that became the hallmark of south-east Asian tycoons of the era. He obtained a steady source of cash flow from revenue farms, in particular opium, and used it to finance expansion into myriad other activities. He was most prominent in the sugar industry, developing plantations and constructing processing mills. The latter used imported European machinery maintained by Dutch technicians; Oei also employed Dutch accountants and administrators in key roles. He expanded into shipping and opened a bank in Semarang. At the time of the First World War, Oei relocated to Singapore, where he died in 1924. His was the one local business that could compete for scale with large Dutch companies.
Still more adaptable was Loke Yew, reckoned the richest Chinese on the Malaysian peninsula at the turn of the century. He built an early business provisioning rival Chinese mining gangs, and the triads that represented them, with food and weapons on the west coast. As the British took formal control of Malaya from 1874, he developed an open-cast tin mining empire employing thousands of Chinese labourers whom he also supplied with opium, liquor and gambling facilities under state revenue farm licences. Loke Yew worked closely with Chinese secret societies to import and manage his labourers; he was a member of the powerful Ghee Hin triad. British Residents in the key mining states relied on him both to control the Chinese populations and to contribute a large share of fiscal revenues. In turn, Loke Yew was at pains to put his colonial counterparties at ease. He acquired English manners, developed a friendship with the first Resident-general of the four Federated Malay States15, Frank Swettenham, and was one of the main sponsors of the élite English language school in Kuala Lumpur, the Victoria Institution. He entered ventures with English and Scottish companies, as well as with the Tamil Indian tycoon Thamboosamy Pillay.16 His negotiating power with the colonial rulers was considerable. When, for instance, the tin price fell in 1896, the Selangor state administration took the unprecedented step of giving him a reduction on the fixed fee he paid for the opium farm because he was deemed so important to state business. In 1898 he was offered a range of revenue farms in the Benteng area of Pahang state at nominal cost, and reduced taxes on the tin he mined, as an incentive to open up the area. Apart from mining, Loke Yew diversified into real estate, rubber plantations and more; he was given a British knighthood.
The strategy of integrating revenue farming operations with mining and plantation ventures was common to tycoons around the region. Most obviously, it reduced the cost of already cheap labour. Thio Thiau Siat, whose interests were truly regional, ran opium, liquor and tobacco farms on both sides of the Malacca Straits, in Sumatra, Malaya and Singapore, and conjoined these with a vast empire centred on plantations. The Khaw family developed an integrated tin mining and revenue farm business that stretched from Penang to south-west Thailand, and thereafter diversified. In Singapore it was the families that dominated pepper and gambier (used in tanning and dyeing) cultivation, the biggest employers there in the late nineteenth century, which held revenue farms – including the key opium farm – and contributed as much as half the government’s annual revenues. Wherever there were revenue farms – which inferred a delegation of state powers of coercion – there were also triad enforcers. But this was not a great concern to colonial governments that had long since recognised that accepting the presence of the secret societies was the easiest way to manage Chinese immigration. As the Straits Observer noted on 17 February 1899: ‘Government has no direct means of communication with the lower class Chinese, and it is this work which the Secret Societies carry on.’
In the Philippines, the greatest of the cabecillas (literally ‘headmen’) was Don Carlos Palanca Chen Qianshan. He was a coolie broker, operator of a major opium monopoly and tax collector with general commercial interests ranging from textiles to sugar and rice trading to real estate. Arriving from China’s Fujian province as a chain migrant with relatives already settled in Manila, he learned Spanish, converted to Catholicism and found a powerful colonial mentor in Colonel Carlos Palanca y Gutierrez, whose name he adopted. At the same time, he was careful to establish his credentials with imperial Qing China, thereby shoring up his role as leader of the burgeoning Chinese community in the Philippines. Like many contemporaries, he purchased Mandarin titles and donned Mandarin robes for formal occasions. Chen Qianshan was instrumental in pressing the Qing government to open a consulate in Manila, which was located in buildings that also housed the Gobernadorcillo de los Sangleyes (as the Chinese leader was formally titled by the Spanish) – Chen sometimes held this post and sometimes merely influenced it – and the Tribunal de los Sangleyes, a court that Chen was repeatedly accused of manipulating. He and his son were consuls.
Chen died a very rich man in 1901. He had established perfect sociological equilibrium between the immigrant Chinese and colonial Spanish communities, receiving honours from both states. As one historian of the Philippines, Andrew Wilson, observes: ‘The Chinese experience of the late nineteenth century made it clear that social and economic power rested with those who not only controlled the institutions that defined Chinese identity in the colonial Philippines, but also had the greatest rapport with and institutional linkages to external sources of authority.’17
Not everyone was admiring of the ability to fulfil these criteria. The novelist and Philippine nationalist José Rizal, himself of mixed-race Chinese origin, almost certainly used Chen Qianshan as the model for the obsequious, duplicitous character Quiroga the Chinaman in his novel El Filibusterismo (1891). It was the hybrid nature of Quiroga’s identity that Rizal found so objectionable – expressed, said the author, in the ‘lamentable confusion’ of styles in his house. Yet the ornamental Chinese gardens, Greek columns, Scottish ironwork and Italian marble floors favoured by south-east Asian godfathers also reflected their strengths.18 Their work drove them to try to be all things to all men. In the process the curiosities they spawned were not merely architectural. Men such as Oei Tiong Ham, or key collaborators of the British colonial government in Hong Kong like Sir Kai Ho-kai,19 set up by themselves and by colonisers as leaders of their communities, had only the shakiest grasp of any Chinese dialect. They were truly stuck in a cultural limbo.
Shaped by Circumstance
Brief sketches of these turn-of-the-century godfathers show the extent to which their activities were shaped by the environment in which they operated. They sought revenue farms because these were the easiest way to make a lot of money. The fattest margins were achieved in the middle of the nineteenth century by Chinese revenue farmers who knew much more about the value of their monopolies than the states that granted them. As states became stronger and better informed, rigged bids, late payment and the like became more difficult. Revenue farming was naturally combined with employment of immigrant Chinese labour, which was flooding into south-east Asia from the mid-nineteenth century and was a major consumer of the offerings of the vice farms. And management of labour was tied up with community leadership of the mutually hostile immigrant speech groups that were looking for work. Often backed by speech-group-specific triads, the tycoon could create a wondrous, circular business in which almost all money ended up in his hands: operate vice and other farms, employ dependent immigrants in labour-intensive businesses like mining and plantations, often in remote regions, and then sell vice products and services, and anything else required, to the workers in order to recover most of their income. On top of all this, the godfather provided the only form of political identity that emigrants had in their new homeland; he was the person who represented community interests before the holders of ultimate political authority.
But colonial power (and international economics in the first great era of globalisation) shaped the world of the aspirant godfather in more ways than simply by making him a revenue farmer and exploiter of his co-nationals. The period established an economic architecture in south-east Asia that would prove hard to change. The colonial powers had no dastardly master plan for the region, but they did institute the trading structure that was most favourable to them. This meant the import into the first world of commodities in return for the export to south-east Asia of finished manufactures to pay, at least in part, for those commodities. In the process, the commodity boom was accompanied by a regional rationalisation of output. Thailand was a rice economy with some tin mining in the south, Malaya did tin and rubber, the Philippines produced sugar and coconuts, Java was planted with sugar and coffee and from Sumatra came tobacco and rubber.20 Finished consumer goods, construction materials and machinery were imported from Europe and the United States in a process facilitated by low import tariffs. This situation was even replicated in non-colonial Thailand,21 which applied a minimal 3 per cent import duty on manufactured goods until 1926. When the United States took possession of the Philippines in 1898 after its war with Spain, Washington combined low import tariffs with a guaranteed export quota for Philippine sugar, further accentuating the bias towards the export of basic commodities and the import of more value-added manufactures in the southeast Asian economy.
The effect of all this was one that has never been thrown off. There was almost no incentive to invest in manufacturing in south-east Asia. Colonials preferred to sell goods made in their home markets while local entrepreneurs were not inspired to compete with imports that were either duty-free or lightly taxed. By contrast, rising commodity prices made the operation of plantations and mines, as well as related service businesses like shipping, attractive. Chinese and other Asian entrepreneurs did not become focused on the trade-based economy because they were ‘born traders’, but because manufacturing was more risky and more difficult. All the way to the Second World War, the macroeconomic story of south-east Asia was one of trade expansion – witness Singapore’s boom period trade growth from an average S$67 million per year in 1871–3 to S$431 million in 1900–1902 – without any industrial take-off. The economic historian James Ingram described the experience in Thailand as succinctly as anyone:
We have seen many changes in the economy of Thailand in the last hundred years [1850 to 1950], but not much ‘progress’ in the sense of an increase in per capita income, and not much ‘development’ in the sense of utilisation of more capital, relative to labor, and of new techniques. The principal changes have been the spread of the use of money, increased specialisation and exchange based chiefly on world markets, and the growth of a racial division of labor. The rapidly growing population has been chiefly absorbed in the cultivation of more land in rice … For the most part, economic changes have occurred in response to external stimuli. Thailand has been a sort of passive entity, adapting to changes and market influences originating in the world economy. Few innovations have originated within, and most of the adaptive response to external influence has taken place along traditional lines.22

The tycoons were merely fellow travellers in this experience, facilitators of a game in which they had no influence on the rules. They profited handsomely as individuals, but in the aggregate their earnings were nothing compared with those of the large European firms. As new technologies increased the need for higher capital investment in many businesses, the tycoons also came under pressure at the turn of the twentieth century because their traditional advantage had been to organise high-volume, low-cost immigrant labour. Tin mining, where Loke Yew prospered, was a typical example. He worked an army of more than 10,000 coolies, to whom he also provided everything from lodgings to food to opium. But the invention of steam-driven bucket dredges, which coincided with the exhaustion of the most easily accessible open-cast mining sites, changed the nature of the business from the second decade of the twentieth century. By 1920 there were twenty dredges able to work to a depth of sixty feet in operation in peninsular Malaysia, and by 1930 there were more than a hundred. The Chinese mining groups that pioneered open-cast excavation could not compete. Most could not harness the necessary investment for capital equipment and even those that could, like Loke Yew, lost their comparative advantage with the move away from the labour-intensive model.
The importance of access to large amounts of capital in twentieth-century business became apparent around the region. Chinese businessmen had competed effectively when agriculture was on a relatively small scale and junks required a relatively modest investment. But as the most profitable plantations multiplied in size, mining was mechanised and modern ships grew in both size and technological complexity, a new capital barrier to entry was raised. In general, would-be Asian tycoons were pushed back by their European competitors between the early twentieth century and the Second World War. In Thailand, for instance, European corporations came to dominate logging and saw milling where Chinese and Burmese interests had once dominated with small-scale activity; tin smelting where large plants became the norm; and steam shipping where Thai and Chinese sailing vessels had predominated. The only field successfully dominated by Chinese revenue farmers moving into new commercial ventures in the late nineteenth century was rice milling, primarily because the necessary capital equipment was relatively cheap and major consumers of the product were the Chinese populations of Malaya, Singapore and Hong Kong.
The dominant European banks – led by Hongkong and Shanghai Bank and Chartered Bank of India, Australia and China – confined almost all of their activity to the financing of trade. Large European and American companies raised their investment capital at home. The colonial banks also had an effective race bar when it came to dealing with most Asians. One octogenarian billionaire recalls of the pre-independence era: ‘For a Chinese businessman to get to see decision makers in the British colonial banks was like seeking an audience with God.’23 The Indian Chettiar and Sikh moneylenders who proliferated in the region offered credit lines to locals but charged rates of interest far higher than those enjoyed by Europeans. A number of Chinese banks did develop in the first two decades of the twentieth century, but they too were constrained by their operating environment. There were no central banks to act as lenders of last resort when commercial bankers needed temporary liquidity, while the fact that most south-east Asian territories operated currency boards further restricted lending. The effect of this system – which a few states around the world still operate today – is to tie the local monetary base directly to the supply of foreign exchange. If foreign exchange receipts from commodity exports fall, so does the supply of local currency. With commodity prices volatile and south-east Asian countries heavily dependent on just one or two exports, money supply tended to be equally volatile. The monetary base in Malaya fell by a half in the early 1920s, largely because of falling rubber prices. As a result of such fluctuations, local banks kept around half their deposits liquid, instead of lending them out; international banks had no such problems. And, despite their prudence, most Chinese banks in Malaya and the Philippines collapsed with the depression and commodities crisis of the 1930s.
Prior to the depression, the south-east Asian economy boomed – with odd blips – for forty years. This was fuel aplenty for would-be godfathers, but it could not disguise the fact that some aspects of the operating environment were beginning to work against them. The new capital intensity of big business coincided with the winding down of revenue farming, which had traditionally supplied the cash flow that carried powerful men into a range of regular commercial businesses. By the 1920s the farms were finished. At the same time, the colonial powers dispensed with their various ‘headman’ systems that automatically confirmed the tycoon as the head of his community. In Malaya, for example, the last headman to be designated was in the first decade of the twentieth century and the last one to step down was in the third. To a significant extent, the headman institution was replaced by the development of the local Chinese chamber of commerce, whose key players were the most powerful businessmen. But the old certainties of being a Majoor or ‘captain China’ and thereby identified by the ruling power as ‘in charge’ were gone.
In rare instances there did appear to be the beginnings of a transition to a less externally dependent form of entrepreneurial tycoon business in the final decades before the independence era. The two obvious cases occurred in Singapore in the form of Aw Boon Haw and Tan Kah Kee. These men, born in 1882 and 1874 respectively, built up large businesses without being compradors or operating revenue farms. Perhaps more tellingly, they moved into consumer goods rather than dealing solely in raw and semi-finished commodities. Aw Boon Haw’s signature product was Tiger Balm, a cure-all ointment and muscle rub that is still widely sold. His Haw Par empire developed a range of over-the-counter pharmaceutical remedies for headaches, seasickness, sore throats and constipation. There were wholesale and retail operations in Hong Kong, mainland China, Java, Sumatra and Thailand. From medicines, Aw Boon Haw expanded into newspaper publishing around the region, mostly in the Chinese language.
Tan Kah Kee started out with plantations, but unlike other Asian producers who fitted into the colonial matrix as providers of raw commodities, he determined to manufacture with the rubber he grew. Tan had factories making tyres, rubber shoes and toys and opened retail operations to sell the output. His decision to take on European, Japanese and American manufacturers without tariff protection, however, only contributed to the downfall of his major business interests during the depression. His was a valiant attempt to buck the system, and it ended in failure.
Nationalism and Class, a Prelude
Tan was curiously, almost exceptionally, politically idealistic for an overseas Chinese business tycoon. Visits to pre-1949 China convinced him to support Mao Zedong’s communists and in 1950 he left Singapore to spend the rest of his life in the People’s Republic, where he died in 1961. This was not the norm in south-east Chinese Asian communities, where big-time success was traditionally linked to an ability to identify with local political power as a means to commercial ends. Tan Kah Kee’s ‘stand’ was an almost unique event encouraged by an era when businessmen were no longer beholden to colonial grants of licences and revenue farms and one when nationalism was on the rise throughout the region. Nationalism, however, was very much a double-edged sword from the overseas Chinese perspective. Its rise in southeast Asian countries could only focus attention on the economic role of the Chinese. The concurrent growth of class consciousness further highlighted the more general dominance of élites in business and politics. None of this augured well for tycoons in the 1930s. Yet actual experience was that traditional structures of power would survive the challenges of political populism intact. The pre-Second World War test case for this came in Thailand.
Global recession, not least in the demand for commodities, helped precipitate a bloodless coup in Thailand in June 1932 that substituted constitutional for absolute monarchy. The People’s Party came to power with an avowed agenda to govern in the interests of ordinary people. This agenda had a strong racial lilt. ‘The Thai economy for Thai nationals’ became a political rallying cry of the 1930s. In fact, Thai nationalism had been brewing for some time. King Rama VI, who reigned between 1910 and 1925, had been much taken with the racial theories popular in Europe at the time, translated William Shakespeare’s anti-semitic Merchant of Venice (1594–7) into Thai and penned an essay about the Chinese in Asia entitled The Jews of the East (1914). What became apparent, however, as restrictive measures were implemented against the Chinese, was that the ethnic Chinese élite was in a position to adapt where ordinary people were not.
The immigrant mass was hit after 1932 with increases in the cost of immigration registration certificates and bans from a range of common occupations. Coming off the back of worldwide depression, this both curtailed immigration and expedited the return to China of many sojourning workers. The ethnic Chinese élite was confronted with a rolling nationalisation programme in businesses where it dominated, including salt, tobacco and rice. However, while political change finished off the economic ascendancy of old revenue farming families, it did not undermine the ascendancy of the broader Chinese business community. New families broke through from the ranks of Chinese traders to become active partners of the government in managing new ‘state’ businesses. Thai bureaucrats had no more intention of sullying their hands with trade than previously. The government leased and bought over Chinese-owned factories and mills in many sectors, but most of those businesses remained Chinese-managed, while state-led monopoly concentration often pushed up prices and profits. ‘The Thai economy for the Thai people’ did not mean an increase in social equity; it was a readjustment of the deal between the élites. As the economic historian Suehiro Akira notes: ‘Whatever the original intent, “Thai people” later did not come to indicate either the common people or Thai farmers. Rather, it came to mean the government officials or a specific political group.’24 Suehiro conducted an exhaustive survey of companies that were nationalised in the period and showed that most of the Thai shareholders and directors turned out to be members of the People’s Party, or persons connected with it, while their partners were invariably the tycoon Chinese families. He concludes: ‘At the level of Chinese business leaders, several groups were able to transform dexterously this state control into an instrument for expanding their enterprises … In exchange for providing management skills and capital funds, Chinese business leaders obtained security as well as political patronage.’25
Where the tycoons were once freelance revenue collectors for the Thai court, they now became joint venture partners of the Thai bureaucracy. This set the pattern for the post-war era of military dictatorship that ran from 1947 to 1973. Under military rule, however, the scale of state involvement in the economy – in the form of businesses involving different army and police factions – and the level of collaboration with ethnic Chinese business leaders became far greater than under the pre-1947 civilian government. The military were not managers – their earnings were taken as shareholders and directors – but political muscle allowed them to define the terms of business activity. For major consumer items, for example, from tobacco to pork, distribution monopolies were established that meant Chinese-run cartels could reliably control pricing. In the 1950s the major areas of military–Chinese expansion were banking and insurance, with the military side providing protection and the Chinese side benefiting from the squeezing-out of foreign competition, access to state capital and a role providing finance to public works. The fundamental rule of the game, as Suehiro notes, was simple: ‘No leading Chinese capitalist could survive or expand their business without alliances with the Thai ruling élite.’26 This was a small price to pay if it also meant – as it would in other countries – an ability to keep European and American companies out of the market.
But First, a Beautiful War
Before the Thai generals took charge, however, there was the Second World War, the biggest agent of global political change in the twentieth century. In south-east Asia there was no exception. The war, which arrived with the invasion of Japanese troops in the region in December 1941, meant the end of the imperial game. Although the Japanese were defeated after three and a half years, too much changed in this time. On the one hand, the absence of British, Dutch and American administrators gave a major boost to nationalist politics; on the other, the situation provided fertile ground for aggressive businessmen. A new generation of tycoons made early fortunes from the opportunities for smuggling and speculation thrown up by the conflict and its aftermath. Much of this activity focused on Singapore and Hong Kong, the two key ports.
As one of the richest men in contemporary Asia recalls: ‘It was a very corrupt time.’ Although unforthcoming about details of his own family’s smuggling activities during the war, he notes that a deal to supply fruit and vegetables to 80,000 Japanese prisoners after hostilities ended was a major break. Smuggling, war trading, the purchase and sale of surplus military equipment and post-war reconstruction contracts involving hefty kickbacks were the early making of many of today’s godfathers. One of the very few who has ever said anything public about this era is Stanley Ho, the Macau casino magnate.27 His tale is instructive of the possibilities that were available to the chameleons of the godfather class.
When the Japanese invaded Hong Kong, Stanley’s great uncle, Sir Robert Ho Tung, the leading comprador tycoon of the era, had already made off to neutral Macau on a tip-off from the Japanese consul, who recognised that occupation would require godfather co-operation.28 Stanley Ho, who was only eighteen years old, was enrolled by the British in Hong Kong as a telephone operator. When the colony fell, he threw away his uniform and took a boat to Macau (before he could get away, however, Japanese troops in Hong Kong stopped him because of his Eurasian appearance; but he could write Chinese fluently and so was not arrested as a prisoner-of-war). In Macau, which was now the smuggling epicentre of the Hong Kong-China region,29 uncle Robert gave him a job. Soon Stanley found a more interesting position with the Macau Co-operative Co., set up as a three-way joint venture between the Japanese, local über-godfather Pedro Lobo and a group of Chinese businessmen.
Lobo, the lynchpin of the business, made Stanley Ho’s chameleon credentials look thin. Ethnically Chinese–Portuguese–Dutch–Malay, he was born in Portuguese East Timor, raised in a Catholic seminary and went on to become simultaneously Macau’s chief economic minister and its leading tycoon, with his own fleet of flying boats and a lock, together with his Chinese partners, on the lucrative local gold trade.30 Stanley Ho was in excellent company and learned a great deal. The Macau Co-operative supplied tugs, lighters and other transport to Japanese troops based in Guangzhou, in return for rice, clothing and anything else in demand from Macau’s exploding population (as well as from people in Hong Kong and elsewhere who were buying goods smuggled out of Macau).
As he learned the ropes, Stanley Ho started trading on his own account with the Japanese. He obtained enough money to open a small kerosene factory, which became a licence to print money after the Americans bombed Macau’s gasoline terminal in the outer harbour. Stanley acquired political cover because he gave English lessons to Colonel Sawa, the local Japanese Kempeitai (secret police) chief, and the real political power in Macau.31 Ho claims he only once called on Sawa to intervene on his behalf – when the local Japanese navy commander tried to wriggle out of a rice delivery he owed him in return for some machinery; Stanley got his rice. There were numerous hairy moments on Stanley’s smuggling and trading trips up the Pearl River and its innumerable tributaries – including an attack by pirates – but Stanley survived and prospered. According to those who know him, he dealt in everything from gold to aeroplanes. At the end of the war envoys of the Chinese Nationalist Party attempted to have Stanley arrested as a collaborator but, Stanley says, the Macau police commissioner was convinced of his case and put the Nationalists’ emissaries in jail instead. Stanley Ho was on his way to becoming very rich. As he cheerily told the historian Philip Snow in 1995: ‘I made a lot of money out of the war.’32
The great thing about the war, from a business perspective, was that it never really ended. There was a chaotic, corrupt period of allied military administration following the official close of the Pacific war and then, in 1950, the Korean conflict started. In 1951 the United Nations imposed a trade embargo on China, which was allied with North Korea, creating a vast smuggling industry centred on both Macau and Hong Kong.33 Stanley Ho carried on his smuggling operations, shipping corrugated iron, rubber tyres and, he says, vast quantities of Vaseline into China. His future partner in the Macau gaming monopoly, Henry Fok, became a sanctions-buster on a far greater scale, shipping huge quantities of petroleum products and pharmaceuticals and – though he always denied it – some weapons as well.34 A Time magazine investigation in August 1951 found ‘freighters on the Pearl [river] last week were laden with steel rails, zinc plate, asphalt, Indonesian rubber, Pakistan cotton, American trucks, steel piping, tubing’.35 In Macau, oil pumping docks were operating day and night, hundreds of Hong Kong dock workers were being hired to meet the demand and ‘air-conditioned opium dens were prospering’.
Apart from Stanley Ho and Henry Fok, rumours of involvement in smuggling surround several major business families in Hong Kong but – as in Singapore – local authorities never brought any significant prosecutions. The Hong Kong government was lambasted by Washingon for its lack of action, and chided by the British government in London, but claimed the situation was beyond its control. In the end it was business, and that was what Hong Kong and Singapore did, although one or two participants were troubled by their consciences. John Cheung, the Chinese partner of the unscrupulous stock market manipulator and Wheelock-Marden boss George Marden in Hong Kong, was said to have sold so much suspect medicine during the world and Korean wars that he lived in fear for his life. Simon Murray, former chief executive of fellow Hong Kong-based conglomerate Hutchison, says he went to a meeting at Cheung’s home to find him living in a windowless room with the bed pushed across the door.36
In Singapore, the veil of secrecy surrounding wartime smuggling is drawn still closer. The island, the logistical centre of a region split since the nineteenth century into economic units specialising in different agricultural and industrial commodities had at least as much potential for illicit trade as Hong Kong and Macau. The rewards were enormous for those who could surreptitiously move rice from food-abundant Thailand to starving Malaya or get industrial commodities out of Indonesia. A reticent, octogenarian confidante of the local tycoon fraternity is not keen to discuss the subject, but notes that the obelisk on the Singapore sea front raised by businessmen in memory of Chinese killed by the Japanese was ‘mostly paid for by smugglers’. A friend of, among others, the Kwek family, whose current twin heads are billionaires Kwek Leng Beng and Quek Leng Chan,37 the source says that wartime patriarch Kwek Hong Png ‘never really denied’ that much of his wealth stemmed from smuggling Indonesian rubber and trading with the Japanese.38 In the Korean War, much of that rubber found its way to China, as Time’s journalists noted in 1951.
The end of the Second World War in Indonesia morphed into a nationalist war against the Dutch, who were attempting to retake control of their colony. This provided still more opportunities for Singapore-based smugglers. Many of the weapons used by Indonesian forces came from the Malay peninsula, where there was an abundant supply of Japanese and British arms. It was Chinese traders, usually operating between Singapore and Sumatra, who handled the movement of weapons, medicines and foodstuffs. Contemporary Dutch government reports show that barter prices for smuggled weapons were well established: one tonne of rubber, for instance, for thirty cartridges, two tonnes for a rifle.39 The trade was enormously profitable and ships owned by major business concerns were involved. A vessel belonging to a subsidiary of Lee Rubber, controlled by Tan Kah Kee’s son-in-law Lee Kong Chian, was found by Dutch authorities to be importing non-lethal military goods to Indonesia in August 1946. Chang Ming Thien, a Malaysian whose rise to regional godfatherdom was only interrupted by his premature death from a life of excess, made his early money as a big-time smuggler of Indonesian rubber. So did Ko Teck Kin, who in the late 1950s became president of the Chinese chamber of commerce in Singapore.40 After the civil war ended, Mohamad ‘Bob’ Hasan was the partner of a then divisional army commander based in Semarang called Suharto in a big sugar-smuggling operation in defiance of central government authority. Suharto, who had already been involved in opium running during the civil war, was lucky not to be cashiered.
Smuggling, however, was not the only way to make money out of conflict. In British colonies, the end of the war brought many months of British Military Administration (BMA), which saw tired and sometimes greedy officers with little or no business experience dispense valuable procurement and construction contracts. The concession to feed 80,000 prisoners-of-war, mentioned earlier, was decided in a couple of hours by two Commonwealth officers. When the time came in different territories to disband the local BMA, or in some instances later, there were auctions of military and civilian surplus equipment that also provided the first millions for new tycoons. Before he became an epic smuggler, Henry Fok was a prime beneficiary of auctions in Hong Kong.
The myth has grown up in Hong Kong that Fok was born on a sampan and received no formal schooling. In reality he won a scholarship to Hong Kong’s élite King’s College on Bonham Road where he learned the English that enabled him to read auction gazettes. Cheap deals at auction after the war were his first serious business. In Malaysia, casino magnate Lim Goh Tong admits in his official biography that he became adept at rigging the bidding in post-war auctions, by working with a group of friends.41 He made his first fortune selling on bulldozers, cranes and similar equipment, or using it to kit out his own construction firm.
It was the educated, the well-heeled and the cosmopolitan who profited most readily from war. In Hong Kong members of the local Chinese élite made fortunes buying up ‘duress notes’ – Hong Kong dollars issued by local bankers under Japanese direction – just before the British resumed power. The notes were purchased at a fraction of their face value in the expectation that the returning colonial power could be persuaded to honour the currency as a means to restore ‘economic stability’. In 1946, this turned out to be the case. The Hongkong Bank bought HK$119 million of duress notes at their full face value. One of the prime beneficiaries was said to be Sir Sik-nin Chau, a London- and Vienna-trained surgeon and businessman and son of Sir Shouson Chow, who had been the first Chinese appointed to Hong Kong’s Executive Council.42
In addition to the short-term profits it generated, the Second World War presaged a seismic shift in the business landscape in south-east Asia, because it displaced European and American interests for an extended period. Until the end of the Pacific war in August 1945, foreign businessmen not killed in fighting were either interned or forced into exile, and those who returned to work in Asia usually did not do so until some time after the armistice. In the meantime Asian businessmen, typically the ethnic Chinese who were fitted by colonial structures into an intermediate role between local agrarian economies and Western big business, were presented with opportunities to change their status. In Thailand, for instance, fourteen banks and twenty-five insurance companies were set up between 1943 and 1952, most of them run by ethnic Chinese businessmen and fronted by senior Thai bureaucrats as chairmen and board members. The Japanese historian Suehiro Akira observes: ‘When the Europeans returned to Thailand, they found that major industries, especially in the commercial and financial sectors, that they had previously controlled were now dominated by either the Chinese or Indians.’43 The transition was not so acute in every country, but the war shook up the economic order in an unprecedented manner.
From world war and the Korean conflict, the region slipped into the Cold War and the US-led fight against communism. This had further, important ramifications for the territories we are following, because it caused a river of American money to flow into the region. In the Philippines, there were two major military bases after independence – Subic Bay naval station and Clark air base – and billions of dollars of aid money, much of it collected by the Marcos regime. In Thailand, US grants for military spending to shore up what was deemed a ‘front line’ anti-communist state underwrote the military regimes of the 1950s and 1960s. All pro-American states in the region benefited and, with them, local politicians and the businessmen they patronised.
An extreme example in Thailand concerned Phao Sriyanonda; he became deputy director-general of police after a military coup in 1947, and director-general in 1951. Phao used CIA-supplied military hardware to establish a police air force and maritime and armoured units that, in the course of the 1950s, became the biggest opium-smuggling syndicate in the country, while Thailand itself became the centre of the global heroin trade.44 The key tycoon client of Phao, and his powerful father-in-law Marshal Phin Choonhavan, was Chin Sophonpanich, the developer of Bangkok Bank, the largest south-east Asian financial institution outside Hong Kong and – as we shall see – the financier of many of the post-war godfathers.
Nationalism and Class: the Main Non-event
If Thailand in the 1930s had suggested that ordinary men and women would not be major beneficiaries of political change and the end of colonialism, the rest of the region proved it after the war. The war was a powerful catalyst for nationalism and class consciousness throughout south-east Asia. Its end also coincided with the rise of new ideas about how governments could intervene in economies to produce outcomes that would meet popular expectations for social and ethnic justice. And at face value, this was an incendiary era. The 1950s witnessed powerful communist currents in the newly democratic countries of the region – the Malayan Emergency, an armed political insurrection, began in 1948; Sukarno, Indonesia’s first post-independence leader, flirted heavily with the country’s communist party. Anti-Chinese sentiment came to the fore and indigenous political leaders found that moves to legislate against perceived ethnic Chinese economic dominance were popular. Yet, despite all this, the pre-war Thai experience had shown that traditional working relationships between separate political and economic élites – ones that crossed the ethnic divide – were extremely durable; so it proved elsewhere in the region.
The experiments with democracy in the Philippines, Malaysia and Indonesia – and previously in Thailand – failed to overhaul traditional social structures. In the post-colonial states the colonisers disappeared, but the new indigenous political élites fell back, despite moments of sometimes violent racial and nationalist discrimination, on familiar ways. It is necessary to consider briefly how the challenges of popular politics were dealt with in different countries in order to understand how tycoon economics survived.
The Balimbing Convention
The Philippines had had a false start with nationalism long before Thailand’s 1932 coup and transition to a constitutional monarchy. There was a revolutionary uprising against the Spanish in 1896. But the rebels were not united and their action had centrifugal tendencies – it seemed as likely to split the country up as to bring it together as an independent state. In the event, the uprising was superseded by a distant war in 1898 between the United States and Spain over Cuba, which put the Philippines in American hands. Washington decided to keep the archipelago. It first befriended the local revolutionaries, then fought a two-year campaign to suppress them; several important rebels were bought off with cash payments and consequently endorsed the new regime. Since the US was without colonial experience, the only practical way to run the Philippines was by co-operation with existing power brokers. As a result, Manila-based and regional élites were not just back in business, they were centre stage. The Americans did bring an element of political idealism with them, but it was insufficiently applied – a bastardised US political system was grafted on to the Philippines that left central government weak, while landed potentates from the regions dominated a new congress, controlling the requisite votes in their localities even as the franchise expanded. Whereas in Thailand or Indonesia the political élite controlled the bureaucracy and made deals with mostly ethnic Chinese businessmen in order to share economic rents, the system that developed in the Philippines saw regional interests working to control parliament and then plunder the central state. The ethnicity of the landed oligarchs – mostly Spanish and Chinese mestizo – was of little apparent consequence; they were all playing the same game. It is instructive that Paul Hutchcroft, the author of Booty Capitalism (1998), a major academic study of the expropriation of the Philippine state by the tycoon fraternity, hardly bothers to distinguish between who is and is not of Chinese ancestry.45 What matters in the Philippines is whether you are a godfather or a member of the masa – the masses.
The model for so much of what was to come was established in 1916 with the setting-up of the Philippine National Bank (PNB). This occurred just as the US colonial power granted Filipino control over both houses of congress. PNB became the oligarchs’ personal treasury, making loans to families in estate agriculture. The government was required to keep all its deposits with the bank, which could also issue currency. It took just five years for PNB to arrive at its first major crisis, by which time the bank had squandered its entire capital base, half the government’s deposits and undermined the national currency. At the same time that oligarchs were being fed a steady supply of credit from PNB, they were assisted by US economic policy, which provided a guaranteed export quota and tariff protection for sugar and also supported the coconut industry. Sugar exports increased seven-fold between the US Payne–Aldrich tariff act of 1909 and the mid 1930s, becoming around half of total exports. It was a scenario guaranteed to throw up rent-seeking tycoons who were able to sell globally uncompetitive agricultural products into the US market while manipulating a political system that was ostensibly democratic. They were granted huge economic rents, and control of congress enabled them to prevent the two things that would damage their interests – land reform and increases in the effective rate of taxation. The only problem for the élite, as many commentators have noted, was that it had to call for Philippine independence in order to have a minimum of electoral credibility; in reality, US-era godfathers were terrified of the economic implications of independence. Enormous effort went into securing a bilateral trade agreement that preserved quota access to the American market before independence came on 4 July 1946.
With the spoils of the US relationship secured until 1974 by what became the Laurel–Langley tariff act, and many more dollars guaranteed by deals for post-war reconstruction aid and the hosting of US military bases, the Philippine government announced it had thrown off the colonial yoke. The electoral tradition of dividing up the requisites of power, whether in the form of the political appointment of all bureaucrats or the disbursement of public works budgets, grew and grew. Political ideologies were a liability in a system where politicians jumped back and forth between the two main parties, looking for the most generous terms; Filipinos refer to their congressmen as balimbing, a star-shaped fruit that looks the same from every side. The political trajectory was one that led, unsurprisingly, to the kleptocracy of Ferdinand Marcos in the 1960s. Along the way there were moments of heightened chauvinism in popular politics – most obviously the Retail Trade Nationalisation Act of 1954, which sought to force non-naturalised Chinese out of their traditional shop-keeping niche – but these in no way constituted an attack on the hyper-élite structure of society. The Chinese and Chinese mestizo godfathers identified with other godfathers, not with the kind of Chinese who ran shops.
An Absolute Bargain
Malaysia’s journey to independence in 1957 produced an arrangement between its separate political and economic élites that was sufficiently explicit to become popularly known as ‘the bargain’.46 The traditional Malay political élite, aristocracy-based, faced a similar problem to the Philippine politician–tycoons as nationalism increased in potency: it was necessary to support the cause of independence without paying an economic price. Just as American colonialism underwrote the position of the Philippine landed class, so the British presence guaranteed the status of the Malay élite in a situation where, by the 1950s, the Malays were barely a majority because of massive immigration from China and India. With the advent of democracy, the party of the Malay ruling class – the United Malays National Organisation (UMNO) – needed a political accommodation with the Chinese economic élite that would guarantee everyone’s interests. The means to this end was the race-based Malayan Chinese Association (MCA), a political party set up in 1949 and sponsored by leading Chinese businessmen. These included Lau Pak Khuan and H. S. Lee, major tin miners, and Tan Cheng Lock and his son Tan Siew Sin, members of a Malacca baba dynasty with extensive rubber interests. Tan Siew Sin was to become an important finance minister. The MCA and UMNO formed the Alliance, the pro-independence electoral vehicle driven by an unspoken élite consensus for Malay domination of the bureaucracy and no state attacks on the Chinese position in business. Edmund Terence Gomez, the leading scholar of business–state relations in Malaysia, characterises the arrangement as ‘ethno-populism camouflaging class dominance’.47 In the first general election in 1955, the Alliance swept 51 out of 52 parliamentary seats.
In the post-independence government, MCA leaders took key economic posts in finance, and trade and industry ministries, and leading Chinese businessmen were granted requests for banking and tariff-protected manufacturing licences. UMNO leaders held ultimate power and hence limitless possibilities for enrichment. The élites were happy. Through the 1960s, however, inequality increased within each of Malaysia’s racial groups, and most particularly the Malay group. There were various projects to set up trust agencies and a policy bank to support indigenous bumiputras, but nothing substantial enough to head off race riots in Kuala Lumpur in May 1969.
The reaction to the violence was a stark reminder to the Chinese community of its lack of any real political power. In 1971 the government launched a New Economic Policy (NEP) with various targets – share of corporate equity, urban employment, university enrolment, and so forth – designed to enhance the position of ethnic Malays. While middle-class Chinese and their children were significantly affected by provisions of the NEP – because of exclusion from employment and educational opportunities – the increase in the indigenous share of corporate wealth was largely achieved by state buy-outs of foreign (mostly British) businesses, using 1970s petrodollars that conveniently became available. There was no rupture of the economic structure at the élite level. After the twenty-year term envisaged at the outset of the NEP expired in 1990, the Malay share of corporate equity in Malaysia had increased from almost nothing to around one-fifth, but the Chinese share had also doubled, from one-fifth to two-fifths. This reflected the fact that the tycoon fraternity was doing better than ever; the NEP had not ended deals between the ethnically separate political and economic élites.
Sukarno’s Champagne Socialism
Indonesia was the post-independence country that most clearly threatened to upend the traditional social and economic structure. Sukarno, the country’s first president, was from a privileged background, but he was also a firebrand nationalist who regarded himself as a revolutionary. The backing he extended to the Partai Komunis Indonesia (PKI), Indonesia’s widely supported communist party, was at least in part motivated by a desire to rid the country of its stultifying feudal traditions. But in the end Sukarno, who himself lived a life of excess in the presidential palace, did no such thing. The structure and anti-commercial prejudices of Javanese culture remained intact. There was a long period of populist persecution of Chinese immigrants for allegedly robbing the indigenous population of its birthright, but this entrained no fundamental change in society. The so-called Benteng Programme, which from 1950 to 1957 allocated foreign exchange and import licences to indigenous traders to support their development, was subsumed in an orgy of corruption. This set a pattern not for the growth of competitive indigenous business but instead for a culture of kickbacks and political fixing. Efforts to curb the economic role of ethnic Chinese culminated in 1958 in the banning of aliens (covering about half the Chinese population that did not have citizenship) from engaging in retail trade in rural areas. Some areas of the countryside banned residence altogether for aliens. As in the Philippines and elsewhere in the region, it was less well-off Chinese who bore the brunt of the ethnic fury. In the Indonesian case, repression was such that in 1960 an estimated 130,000 people accepted an offer of free repatriation made by the People’s Republic of China.
The Sukarno era was unpleasant for almost all ethnic Chinese – even Oei Tiong Ham’s assets were taken over by the state. But nothing happened at a structural level to prevent a quick reversion to historical form when Sukarno was pushed out in the 1960s. In fact, quite the opposite. When, in 1957, Sukarno used a territorial dispute over Irian Jaya (western New Guinea) – which the Dutch clung on to until 1963 – to start nationalising Dutch, and later other foreign, businesses, he was opening up the economic space into which ethnic Chinese businessmen would subsequently move. The five biggest Dutch trading houses alone handled 60 per cent of foreign trade. In total, some 800 foreign enterprises came into state hands after 1958 and neither the government nor the army could run them effectively. Through the first half of the 1960s the condition of the economy deteriorated at a frightening pace while inflation raged. The stage was perfectly set for a rescue operation involving a return to a traditional division of political and economic labour.
That is what happened following an abortive coup in 1965 that saw Colonel Suharto begin a rise to power which ended with his replacement of Sukarno as president in 1967. Suharto was the ‘normal’ kind of petty Javanese aristocrat, content with the traditions of deference in local culture and committed, above all, to maintaining harmonious – which is to say, carefully regimented – societal relationships. He served in the army under the Dutch and Japanese, and learned to preserve stability through force. In short, unlike Sukarno, Suharto was a natural conservative, and much of the officer class – where many Javanese priyayi aristocrats wound up after independence – were just like him. Suharto was also a quartermaster familiar with doing business with Chinese traders. When he was running the Diponegoro Division, based in Semarang, in the 1950s, he worked with Mohamad ‘Bob’ Hasan and others to make trading in essential commodities like sugar a military monopoly and thereby supplemented his official budget. Suharto was also involved in smuggling, for which then army commander A. H. Nasution censured him; he escaped a military tribunal in 1959 because of the support of his superior officer, General Gatot Subroto, who also happened to be Bob Hasan’s adoptive father.48 With ultimate power in his hands, in the 1960s Suharto could dole out concessions in a manner familiar to him – to people who would get a job done and who posed no political challenge to his authority.
These individuals tended to be Chinese immigrants of relatively recent arrival. Best known of them was Liem Sioe Liong, a petty trader who arrived in Java in 1938, with whom Suharto had also had commercial dealings in the 1950s. During the Second World War and the war against the Dutch, Liem had made some early money with his brother provisioning the republican army, which is how he became acquainted with key officers in Java, including Suharto. In 1968 he was granted a half share in a monopoly for importing cloves, the key ingredient of Indonesian kretek cigarettes; in 1969 that concession became a complete monopoly on the import, milling and distribution of flour, and in the 1970s a near-monopoly on cement production.49 He also enjoyed protected positions in the trading of rubber, sugar and coffee. It was a return to the nested relationships between political power and Chinese traders that characterised the nineteenth century. As Edwin Soeryadjaya, the eldest son of William Soeryadjaya, one of Indonesia’s wealthiest Suharto era tycoons, puts it: ‘When Suharto came to power he wanted to be the king. So he did exactly what the Dutch did.’50
The Indonesians came up with the term cukong to describe the businessman who is politically beholden for his commercial success and has to cut politicians and the military in for a share of the returns. The Philippines in the 1960s gave birth to the expression ‘crony capitalist’. In Malaysia, businesses fronted by ethnic Malays but actually run by Chinese became known as ‘Ali Baba’ operations, where Ali was the Malay and Baba the Chinese. Fred Riggs, an academic specialising in Thailand, coined the phrase ‘pariah capitalist’ – after a sub-group of Indian untouchables – to define businessmen who are outcasts in political terms but who are tolerated so long as they stick to their job – commerce. All these expressions point to the same thing – that the use by political power of a wealthy but dependent class of tycoons was too attractive to be ditched merely because of the end of colonialism. Only a bottom-up reordering of political life would have changed this pattern of activity, and such did not occur. Throughout south-east Asia, popular forces of nationalism and class were contained and constrained within the old social structures, whether governments were democratically elected or not.
Zeitgeist Economics
In terms of broad policy, a global intellectual influence acting on the region in the era of independence was economists’ penchant for more planning and control. This was only a boon to the local structures of godfather business. Every era has its economic zeitgeist – its ‘spirit’. In the early modern era in Europe, from 1500 to 1800, mercantilism was the unquestioned economic rationale. In the nineteenth century came the rise of free trade theories. By about 1930, as a result of global depression, the First World War and socialist thinking, planning and control were in the ascendancy. This period of interventionist economics started under colonial management and continued through early independence, with its objectives shifting from imperial preference to domestic development as locally led governments took power.
In the mid-twentieth century, each of the south-east Asian economies we are following tried what was known as import substitution industrialisation (ISI). ISI was a reasoned response to the end of colonialism. Advocates pointed out that colonial powers had structured the economies they controlled to provide raw commodities and buy finished manufactures – most obviously through tariff policy – and this discouraged Asian manufacturing. The result was economic dependency in which south-east Asian countries were stuck in low value-added activities in agriculture and mining, and forced to export commodities to advanced industrial nations in order to import their relatively expensive manufactured goods. The only way to break out of the cycle, it was argued, was to increase import tariffs, subsidise industrial credit and micro-manage the supply of foreign exchange in order to support the development of native manufacturers.
The theory was sufficiently compelling that it had considerable support in international agencies like the World Bank and the International Monetary Fund (IMF). In practice, however, ISI went wrong in one country after the next – at least if judged by the intention to create internationally competitive domestic industry. The reason was that policy was undermined by the traditional, dominant relationship between political and economic élites. Some of the experience has been alluded to in the preceding section, because it was very much tied up with the post-independence agenda of nationalist politics and the backlash against perceived historic Chinese dominance in matters economic. (The latter notion, of course, is a myth since it was really big European and American companies that dominated in the colonial period.)
In Thailand, nationalisation began in the late 1930s, but ISI was mainly associated with the regime of Field Marshal Sarit Thanarat, who came to power in a coup in 1957. At every turn the ISI process in Thailand was built around civilian and military bureaucrats-turned-capitalists and a small number of ethnic Chinese tycoon collaborators. The tycoons were from trading backgrounds, and this defined their approach to manufacturing. They sought concessions from politicians and the army and then turned to foreign businesses – usually Japanese – to supply them with technology and production processes. Existing manufacturers in Thailand were usually not able to trade up in scale because government projects for import substitution in new industries involved requirements for minimum investment or minimum production capacity that were beyond their means. Instead of incumbent manufacturing firms being assisted by government policy to grow to competitive scale, what happened was that well-connected merchants monopolised deals for protected manufacturing.
The norm was for a product’s importer to become its local assembler in an arrangement with the foreign supplier. One example is cars and motorcycles, where tariff protection gave rise to manufacturing joint ventures with Nissan, Toyota, Mitsubishi, Hino, Daihatsu, Isuzu and Honda, but no genuine domestic production. Import substitution produced large companies, but it did not achieve the objective of making Thai businesses originate internationally competitive manufactures. By the 1970s Thai industry was a series of big conglomerates dependent on foreign partners, started at different times by merchant tycoons responding to new import substitution policies: in auto assembly, electrical appliances, steel products, glass, chemicals and animal feedstock. Suehiro Akira, airing what has become the key Japanese critique of south-east Asia, observes: ‘In Japan and in other industrialized countries, technical experts and factory owners frequently became significant contributors to domestic industrial development… in Thailand, there was no comparable development.’51
A pattern of the existing business élite grabbing the fruits of ISI policy was even more apparent in the Philippines. The difference there was that the local élite was rooted not just in trading but, as a result of colonial legacy, in agricultural land. This created powerful contradictions. Well-connected landowners went into manufacturing in the 1950s and 1960s – typically final-stage assembly of American products – because foreign exchange allocations, state loans, tax breaks and tariff protection meant windfall profits. But landed tycoons were also exporters of agricultural and mineral commodities who were forced to surrender their export earnings to the central bank to support the ISI programme. As a result they backed ISI in the early, high-return stages – when manufacturing growth was around 10 per cent a year in the 1950s – and then turned against it in the early 1960s. In 1962 exchange controls were lifted and the peso devalued by some 50 per cent. The legacy was tycoons whose interests spread across agriculture, mining, manufacturing and banking who had no particular commitment to any national development strategy – they simply sought concessions. The major landed families that spread into manufacturing and banking under ISI included the Aboitizs, Aranetas, Ayala-Zobels and Cojuangcos; the Gokongweis and Palancas came out of mining. The Philippines economist Temario Rivera writes of a social structure ‘dominated by landed families whose pursuit of a self-contradictory set of interests weakened the constituency for a coherent strategy of industrial growth and development’.52 In other words, ISI was hijacked by the usual suspects.
Indonesia, as discussed above, pursued the nationalist Benteng Programme in the 1950s which apportioned most foreign exchange to indigenous traders. The economic historian Richard Robison observes that it created ‘not an indigenous merchant bourgeoisie but a group of licence brokers and political fixers’.53 The same would be true in the 1970s when, suddenly flush with oil and gas money, as international prices soared, the government experimented with manufacturing ISI. Licences and support did not go to small-and medium-size manufacturers, but to well-connected pribumi and ethnic Chinese tycoons. Steel, cement, automotive, chemical and fertiliser plants were again constructed on the basis of merchant traders bringing in multinational firms to provide technology while they concentrated on finessing political deals. Adam Schwartz, a long time Indonesia specialist, author and journalist, writes of the bureaucratic maze that was created: ‘While many private enterprises with strong political pull did well in this period, smaller firms, buried under an avalanche of credit ceilings and regulations covering production, investment and distribution, suffered.’54
This was the constant in the region: ISI did not nurture small local manufacturers into larger, internationally competitive manufacturers, it simply reinforced the position of the trading-based élite of the colonial era. In Malaysia, ISI policies in the period prior to the 1969 riots saw, for instance, Robert Kuok – from an established trading family – move successively into protected positions in sugar milling, flour milling and shipping through partnerships with Japanese technology providers. Many beneficiaries of ISI protection in Malaysian manufacturing were British companies whose interests in the market had been guaranteed by local politicians in return for an early grant of independence. Chinese merchants in the period obtained important licences to open banks and gaming operations. After 1969, ISI gave way to nationalisation of British and other foreign assets – using windfall oil and gas revenues – many of which were in turn later privatised into the hands of the godfather élite. Everywhere in the region import substitution industrialisation failed to create a tradition of industrial capitalism to complement the merchant capitalism that had been allowed to prosper in the colonial era. Instead, successful merchant capitalists acquired manufacturing interests in joint ventures or technology tie-ups with Western and Japanese industrialists. The pattern never subsequently changed.
The Hong Kong and Singapore Thing
One of the least helpfully discussed themes in Asian economic history is how Hong Kong and Singapore fit into the overall economic structure of southeast Asia and, since its policy of re-opening to the outside world after 1979, of China, too. This is unfortunate because the region is only properly understood if the special dynamic of these two cities is recognised. The product, as we have seen, of a British imperial and economic quest for self-contained, offshore island bases, the structural roles of Hong Kong and Singapore are remarkably similar. This fact is only obscured by the reflexive description of post-war Hong Kong as a bastion of free enterprise (which is not, with respect to its domestic economy, true) and Singapore as a statist behemoth. Singapore’s description of itself as a ‘country’, while technically true, is also confusing from an economics perspective.
What is important about Hong Kong and Singapore is that they are archetypal city states – ‘port city states’ would be more precise. Since colonial inception they have offered tariff-free trade (with few or no questions asked about what is being traded) and have been places to park money (with few or no questions asked about where the money came from). As relatively easily managed city states, with highly motivated and purely immigrant populations,55 Hong Kong and Singapore perform a simple economic trick: they arbitrage the relative economic inefficiency of their hinterlands. In other words, business comes to them because they perform certain tasks – principally services – a little better than surrounding countries. They are both natural deep ports and have long built on this advantage. Hong Kong’s immediate hinterland is southern China, but the closing of the mainland to most trade between 1949 and 1979 made the city focus more than it otherwise would have done on business with south-east Asia. Singapore’s dominant hinterland, contrary to the apparent geographic logic that suggests the Malay peninsula, has long been Indonesia. This is not to say that Malaysia has been unimportant, only that Indonesia has been more important, because it is a relatively much bigger economy. Singapore’s trade with Indonesia (focused on Sumatra and Borneo) was greater than that with peninsular Malaysia in the late nineteenth century and this continued to be the case in the twentieth century. In the 1950s, for instance, almost half Singapore’s exports were rubber and most of this came from Indonesia, often obtained by illegal barter exchange for manufactured goods. So dominant was Singapore as the ocean-going port for both Malaysia and Indonesia in the post-Second World War era that the Singaporean government suppressed much of its trade data in a largely successful bid to avoid unwanted publicity.56
Hong Kong and Singapore have long traditions as the regional centres of smuggling trade as well as of legal trade. For as long as surrounding countries have imposed tariffs or quotas on trade in their efforts to fund government, Hong Kong and Singapore have profited from circumventing those restrictions. As long ago as the 1860s the Hong Kong chamber of commerce and influential merchant houses like Jardine Matheson expressed outrage when Britain’s Sir Robert Hart and his largely British staff took on the running of China’s Maritime Customs Service and tried to help the weakened Chinese state raise essential taxes. When Hart began to clamp down on smuggling originating in Hong Kong, he found the Hong Kong government unwilling to co-operate.57
Hong Kong and Singapore have been at least as important historically as places to store capital, and this role has only increased in recent decades with the development of modern financial services. Ethnic outsider tycoons who have profited from business concessions in surrounding countries have always sought to keep funds offshore, fearing – with good reason – that they may one day be the victims of political change. The possibilities for tax evasion and transfer pricing between different south-east Asian jurisdictions have also produced vast funds in need of off-shore havens. Hong Kong and Singapore’s banking secrecy, their willingness to bank the accounts of exotic shell companies with nominee directors, and Hong Kong’s exemption of private companies from the need to produce public accounts, have offered the perfect, readily accessible refuge. It was said, for example, in the Marcos era that Hong Kong received a boost from the development of the private jet, simply because Marcos’s family and cronies could pop over to their Hong Kong banks for the day; Imelda Marcos did a lot of shopping in the colony.
The regional offshore roles of Hong Kong and Singapore have been absolute constants since their founding, and show no sign of change. In the aftermath of the Asian financial crisis Michael Chambers, head of research in Indonesia for Credit Lyonnais Securities Asia (CLSA), estimated – based on information from banking sources – that some US$200 billion of Indonesian capital was sitting in Singaporean banks.58 That compared with an Indonesian GDP of US$350 billion. Some money in city state banks is legitimate expatriated capital and some is ill-gotten gains; Hong Kong and Singapore show little interest in separating the two. Indeed, in recent years, as the European Union finally brought pressure to bear on Switzerland and other European private banking centres to block tax evasion and introduce withholding tax for some non-nationals, Singapore moved to fill a global – as well as its regional – niche. The city increased account secrecy provisions and changed trust laws in a manner designed to attract the kind of money Switzerland had dealt in; the number of foreign private banks in Singapore almost doubled between 2000 and 2006.59 After Singapore hosted an IMF conference in September 2006, there was a rare and highly entertaining insight into how some – normally reticent – investment bankers really view the island state. Exasperated by the ‘nauseating pleasantries’ of the conference and a dinner with prime minister Lee Hsien Loong at which foreigners ‘fawned [over] him like a prince’, Morgan Stanley’s chief economist in Asia, Andy Xie, fired off a missive to colleagues. People at the meeting, he said, ‘were competing with each other to praise Singapore as the success story of globalization … Actually, Singapore’s success came mostly from being the money laundering centre for corrupt Indonesian businessmen and government officials … To sustain its economy, Singapore is building casinos to attract corruption money from China.’ When the email was leaked, a flustered Morgan Stanley spokeswoman said its content was ‘aimed at stimulating internal debate’ in the firm; Mr Xie resigned.60
Together with banking services in Hong Kong and Singapore go real estate, shopping and entertainment. The luxury housing markets of the city states have always been driven by outsiders – today it is mainland Chinese in Hong Kong; in Singapore it has always been Indonesians. The Hong Kong or Singapore bolthole has been a source of security and a reliable investment for tycoons from Thailand, Malaysia, Indonesia and the Philippines, whether in the nineteenth century or today. After the Asian financial crisis and anti-Chinese riots in Indonesia, the early Monday morning and Friday afternoon flights between Singapore and Jakarta became a tycoon express as ethnic Chinese Indonesia tycoons shuttled back and forth. They moved their families out of their Jakarta homes and into their Singapore ones. Hong Kong and Singapore also have long been the regional centres for luxury shops and fine cuisine, while Hong Kong has its horseracing and the nearby gambling and money laundering fleshpot that is Macau. Though many people expressed surprise, it was not one in terms of historical continuity when the authoritarian regime in Singapore decided in 2005 that it would license two huge casino resorts. The post-independence Singapore of Lee Kuan Yew and family has only evinced moral fervour when it does not interfere with the business of a city state. Hence the contrast between banking secrecy and long-tolerated prostitution – which largely serves visiting businessmen – on the one hand, and Singapore’s fines for not flushing urinals or failing to shut the curtains while in a state of undress on the other. Prime Minister Lee Hsien Loong greeted the legalisation of gambling with the rhetorical question: ‘If we don’t change, where will we be in twenty years?’ But in reality Singapore’s casinos are just the latest chapter in its remaining the same.
Hong Kong and Singapore were destined to succeed. All they had to do was to be one degree more efficient, one degree more attractive to capital than surrounding countries and they would prosper. Smallness would be a virtue. This was not always apparent to Singapore’s leadership, however. In 1963 the leaders of the newly independent state were obsessed with the idea that the place could not survive on its own and they took the city into the Federation of Malaysia, only to be bumped out two years later; premier Lee Kuan Yew wept in public. The episode perhaps gives succour to those who argue that Singapore’s dominant post-independence politician never understood much about how business and businessmen really operate. If he had, he would have recognised that Singapore was always better off on its own. Under Mr Lee – who never much liked private businessmen – Singapore followed a statist model, with the government taking public control of most significant companies. Any absolute loss of efficiency from this form of development did not matter because the port and the banks in Singapore were still relatively more efficient, and secure, than those in Indonesia and Malaysia. Hong Kong pursued an apparently opposite free market model – though, as we will later see, its services were in reality always heavily cartelised – and had private port operators and many more privately held banks. At the end of the twentieth century the result of ostensibly diametrically opposite approaches to economic management was GDP per capita in the two cities that varied by less than US$1,000 – US$23,930 in Hong Kong and US$22,960 in Singapore. The lesson? That a city state with a strategic deep water port in a region that has relatively higher levels of mismanagement, corruption and political uncertainty will prosper with little reference to official economic philosophy.
In terms of their resident tycoons, Hong Kong and Singapore have always had two kinds – imports and locals. There has been a steady stream of godfathers who have migrated in from surrounding countries. A long line of Indonesian tycoons, from Oei Tiong Ham on, have settled as corporate and individual residents of Singapore; the only drawback for them is that this tends to upset the Indonesian government. Equally, there has been a long line of Malaysians, from Eu Tong-sen to Robert Kuok, who have ended up in Hong Kong. Some native Singaporean tycoon families – like that of Ng Teng Fong – have split themselves between Singapore and Hong Kong; Hong Kong tycoons do not migrate to Singapore, where the state crowds out a lot of private activity.
Local Hong Kong and Singapore godfathers divide in turn into two further sub-types: those based in land and those based in banking. Since land is structurally scarce in the city states, from the nineteenth century on real estate has always been expensive by regional and international standards, subject to considerable price volatility and productive of high speculative returns. Real estate has therefore been the root of most tycoon wealth. Banking has been the other billionaire mainstay, although in Hong Kong, where colonial government continued until 1997, two British banks – Hong Kong and Shanghai Banking Corporation and Standard Chartered (the successor to Chartered Bank of India, Australia and China) – were able to remain the dominant players; in Singapore, government banking left room for three sizeable local private banks. The one other thing to know about godfather wealth in Hong Kong is that there is a secondary structural connection to the smuggling and gambling riches of nearby Macau. The former Portuguese colony is a truly wondrous, corrupt and enthralling place that will be referenced as we proceed. To conclude our historical survey, however, we need to return to the world of macroeconomics.
The Last Word in Acronyms
Import substitution industrialisation (ISI), as we have seen, was both a part of global economic fashion and the natural post-war reaction to the manner in which colonial regimes structured south-east Asia as a provider of commodities and purchaser of manufactures. In the short-term ISI produced respectable growth rates in the region. But it was all too easily manipulated by a tycoon class that was raised on trading. Every effort to plan industrial development was another arbitrage opportunity for the politically well-connected. Usually, the procedure was for a tycoon to obtain the necessary licence, bring in a foreign partner to provide a manufacturing process that was reduced to kit assembly (with most parts and components imported), and then hide behind tariff barriers selling goods that were unsaleable internationally. The result was profits, but minimal progress in constructing a sustainable domestic manufacturing base. The level of abuse varied from project to project and from country to country, but by the late 1960s it was clear that ISI was not a panacea for economic development. Moreover, countries in north-east Asia – Japan, South Korea and Taiwan – were developing more quickly and sustainably than south-east Asia on a model based on manufactured exports. South Korea and Taiwan, for instance, overtook the Philippines – second only to Japan among countries in the region by GDP per capita at independence – on almost all economic measures by the end of the 1950s.
Thus began the great acronym transition in south-east Asia, from ISI to what economists call export oriented industrialisation, or EOI. This was encouraged by the World Bank, the IMF and, in particular, the US government. The story started in Singapore, which itself had a flirtation with ISI from the mid 1950s, building steel rolling capacity and vehicle assembly plants. The experience was short-lived. Singapore’s planners switched trains. By the mid 1960s the Jurong Industrial Estate on the west side of Singapore island was reclaimed from swamp land and the government set out to woo export-oriented foreign investors to fill it up. Early success came with American semiconductor manufacturers like Texas Instruments and Fair-child, and Singapore’s role as an electronics outsourcing centre was primed. By the early 1970s, with multinational companies experiencing huge cost savings from the use of Asian labour and the Singaporean government doing everything in its power to accommodate them, most of the world’s offshore processing of semiconductors – comprising the lower value-added finishing processes – had relocated to Singapore. In 1973 the value of manufactured exports exceeded commodities for the first time. Over the long run, Japanese investment proved to be more significant than American. Multinationals from Japan moved a full range of export-oriented investments to Singapore, including heavy industrial projects in ship repair and shipbuilding in the 1960s and early 1970s, and a vast chemicals complex established by Sumitomo. The yen was appreciating against other major currencies in the 1970s, and this encouraged the exodus offshore. Matsushita led the charge of the household goods manufacturers to Singapore, setting up a first refrigerator compressor plant in 1972.
What began in Singapore, and expanded so impressively, spread around the region. Governments signalled their change of tack with new legislation. The Philippines, for instance, passed an Investment Incentives Act in 1967, while Malaysia followed suit with an act of the same name in 1968. Governments were also quick to curtail worker rights in order to reassure foreign investors. The Sarit regime in Thailand repealed legislation granting workers employment rights and banned unions as early as 1958. In Singapore the People’s Action Party (PAP) of Lee Kuan Yew, which had come to power on the back of an alliance with workers’ groups, established government control over unions and deliberately suppressed wages in the 1970s via a National Wages Council. The pace of implementation of foreigner-friendly investment regimes varied, and governments continued to protect domestic businesses with tariffs and other measures, but the direction of economic policy changed fundamentally. EOI met the requirement for economic growth, generated lots of foreign exchange and was also much better than ISI at creating employment, something essential as post-war population growth picked up dramatically.
From the 1970s, south-east Asia’s development was defined by EOI. In Malaysia, as one example, manufacturing’s share of exports increased from 12 per cent in 1970 to 74 per cent in 1993. Exports grew to a point where they actually exceeded gross domestic product. South-east Asian EOI was very much driven by assembly operations using imported components. The most important phase of the export boom came from the mid 1980s. During the 1970s, governments in Malaysia, Indonesia and Thailand had considerable room for policy manoeuvre as oil and gas price rises made their income from these commodities rocket. But after a debt-fuelled recession in the mid 1980s, it became necessary to court foreign investment more assiduously. This coincided with a big increase in multinationals’ focus on the benefits of offshore manufacturing and led to powerful export growth throughout the region for a decade from 1987.
EOI brought growth and jobs, but it was not a mirror image of the north-east Asian experience. In Japan, South Korea and Taiwan, exports were developed by indigenous companies while governments blocked foreign investment. The sustainability of the model came from firms’ rising ability to manage research and development of new products, and slowly build international brands. Import substitution industrialisation failed to achieve these objectives in south-east Asia, instead creating assembly operations beholden to foreign partners and suppliers. And EOI did not solve the problem either. What it did, instead, was to rent out south-east Asia’s cheap labour to multinational companies, which outsourced manufacturing processes while keeping research and development activities in more developed countries. There is an argument that this created a new form of dependency, albeit one over which independent governments – in contrast to the colonial commodities-for-manufactures structure – had ultimate control. Whether or not the argument has merit, the impact of EOI was still enormous. By 1990 in Singapore, where the model first took hold, almost nine-tenths of direct exports came from foreign-invested enterprises using the city state as a manufacturing platform.
The reaction of local business to the multinational exporters, welcomed back so soon after foreign enterprises that grew up in the colonial era had been kicked or bought out, is telling. Small firms found innumerable opportunities supplying parts and components and services to multinational investors. But their ability to move up the value chain was inhibited by a lack of scale that left them without resources for research and development. Tycoons, on the other hand, had scale and access to capital, but were rarely interested in working in the export sector. The reason is simple. Exporting is a globally competitive business. Where the godfathers outperformed was in trading on the inefficiencies of south-east Asia’s domestic economies, whether in the form of politicians’ willingness to disburse monopolistic concessions on the basis of personal relations or through the profits to be made when governments tried to micromanage industrial development. For tycoons, the benefit of EOI was significant but indirect: the growth it produced underwrote the continued relationship between political and economic élites and eased pressure for effective deregulation of domestic economies. Public works projects without tenders, and privatisations decided behind closed doors, were politically much more feasible when exports were driving the south-east Asian economy. This was the real, macroeconomic background to the hubris of the late 1980s and 1990s, when tycoons congratulated themselves at conferences and in the media for making south-east Asia prosperous while (mostly) female assembly line workers in export processing factories really did make southeast Asia prosperous. The graph on every godfather’s wall ought to be the one on page 299; unfortunately, like most people, they demonstrate a limited capacity for self-analysis. As Stephen Brown, the veteran head of research at Kim Eng Securities in Hong Kong, puts it: ‘They honestly believe that: “If I wasn’t the business genius I am, you would all be out of a job