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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2022. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use.date: 16 May 2022

The Politics of Structural (De)Transformation

The Politics of Structural (De)Transformation

The Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Chapter:
(p.285) 10 The Politics of Structural (De)Transformation
Source:
Deals and Development
Author(s):

Kunal Sen

Matthew Tyce

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198801641.003.0010

Abstract and Keywords

The chapter sets out the similarities between Thailand and Malaysia’s patterns of economic growth and political settlements. Both countries have witnessed strong economic growth since the 1960s to the late 1990s, followed by a period of growth deceleration which continues to the present day. In both countries, a dualistic deal environment existed where closed deals were offered to the powerbrokers and rentiers within both economies while open deals were offered for magicians. This allowed both countries to preserve rents for economic elites which maintained political stability while accelerating economic growth. However, this type of dualistic deals approach may act as a barrier to future economic growth as well as structural transformation over time. If negative feedback loops exist within a country, it may lead to a future narrowing of the deals space.

Keywords:   economic growth, political settlements, deals environment, Malaysia, Thailand, rent space

10.1 Introduction

In the early 1990s, Malaysia and Thailand looked set to join South Korea, Singapore, and Taiwan among the few developing countries which have successfully made the transition from low-income status to high-income status. During the 1950s to the early 1990s, both countries had growth rates that were among the highest in the world in that period, driven in large part by the rapid growth of an export-oriented manufacturing sector. This growth acceleration phase was accompanied by significant structural transformation, as measured by manufacturing value added as a share of GDP and the product complexity of exports. Outside the East Asian miracle economies, there were few other countries in this period that had such impressive rates of structural transformation.

However, with the onset of the Asian financial crisis (AFC) in 1997, economic growth plummeted in these two countries, as in other countries that had seen rapid growth till that point, such as Indonesia and South Korea. The AFC was itself the result of both external factors (contagion driven by outflows of short-term portfolio capital, leading to a currency crisis) and internal factors (overly optimistic investments in real estate and infrastructure, and the inability of the financial system to monitor these investments) (Jomo, 1998; Lauridsen, 1998; Wade, 1998; Kaminsky and Reinhart, 2000). It was widely believed that the recession caused by the AFC would be short-lived and that economic growth would return to Malaysia and Thailand once stabilization and reform measures that were undertaken in these two countries in the (p.286) aftermath of the crisis had a positive effect on economic activity. This has not happened, with economic growth in the two decades since the crisis significantly below the rates that were achieved in the growth acceleration phase. The growth deceleration episode from the mid-1990s to date has been accompanied by an investment collapse, stagnating manufacturing exports, and slowing or stagnant rates of structural transformation. Two decades after the AFC, it is clear that the slowdown in economic growth since the AFC is a secular phenomenon and not a short-term outcome of the crisis.

A large literature has studied the growth successes of Malaysia and Thailand prior to the AFC (see Ariff, 1991; Bruton, 1992; Warr, 1993; Agarwal et al., 1995; Agarwal et al., 2000). The conventional narrative in this literature is that Malaysia’s and Thailand’s superior growth performances are due to the open trading regime and liberal economic policies that these two countries followed, which allowed them to succeed in export-oriented industrialization (see Ariff (1991) for Malaysia, and Warr (1993) for Thailand). However, the conventional narrative that lays emphasis on economic factors does not pay sufficient attention to the fact that relatively closed patronage-based networks and mechanisms between political and economic elites were also important during the rapid growth phases observed in the two countries till the mid-1990s. The conventional narrative is also unable to explain why Malaysia and Thailand underwent prolonged growth slowdown since the AFC (while South Korea recovered quickly from the AFC and returned to rapid growth).

In this chapter, we provide a political economy explanation of Malaysia and Thailand’s growth experiences, both of their rapid growth phases prior to the AFC and the subsequent growth slowdown. Using the conceptual framework of Chapter 1, we show that the core explanatory variables—the political settlement, the rents space, the deals space, and feedback loops—can provide a unifying explanation of why growth accelerated in the two countries prior to the mid-1990s, and then subsequently decelerated.

We argue that political elites in these two countries followed a dualistic deals environment in the first growth phase (that is, from the 1960s to the AFC), where they offered open ordered deals to magicians—that is, firms in the export-oriented manufacturing sector—and at the same time offered closed ordered deals to powerbrokers: mostly domestic firms operating in non-tradeable sectors or in manufacturing sectors that were protected to a large extent from foreign competition (and, in the case of Malaysia, to rentiers as well). In the case of Malaysia, the dualistic deals environment was an outcome of the strong dominant party political settlement which attempted to balance the need for political stability (through rents that were created for powerful Malay groups in society via the closed deals with powerbrokers) with the need for high rates of growth that occurred from the open ordered deals offered to magicians. In the case of Thailand, the dualistic deals environment (p.287) was more a result of a shift to a competitive clientelist political settlement in the 1970s, as well as the means of securing the support of the military and monarchy for the growth strategy followed by Thai political elites.

The dualistic deals environments served Malaysia and Thailand well in the first growth phase, as high growth and fast rates of structural transformation ensued with the rapid expansion of the export-oriented manufacturing sector. However, towards the mid-1990s, negative feedback loops were observed in both countries, with the political settlement in Malaysia moving from strong dominant party to a vulnerable authoritarian political settlement after the AFC, and the competitive clientelist political settlement in Thailand becoming increasingly virulent, culminating in a shift to a vulnerable authoritarian political settlement in the 2000s. In the case of Malaysia, the closed ordered deals that were offered to Malay entrepreneurs, as a means of countering the power of the country’s Chinese capitalist class, had largely failed to create a dynamic Malay capitalist class that could compete effectively in world markets. This led to a dualistic industrial structure, with multinationals operating in the export-oriented manufacturing sector and globally uncompetitive Malay conglomerates in the domestically oriented manufacturing and service sectors. In Thailand, local content requirements in the automobiles and electronics sectors had created a large number of Thai companies which successfully became supplier firms to the multinationals operating in these sectors. As a consequence, Thailand observed higher rates of structural transformation, though not at the same pace as in the pre-AFC phase, than Malaysia in their respective growth deceleration episodes. In both countries, the dualistic deals environments had increasingly become patronage-based after the AFC (and, in the case of Malaysia, increasingly disordered), and as a consequence, limited the possibility of high growth returning to Malaysia and Thailand after the economic downturn caused by the AFC.

The chapter is organized as follows. Section 10.2 briefly describes the growth and structural transformation experience of Malaysia and Thailand. We then describe the evolution of the political settlement, the rents space, the deals space, and feedback loops in Malaysia and Thailand in the growth acceleration phase. We then follow the same structure in our discussion of the growth deceleration phase in the two countries. Finally, we present some concluding remarks.

10.2 Economic Growth and Structural Transformation in Malaysia and Thailand

As Figure 10.1 makes clear, both Malaysia and Thailand have had extended growth acceleration periods, both starting in the 1950s and ending in the mid-1990s (1997 in the case of Malaysia and 1996 in the case of Thailand; see (p.288) Kar et al., 2013). In the growth acceleration phase, the annual average growth rate of GDP per capita was 4.9 per cent for Malaysia and 5.7 per cent for Thailand.1 Beginning in 1997 for Malaysia and 1996 for Thailand, both countries went into a growth deceleration phase, which has lasted to the present day. The growth rate for Malaysia in 1997–2010 was 1.9 per cent, a drop of three percentage points from the previous growth rate. The growth rate for Thailand was 2 per cent, a drop of 3.7 percentage points from the previous growth rate.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.1. Per capita GDP for Malaysia and Thailand (US PPP dollars)

Source: World Bank, World Development Indicators.

Annual growth rates show similar trajectories, with major dips occurring largely as a result of exogenous factors, such as the crash in commodity prices during the early 1970s and early 1980s (both of which hit Malaysia hardest, due to its reliance on oil exports), the 1997 AFC, and the global financial crisis of 2007–8 (Figure 10.2).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.2. Economic growth in Malaysia and Thailand, 1956–2010

Source: World Bank, World Development Indicators.

A proximate cause of the fall in economic growth since the AFC was the decline in the investment rate in the two countries. Investment as a ratio of GDP rose steadily during the 1960s and 1970s in Malaysia and Thailand, before a surge in the mid-1980s (Figure 10.3). However, investment rates fell (p.289) (p.290) sharply from a high of over 40 per cent in the mid-1990s to around 25 per cent in the two countries in the 2000s, following the AFC. We see a similar pattern with FDI as a ratio of GDP, though the increase as well as the fall has been much more pronounced in Malaysia (Figure 10.4).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.3. Investment rates in Malaysia and Thailand, 1960–2010 (% of GDP)

Source: World Bank, World Development Indicators.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.4. FDI in Malaysia and Thailand, 1970–2008 (% of GDP)

Source: World Bank, World Development Indicators.

A feature of Malaysia and Thailand’s growth experience has been the high rates of structural transformation that has accompanied the rapid growth in these two countries. This is evident from the sustained increase in manufacturing value added as a percentage of GDP since the 1960s in Malaysia and Thailand (Figure 10.5). The trend was broken at the turn of the century, however, as Malaysia experienced a clear decline, while Thailand has continued to rise steadily, though at a slower rate than in the pre-AFC phase.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.5. Manufacturing value added in Malaysia and Thailand, 1960–2010 (% of GDP)

Source: World Bank, World Development Indicators.

A similar picture emerges from the exporting behaviour of the two countries (see Figure 10.6). Both have followed similar trajectories, though Malaysia enjoyed—and has maintained—a higher starting point, possibly as a result of the legacy of colonialism, which left it with a relatively advanced economy that was far more connected to the global economy than uncolonized Thailand. However, manufacturing exports as a share of total exports has fallen sharply for Malaysia since the AFC, while in Thailand we do not see a similar fall (though manufacturing exports as a share of exports seems to have plateaued for Thailand in the 2000s) (Figure 10.7).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.6. Exports from Malaysia and Thailand, 1960–2008 (% of GDP)

Source: World Bank, World Development Indicators.

(p.291)

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.7. Manufactured exports from Malaysia and Thailand, 1964–2010 (% of GDP)

Source: World Bank, World Development Indicators.

(p.292) Finally, examining the movement in the Hausmann–Hidalgo measure (Hausmann et al., 2013) of product complexity, we see a sustained increase in this measure for both Malaysia and Thailand from the early 1970s (see Figure 10.8). This increase was observed till the early 2000s. Beyond this date, there has been no improvement in the product complexity measure for Malaysia, but a further increase for Thailand during the 2000s, though at a lower rate of increase.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.8. Hausmann–Hidalgo measure of economic complexity, Malaysia and Thailand, 1964–2013

Source: The Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Overall, we find that both Malaysia and Thailand have had very similar growth experiences, in that both countries witnessed a prolonged period of rapid growth from the 1960s to the mid-1990s, before the onset of the AFC. Both these countries have seen a noticeable growth deceleration phase since the mid-1990s. This has been reflected in surges in investment rates till the mid-1990s and then a sharp fall. Much of the growth in the pre-AFC phase in these two countries has been driven by the export-oriented manufacturing sector. Both these countries have seen significant structural transformation in the growth acceleration phase, as reflected in an increase in manufacturing value added as a share of GDP, and in the product complexity of exports. However, where these countries have parted ways has been in the nature of structural transformation in the growth deceleration phase. In Malaysia, there (p.293) has been a slowdown and possible regress in structural transformation.2 This has not happened in Thailand to the same degree, with both indicators of structural transformation—manufacturing value added as a share of GDP and the Hausmann–Hidalgo measure—showing an improvement over time in the post-AFC phase, though the rate of improvement was not as impressive as that observed in the growth acceleration phase.

In Sections 10.3 and 10.4, we analyse the growth acceleration and deceleration episodes in turn, using our conceptual framework to understand why there was rapid growth in the first episode in Malaysia and Thailand, followed by a growth slowdown in the second episode. (p.294)

10.3 The Growth Acceleration Episodes in Malaysia and Thailand

We begin by analysing the political causes of Malaysia’s growth acceleration. We do this by discussing the political settlement, rents space, deals space, and feedback loops in Malaysia in turn. We then follow the same structure while discussing Thailand’s growth acceleration episode.

10.3.1 Malaysia

Malaysia’S Political Settlement

Malaysia possessed a strong dominant party throughout its growth acceleration episode, though the structure of the ruling coalition shifted significantly during that time (see Figure 10.9). At independence, Malaysia’s political settlement was based on a power-sharing agreement between its three major ethnic groups. Referred to as ‘the bargain’, it represented an understanding that Malays would dominate the political system, due to their status as the original inhabitants of the Malay Peninsula, but that the sizeable and economically powerful Chinese and Indian communities would remain unmolested by the state (Gomez, 2004). This distribution of power was reflected in both the new constitution, particularly Article 153, which offered non-Malays full citizenship in exchange for acknowledging the ‘special position of the Malays’, and in the configuration of the tripartite ruling coalition called the Alliance (p.295) (Milner et al., 2014: 25). Led by the Malay prime minister, Tunku Rahman, it was comprised of Malaysia’s three biggest ethnically based parties—the United Malays National Organization (UMNO), the Malaysian Chinese Association (MCA), and the Malaysian Indian Congress—but was dominated by UMNO, as per the power-sharing formula. Nonetheless, the MCA enjoyed a significant degree of influence, as its links with Chinese apex organizations such as the Chambers of Commerce ensured a stream of donations from Chinese firms. Reliant on the MCA for financial support, UMNO elites ceded control of the Finance, Commerce, and Industry Ministries to the latter (Jesudason, 1990). From there, it blocked policies encroaching on Chinese commercial dominance, instead advocating a laissez-faire approach that favoured non-Malay commercial and industrial interests (Thirkell-White, 2006).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.9. Malaysia’s political settlement during its acceleration episode

Source: Authors’ illustration.

As a result, extreme socio-economic inequalities from the colonial period became more accentuated, also taking on an ethnic dimension as poor Malays blamed the ‘ubiquitous Chinese businessman’ (Gomez and Jomo, 1997: 21).3 Ethnic tensions became increasingly divisive, escalating in 1969 during the aftermath of an election that saw Chinese voters desert the Alliance en masse to support a new opposition party demanding an end to Malay special status (Jesudason, 1990). Rioting began in Kuala Lumpur and spread across Malaysia, realigning the balance of power within its political settlement. After two years of martial law, the Alliance reinvented itself as the Barisan Nasional (National Front, BN), enlarging its roster to incorporate a number of small Malay opposition parties. The effect of this political restructuring was twofold: on the one hand, it brought competing Malay groups into a unified structure; on the other, it reduced the MCA’s influence, giving Malay elites dominance over Chinese interests (Jesudason, 1990). These changes also cemented UMNO’s status as the dominant force in Malaysian politics. Where coalition partners previously held important posts, they now contented themselves with token seats, while the ‘power portfolios’ went to the UMNO (Pepinsky, 2007: 115).

With this control over Malaysian politics—and Chinese interests in particular—the BN, led by newly elected prime minister, Tun Razak, embarked in 1971 on an assertively pro-Malay stance called the New Economic Policy (NEP). Funded by taxing Malaysia’s now politically isolated Chinese capitalists, the twenty-year NEP aimed to foster national unity and racial harmony, henceforth the guiding principles of Malaysian politics, through two mechanisms: first, by eradicating poverty regardless of race; second, by restructuring society to achieve socio-economic parity between Malay Bumiputera (‘sons of the soil’) and predominantly Chinese non-Bumiputera (Gomez et al., 2013). The former would be achieved through an export-oriented industrialization (p.296) (p.297) (p.298) strategy that would yield high growth rates and raise income levels for all, while the latter would be brought about through affirmative action; the most ambitious target was increasing Bumiputera corporate ownership from 1.9 per cent in 1970 to 30 per cent in 1990 (Gomez et al., 2013). Recognizing that a Malay business class would not emerge overnight, however, the BN created a plethora of state enterprises and trust agencies, mandating them with acquiring assets and holding them in trust until such time as they could be taken over.

Mahathir bin Mohamad became prime minister in 1981, marking a turning point in Malaysian politics. Inspired by South Korean strongman, Park Chung-Hee, he centralized power within the executive and utilized his control over state organs to enforce a major shift in development policy (Gomez, 2004). Long critical of the NEP for encouraging a ‘subsidy mentality’ among Malays (Mahathir, 1982: 40), Mahathir felt vindicated when escalating public spending combined with plunging commodity prices to tip the economy into recession in 1985 (Gomez, 2002). Claiming that the NEP had become unsustainable, Mahathir significantly narrowed the range of beneficiaries, switching from a broader goal of interethnic parity to fostering an elite entrepreneurial class that could symbolize Malay prosperity. This would be done through an intensive focus on heavy industry, which Mahathir saw as a powerful expression of Malay nationalism. Pointing to South Korea as the model to emulate, Mahathir sought to create Bumiputera businesses of international repute. Enormous conglomerates soon emerged as he pressed ahead with a ‘Look East’ approach that emphasized rapid industrialization (Nyanjom, 2013).

Malaysia’s Rents Space

Before the launch of the NEP, Malaysia’s rents space was dominated by rentiers, with primary commodities such as rubber and palm oil, both of which were grown on large-scale plantations, as well as timber and tin, driving growth (Figure 10.10). Rentiers were predominantly foreign mining and plantation firms, the exceptions being wealthy Malaysian Chinese business people who had started as rubber and tin dealers during the colonial period before diversifying backwards into owning plantations (Jesudason, 1990). The limited numbers of manufacturing firms were either magicians involved in basic agro-processing or powerbrokers assembling imported components for sale in the protected domestic market, with Chinese capitalists dominating both these activities (Cho, 1990).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.10. Malaysia’s export structure, 1971

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Ten years after the launch of the NEP, Malaysia’s rents space had changed quite dramatically. Rentiers remained influential, with declines in tin and rubber offset by a surge in petroleum exports following the founding of Petronas, Malaysia’s national oil company, in 1974 (Figure 10.11). However, the most significant shift was the rise of Malaysia’s magicians, to the extent that they held the second largest share of GDP after the powerbrokers in 1987 (p.299) (Figure 10.12).4 Major emergent industries were textiles and basic electronics, both of which were promoted under the BN’s export-oriented industrialization strategy (Hobday, 1999).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.11. Malaysia’s export structure, 1981

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.12. Malaysia’s rents space, 1987

Source: Department of Statistics, Government of Malaysia, authors’ calculations.

Note: Percentage share.

By the end of the acceleration episode, Malaysia’s economy had undergone a structural shift from being resource-based to one centred on manufacturing and services, demonstrated by reductions in the workhorse and rentier sectors and the continued growth of magicians (see Figure 10.13). Not only did magicians continue to grow, they also moved into increasingly complex products, with electronics and electrical goods growing sixfold during the 1980s, to comprise half of Malaysia’s exports structure (Figure 10.14; Hobday, (p.300) 1999). An even more dramatic shift was the rise of Malaysia’s powerbrokers, to the extent that they held the largest share of GDP by 1996. Much of this can be attributed to Mahathir’s industrialization strategy, which entailed a second round of import-substituting industrialization involving state-led investment in heavy industry to create linkages between magicians and the rest of Malaysia’s economy (Lee, 2012).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.13. Malaysia’s rents space, 1996

Source: Department of Statistics, Government of Malaysia, our calculations.

Note: Percentage share.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.14. Malaysia’s export structure, 1996

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Malaysia’s Deals Space

Deals were ordered throughout the acceleration episode, owing not just to the fact that there was a managed handover of power to a stable ruling coalition in 1957, but also because that same coalition, albeit with significant shifts in its structure and orientation, remained in power for the duration (Jomo, 1997). However, the extent to which deals were open or closed differed greatly across the acceleration episode, as well as within different rents space domains. Due to the structure of the rents space and the power-sharing system inherited at independence, deals were extremely closed until 1969, with business opportunities going to foreign or Chinese rentiers with the resources to ‘assiduously lobby’ the Alliance, particularly the MCA elites running the Ministries of Finance, Industry, and Commerce (Jomo, 1997: 96). The ability of Chinese capitalists to secure deals was also boosted by the domination of Chinese banks within Malaysia’s financial sector, which allowed them to source credit and financial guarantees on highly preferential terms (Jesudason, 1990). (p.301)

(p.302) The nature of deals changed significantly following the NEP’s launch. Driven by the goals of sustaining growth and restructuring society, the BN presided over a dualistic deals strategy, whereby closed ordered deals were offered to certain domains while open ordered deals were offered to others. Closed deals went to rentiers and powerbrokers, where the relative ease of shielding them from competition allowed the BN to advance its restructuring goals (Cho, 1990). In industries requiring little capital and technological expertise, and where it had control over licences and contracts—notably in construction, logging, rubber dealing, trade, and transport—the BN heavily favoured Malays through newly created agencies, such as the Majlis Amanah Rakyat (People’s Trust Council) and Urban Development Authority, which provided loans, credit, and advisory services (Jesudason, 1990). The flow of funds to Malays was also boosted by stringent lending targets set by the Central Bank, with commercial and development banks facing punitive charges for not complying. As a result, Bumiputeras were receiving 20.6 per cent of loans by 1980, up from 4 per cent in 1968 (Jesudason, 1990).

The BN pursued a different strategy in capital-intensive powerbroker and rentier industries. Backed by enormous funds and regulatory power, trust agencies accumulated assets on behalf of Bumiputeras (Jesudason, 1990). The principal agencies incorporated for this task were Perbadanan Nasional Bhd (National Corporation, Pernas), established in 1969 and controlled by the Ministry of Finance Incorporated, and Permodlan Nasional Bhd (National Equity Corporation, PNB), founded in 1978 to accelerate the Bumiputerization of strategic sectors. Their role was to purchase foreign (often ailing) plantation and mining firms, notable acquisitions being London Tin (the largest producer in the world) in 1975, Sime Darby (the plantation-based conglomerate) in 1976 and British-owned Guthrie Corporation (Malaysia’s largest plantation company, with 200,000 acres of oil palm and rubber estates) in 1981 (Jesudason, 1990). Such was their success that, by 1982, these agencies controlled over 60 per cent of plantation and mining activity, in addition to having made inroads into powerbroker sectors such as cement, hotels, property, and finance. Divestments were limited at this stage, and did not begin in earnest until the mid-1980s, but went to politicians, ex-bureaucrats, and well-connected business persons whenever they did occur (Gomez and Jomo, 1997).

Open ordered deals, by contrast, were offered to magicians to foster growth and employment. Owing to the political sensitivities of relying on Chinese firms, the BN sought to attract foreign firms, leading to a situation whereby it was reducing the dominance of foreign capital in some sectors, but increasingly reliant on it in others (Ritchie, 2005). In addition to providing a stable political and fiscal environment, generous incentives were offered through the Investment Incentives and Free Trade Zone Acts, both unveiled in 1971. The former provided tax relief and pioneer status to industries such as (p.303) electronics and textiles, while the latter offered tariff and customs exemptions, as well as infrastructural support to firms in export-processing zones (EPZs) (Bowie and Unger, 1997). There was also a willingness to reform ministries and agencies to meet investor demands. While most of the bureaucracy remained subsumed by ethno-political interests, ‘pockets of effectiveness’ were carved out within the Ministry of Finance, Ministry of Trade and Industry, and the Malaysian Industrial Development Authority, the latter becoming a ‘competent and supportive’ one-stop investment authority (Leutert and Sudhoff, 1999: 263).

This dualistic deals strategy became even more pronounced under Mahathir. Retaining open ordered deals for magicians—and even opening them further with the 1986 Investments Promotion Act, which provided ten-year tax holidays and relaxed foreign equity restrictions for firms in priority sectors (Gomez, 2013)—Mahathir offered extremely closed deals to powerbrokers and rentiers. To foster his industrial class, Mahathir established the Heavy Industry Corporation of Malaysia (HICOM). Backed by enormous resources, HICOM was to spearhead Malaysia’s industrialization by investing in industries such as cement factories, iron and steel works, petrochemical plants, and Proton, the national automobile manufacturer (Lee, 2012). In reality, however, it became little more than a vehicle for dispensing patronage to a ‘politically influential minority’ (Gomez and Jomo, 1997: 1).

Following the recession and fiscal crisis of 1985, Mahathir gave in to pressure from international finance institutions to initiate privatization reforms. Within a decade, the BN had sold off its state enterprises, including HICOM and Petronas in 1994, shifted to private infrastructure procurement, and divested Pernas’ and PNB’s enormous assets (Thirkell-White, 2006). Rather than competitive tenders, however, privatization became a political mechanism for fostering Mahathir’s industrial elite, with beneficiaries being Bumiputeras with connections to senior UMNO elites, particularly Mahathir, Deputy Prime Minister Anwar Ibrahim, and Finance Minister Daim Zainuddin. This unique brand of privatization showed ‘scant regard for relevant experience and expertise’, leading to the emergence of huge, ultimately unsustainable, Bumiputera conglomerates (Gomez and Jomo, 1997: 180).

Malaysia Feedback Loops

Positive and negative feedback loops characterized Malaysia’s acceleration episode. Positively, the increasing importance of magicians allowed them to pressure the BN into implementing a number of reforms, notably overhauling the Malaysia Industrial Development Authority, relaxing foreign equity stipulations, and liberalizing the tax code (Ritchie, 2005). The accommodative 1986 Promotion of Investments Act was also implemented on the back of investor demands. However, one should not overstate the positive (p.304) feedback. Hill (2012: 12), for example, believes Malaysia was ‘too open’, in that the BN was so reliant on FDI to foster growth and employment that it was unwilling to enforce local content requirements or promote linkage generation. Instead, magicians remained cocooned within EPZs, importing equipment and materials.

Negative feedback was political in nature, stemming from the closed deals offered to rentiers and powerbrokers, particularly under Mahathir. By the late 1980s, Malaysia’s most successful businesspeople were all intimately connected with—and owed their continuing success to—senior UMNO elites, with the result that huge groups of interlocking corporate interests cohered around particular politicians. With ‘power agglomerated at the top’, fractures emerged, as factions jostled to secure preferential access to rents (Jesudason, 1990: 117). Initially, these disputes were contained within the ruling coalition, such as in 1984—when there was a bitterly fought contest for the deputy presidency between Deputy Prime Minister Hitam and Finance Minister Razaleigh—and in 1987, when they united in a failed attempt to unseat Mahathir (Gomez and Jomo, 1997). However, power struggles became increasingly irreconcilable, to the extent that Razaleigh defected to form an opposition party before the 1990 elections, only returning in 1995 with the lure of prominent positions for himself and his supporters. Though these internal machinations did not at this time threaten the BN’s longevity, they do provide an important backdrop to the shifts that, as we discuss later, occurred in Malaysia’s political settlement during its deceleration episode.

10.3.2 Thailand

Thailand’s Political Settlement

Strong Dominant Party (1957–73)

Our analysis of Thailand’s political settlement begins in 1957, the year that Field Marshal Sarit Thanarat launched a coup. Previously, Thailand had been undermined by violence and disorder, as competing military factions jostled for power. Following Sarit’s coup, however, rival factions were purged, the constitution was abolished, and political parties were banned, as Sarit established a system of ‘despotic paternalism’, whereby his Revolutionary Party emphasized order and stability over democracy and Western-style representative institutions (Warr, 1993: 11). To bolster his legitimacy, Sarit rehabilitated the monarchy, which had been reduced to little more than a figurehead following a 1932 coup. While there was no return to absolute rule, the Palace re-emerged as a para-political institution that operated through a web of alliances and proxies, notably the president of the privy council, to influence Thailand’s political direction—a modern form of monarchical rule that McCargo (2005) terms ‘network monarchy’.

(p.305) With his First Army command structure arrayed below him, and buttressed by the ideational holding power of a rehabilitated monarchy, Sarit guided Thailand into a period of unprecedented stability (Hewison, 1997). Where no single faction had been able to establish its supremacy, Sarit’s systematic elimination of his rivals, coupled with his suppression of political activity, ensured that excluded factions and lower-level actors remained weak, giving Thailand a classic strong dominant party (Khan, 2010). Even when Sarit died unexpectedly in 1963, power transferred smoothly to Generals Thanom Kittikachorn and Prapas Charusathiarana, his deputies, who ensured that the regime continued unabated into the 1970s.

Competitive Clientelism (1973–96)

As in Malaysia, iniquitous distribution of economic opportunities generated unrest. Unlike Malaysia, however, the ensuing riots altered the structure of power so significantly that they overturned the ruling coalition and triggered a shift in Thailand’s political settlement. During the early 1970s, a disparate range of actors had become disaffected with military rule, notably student movements, trade unions, and a business community that resented paying informal taxes to generals (Phongpaichit and Baker, 2000). Unrest peaked in 1973, when students were arrested in Bangkok for distributing leaflets demanding an end to military rule. More than 400,000 protesters spilled on to the streets but the police responded in a heavy-handed manner, which left over a hundred dead. Alarmed at escalating unrest as government buildings were ransacked and torched, King Bhumibol ordered Thanom and Prapas into exile, causing the junta to collapse.

Khan (2010) believes the riots initiated a transition to competitive clientelism and in broad terms we agree with this classification, though we stress that Thailand had a hybrid competitive settlement, in which extra-parliamentary actors—the so-called ‘unelected’ elites, notably the Palace and military—retained significant holding power (Kanchoochat, 2014). Following the riots, Thailand endured a period of upheaval as parties and factions jockeyed for power under a new constitution that adopted the basic tenets of a parliamentary democracy. A number of unstable coalitions came and went as each struggled to find a power balance that worked (Phongpaichit and Baker, 2000). Lower-level actors became increasingly influential within this context, because they were able to play off competing factions against each other, switching sides at will. After years of turbulence and military-instigated no-confidence votes, the constitution was modified in 1978 to allow a stronger military presence in parliament, with generals again allowed to serve in the cabinet and as prime minister. While regressing on the spirit of 1973, this inaugurated a period of relative stability. In 1979, Kukrit Pramoj’s Social Action Party won the election and selected General Prem Tinsulanond as prime minister. Prem had the support (p.306) of the military and of the Palace, while Kukrit represented a plethora of emerging business interests, and the two agreed a power-sharing deal; Prem’s allies would control the defence, interior, and finance ministries, while sectoral ministries would be distributed between Kukrit’s party and its coalition partners (Wingfield, 2002).

Prem was prime minister for eight years before retiring from frontline politics in 1988, opting to join the privy council and later becoming its president. With Thailand’s business and middle classes assertive after years of stability and growth, the resulting election heralded a ‘watershed’ moment; unprecedented numbers of businesspeople-cum-politicians were elected and there was optimism that Thailand was leaving its military past behind (Wingfield, 2002: 261). Chatichai Choonhavan’s incoming coalition mounted an attack on the institutional bases of the military’s power, seizing the defence, finance, and interior ministries from Prem’s allies, before passing a cut in defence spending, thereby terminating the delicate power-sharing deal that Prem had cultivated (Baker, 2016). To protect its patrimony, the military launched a coup in 1991, remaining in power for a year to oversee the passage of a constitution enshrining its dominance, before handing over to its own Samakkhitham party following discredited elections. Demonstrations started immediately thereafter, prompting the military to wage a brutal Phairi Phinat (‘crush the enemy’) anti-insurrection strategy (Phongpaichit and Baker, 2000: 359). Intense rioting ensued before the king again intervened to demand that the military step down.

Mirroring events of 1973, Thailand endured a period of upheaval following the dissolution of military rule, as businesspeople-cum-politicians vied with each other now that they were no longer unified against the junta. The country endured three unstable governments between 1992 and 1997, each failing to survive a full term. These years saw the emergence of unrestrained ‘money politics’, with money becoming vital for bringing parties to power and keeping them there (Hewison, 1997: 2). Elections were won by those who could buy the most votes—a trend established in 1992, when the military ploughed vast sums into buying the previously untapped, but now increasingly engaged, rural vote. Elections became little more than bouts of ‘horse-trading’, as parties sought not only to purchase the support of voting blocs, but MPs from other parties, signalling the increasing strength of lower-level actors (Maisrikrod and McCargo, 1997: 137). Prior to the 1995 election, for example, MPs could command ‘transfer fees’ of 20 million baht (Maisrikrod and McCargo, 1997: 138). Once in office, the logic of competitive clientelism then guided politicians; they had to recoup expenses and start building a coalition for the next election by diverting resources to key allies and constituencies (see Figure 10.15 for an evolution of Thailand’s political settlement during its growth acceleration episode).

(p.307)

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.15. Thailand’s political settlement during its acceleration episode

Thailand’s Rents Space

Like Malaysia, Thailand’s economy underwent a structural shift from agriculture to manufacturing, with the most significant changes occurring between the advent of competitive clientelism in 1973 and the end of Prem’s tenure in 1988. Prior to 1973, Thailand’s export structure had been dominated by agricultural commodities, such as rice and rubber (see Figure 10.16). In contrast to Malaysia’s plantation-based rentier economy, however, these commodities were produced predominantly by workhorses, as the monarchy had seen smallholder agriculture as a way of stymieing the rise of land barons, who might pose a threat to its rule (Raquiza, 2012). The limited numbers of magicians operated within basic manufacturing sectors, such as textiles and footwear, while the almost non-existent rentier domain reflects Thailand’s limited natural resource endowments, save for small reserves of tin that were all but exhausted by the mid-1970s (Dixon, 1999). Indeed, Figure 10.17 illustrates that the most important groups in 1973 were workhorses (agriculture and retail trade), followed by magicians (manufacturing) and powerbrokers (construction, utilities, transport, and communication), owing to the fact that Thailand had a sizeable service sector, as well as a large rice-growing agricultural sector.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.16. Thailand’s export structure, 1973

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.17. Thailand’s rents space, 1973

Source: National Economic and Social Development Board, Government of Thailand, authors’ calculations.

Note: Percentage share.

By 1988, Thailand’s export structure had changed significantly, with labour-intensive manufactured commodities, such as footwear and textiles, becoming increasingly important. In addition, high-technology products, such as electronics and auto parts, had emerged (see Figure 10.18). Taken together, (p.308) (p.309) magicians increased their share of GDP, with workhorses diminishing in importance. These trends continued throughout the 1990s, with workhorses continuing to lose ground to magicians, who had, by 1996, moved into industries such as computer peripherals and microcircuits, and fertilizer and petrochemicals, respectively (see Figures 10.19 and 10.20).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.18. Thailand’s export structure, 1988

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.19. Thailand’s export structure, 1996

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.20. Thailand’s rents space, 1996

Source: National Economic and Social Development Board, Government of Thailand, authors’ calculations.

Note: Percentage share.

Thailand’s Deals Space

Where deals had been disordered, due to intense divisions within the military, Sarit presided over a reorientation of the economy and a transition to orderly deals. Under the tutelage of the USA, which regarded Thailand as a bulwark against communism, his administration developed within a capitalist framework that emphasized private-sector growth (Wingfield, 2002). Concurrent with this vision, Sarit carved out space for the Ministry of Finance and the Bank of Thailand to operate as a pocket of effectiveness, staffing them with Western-educated technocrats, such as Governor Puey Ungpakorn, who imbued the Bank with ‘a spirit of fierce integrity’ between 1959 and 1979 (Siamwalla, 1997: 70). In so doing, Sarit returned Thailand to a technocratic tradition that had begun in the nineteenth century (Raquiza, 2012). At that time, hemmed in by colonial powers, and resolving that fostering financial stability was the only way to maintain sovereignty, King Chulalongkorn launched a state reform programme that gave birth to a modern technocracy. (p.310) (p.311) (p.312) As Doner and Ramsay (2000) argue, these reforms have endowed subsequent generations of ruling and bureaucratic elites with strong ideological preferences for macroeconomic stability and fiscal caution, and are instrumental to understanding why Thailand’s macroeconomic institutions remained relatively autonomous for much of its acceleration episode.

While ordered, deals were also closed under Sarit, with two groups benefiting particularly. The first were Sino-Thai capitalists, who had dominated Thailand’s economy since the nineteenth century, when, concerned about indebtedness and seeking to generate foreign exchange, King Chulalongkorn had entered into a de facto alliance with them (Doner, 2009). In exchange for offering board positions, directors’ fees, and other kickbacks to Sarit and his deputies, a handful of Sino-Thai banking families hoovered up government contracts and licences, as well as investment incentives being distributed by the newly created Board of Investment (BOI) (Samudavanija, 1997). This allowed them to establish conglomerates that sprawled across financial services, agri-business, and basic assembly industries, as well as newly promoted industries such as chemicals and automobiles. Indeed, by 1973, nearly 300 firms—and much of Thailand’s economy—were controlled by the Lamsam, Rattanarak, Sophonpanich, and Techaphaibun families (Wingfield, 2002). These close relationships with ethnic Chinese businesspeople represent an important and enduring feature of Thai politics, and are also where the story (p.313) diverges from that of Malaysia. Unlike in Malaysia, Sarit and his successors partnered with Sino-Thai capitalists because the legitimacy of their regime did not hinge on redistribution, but instead on fostering rapid growth, which meant supporting Thailand’s most capable business persons (Dixon, 1999).

The second beneficiary was the Palace. In addition to reinstating the political role of the monarchy, Sarit returned the Crown Property Bureau (CPB)—seized during the 1932 coup—into Palace hands. Acting as the monarchy’s ‘investment arm’, the CPB ‘became one of the conglomerates at the core of the expanding economy’ (Ouyyanont, 2008: 166). Its success rested on three pillars. The first was property, as it owned two-thirds of the land in Bangkok, while the second was Siam Commercial Bank, which grew precipitately, along with Sino-Thai banks. The third was Siam Cement, a company founded by royal decree in 1913, which would become Thailand’s largest conglomerate, with a fraction of its income actually coming from cement (Ouyyanont, 2008: 172). The rest came from a plethora of unrelated companies, including Thailand’s largest iron and steel foundry, a battery manufacturer, paper producer, and several resource-based companies extracting marble, rubber, and plywood.

As in Malaysia, the political restructuring that followed the riots led to a major reorientation of the deals space, with a dualistic deals environment emerging that was similar to that of Malaysia. However, this was not as distinct, or indeed as deliberate, as Malaysia’s. On the one hand, closed deals were offered to powerbrokers and rentiers, because this was critical to the longevity of the political settlement. Following the Sarit years, many of Thailand’s senior political and bureaucratic elites had shares with, or were board members of, Sino-Thai conglomerates; thus they had a stake in their continuing success (Raquiza, 2012). As a result, foreign investment laws were introduced in 1973 and 1979 reserving certain industries exclusively for Thais, notably those utilizing natural resources or catering to the domestic market. Examples include rice milling, real estate, retail, and pharmaceuticals (Raquiza, 2012).

On the other hand, open deals were offered to magicians. In contrast to Malaysia, these deals were not initially a conscious decision, but an ‘accident’ arising from Thailand’s shift to a unique type of competitive clientelism (Unger, 1998: 125). Between 1973 and 1978, a rapid turnover of ruling coalitions—and with them the bureaucrats in sectoral ministries, such as agriculture, commerce, and industry—created a system in which ‘many centres of state regulatory control and their links to different political factions ensured that no single firm or group of firms could block competition from new entrants’ (Unger, 1998: 125). As Doner and Ramsay note (2000: 154), this ‘particular type of clientelism tended to expand, rather than restrict, opportunities’, particularly in industries not dominated by the CPB and (p.314) Sino-Thai conglomerates, such as textiles and electronics. Indeed, entry barriers were so low in textiles that deals verged on being disordered. During the mid-1970s, a glut of firms resulted in overcapacity, prompting the Ministry of Industry to impose a ban on new entrants; however, in a context of political competition and bureaucratic flux, it proved impossible to enforce and illegal entrants were given amnesties, causing even greater saturation (Doner, 2009). Nonetheless, while entry barriers were low, so too were the exit barriers. Owing to the fact that macroeconomic institutions remained insulated from political turbulence, the government refused to bail out large and inefficient firms, instead letting them collapse, despite intense lobbying. The autonomy of the Finance Ministry and the Central Bank also produced a very stable macroeconomic environment, giving firms advantages over exporters in other countries (Doner and Ramsay, 2000).

Initially an accident, offering open ordered deals to magicians became explicit under Prem, as his administration launched an export-led industrialization strategy that responded to shifting global economic conditions and the limits of import-substitution industrialization (Warr, 1993). In addition to key macroeconomic reforms—such as devaluing the baht and implementing a wave of liberalization measures—that made Thailand more attractive to FDI at a time when the surging yen was forcing Japanese firms to relocate overseas, Prem restructured the BOI so that it favoured export-oriented industries, such as electronics, textiles, and automobiles (Raquiza, 2012). As in Malaysia, EPZs also figured prominently; the predominantly foreign firms located in them benefited from relaxed labour laws, tax exemptions, and infrastructural support (Jomo, 1997). Nonetheless, Thailand’s dualistic deals strategy remained in place, albeit one that was less marked than Malaysia’s at this time. For instance, the CPB was able to capitalize on its links with Prem’s regime to diversify Siam Cement into petrochemicals after the discovery of natural gas in the early 1980s; indeed, while it continued to go by the name of a cement company, petrochemicals became Siam Cement’s ‘largest segment, both in profits and assets’ (Jomo, 1997: 177). Similarly, Prem presided over a heavy industry project called the Eastern Seaboard Development Plan. Located on the coastline near Thailand’s gas fields, it sought to create capital-intensive import-substituting industries, such as fertilizer and chemical plants, but ultimately favoured Sino-Thai conglomerates (Raquiza, 2012).

Thailand Feedback Loops

Similar to Malaysia’s acceleration episode, one can identify positive and negative feedback loops. As Thailand’s private sector grew, it also became increasingly organized, with a number of business associations emerging (Doner, 2009). In response to the demands of Thailand’s peak association, the Association of Thai Industries, Prem established the Joint Public and Private Sector Consultative (p.315) Committee (JPPCC) to foster dialogue between the business community and senior officials from core ministries; Prem chaired its monthly meetings and a number of obstacles to export were remedied (Doner, 2009). Sectoral business associations also successfully lobbied the government. The Thai Garment Manufacturers Association, for example, pressured it into improving the supply and quality of local cotton, and also worked closely with the Department of Export Promotion to identify new export markets that eased overproduction issues and offered potential for higher-value-added production (Doner and Ramsay, 2000). In automobiles and electronics, meanwhile, suppliers formed associations to lobby for local content requirements that were, despite initial resistance from multinational corporations, relatively successful in generating linkages, due to the time-bound targets set by the BOI (Rock, 2000; Natsuda and Thoburn, 2012).

As in Malaysia, negative feedback was political in nature. It stemmed from the advent of money politics in the 1990s, and specifically from the ruptured power balance that Prem’s coalition cultivated between military and bureaucratic elites and businesspeople-cum-politicians. Thais tend to characterize the period as a series of ‘buffet cabinets’, referring to the eagerness with which politicians helped themselves to state resources (Marshall, 2014: 94). So corrosive was the political climate that even macroeconomic cornerstones became subject to political feuding. Technocrats were replaced with politically motivated appointments, resulting in increasingly disordered deals and a ‘rapid decline in the management of the economy’ (Phongpaichit and Baker, 2000: 23). Where Prem’s eight-year tenure saw three finance ministers, the following ten saw thirteen men hold the position. Even the previously incorruptible Central Bank became embroiled in a series of scandals, including the bailout of a politically connected commercial bank that would have been unthinkable previously (Hicken, 2004). Beyond the macroeconomic cornerstones, there was a weakening of Thailand’s institutions generally; the National Economic and Social Development Board (NESDB) and BOI were captured by rent-seekers and used to lavish opportunities upon cronies, while the JPPCC stopped meeting and was later dissolved (Doner, 2009).

10.4 Deceleration Episodes in Malaysia and Thailand

10.4.1 Malaysia

Malaysia’s Political Settlement

While power struggles had undermined the BN since the late 1980s, it was only after the AFC—and particularly the sacking, beating, and imprisonment of Deputy Prime Minister Anwar—that an outright rupture occurred. Nominally, differences had arisen over how to deal with the crisis, as Anwar was reluctant to bail out Bumiputera conglomerates and instead favoured an (p.316) IMF-style rescue package; while Mahathir, swayed by ethno-political considerations, was determined to save them, arguing that failure to do so would jeopardize Bumiputera interests (Balasubramaniam, 2006). Just as importantly, however, Mahathir believed that Anwar was using the crisis as a pretext to challenge him, as there had been rumours ever since the early-1990s that he was plotting a leadership bid (Abbott, 2004). Either way, the affair triggered an unprecedented backlash, because it revealed the extent to which the police, judiciary, and Attorney General’s Office were controlled by Mahathir’s inner circle. As the 1999 elections approached, a multi-ethnic multiparty coalition called the Barisan Alternatif (Alternative Front, BA) emerged, led by Anwar’s wife, declaring that it would contest on a platform of improving governance, strengthening democratic institutions, and eradicating money politics (Abbott, 2004).

For the first time since independence, Malaysians talked seriously about BN rule coming to an end. The BA transcended ethnic divisions, uniting Chinese voters long resentful of pro-Bumiputera policies with middle-class Malays, who had felt neglected since Mahathir reduced the number of Malays benefiting from the state (Gomez, 2004). That the BN held on owed much to the legislative and coercive apparatus at its disposal. In addition to reinstating the colonial-era Internal Security Act to imprison opposition activists without trial, Mahathir tampered with electoral procedures so that 680,000 newly registered young voters thought to favour the BA could not vote, and utilized his control over the media to shut down newspapers and websites and embark on a propaganda campaign that played on the opposition’s ethnic and class divisions (Gomez, 2004). Thus, while nearly half of Malays did not vote for the BN—and in two states it lost control completely—the election did not overturn the ruling coalition.

Yet this was merely a reprieve, as the BN’s vote share has declined in each subsequent election (see Figure 10.21). Not only are excluded factions getting stronger, they are also increasingly unified under the new Pakatan Rakyat opposition banner, and hence less easy to play off against each other (Weiss, 2016). The exception was in 2004, when Abduallah Badawi, succeeding Mahathir upon his retirement, lured voters with a reformist agenda. Upon assuming office, however, Abdullah encountered forces resistant to change; stacked with Mahathir’s old guard, his cabinet blocked reforms, leading to an unprecedented rejection of the BN in 2008 (Weiss, 2016). Abduallah was succeeded by Najib Razak, a hard-line politician in Mahathir’s mould. Exemplifying Malaysia’s new vulnerable authoritarian coalition, he has employed unsavoury measures following another disastrous election in 2013. These include reimprisoning Anwar on exactly the same charges, despite Abdullah ratifying his release (Amnesty International, 2016). Belying Najib’s inclusive Malaysia rhetoric, there has also been a disconcerting return to identity (p.317) politics, with Najib blaming the 2013 losses on a ‘Chinese tsunami’, rather than on what would more appropriately be called a middle-class one (Milner et al., 2014).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.21. Seats in Malaysian parliament

Source: The Economist (2015).

Increasing Competitive Clientelist Tendencies

However, while the BN is currently a vulnerable authoritarian coalition, this is not likely to be the case for much longer, as Malaysia’s political settlement demonstrates increasing competitive clientelist tendencies (see Figure 10.22). Haemorrhaging middle-class support, the BN is now increasingly reliant on working-class Malays, with the result that lower-level actors—particularly UMNO leaders at divisional and branch levels, as well as non-party brokers—have become influential, due to their importance in distributing patronage and mobilizing voters (Weiss, 2016). More generally, the strength of lower-level actors as voting blocs is also forcing the BN into unveiling a raft of populist measures before elections. Unveiling his 2012 budget, Najib, who now doubles up as finance minister, announced that 1.4 million civil servants would receive a 13 per cent salary increase, that low-income households would be given RM500, and that high-school and university students—the demographic most likely to vote for the opposition—would receive book vouchers worth RM500 (Crisis Group, 2012). Forced into doling out these goodies by Malaysia’s shifting political settlement, the BN is increasingly dependent on illicit money for campaigning and vote-buying, which only exacerbates the collusive state–business relations that the middle classes seek to eradicate. This is exemplified by the scandal surrounding the US$681 million that ‘mysteriously’ appeared in Najib’s bank account prior to the 2013 elections, which is rumoured to have (p.318) been siphoned off from 1Malaysia Development Berhad, a state investment fund he chairs (Wall Street Journal, 2016a).

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.22. Malaysia’s political settlement during its deceleration episode

Source: Authors’ illustration.

Such is the increasing strength of lower-level actors, that previously peripheral players have become kingmakers. A prime example is Sarawak’s chief minister. The loss of votes in the relatively wealthy, urbanized, and middle-class peninsular Malaysia means that the BN’s political base hinges on the less developed and rural Sabah and Sarawak (see Figure 10.23). Following the 2013 elections, the BN had a twenty-one-seat majority; considering Sarawak alone contributed twenty-five MPs, this means it would have collapsed without its votes. This shift in political geography has endowed Sarawak’s chief minister with hitherto unimaginable political influence, which long-serving Abdul Taib Mahmud (1981–2014) and Adenan Satem, his brother-in-law and successor (2014–17), have exploited to leverage significant concessions from the federal government (Aeria, 2013). As long as Sarawakians continue to vote for the BN, as they did in the 2016 state elections, which eliminated most of the remaining opposition strongholds, the chief minister has free rein in Malaysia’s resource-abundant state.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.23. Malaysia’s general election results, 2013

Source: The Economist (2015).

Malaysia’s Rents Space

Two trends characterized Malaysia’s rents space during its deceleration episode, both of which are intimately linked to its political settlement. First, Malaysia’s magician sector, measured either by share of GDP or export structure, has declined markedly (Figures 10.24 and 10.25). The textiles industry has contracted, with average growth rates of −6.4 per cent between 2000 and 2010, while electronics fared little better, averaging an anaemic 0.9 per cent (p.319) (Rasiah et al., 2015). While this process accelerated after the AFC, when foreign investors questioned the dynamism of South East Asian economies, it actually started in the late 1980s, when Malaysia entered a ‘suffocating structural squeeze’ (Ritchie, 2005: 746). On the one hand, rising salaries were prompting multinational corporations to relocate to China and (p.320) (p.321) Vietnam, which offered similar export incentives and infrastructure, but lower wages for assembly-based industries; on the other, Malaysia was unable to compete in higher-value-added activities with Singapore and the newly industrialized countries.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.24. Malaysia’s rents space, 2011

Source: Department of Statistics, Government of Malaysia, our calculations.

Note: Percentage share.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.25. Malaysia’s export structure, 2013

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

An underlying cause of this squeeze was the lack of strong local ancillary industries to foster linkages with foreign magicians, and this is where the links with Malaysia’s political settlement come in. Unlike the newly industrialized countries, Malaysia has avoided nurturing indigenous firms through industrial policy because Chinese capitalists would have benefited. As Ritchie (2005: 753) argues, ‘the exception that proves this rule is Penang’, as the majority of its inhabitants are Chinese, which has allowed the Chinese-dominated state government to foster linkages between local and foreign firms ‘without fear of upsetting delicate communal balances’, particularly through its much-lauded Penang Development Corporation. Bumiputera suppliers, meanwhile, are almost non-existent, because Malays prefer to operate in highly protected rentier and powerbroker sectors, such as extractives, finance, trading, infrastructure, construction, and property, which offer easy profits (Gomez et al., 2013). The BN tried to remedy this situation in 1988 with its Vendor Development Programme, which sought to increase the share of inputs sourced from SMEs. However, even this succumbed to ethnic politics, as the approved Bumiputera suppliers were wholly uncompetitive, even by Malaysian standards (Capannelli, 1999). The widespread failure of private Malaysian companies after the AFC also led to the state purchasing non-performing loans from these companies through the state asset management company, Danaharta, and the replacement of private managers by state managers. Thus, the post-AFC phase was characterized by ‘renationalization and a return to state ownership in the form of government-linked corporations (GLCs) as a proxy for Malay corporate ownership’ (Tan, 2014: 160). GLCs accounted for over 50 per cent of the market capitalization of the Kuala Lumpur stock market by the 2000s. As Tan (2011: 171) argues:

the emergence of GLCs may be seen as a return to proxy ownership of corporate equity by the state on behalf of Malays in the context of the historic failure of numerous high profile Malay entrepreneurs and reflected the failure of domestic companies to move into high technology sectors in the face of increasing competition.

These GLCs were mostly present in powerbroker sectors, such as utilities, transportation, banking, and retail trade, and their dominance led to a crowding out of private investment in these sectors (Menon and Ng, 2013). One important reason for the failure of the Malaysian state to foster the creation of a strong domestic capitalist class was that, unlike South Korea, the subsidies provided to Malay entrepreneurs did not have performance requirements (p.322) (Menon and Ng, 2013). Further, the lack of skills and a previous learning base in the Malay entrepreneurial class meant that the government could not address the issue of the lack of absorption of the complex organizational and production processes in the private sector necessary for industrial upgrading (Bruton, 1992; Lall, 1995).5

The second and related trend is a resurgence of rentiers. This has resulted in a reversal in structural transformation, with declines in textiles and electronics accompanied by increases in petroleum and palm oil. Palm oil’s return is particularly pertinent, because again it is intimately linked to the shifting political settlement. To further its restructuring goals, the BN had tried to turn it into a workhorse sector, using trust agencies to purchase foreign plantations; land was then parcelled out to smallholders through schemes such as the Federal Land Development Agency (FELDA). FELDA was Malaysia’s biggest grower by 1990 and was lauded for integrating smallholders into production (Cho, 1990). Since then, however, and in the context of a weakening BN, production has become rentier-dominated. Reliant on private money to bankroll election-related expenditure, Sarawak’s chief minister, cooperating closely with top UMNO elites, has granted enormous concessions in Malaysian Borneo to politically connected businessmen (Cramb, 2011). In exchange for receiving long-term leases at well below market prices, or often for free, or ‘payment in kind’, these businessmen channel donations to the minister’s Pesaka Bumiputera Bersatu party, as well as the BN more broadly (Aeria, 2013: 134). By 2011 it was estimated that 198,882 hectares, an area three times the size of Singapore, had been allocated to palm oil plantations. This heralds a ‘radical transformation’ of the sector since 1990, when 23,000 hectares were cultivated, the majority under FELDA-type schemes (Cramb, 2011: 275).

Malaysia’s Deals Space

Up to the AFC, the BN got its dualistic deals strategy more or less right, striking a reasonable balance—albeit less so under Mahathir—between sustaining growth by offering open ordered deals to magicians, while simultaneously restructuring society with closed ordered deals to rentiers and powerbrokers. Owing to recent shifts in Malaysia’s political settlement and rents space, however, this strategy is unravelling, with policies and institutions that were once successful in driving growth and fostering ethnic harmony becoming counterproductive (Nelson, 2012). For one, the heady combination of declining magicians, resurgent rentiers, and an increasingly vulnerable authoritarian coalition is making (p.323) Malaysia’s deals space more closed. This is exemplified by the shady patronage deals, land leases, and interlocking shareholdings that have transformed palm oil (Cramb, 2011).

Malaysia’s automotive industry provides a clear example of how the dualistic deals strategy increasingly became a constraint on growth over time, as powerbrokers were created, even in industries which are usually the domain of magicians. In 1982, Mahathir Mohamad announced that a company called Proton would be established to produce Malaysia’s first national car. The national car project was aimed at accelerating Malaysia’s heavy industrialization drive, as well as strengthening the economic position of the Bumiputeras and securing their participation in supporting industries (Segawa et al., 2014). Proton was protected not only by the general level of automotive tariffs, but also by a variety of additional measures. In particular, the Malaysian government encouraged the development of component suppliers with a strong bias towards entrepreneurs of Bumiputera origin, which were of poor quality and high costs (Segawa et al., 2014). As a consequence, automobiles made by Proton have been a failure, both in export and domestic markets, and in the first decade of the 2000s, Proton was operating at half of its capacity and making substantial losses (Natsuda et al., 2013). Unlike Thailand’s automotive industry, which functioned as a successful magician sector, Malaysia’s domestic automotive industry could be characterized as a powerbroker sector, operating under non-competitive market structures and in a closed deals environment, and unable to sell automobiles in export markets.

Of even more concern, the ordered deals that have underpinned Malaysia’s growth trajectory are slipping, with disorderly deals becoming increasingly prevalent. Oil is a perfect example. Deals have been closed—extremely so—since the 1974 Petroleum Development Act gave Petronas exclusive rights to exploit Malaysia’s reserves, much to the chagrin of foreign companies (Cho, 1990). However, deals were highly ordered, with Petronas earning a reputation as one of the world’s best-managed national oil companies, staffed with capable technocrats who secured favourable production-sharing agreements (Jesudason, 1990). Yet the weakening of Malaysia’s political settlement has led to increased ‘political meddling’ (Doraisami, 2015: 102), with Petronas deployed to prop up flagship Bumiputera projects such as Proton, and provide energy subsidies to politically connected firms or even suppress the opposition, with royalty payments to oil-producing regions halted whenever opposition parties are elected (Doraisami, 2015). As the BN has become increasingly reliant on Petronas as a patronage tool, management of the oil sector has concomitantly declined, demonstrated by the BN’s disregard of its own National Depletion Policy. Unveiled in 1980 to manage Malaysia’s oil reserves, production was meant to be capped at 270,000 barrels per day, a far cry from the 603,000 currently being produced (Doraisami, 2015).

(p.324) Malaysia Feedback Loops

Even in the late 1980s, the BN was acutely aware of Malaysia’s impending structural squeeze, with Mahathir launching an Industrial Master Plan to stimulate technological upgrading (Rasiah, 2012). Najib is similarly under no illusions, warning that: ‘we have become a successful middle-income economy, but we cannot be caught in the middle-income trap; we need to make the shift to a high-income economy or risk losing growth momentum’ (World Bank, 2016: 1). The problem is that just when political commitment, state capacity, and effective complementary institutions are needed to implement the deep structural reforms required, negative feedback from Malaysia’s shifting political settlement and rents space has caused severe institutional degradation (Gomez, 2012: 79).

There are two forces at play. First, declining political support has led the BN increasingly to dole out prominent public sector jobs to politically influential individuals, resulting in ‘revolving door’ patronage appointments (Lopez, 2009: 274). Even the previously relatively insulated macroeconomic institutions are under threat. The finance ministry has been compromised ever since Najib took on the dual role of prime minister and finance minister, while the long-serving and internationally lauded Central Bank governor, Zeti Aziz, was due to be replaced by a politically motivated appointee until Najib’s recent U-turn (Wall Street Journal, 2016b). Second, bureaucratic performance has been undermined by employment quotas, which reportedly require a ratio of 10:2:1 for Malays, Chinese, and Indians (Gomez et al., 2013). UMNO elites accept that these quotas are undermining performance, but will not remove them as they are popular with working-class Malays, on whose support they now depend. It is the same with education, where quotas allow poor Malays to attend university, but exclude talented non-Malay students, who leave Malaysia in search of tertiary education, sometimes never to return (Rasiah, 2012). This is a real concern, given Malaysia’s chronic shortage of engineers and researchers, and the urgency with which it needs to implement an upgrading agenda.

10.4.2 Thailand

Thailand’s Political Settlement

Competitive Clientelism (1996–2014)

Thailand retained a competitive clientelist settlement for the majority of its deceleration episode, though the political fissures it generated became increasingly virulent, ultimately triggering a shift to a vulnerable authoritarian coalition. As in Malaysia, the AFC—and particularly the unwieldy six-party ruling coalition’s inept response to it, which entailed months of dithering over the terms of an IMF bailout before finally accepting one on even more stringent (p.325) terms—triggered an outpouring of public anger and the eventual resignation of Prime Minister Chavalit Yongchaiyudh (Freedman, 2006). Spurred on by bringing down Chavalit’s administration, an alliance of social forces steered by the middle classes pressured an incoming seven-party coalition led by Chuan Leekpai into appointing a constitution-writing committee stacked with civil society actors. The resulting constitution was radical; informed by notions of good governance, it sought to create a modern political system, where parties would compete through manifestos rather than money (Khan, 2010). The electoral system was altered to favour large parties, election spending was capped, MPs were prevented from defecting before elections, and monitoring bodies were established, notably the Electoral Commission, Constitutional Court, and National Counter Corruption Commission. These provisions, it was hoped, would ‘attack money politics on a number of levels’ (Wingfield, 2002: 273).

It was within this context that Thaksin Sinawatra, a telecommunications tycoon with interests in the media, transport, and manufacturing sectors, led his Thai-Rak-Thai (TRT) party to success in 2001, the first elections under Thailand’s new constitution. Also a first, Thaksin won on the basis of a coherent manifesto that pledged ‘new thinking, new ways, for all Thais’ (quoted in Hewison, 2004: 511). His policy platform united a remarkably eclectic spectrum of voters, unmatched before or since. The middle classes, new rich, and Sino-Thai capitalists all flocked to Thaksin, because he railed against IMF measures; while he also struck a chord with poor, predominantly rural, voters by promising spending programmes and to channel credit to SMEs (Wingfield, 2002: 278). Another first, he followed through with his pledges, launching the Village and Community Fund, which provided low-interest loans to entrepreneurs and small enterprises in every village, and the Universal Health Scheme, which offered healthcare for 30 baht, within just a year of assuming office (Hewison, 2004). By 2002, these schemes were reaching fifty-two million beneficiaries, and Thaksin was riding a wave of popularity.

Thaksin’s stance changed dramatically as he neared his second term. The ‘nationalist shibboleth’ that had swept him into power was dissipating; his unwieldy coalition had put aside its differences to deal with the crisis, but tensions surfaced as the economy recovered, particularly over escalating rural spending (Hewison, 2004: 512). A political chameleon, Thaksin reinvented the TRT as the 2005 elections approached. Espousal of economic nationalism was dropped for a populist platform that positioned him as a defender of the poor (Khan, 2010). A stunningly successful strategy, it produced the most crushing victory in Thailand’s history. Thaksin won 375 of 500 seats, his numbers swelling as smaller parties were corralled into his coalition. Within this context, parliament became a place for the TRT to ‘talk shop’ and process (p.326) legislation unopposed, with Thaksin’s behaviour becoming increasingly authoritarian as he lavished business opportunities on cronies and placed allies within the clutch of institutions that had been created to provide checks and balances (Hewison, 2010: 123).

Furious at a resurgence of money politics, the middle classes formed the People’s Alliance for Democracy, a movement that enjoyed support among the business community, military, and Palace. It launched non-stop street demonstrations during 2006, eroding Thaksin’s ability to govern. Finally, on 19 September, claiming to be restoring stability, the military launched a coup. Hurling Thailand back into its ‘familiar whirl of coups, constitutions, and elections’, the junta rewrote the constitution in ways that unravelled Thaksin’s control over the political system and then called another election, to be held in 2007 (Pongsudhirak, 2008: 143). The political tumult that has occurred since is too complex to recount in detail here, but has followed a similar pattern. Broadly speaking, this involved the re-election of Thaksin-linked parties in 2007, 2011, and 2014, the consequent mobilization of the anti-Thaksin yellow shirt movements in 2008, 2011, and 2014, and the overthrow of these Thaksin-linked parties by the courts or military in 2008 and 2014, followed by pro-Thaksin red shirt protests (Crisis Group, 2012). Such are the ‘ravine-like political divisions’ in Thailand’s political settlement that these rifts between yellow/red, rural/urban, for/against Thaksin are now almost unbridgeable, with the result that incoming coalitions struggle to reconcile the interests of business and middle classes, on the one hand, and factions that Thaksin mobilized, on the other (Connors, 2011: 285).

Vulnerable Authoritarian Coalition (2014–Today)

It is in this context that the military launched its third coup since 1996. Declaring that feuding had left Thailand on the brink of civil war, it ousted a government led in Thaksin’s absence by his sister Yingluck, which had riled the establishment with an amnesty bill pardoning Thaksin. While coups have been a constant feature of Thailand’s trajectory, this had several features that distinguish it from others, leading us to conclude that the political settlement has shifted to a vulnerable authoritarian coalition (see Figure 10.26). In contrast to 2006 and 2008, when the military made relatively minor constitutional amendments before presiding over elections weighted against Thaksin-aligned parties, this time it has systematically restructured the political system in ways that unravel the electoral system and prevent future ‘parliamentary dictatorships’ (Kanchoochat, 2014). A military-dominated Constitution Committee was tasked with drafting a new constitution. As expected, the draft curbed the authority of elected politicians and parties while enhancing the power of appointed officials, oversight bodies, and a military-dominated upper chamber, all of which were mechanisms for extending military rule. (p.327) The charter caused an outcry, prompting the junta to respond with Orwellian-esque ‘attitude adjustment’ sessions for critics at remote military bases.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.26. Thailand’s political settlement during its deceleration episode

Source: Authors’ illustration.

After repeated postponements, a referendum on the charter was held in August 2016. In spite of criticisms from the USA, UN, and European Union that observer groups were prevented from monitoring the process, and that voter turnout was only just over 50 per cent, the junta heralded the vote as a decisive victory and promised elections in 2017 (Economist, 2015). Yet King Bhumibol died two months after the referendum, plunging Thailand back into a period of intense uncertainty. A year of national mourning was immediately called by Prime Minister Prayuth, while the junta shelved any discussion of elections to oversee the transition and made increasingly draconian use of lèse-majesté to prevent discussion of the succession.

Following a rapprochement of sorts in the months leading up to the King’s death, Prayuth announced that Vajiralongkorn would be Thailand’s next monarch, but that his accession would be delayed for an unspecified period of time, feeding rumours that the establishment was assessing other options. Despite the constitution stipulating that Vajiralongkorn, the undisputed heir, should have immediately succeeded his father, seven tense weeks passed before the leader of the national assembly finally invited him to take up the throne. The official explanation was that the prince needed time to grieve for his father. In reality, however, the delay was due to intense behind-the-scenes negotiations, as the junta sought guarantees on key issues such as Thaksin’s ongoing exile, and the upholding of its new constitution. Vajiralongkorn (p.328) ultimately accepted the junta’s offer and ascended to the throne. However, there remains a significant level of mistrust regarding each other’s motives. As such, the junta is even more committed to staying in power than it was before, demonstrated by its reticence to offer even a vague timetable for the elections it proposed before Bhumibol’s death.

Thailand’s Rents Space

Thailand’s rents space had shifted towards powerbrokers by 2009 (see Figure 10.27). Like Malaysia, Thailand is increasingly finding itself squeezed between low-wage and high-technology competitors (Doner, 2009). However, there has not been the same exodus of multinational corporations, owing to the (limited) linkages forged with predominantly Sino-Thai suppliers through the various local content policies launched in the 1980s (Rock, 2000). Unlike in Malaysia, where ethno-political considerations have prevented the BN from promoting indigenous firms, Thailand’s political settlement has allowed—and even encouraged—ruling elites to nurture Sino-Thai capitalists, both as a means of stimulating growth and as a source of personal enrichment (Raquiza, 2012). Similarly, unhindered by redistributive ethnic concerns, Prem’s coalition reacted quickly when it became clear there was a shortage of researchers and engineers in the 1980s, launching a major training programme for science and technology students that was devoid of ethnic quotas (p.329) as seen in Malaysia (Rock, 2000). This has helped to generate relatively strong linkages with foreign magicians, in turn explaining their continuing—and, in the case of automobiles, increased—presence within Thailand’s rents space and export structure (see Figure 10.28). On the other hand, there has not been the resurgence of rentiers witnessed in Malaysia, owing to the fact not just that Thailand has never been as well endowed with natural resources, but that the one resource it did have—land—has been exhausted since the 1980s, in stark contrast to Malaysia’s vast land frontier in Sabah and Sarawak.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.27. Thailand’s rents space, 2009

Source: National Economic and Social Development Board, Government of Thailand, authors’ calculations.

Note: Percentage share.

The Politics of Structural (De)TransformationThe Unravelling of Malaysia and Thailand’s Dualistic Deals Strategies

Figure 10.28. Thailand’s export structure, 2013

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Thailand’s Deals Space

Where deals became increasingly disordered during the 1990s, Thaksin reordered the deals space by implementing major reforms within the bureaucracy. Notably this involved strengthening core institutions, such as the Central Bank and Ministries of Finance and Industry, as well as revitalizing the BOI and NESDB after years of neglect (Kanchoochat, 2014). Yet, even here, Thaksin clashed with the old elite, as he also demanded an ‘ideational shift’ among bureaucrats (Thak, 2007: 72). Thailand’s bureaucracy has long been relatively effective, but promotions and advancement have historically been predicated upon seniority rather than ability, whereas Thaksin implemented a rigorous new public management system, whereby high-performing bureaucrats were fast-tracked to the top as ‘CEO governors’ (Doner, 2009: 131). Some suggest this offered Thaksin a convenient way to transplant allies into the upper echelons of the bureaucracy, while others maintain that he was genuinely committed to reform. Either way, it was yet another arena in which he clashed with the establishment.

Aside from reordering deals, Thaksin retained the broad features of Thailand’s dualistic deals strategy, though the beneficiaries of these deals changed significantly in certain domains, offering further insights into why he was overthrown. Consistent with previous administrations, Thaksin offered open ordered deals to magicians, unveiling a comprehensive, cluster-based industrial policy that offered incentives and cheap credit to firms in five priority sectors—automobiles, computers, textiles, food, and tourism (Doner, 2009). Thaksin focused on automobiles, believing Thailand had the potential to become the ‘Detroit of Asia’ and a regional export hub (Chen, 2014: 71). In 2002, he unveiled a four-year master plan offering tax incentives in exchange for meeting ambitious targets such as producing 1,000,000 cars a year and localization of 60 per cent (Kanchoochat, 2014: 20). These targets were met a year ahead of schedule and several Japanese manufacturers established research and development facilities in the country. Referring to Thailand’s structural squeeze as the ‘nutcracker effect’, Thaksin also helped domestic suppliers to upgrade, establishing a National Committee on Competitiveness, (p.330) (p.331) as well as instructing the BOI to focus on promoting technology development (quoted in Doner, 2009: 131).6

While there was continuity for magicians, a major shift occurred within the rentier and powerbroker domains. Closed ordered deals remained the order of the day, but beneficiaries were no longer establishment-linked firms; instead, deals went to Thaksin’s business associates. Thaksin was Thailand’s major telecommunications tycoon, while his inner circle had interests across the construction, real estate, media, and retail sectors, all of which have historically been dominated by the ‘old oligarchy’ (Hewison, 2010: 127). Deals became exceptionally closed within these sectors as Thaksin channelled licences and contracts to ‘a small coterie’ of TRT-linked businesses, helping them to expand at an unprecedented rate. Pasuk and Baker (2009), for example, estimate that the stock market value of Thaksin’s five listed enterprises more than tripled during his first term, with Shin Corp capitalizing particularly to expand into a range of new ventures. Simultaneously, the protection long afforded to establishment-linked conglomerates as a means of sustaining the political settlement was unravelled, particularly privileges given to the CPB, whose ‘special status’ Thaksin resented (Hewison, 2010: 128). These are critical insights, then, as they reveal the extent to which Thaksin ‘was pitted against the “old oligarchy”’, and that the coup was ultimately a mechanism for ‘preserving the status quo’ (Hewison, 2010: 127).

Deals have remained generally ordered following Thaksin’s ouster, particularly for magicians, who are cocooned within Thailand’s EPZs and largely insulated from political upheaval. Yet this order has been punctuated by pockets of disorder around regime changes. Thailand has had five prime ministers between 2006 and 2014, resulting in ‘constant changes on the management level’ of ministries and agencies, as each incoming administration rewarded its supporters in a bid to keep itself in power (Chen, 2014: 71). There has been a significant reordering since 2014, however, with the junta presiding over major reforms within the bureaucracy (Asian Review, 2016). There has also been a return to a more traditional dualistic deals strategy under the junta’s twenty-year ‘Thailand 4.0’ plan, which aims to transform the country into a ‘first world nation’ with a value-added economy, and whose provisions will be enshrined in law so that future governments are forced to implement them (Diplomat, 2016). Offering incentives to magicians such as automobiles, electronics, and textiles, on the one hand, and powerbroker industries such as petrochemicals, chemicals, and pharmaceuticals, on the (p.332) other, it pointedly removes subsidies from Thaksin-linked industries such as telecoms and roads (BOI, 2016).

Thailand Feedback Loops

The shift to a vulnerable authoritarian coalition since 2014 suggests the possibility of a clear negative feedback loop from the evolving political situation to the deals space that may lead to a disordering of deals in the near future. The increasingly authoritarian nature of the current political regime could lead to pushback from excluded elites (for example, those loyal to the Thaksin family). It is also possible that the pent-up frustration in the countryside, due to the stark regional inequalities in the country, spills over to the streets of Bangkok once again. While magicians have been remarkably resilient during previous periods of electoral turmoil and military coups, the lack of clarity on when new elections will be held in the country, as well as the continuing role of the monarchy as a key source of patronage, may prolong (or worsen) Thailand’s current growth deceleration episode for an indefinite period.

10.5 Conclusion

Both Malaysia and Thailand have had strong economic growth since the 1960s, and are among the few developing countries which had seen high rates of structural transformation until recently. However, their growth experiences can be broken down into two phases: one, a growth acceleration phase from the 1960s to the mid-1990s; and two, a growth deceleration phase, from the mid-1990s to date. In this chapter, we have provided a political explanation of why these two countries first witnessed a long period of growth acceleration, followed by an extended period of growth deceleration, which is still ongoing. We have stressed the role of the political settlement interacting with the rents space in influencing the nature of deals that political elites offered to firms in Malaysia and Thailand. We have argued that both these countries witnessed a dualistic deals environment where closed deals were offered to powerbrokers and rentiers and open deals were offered to magicians. The dualistic deals environment facilitated economic growth and, at the same time, preserved rents for powerful groups that maintained political stability. However, the dualistic deals environment increasingly became patronage-based and disordered, especially after the AFC, as the political settlements in Malaysia and Thailand became more vulnerable to challenges from excluded elites, as well as non-elites, over time. In the case of Malaysia, the inability to create a dynamic, outward-oriented Malay capitalist class, who could push for open deals in the sectors of the economy that provided critical inputs to the (p.333) export-oriented manufacturing sector, was the major impediment for further industrialization and value addition in the manufacturing sector. In the case of Thailand, there was the successful creation of a Sino-Thai entrepreneurial class, which explains the relative success that Thailand has had with structural transformation as compared to Malaysia after the AFC.

The findings of this chapter suggest that a dualistic deals strategy can achieve growth along with political stability for a prolonged period, but also has the potential to act as an impediment to further growth and structural transformation over time. This is particularly true if negative feedback loops lead to further closing of the deals space and if there is not a sufficiently dynamic domestic capitalist class that can push for open deals across the board. In both Malaysia and Thailand, there was a need to move away from the closed deals that were prevalent in large parts of the economy, but this was difficult to do, given the prevailing political settlement.

Our findings also suggest that structural transformation per se may not lead to a movement from deals to rules if the underlying political settlement remains clientelist, and if it is not in the interests of the political elite to embrace rules-based capitalism, which would mean an end to the closed deals that may benefit them. This implies that there is nothing preordained about the movement from middle-income to high-income status, even for countries such as Malaysia and Thailand, which have had remarkable growth success for many years. The ‘middle-income trap’, as it is sometimes referred to, for countries in this kind of situation (see Eichengreen et al., 2013) may then be a reflection of a type of political equilibrium that prevails in middle-income countries, which may not be conducive to the set of institutional reforms needed for further growth and structural transformation. For Malaysia and Thailand to break out of the middle-income trap, it would be necessary for them to move out of the political equilibrium trap that both countries find themselves in. The outlook for this to happen does not look positive for Malaysia or Thailand in the foreseeable future.7

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Notes:

(1) Based on ordinary least squares growth rates; see Kar et al. (2013) for more details.

(2) Most countries show a decline in manufacturing value added as a share of GDP at high levels of per capita income as the share of manufacturing in total output shows an inverted U-shaped curve over the course of development (Rodrik, 2016). However, as Tan (2014: 160) notes, ‘the turning point for manufacturing at around US$4,000 GDP per capita in 2000 indicates that (Malaysia’s) deindustrialisation is premature’. The regress in structural transformation in the case of Malaysia is also indicated by the decline in the product complexity measure, as well as the decline in manufacturing output and productivity growth in the 2000s (Tan, 2014).

(3) As Thillainathan and Cheong (2016) note, the Gini coefficients on income for all ethnic groups increased during 1957–70, with the fastest increase in inequality among the Malays.

(4) We construct the rents space diamond for Malaysia and Thailand by classifying manufacturing as magicians; agriculture, wholesale trade, and hotels and restaurants as workhorses; construction, utilities, and transport and communications as powerbrokers; and mining as rentiers. Unfortunately, the national income accounts for Malaysia are not disaggregated enough for the agricultural sector, which did not allow us to classify rubber and palm oil within agriculture as rentiers. Note also that not all of agriculture will be producing for the domestic market, with a large proportion of agricultural produce (at least in Thailand) sold in the export market. However, the national income accounts for Malaysia and Thailand do now allow us to differentiate between export-oriented and domestically oriented agriculture (so between that part of agriculture which should be included in the magician sector, and not in the workhorse sector, as in the current classification). Finally, we do not include community services, education, and health in the calculation of the rents space diamonds, as most of these are in the public sector (and the national income accounts data do not make clear which of the services outputs originate in the private sector). Given the coarse assumptions we need to make to generate the rents diamonds, our calculation of the economic contribution of magicians, workhorses, rentiers, and powerbrokers needs to be treated with some caution.

(5) The failure of Malay companies is reflected in the ownership pattern of companies, where seven of the ten largest Malaysian companies in 2008 were state-owned and not a single Malay company featured in the largest twenty companies (Tan, 2011).

(6) In 2010, 53 per cent of the 690 companies that constituted the Tier 1 suppliers to the assemblers were pure Thai or Thai majority firms, while all 1,700 Tier 2 suppliers were Thai firms (Natsuda and Thoburn, 2012).

(7) We wish to acknowledge comments from Dr R. Thillainathan, which have considerably strengthened the chapter.