Download 1 Transaction costs and crony capitalism in East Asia

Transaction costs and crony capitalism in East Asia
(Forthcoming in Comparative Politics)
David C. Kang
Tuck School of Business
Government Department
Dartmouth College
Hanover, NH 03755
(603) 646-2548 (o)
(603) 646-2152 (fax)
email: [email protected]
May 21, 2002
Many thanks to Danny Blanchflower, Kathleen Collins, Michael Ross, and three anonymous reviewers for
their comments. An earlier version of this article was presented at Stanford University; the University of
Notre Dame; and the conference “Asian political-economy in an era of globalization,” Tuck School of
Business, Dartmouth College, May 10-11, 2002.
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Abstract: Transaction costs and Crony Capitalism in East Asia
Wordcount: 7,808
Why did corruption and cronyism impede growth in some developing countries but not in
others? Building upon theoretical advances in the fields of rent-seeking, transaction costs,
and the new institutional economics, in this article I suggest a first-cut explanation that
will help us understand when cronyism is deleterious and when it is not. This study finds
that if there is a situation of “mutual hostages” among a small and stable number of
government and business actors, cronyism can actually reduce transaction costs and
minimize deadweight losses, while either too few or too many actors increases
deadweight losses from corruption. This study uses cases from East Asia and shows how
a small set of actors led to mutual hostages in government-business relations in Korea,
while in the Philippines and Indonesia too many or too few actors raised transaction
costs.
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"[crony capitalism is a system] where stocks are purchased and loans are
made on the basis of association, not economic value."
-Alan Greenspan, testimony before the U.S. House of
Representatives, January 30, 1998
The previous generation of scholarship on Asian development agreed on one
seemingly plausible analytic point: uncorrupt governments were better at fostering
growth than those riven by crony capitalism and corruption.1 Yet the events of 1997,
combined with the waves of corruption scandals during the 1990s in success cases such
as Korea and Taiwan, have made the widespread existence of crony capitalism too
obvious to ignore.2 As Richard Doner and Ansil Ramsey argue, "if corruption and rentseeking can be damaging to growth in some countries, but not others, we need a clearer
understanding of what kinds of corruption and rent-seeking affect economic performance
in what kind of circumstances."3 Why did corruption and cronyism impede growth in
some developing countries but not in others? 4
Building upon theoretical advances in the fields of rent-seeking, transaction costs,
and the new institutional economics, in this article I suggest a first-cut explanation that
will help us understand when cronyism is deleterious and when it is not. 5 This study finds
that if there is a situation of mutual hostages among a small and stable number of
government and business actors, cronyism can actually reduce transaction costs and
3
minimize deadweight losses through a mutual hostage situation; while either too few or
too many actors increase deadweight losses from corruption. This article examines
corruption and cronyism through the lens of transaction costs, and shows why a particular
set of government-business relations– although corrupt – also lowered transaction costs
and made investment more credible while another set of relations did not. This study thus
provides the outlines of a story that can explain one aspect of corruption and also yields a
theoretically-grounded causal mechanism that lets us distinguish between types of
corruption.
It is widely accepted that low transaction costs -- the costs of making, monitoring,
and enforcing agreements between actors – affect economic and political outcomes. 6
Cronyism -- family-based clans, personal relationships, and informal networks -- is often
seen to raise transaction costs in a country.7 But there are also conditions under which
cronyism can lower transaction costs.8 Personal relationships can lead to better
information, provide more opportunities and longer time-horizons for side-payments and
reciprocity, reduce monitoring costs, and make enforcement of agreements easier. Such
ties may be even more important in developing countries, which typically have weak
institutional and legal structures. As Richard Doner and Ben Ross-Schneider write,
“distributional objectives may coexist or even alternate with more productive
goals…[and] result in the ‘joint production’ of both private and public goods.”9
4
Using South Korea, the Philippines, and Indonesia as cases, this study examines
cronyism and shows how explaining when personal relations are useful and when they
are deleterious can help us understand contrasting economic and political outcomes. The
comparison of these three countries is useful because is widely accepted in the literature
that Korea was a more successful developer due in part to a much lesser role for
corruption than existed in the Philippines and Indonesia. Yet policymaking in all three
countries has been dominated by political considerations and informal connections, and
bribery and rent-seeking has been the norm in Northeast Asia as well as in Southeast
Asia.10 As Mushtaq Khan writes, "the problem is that transfer-based rents were
ubiquitous in all developing countries, not just in the stagnating ones. Thus it is
misleading to argue that economic success required the absence of rents based on
transfers."11
Much of the argument presented here is compatible with a number of other
approaches. Alice Amsden’s notion of subsidies in exchange for performance, Peter
Evan's argument about embedded autonomy, and Michael Ross' emphasis on political
uncertainty in Indonesia all touch on aspects of transaction costs.12 A transaction costs
perspective systematizes these diverse approaches and allows them to be seen as aspects
of a larger analytic issue.
This article does not attempt to provide a general explanation for growth in these
three countries. A full explanation for different economic trajectories would entail
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understanding differences in state capacities between Northeast and Southeast Asia,
different colonial legacies, different geopolitical situations, and a host of other factors.13
Rather, my purpose is more limited: to explore whether we can make discriminating
hypotheses about one factor that is widely considered to be important for economic
outcomes. Thus, this article does not explain the origins of the unique domestic
structures, institutions, and external situations of each country. Rather, I take these
structures as given and ask whether it is possible to make generalizable statements.
The article is organized in four major sections. In the first section I provide a brief
analytic framework that contrasts a transaction cost approach with neoclassical models of
the economy, and show that a transaction cost approach leads us to different expectations
and different conclusions regarding cronyism and policymaking. The second section
shows how a small set of actors led to a mutual hostages in Korean government-business
relations, while the third section shows that in the Philippines and Indonesia too few or
too many actors raised transaction costs. A final section concludes by drawing lessons for
the literature and focusing on future research.
I. Cronyism and transaction costs
Part of a larger field of the “new institutional economics” (hereafter NIE), the
study of transaction costs focuses on exchange between actors.14 Neoclassical economic
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theory assumes that the institutional framework -- the legal, political, and informational
aspects of an economy -- is given. In a neoclassical world contracts are costlessly and
immediately enforced, property rights are secure, and any initial distribution of resources
can be voluntarily bargained over and exchanged in order to maximize efficiency. Thus
built into the model is the idea that any government intervention must be deleterious,
since it involves a move away from a perfect market. However, once we begin to
question the idea of an undistorted initial period, much of the distinction between profit
and rent-seeking breaks down. If the initial distribution of resources is distorted, then
rent-seeking may involve fights over the distribution of rents, and may not necessarily
involve inefficient dissipation.15
In contrast, transaction cost economics emphasizes that creating, monitoring, and
enforcing long-term agreements is inherently impossible, and therefore long-term or
iterated exchange is risky.16 Transaction cost analysis thus examines the search for
institutions that reduce the costs of exchange, and the basic insight is that institutions
evolve in order to minimize transaction costs. Closely related to this theme is a focus on
property rights, informational asymmetries, and principal-agent models. In this world, a
high-performance economy is one in which institutions minimize transaction costs,
property rights are secure, information is common or at least relatively public, and
judicial and political rights are immutable. These conditions are not met in most
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developing countries. 17 Coercion and uncertainty are both central to politics and also
intensify a political actor’s fears regarding potential expropriation, opportunism, and
shirking. The search for institutions and methods by which actors can credibly engage in
cooperative behavior is thus one central aim of the NIE.
1. Cronyism
An NIE perspective is particularly useful in understanding cronyism – a blanket
term to refer to a number of related concepts: family and personal relations, bribery and
corruption, patron-client relations, and collusion. In some cases cronyism involves
political factions, groups, or informal networks, while in other cases it involves actual
clans, families, or social groups. Cronyism is often seen as deleterious to economic
growth because it implies decisions based on non-market principles, increases transaction
costs, impedes efficiency and involves rent-seeking, distortion of economic incentives,
and makes exchange between actors more difficult.18 And, in most instances, reliance on
personal relations is detrimental to economic efficiency. In addition, bribes are merely
transfers, and the relevant question is whether the resources will be put to more
productive use in the possession of the seeker or the seekee.19
However, sometimes personal relations can enhance efficiency. In countries with
weak legal, political, and economic institutions – the case in most developing countries --
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information about market conditions and possibilities is both scarce and difficult to
obtain, and investments and property rights may be insecure. In general this leads to an
increased difficulty in making long-term commitments of any sort, because the political
and economic conditions and actors can change rapidly. Capital markets do not function
as effectively in developing countries, and in general political or economic
decisionmaking is subject to greater uncertainty than in developed and democratic
systems. For businessmen and politicians in this environment, the transaction costs of
making and keeping agreements and securing property rights can be prohibitively high.
Absent some enforcement mechanism, parties may be reluctant to enter into long-term
relationships.
Under these conditions, cronyism can actually reduce transaction costs. This is
because actors have deep and enduring contact with and knowledge of each other, and are
able to make nuanced judgements about actors’ credibility and integrity. Monitoring is
also easier, because all parties know each other, and actors with long-term, close, and
overlapping personal ties can sanction each other and spread information more easily. It
is not the case that if long-run gains are hazardous that actors look myopically short-run:
rather they attempt to craft alternatives that will add some predictability and stability to
the future, and this often means relying on personal relations.20
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Thus, cronyism can lead to better information, monitoring and sanctioning,
strengthen property rights, and provide alternative means for reciprocity and sidepayments. In this context, cronyism within a well-defined set of actors may reduce
transaction costs across the board. Since institutions are weak and property rights fluid,
confidence in exchange and agreements can be imbued only through other relationships.
Thus the question becomes: under what conditions does cronyism lower rather than raise
transaction costs?
2. A situation of mutual hostages among elites reduces transaction costs
The most important factor that reduces transaction costs is a situation of mutual
hostages among a small number of elite actors. "Mutual hostages” exist whenever two
actors have significant vulnerability relative to each other. This can arise from either an
explicit or an implicit exchange of hostages. In so doing, each side thus has an incentive
both to continue the relationship, and can also limit opportunism by the other party. Thus,
rents can be had and corruption can occur, but neither group dominates the other. Both
political and economic elites are powerful enough to harm the other, but deterred from
such actions by the damage the other side can inflict.21 In this sense, a mutual hostage
situation between government and business elites corresponds to a Prisoner’s Dilemma,
and cooperation is not automatic. While in the short run either actor may be better off
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defecting and gaining all the rents for himself, the other actor retains the ability to punish
defection over time, and thus grudging cooperation may ensue.22
Furthermore, small numbers lower costs in other ways, as well. The less
competitive the rent-seeking process, the less the total costs arising from the process.
Gordon Tullock argues that “getting a monopoly is essentially a competitive industry.”23
Tullock’s argument is that rent-seeking has double costs: the distortionary effects of the
rent itself, and then the diversion of productive resources towards competition for the
prize of the rent. In situations in which an unlimited number of supplicants may bid for a
rent, the expected price for the rent will be higher as actors compete with each other to
bid up the price for the rent. Fewer actors lessens competition for rents, and thus less
resources are diverted in obtaining rents. Much rent-seeking also entails competing with
other actors to win rents and then building entry barriers and other mechanisms to protect
those rents. Thus, when compared to an open-market auction, a smaller number of actors
will decrease the deadweight loss if they can form a cartel.24 A group that has exclusive
access to the rent markets has lower information costs, and can collude over time with
other rent-seekers to lower costs.25 The less these “protection costs,” the less deleterious
will be rent-seeking. The implication from this is straightforward: smaller numbers of
rent-seekers reduce the total social cost because bidding is limited, property rights over
the rent are more secure, and deadweight losses are lowered.26
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Small numbers also affect informational needs. In this case, government and
business elites have greater information about each other and are able to make relatively
more sophisticated judgements about trustworthiness and ability. Small numbers also
lead to iteration; actors know each other and are able to develop reputations. Iteration
reduces opportunism because the same actors will be active in the future, as well. While
such iterated interaction among a constant set of actors may lead to an Olsonian form of
distributional coalition that impedes efficiency compared to that of a pure market, the
more important point is that such a coalition will entail lower rent-seeking costs than an
unorganized and unlimited number of bidders, and that agreements are both stable and
durable.27
In countries with weak legal and political institutions, a situation of mutual
hostages among a small set of government and business actors lowers transaction costs
can provide a number of benefits that reduce transaction costs: better information about
the actors, greater ease of monitoring and enforcing agreements, greater confidence in
exchange, and more ease in making side-payments and engaging in reciprocity. Table 1
summarizes the two approaches – a neoclassical and an NIE perspective on cronyism.
//Table 1 here//
3. The Goldilocks principle: too few or too many
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The two polar conditions are either many actors, or centralization around one
important actor. In the case of large numbers of actors, there is no stable balance, and
"cascades" of cronies will flock to the side currently in power, hoping to curry favor.
Large-N also makes generating consensus and stability more difficult over the long run.
This leads to widely fluctuating economic policies, frequent re-negotiation of agreements,
an over-reliance on personal connections, and an unpredictable investment climate, which
increase transaction costs (Figure 1).28
//Figure 1 here//
The opposite pole – the case of a dictator – entails transaction costs that are either
much lower or much higher. On the one hand, decisionmaking is potentially very
efficient. Investors would often prefer to deal with a dictator, because making agreements
is easier than working through large numbers of veto players, and even if the bribe is very
large, it is only negotiated with one person. Economic decisionmaking can be quick and
efficient, and enforcing it may be easier because there is only one dictator with whom to
deal. However, a dictator can change his mind at any time, especially if he is a tinpot
dictator. Without a group that can counterbalance the dictator, arrangements are highly
contingent: property rights may be temporarily more stable under a dicator, but they are
less durable through crisis or transition. If time-horizons are short, or there is some
uncertainty regarding the stability of the dictator, then transaction costs can be very high
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and property rights virtually meaningless.29 In times of transition, centralization of
authority leads to higher transaction costs, greater uncertainty, and potentially
skyrocketing costs during the dictator's collapse.
Evaluating the role of transaction costs and cronyism is important, even though
scholars widely acknowledge the difficulty in measuring them.30 Recognizing this
difficulty, this study uses detailed case studies of polar cases of Korea, the Philippines,
and Indonesia in order to lay out the ranges of the variables and test the model’s
plausibility.
II.
Mutual hostages in Korea
All Asian countries have been characterized by cronyism. Close personal or
family connections have been central to political and economic life in Korea, the
Philippines, Indonesia. This process involved intermarriage among elites and the
assiduous cultivation of personal relationships. In these countries an introduction from a
mutual acquaintance has been critical in opening doors. And the broad pattern of politics
appears superficially similar: leaders have extensive power and weak parties devolve into
personal vote machines that trade pork for payoffs. In these countries, political payoffs
allow business influence over policy decisions, and access to the state was the avenue to
economic success. Because of the need to finance political parties, and thus the pivotal
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role of big business, in these countries the state had trouble disciplining business and
enforcing limits. The erratic nature of economic policy and the extensive corruption can
be seen as an outcome of this effort to build these bases of business and political
support.31
Yet the case of Korea has one major exception: despite extensive cronyism,
corruption was constrained by a mutual hostages between the business class and a
coherent state. Both of these groups actors were able to benefit from their close
relationship with the other, but neither was ever able to gain the upper hand. Business and
government elites needed each other and relied upon each other, and stability allowed for
long-term investment and iterated relationships. This is all the more remarkable because
the same small set of actors has remained essentially the same through a tumultuous halfcentury of Korean history including numerous coups d’etat, an assassination, a
democratic transition, and frequent political and economic crises.
In Korea, government intervention was subject to political influence in a number
of ways that reduced both rent-seeking on the part of the entrepreneurs, and transaction
costs for the politicians and bureaucrats involved in monitoring the policy process. This
mutual hostages between government and business limited the opportunities for excessive
advantage. While the “strong developmental state” has been the focus of much of the
literature on Asian growth, the surprising strength of the business sector has received less
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attention. This section will examine three areas that highlight the mutual hostages in
Korea and show how cronyism can lower transaction costs. The first area is the pattern of
financial relations in Korea. Second, the strength and organization of the chaebol as
exemplified by the Federation of Korean Industries (FKI). Third, the 1961 Illict Wealth
Accumulation Act and what it implies for our understanding of the strength of the Korean
state.
First, the state’s control over finance and the coherent and small set of Korean
business (chaebol) created a situation of mutual hostages. State control over the financial
sector had enormous consequences for the organization and conduct of business in
Korea.32 Since Korean companies were highly leveraged, these were vulnerable to state
control. Paradoxically, this weakness became a source of strength relative to the state.
By encouraging the formation of large conglomerates that accounted for large
percentages of the Korean economy, the state in effect became mutual hostages with the
chaebol.
The Korean government’s control over capital made any threat to cut off credit to
the chaebol lack credibility, because all actors knew that it would hurt the regime as
much as the chaebol. A flow of political payoffs to politicians cemented this pipeline of
easy money.33 For politicians, the need for political funds to run elections and other
political activities, as well as a natural proclivity toward greed, gave them no incentive to
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sanction companies unless the business managers were utterly incompetent. While both
business and the state benefited from close ties, neither side was able to dominate the
other.34 This is analogous to a prisoner’s dilemma: in PD both sides would prefer to
defect, but they are restrained from doing so by the ability of the other side to respond in
kind, and hence a form of stability ensues. The exchange of hostages led to an uneasy
balance of constrained collusion that existed throughout the period of high growth.
Mutual hostages lowers transaction costs in a number of ways. Business and the
state both knew that each needed the other, both also knew that few alternatives existed.
The set of favored cronies was relatively small, and thus the costs of competing with each
other were lower, because the prospects for opportunism and the need to protect
investments was lower.35 In addition, elites knew they were playing an iterated game,
where actors would be around for a while, with both the opportunity for reciprocity and
the fear of payback.
The second aspect of cronyism that lowered transaction costs in Korea was the
relative organization of business. Business in Korea was more coherent and organized,
allowing it to restrain and influence a strong state. The political circumstances in which
Park Chung Hee came to power initially dictated an effort to control business activities.
Over the longer run, however, the government was less preoccupied in limiting business
power, more dependent on business for both economic performance and political support,
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and thus more willing to actively organize business in an effort to achieve its economic
objectives. As a result, business associations played a more significant role in the
formulation and implementation of policy than they did in the Philippines, particularly
during the early phase of the export-led growth strategy.36
This best example of this is the Federation of Korean Industries (FKI). Formed of
those leading businessmen who were arrested in 1961 for illicit accumulation of wealth,
the FKI operates as sort of a club for the richest and most influential of the big capitalists,
and limits its membership to an elite stratum of entrepreneurs. After their release from
jail, the members of the FKI submitted a plan to the Supreme Council on National
Unification identifying fourteen key industrial plants -- cement, steel, fertilizer, etc. -- in
which they were interested in investing. One of the FKI’s initial actions was to travel
overseas and invite foreign capital to invest in Korea, and each member was designated a
particular field for investment.37
The FKI also lobbied successfully for the construction of an integrated industrial
complex at Ulsan in 1962 and the export industrial complex at Kuro that was an early
predecessor of the later export-processing zones.38 Thus the original investment decisions
in the early 1960s were a result of business-government relations, bypassing lengthy and
costly bureaucratic procedures.39 In an interview, Hahn-been Lee, former Prime Minister,
said that “of course the political leadership made all the major decisions about projects.
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We were there to provide a rationale for the decisions the regime had already made, and
then to implement them. The approval guidelines were there to help, but were not strictly
enforced.”40 The influence of the FKI makes clear that the bureaucracy’s role was to
justify and implement economic choices made for political reasons.
The FKI has also been influential regarding finance, particularly gaining access to
foreign exchange.41 Because Korean businessmen in the early 1960s did not have
experience in obtaining foreign capital, the FKI – in conjunction with the government -took on the role of selecting and overseeing firms that wished to borrow abroad. With
FKI approval, firms were more likely to obtain approval from the state, which results in
coordination and streamlining procedures.
The FKI also was instrumental in expressing its interests to the state and – at
times – presenting a unified voice. One example is the August 3rd, 1972, “Presidential
Emergency Decree on Economic Stabilization and Development” (informally known as
the “8-3” or pal-sam decree), when Park Chung-hee decided to freeze high-interest
informal (“curb”) market loans and replace them with long-term bank loans. The
chairman of the FKI finally decided to ask the president directly for help. After two
personal meetings in June between the FKI chairman and the president, Park Chung-hee
told his chief of staff, Kim Chung-nyum, along with presidential secretary Kim Yonghwan, to prepare an emergency decree.42 The FKI was in fact able to appeal directly to
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the president and have an influence.43 The FKI was not the only institutional voice to
press the state, and indeed individual business and cronies were more influential. The full
story of government-business relationsis complex. However, the FKI is significant for a
number of reasons. The FKI was able to aggregate voices and shows the ability of the
Korean business sector to compete and bargain with the state.
The third example of how strong business and strong state lowered transaction
costs is the 1961 bargain between state and business in Korea. As with the mutual
hostages of debt, the 1961 compromise is an example of the mutual hostages that existed
between elites in Korea. Perhaps the most-cited example of the South Korean state’s
power over chaebol arises from Park’s expropriation of major business leaders’ wealth
soon after his coup in 1961.44 In 1961 Park promulgated the bujong chukje-an, or “Illicit
Wealth Accumulation Act,” which allowed him to arrest hundreds of businessmen and to
seize their assets for illicit wealth accumulation under the Rhee administration.45 This
incident has generally been used to buttress the “strong state” thesis, showing that Park
had tremendous leverage over capital. However, expropriation was only the initial stage
of this incident. By examining the whole incident and by looking at the end results of the
actual expropriation, a different story emerges -- one that shows the power of business
relative to the state.
20
The evidence indicates that instead of “dominating” capital, Park worked closely
with capitalists and promoted rather than censured them. Park rapidly realized that
eliminating these businessmen would mean widespread economic problems. Kyong-dong
Kim neatly summarized the reason: "the only viable economic force happened to be the
target group of leading entrepreneurial talents with their singular advantage of
organization, personnel, facilities and capital resources."46 The result was a compromise
with the military government: the charges concerning illicit wealth accumulation would
be dropped in return for cooperation with the government in its efforts at industrial
planning. The thirteen businessmen with the largest assessed fines were the only Koreans
allowed to go abroad and solicit foreign loans, and upon their return they made a number
of policy recommendations to the Park government, including the establishment of an
industrial port at Ulsan. Many of those businessmen who had been assessed fines instead
negotiated to invest in the Five-Year Plan under Park, and received government loans for
that purpose. When the manufacturing plants were completed, these entrepreneurs
decided to pay their fines in cash rather than in stock, thus retaining control of the very
firms that Park had hoped to nationalize.
In this way, even at the beginning of the Park regime, capitalists realized that they
were not entirely vulnerable to the state, but rather that both had a certain ability to
sanction the other. Opportunism was constrained, information about a small set of cronies
21
was plentiful, and property rights were more secure. After 1961, the Korean state, which,
despite its bluster, rarely moved against the economic elite. When the state did attempt
rationalization in Korea, as with the automotive industry, it generally failed.47 Korean
mutual hostages lowered transaction costs because the number of players was smaller,
which allowed for more and better information, easier monitoring, consistent policies,
and better enforcement. Thus, the pattern of business-government relations in Korea was
a clear mutual hostages that allowed for a measure of stability and limited the potential
for one group to dominate the other.
III. The Philippines and Indonesia as polar cases
The Philippines and Indonesia represent the polar examples of cronyism in
government-business relations. In the Philippines and Indonesia transaction costs have
been highe, and while property rights and economic decisions were often redistributed
through the power of the state, often there was no constraint or incentive that pushed
Philippine or Indonesian actors to use those rights more productively than before. The
Philippines and Indonesia are also interesting because they represent polar cases
themselves: in the Philippines the presence of too many actors led to cascades of
supplicants, while in Indonesia extreme centralization of authority was initially efficient
but ultimately led to chaos.
22
1. Cascades in the Philippines
In the Philippines, too many actors raises the costs of making and enforcing
agreements, and both the state and the oligarchs have been unable to cohere. During the
democratic era the powerful oligarchs were able to overrun the state, while under Marcos,
the pendulum swung too far in the opposite direction and the state was able to prey upon
society.48 In the Philippines there was never a balance as existed in Korea. Thus
Philippine politics has been dominated by a pendulum of corruption that swung to and
fro, but never reached an equilibrium where corruption was constrained or property rights
were stable. Transaction costs were higher in the Philippines, stability lower, and the
economy less efficient. Cascades of supplicants were drawn to whomever was
temporarily in power, and although the leader may have attempted to limit these
demands, eventually the crush of supplicants would become too great, overwhelming the
system.
During the democratic era, the Legislature was an important focus of both rentseeking competition and political competition. Oligarchs obtained access to the state
through electoral competition, and the victors then divided the spoils among themselves.49
This process is best described as a pendulum of political power where two weak parties
(the Liberals and Nacionalistas) regularly traded power. Through the cascade effect,
23
opportunists and supplicants scrambled to make hay while the sun shone. Over time the
demands would become too crushing, and aspiring opposition politicians would begin to
have the opportunity to lure oligarchs to their side in return for promises of greater spoils.
Eventually the defection of supporters from the incumbent politician would lead to a
tipping of the balance, and a headlong rush would begin as toadies and flatterers flocked
to the new, rising politicians.50 An example of this was the “50-50” agreement of 1959.
The president and congress had competed with each other to provide patronage
appointments within the bureaucracy, with the result that the government had grown out
of control. Negotiations resulted in an agreement that fifty percent of the bureaucracy
would be filled by the president, fifty percent by congress. Notable not only was the
pressure to provide patronage, but also that both sides immediately ignored the agreement
and continued business as usual. 51
This process of cascades led to swings in who nominally held office.52 At
the initial stages everyone jumped on, in order to receive the benefits that the new
politician could provide. 53 Over time, as the presence of more hangers-on began
to dilute the benefits and make ruling unwieldy, aspiring opposition politicians
began to gain defectors, who hoped to gain more by defecting. And then the
pendulum would swing back, and a new politician would take office.
24
These machines offer their votes to aspiring politicians in return for favors, both
legal and illegal. Power careened wildly between parties. Gabriella Montinola argues that
the overall result was an excess of demands on the state and the inability of top
politicians to formulate or implement coherent policies. 54 During election years, those in
power would run budget deficits as they handed out pork and granted other favors. Table
2 shows the excessive government spending during election years.
//Table 2 here//
Like South Korea, Philippine business is dominated by large, diversified, familybased conglomerates that have endured and survived over generations. Indeed, Filipinos
talk of the 100 or so Philippine families that control most of the country’s business.55 In
1980, 98 percent of all sectors had “four or fewer companies controlling 35 percent of
sales.”56 However, In contrast to Korea, the Philippines has been described as an "anarchy
of families."57 The actual number of relevant business families in the Philippines is far
larger in number, more diffuse geographically, and more widely distributed across
various industries. Among commercial banks, for example, the five largest banks
comprise only 20 percent of the entire market.58 This is much lower than in Korea, where
the state maintained dominant control well into the 1990s.
Business in the Philippines has been intricately enmeshed in cascades. This raises
transaction costs and lowers economic efficiency in a number of ways. First, greater
25
economic and social mobility means that the competition for rents is more costly and
more diffuse. Second, the distribution of property rights is more tenuous, because
families have less influence on government and less power to resist.59 Finally, the
mobility of families means less coherence in pressing demands on the state, and a more
easy division by state actors. As Paul Hutchcroft writes, "As long as such rents can be
obtained....rent seekers find it more important to maintain their government connections
than to concern themselves with the internal efficiencies and investments of their
firms."60 Investment in the Philippines, lacking safeguards, was difficult to undertake.
Similarly, much energy was diverted from developing efficient businesses and channeled
instead into political protection of economic interests.
The pattern of Philippine government-business interaction raises transaction costs
in other ways, as well. Philippine business has been unable to coordinate or organize, and
the Philippines the Philippine Chamber of Commerce, Makati Business Council, and
other associations were notoriously unable to speak with a unified voice. Philippine
business tends to be geographically more dispersed, limiting both the coordination and
the collusion possible between the families themselves. In addition, because interests are
familial and cross-sectoral, the business sector has been unable to coherently form
demands and press the state for consistent policies. "Philippine business associations are
notoriously weak and poorly institutionalized, and its members know that the way to
26
make money is to gain privileged access to the government and then to 'exclude
information from each other.' "61
The nature of political competition under both democracy and authoritarianism
meant that the families were concerned about providing particularistic goods to
themselves only, and that cooperation for jointly beneficial policies and lobbying was
difficult to achieve. Although Philippine family conglomerates have been well organized
in some respects (diversification, many with their own banks, able to extract rents from
the state), as a sector the families found it difficult to work together to further their
interests with respect to the state. Again, this raises transaction costs by forcing
companies not only to curry favor with politicians, but also to expend resources
competing with each other.
If the democratic era saw a weak government overrun by interest groups, martial
law saw the pendulum swing too far in the opposite direction, with Marcos concentrating
power in the presidential palace to a degree that gave him the opportunity to do virtually
whatever he wished. From a weak state and a strong society during the democratic era,
the pendulum had swung too far in the other direction: a coherent state was able to
divide a weak society and predate upon it. Centralization under Marcos, although initially
viewed was providing the Philippines stability and direction, rapidly devolved into an
erratic decisions that choked off economic growth.
27
To maintain his rule, Marcos played a game of divide and conquer. He attacked
those oligarchs strong enough to be potential competitors, developed new oligarchs who
were solely dependent upon him for their success, and left the majority of the oligarchs
alone as long as they left him alone. As an anonymous politician noted, “Marcos’ tactics
were purposeful. First, grab the cash flow of heavy industries such as Mercalco (power
generation). If you have cash, you can pay anybody off. Second, divide and conquer.
Third, obfuscate by creating a squid’s screen of ad hominen attacks and distortions.
Finally, deliberately create trouble so you can be the savior.”62 Marcos created new
oligarchs who were dependent solely on him for their success, and he also rewarded
traditional elites who actively cooperated with him.63 Thus the direction of corruption
shifted once again, this time from bottom-up plundering of the state to the top-down
plundering of society.64 As Richard Doner writes,
These were businessmen, who, by virtue of close links to the Marcos
family, grew so large as to control strategic portions of the economy...the
Filipino private sector of the 1970s came to be dominated by a set of
entrepreneurs who, while financially quite well off as a result of state
subsidies, were poorly managed and largely oriented towards short-term
profits.65
Although Marcos was able to take advantage of a disorganized business class, he
did not fundamentally transform Philippine society. Rather, Marcos took the pattern of
Philippine corruption to its logical extreme. The oligarchs were not destroyed but instead
28
new oligarchs were brought in, who rapidly tried to become like the old oligarchs. The
cascades of the democratic era continued, and everybody still needed -- and desperately
wanted -- access to the presidential palace. Although this system initially worked
smoothly, soon the regime began to crumble under its own weight, and the process began
again.
The pattern of crony relations in the Philippines has contributed to high
transaction costs and resultant lower economic performance. Business groups competed
with each other over the spoils of the state, with power shifting rapidly between groups.
Both property rights and elites were not stable. Business itself was unable to organize and
as a result had no coherent voice with which to press the government for consistent
policies, and more importantly business devoted many resources to competing among
themselves for government favor. Although the Marcos era saw increased state strength,
new cronies brought in created by expropriating traditional oligarch’s wealth further
exacerbated the high transaction costs in the economy.
2. Efficiency and chaos in Indonesia
Indonesia illustrates the polar case -- and both potential outcomes -- of
centralization around one figure. Initially, when Suharto's (president from 1966-1999)
rule was stable, Indonesia experienced sustained and impressive growth, and most
29
domestic and international actors saw corruption as a merely a cost of doing business
with him. Power concentrated in Suharto led to a state-dominated economy permeated by
patronage and corruption but one that was also decisive and flexible. 66 Observers noted
that “the absence of institutional constraints on executive power meant that policy could
be adjusted quickly.”67 Spurred by oil revenues, the interventionist state oversaw
significant economic growth during the 1970s and 1980s, and foreign direct investment
surged into Indonesia. However, while flexibility contributed to Indonesia's growth
during the boom years, decisionmaking was never institutionalized and remained ad-hoc.
As Michael Ross argues, as Suharto's rule became increasingly tenuous, centralization led
to a political and economic crisis from which Indonesia is still trying to recover.68
Centralization restricted political participation and kept power in the hands of
Suharto and later, his family. The business sector, small and weak to begin with, never
developed to the point that it could coordinate and become an independent base. Policy
was determined by those with crony ties to Suharto or the ruling family receiving
favorable treatment at the hands of the government. John Sidel writes that “Suharto
presided over the continuous flow of capital, labor, and commodities, and the regular
rotation of military and civilian personnel…it was precisely this steady circulation…that
kept Indonesia in motion as Suharto stood still, for more than thirty years.”69
30
As in the Philippines, favored supporters gained access to government largess.
However, centralized authority in Indonesia meant that politics took the form of
competition within the elite who were concerned mainly with creating good ties to
Suharto and in gaining access to the distribution of spoils. Cronyism extended to
Suharto’s family and close friends, as well. Suharto’s six children have become major
players in business over the past three decades, with the family as a whole having been
involved in an estimated $73 billion in business between 1966 and 1998, and are
estimated to have financial or business interests in over 550 companies in Indonesia
alone.70
The bureaucracy and the state banks were also under the control of Suharto.
Technocrats were dependent upon Suharto’s personal support to implement policy
initiatives, and these initiatives were often overridden or ignored for political reasons.71
Although a balanced budget law was implemented in the 1960s, by the 1980s Suharto
himself was ignoring the rule, using the state coffers to finance electoral campaigns or
support various cronies, such as B.J. Habibie’s use of the “reforestation fund" to finance
his pet project, construction of an Indonesian aircraft.72 The financial sector remained
dominated by the state banks, state-owned enterprises – many headed by members of
Suharto’s family – came to dominate large sectors of the economy, and the native
Indonesian entrepreneurs remained sidelined in the political process. As Adam Schwarz
31
writes, “State bank involvement is crucial for the cronies [of Suharto] since some of their
projects are of such dubious quality that private lenders would shun them.”73 Military
officers were constantly circulated and reassigned to limit their power.74
In addition, the business sector was either weak or dependent on Suharto, not a
situation of mutual hostages as in Korea. 75 Richard Robison and Andrew Rosser note that
“in each instance, the rise of the new business interests was contingent upon the opening
of former public monopolies,” and that by 1980 the state controlled almost 60% of equity
in all domestic investment.76 “Political patronage and state protection afforded privileged
access to bank credit, forestry concessions, trade and manufactured monopolies…and
state contracts for supply and construction.”77
A major cause of business weakness was its ethnic makeup. Between forty and
seventy percent of the modern private sector is owned by the ethnic Chinese minority,
even though they comprise just three percent of the population.78 Chinese Indonesians
who became leading business figures included Liem Sioe Liong of the Salim Group, Bob
Hasan of the Hasan Group, and Goh Swie Kie of the Gunung Sewu Group.79 Not only
was there widespread resentment against the ethnic Chinese entrepreneurs, “New Order
policies discriminating against the ethnic-Chinese impeded their circulation and
ascendancy.”80 Exclusive Chinese organizations have been discouraged or banned, and
only one Chinese held a ministerial position under Suharto.81 Because they faced hostility
32
and periodic anti-Chinese riots, Chinese businessmen were unable to cohere as a
powerful group and politically vulnerable, and so they became dependent on Suharto.
Without Suharto’s protection they would be widely despised. Thus -- in contrast to the
Korean chaebol who were genuinely independent and powerful outside of the military
regime -- the Indonesian business sector was unable to balance the Suharto family’s
interests.
As Suharto's rule became increasingly unstable, the pattern of flocking towards
Suharto resulted in excessive uncertainty. Michael Ross writes that “the highest level of
uncertainty should be found in the waning days of personalistic regimes…and investors
who have holdings in economies governed by personalistic regimes should be anxious to
determine when the regime is likely to end, and how disruptive that end is likely to be.”82
Ross McLeod argues that deep problems of credibility and unreliability reveals the
deeply flawed nature of the system.83 An imbalance between political and economic
power led to corruption and weak property rights, and when the Asian financial crisis
struck the region in 1997, the weaknesses of the system became exposed, and Suharto
and the regime were toppled by widespread political turmoil.84 Most tellingly, the crisis
hit Indonesia harder than other Asian countries, foreign direct investment in Indonesia
has plummeted, and Indonesia has taken longer to recover both political and economic
stability (figure 2).85 With decentralized power, Indonesia has been swamped with too
33
many players, and "the fluidity of uncertainty of political power reportedly makes bribe
takers more demanding than before, because they face a real risk of quickly losing
whatever power they have when the political winds shift."86
//Figure 2 here//
The Philippines and Indonesia represent the polar cases where too many or too
few actors raises transaction costs, and leads to unstable policies, greater uncertainty, and
more corruption. In the Philippines too many actors led to a cascade of supplicants who
followed whoever happened to gain power for the moment. In Indonesia, centralized
authority during Suharto’s reign -- although efficient while his rule was stable -- led to
higher transaction costs once uncertainty about his rule began to surface. In both cases
there is a marked contrast with the durability and stability of mutual hostages in Korea.
IV. Conclusion
This study has provided an explanation that links differences in the nature and
type of cronyism to different patterns of government-business relations in Korea, the
Philippines, and Indonesia. A mutual hostages situation lowered transaction costs in
Korea, while cascades raised them in the Philippines and centralization had mixed effects
in Indonesia. In countries with weak legal and political institutions, long-term
relationships may be difficult to create. In Korea the balance kept corruption from
34
swamping growth, while Philippine and Indonesian cases show the lack of stability that
harms long-term growth.
We should emphasize, however, that cronyism is only one variable involved in
explaining developmental outcomes.87 Fostering economic growth requires much more
than limiting cronyism and eliminating corruption.88 A mutual hostage situation is
uncommon – most developing countries are closer to one of the poles of either too few or
too many actors. Indonesia and the Philippines are still relatively successful cases of
development "at the poles" when compared to many developing countries such as
Nigeria, Venezuela, and pre-NAFTA Mexico. However, while many of the reasons for
lesser growth in these countries have to do with other factors, high transaction costs are a
major problem for growth in all countries.
New developments in microeconomics, sociology, and anthropology have
underlined the role of institutions in East Asia's economic performance. Rather than
seeing markets as the frictionless intersection of supply and demand curves, markets are
being reinterpreted as complexes of principal-agent relationships in which problems of
imperfect and asymmetric information, contracting and credibility are ubiquitous. The
smooth functioning of markets is not simply a matter of getting policies, incentives, or
prices right, but of public and private institutions that facilitate market exchange: from
the legal system and a clear delineation of property rights; to the public provision of
35
information; to informal institutions that build trust. Central to understanding these
components is understanding the conditions under which the pattern of cronyism lowers
transaction costs and supports economic growth, and when it raises transaction costs and
harms economic growth.
36
Table 1. Two approaches to rent-seeking and cronyism
Neoclassical rent-seeking
1. The initial distribution of Perfect
property rights (t=0)
NIE
Imperfect, even chaotic
2. who can play the game
Anyone
Small-N lowers transaction
costs. The cost of rentseeking is lower because
there is no need to build
entry barriers, pricecollusion, etc.
3. resources used to get
rents
Deadweight loss (DWL)
Initially all resources are
allocated to their highest
marginal return in point 1.
Bribes=transfers. Not
necessarily any DWL
4. use of rents and property
rights in (t=1)
DWL
Transaction costs lowered
because information is
easier to obtain and from
iteration among elite
groups; resources are
underutilized anyway in
t=0, and rent-seekee
potentially uses resources
more efficiently than in t=0
37
Figure 1. Actors and transaction costs
high
Chaos
Cascades
Transaction
costs
Mutual hostages
low
Efficiency
Dictator
Small-N
Number of actors
38
Many
Table 2. Excessive government spending in election years, 1957-1968
Year
President
Election year?
Central government net
receipts (million PP)
1957
Garcia
Yes
-123.4
1958
Garcia
No
17.8
1959
Garcia
Yes
-60.7
1960
Garcia
No
46.9
1961
Garcia
Yes
-159.2
1962
Macapagal
No
88.8
1963
Macapagal
Yes
-110.0
1964
Macapagal
No
75.3
1965
Macapagal
Yes
-208.2
1966
Marcos
No
-86.7
1967
Marcos
Yes
-120.8
1968
Marcos
No
-85.3
Source: Harvey Averch, John E. Koehler, and Frank H. Denton, The Matrix of Policy in the Philippines
(Princeton: Princeton University Press, 1971), p. 101.
39
Figure 2. FDI in Indonesia, 1981-1999 ($US billion)
7
6
5
4
3
2
1
0
1981 1982
1983
1984 1985
1986 1987
1988 1989
1990
1991 1992
1993 1994
1995 1996
-1
-2
-3
-4
Source: IMF, International Financial Statistics Yearbook, various years
40
1997
1998 1999
ENDNOTES
1
Dani Rodrik wrote that “What was required was a competent, honest, and efficient bureaucracy to
administer the interventions, and a clear-sighted political leadership that consistently placed high priority
on economic performance.” Rodrik, "Getting Interventions right: How South Korea and Taiwan Grew
Rich," EconomicPolicy 20 (1995): p. 91. Peter Evans has argued that “highly selective meritocratic
recruitment and long-term career rewards create commitment and a sense of corporate coherence.” Evans,
Embedded Autonomy (Princeton: Princeton University Press, 1995) p. 12. Alice Amsden also wrote that
“economic success in Korea challenges the assumption...that government intervention degenerates into
“rent-seeking.” Alice Amsden, Asia’s Next Giant (Cambridge: Cambridge University Press, 1989), p. 327.
For other specific instances, see Karl Fields, “Strong States and Business Organization in Korea and
Taiwan,” in Business and the State in Developing Countries, edited by Sylvia Maxfield and Ben Ross
Schneider (Ithaca: Cornell University Press,1997), p. 126; Chalmers Johnson, “Institutions and Economic
Performance in South Korea and Taiwan,” in The Politics of the New Asian Industrialism, edited by
Frederic Deyo, (Ithaca: Cornell University Press, 1987), p. 152; and Ziya Önis, “The Logic of the
Developmental State,” Comparative Politics 24 (1991), p. 114.
2
For more detailed discussion of corruption in Asia, see Cheng-Tian Kuo, “Taiwan’s Distorted Democracy
in Comparative Perspective,” Journal of Asian and African Studies 35, no. 1 (2000): 85-111; Tun-jen
Cheng and Brantly Womack, “General Reflections on Informal Politics in East Asia,” Asian Survey 36, no.
3 (March 1996): 320-338; Mushtaq Khan and Jomo K.S., eds., Rents, Rent-Seeking and Economic
Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000); and Author.
3
Richard Doner and Ansil Ramsey, "Rent-Seeking and Economic Development in Thailand," in Mushtaq
Khan and Jomo K.S., eds., Rents, Rent-Seeking, and Economic Development: Theory and Evidence in Asia
(Cambridge: Cambridge University Press, 2000), p. 147.
4
I use cronyism here as a generic term to refer to corruption, rent-seeking, and personal relationships. For
economists, such actions have the same effect – as the Greenspan quote suggests, it implies decisionmaking
made on grounds other than pure economic efficiency.
5
There has been a recent wave of interest in understanding cronyism (broadly defined). See, for example,
Kathleen Collins, “The Political Role of Clans,” Comparative Politics (forthcoming); Janet Landa, Trust,
Ethnicity, and Identity: beyond the new institutional economics of ethnic trading networks, contract law,
and gift-exchange (Ann Arbor, MI: University of Michigan Press, 1994); Richard Doner and Ben RoseSchneider, “Business Associations and Economic Development: Why Some Associations contribute More
than Others,” Business and Politics 2, no. 3 (November 2000):261-288; Paul Hutchcroft, Booty Capitalism
(Ithaca, NY: Cornell University Press, 1998); Masahiko Aoki et al., eds., The role of government in East
Asian economic development : comparative institutional analysis (New York: Oxford University Press,
1997); Murray L. Weidenbaum and Samuel Hughes, The bamboo network : how expatriate Chinese
entrepreneurs are creating a new economic superpower in Asia (New York: Martin Kessler Books, 1996);
Lucian Pye, “Money politics and transitions to democracy in East Asia,” Asian Survey 37 (March 1997):
213-28; Gary Hamilton and Nicole Biggart, “Market, culture, and authority: a comparative analysis of
management and organization in the Far East: Japan, South Korea, Taiwan,” American Journal of
Sociology 94 supplement (1988): S52-S94; Mushtaq Khan, “The Efficiency Implications of Corruption,”
41
Journal of International Development 8, no. 5 (1996): 683-696; Pranab Bardhan, “Corruption and
Development: A Review of Issues,” Journal of Economic Literature 35 (1997):1320-1346; Andrei
Shleifer and Robert Vishney, “Corruption,” Quarterly Journal of Economics 108 (1993):599-617; Khan
and Jomo, eds., Rents, Rent-Seeking, and Economic Development; and Mushtaq Khan, “The Input-output
Function for rent-seeking: A comparative analysis of differential effects,” (Unpublished manuscript,
University of London, 1997).
6
See Oliver E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985);
and Barry Weingast, “Constitutions as Governance Structures: The Political Foundations of Secure
Markets,” Journal of Institutional and Theoretical Economics 149 (March 1993):286-311.
7
See Paul Krugman, “What Happened to Asia?” (MIT, manuscript, 1998). Krugman argues that moral
hazard was the main reason for financial failures in Asia. Moral hazard is a specific issue that is subsumed
under a larger discussion of the NIE, and hence Krugman’s argument is compatible with but more limited
than the analysis presented here. See also Paolo Mauro, “Corruption and growth,” The Quarterly Journal of
Economics 110 (August 1995): 681-712; Daniel Treisman, “The Causes of Corruption: a cross-national
study,” (UCLA: ms, 1997); and Cheryl W. Gray, “Corruption and development,” Finance and
Development 35 no. 1 (March 1998): 7-10.
8
See Douglass North, “Government and the Cost of Exchange in History,” Journal of Economic History
44, no. 2 (1984):255-264.
9
Doner and Schneider, “Business Associations and Economic Development,” p. 261.
10
On corruption in Korea during the Park era, see Park Kyung-suk, “Taet’ongnyÒng kukhoe wiwÒn sÒngo
chagÚm (Campaign Funds for Presidential and Assembly Elections),” Sindonga (May 1967), especially
pages 204-7; Kim Jin-bae and Park Chang-rae, “Ch’agwan (Foreign Loans),” Sindonga (December 1968),
p. 88; and Joungwon Alexander Kim, Divided Korea: The Politics of Development, 1945-1972
(Cambridge, MA: Harvard University Press, 1975), esp. pp 230-244. For corruption in Taiwan, see ChengTian Kuo, “Taiwan’s Distorted Democracy in Comparative Perspective"; Shelley Rigger, “Electoral
Strategies and Political Institutions in the Republic of China on Taiwan,” in Harvard Studies on Taiwan:
ss of the Taiwan Studies workshop, volume 1 (Cambridge, MA: Fairbank Center for East Asian Research,
1995); and Michael Ying-Mao Kau, “The Power Structure in Taiwan’s Political Economy,” Asian Survey
36, no. 3 (March 1996), p. 290. For corruption in Japan, see Chalmers Johnson, “Tanaka Kakuei, Structural
Corruption, and the Advent of Machine Politics in Japan,” Journal of Japanese Studies 12, no. 1 (Winter
1986); Yayama Taro, “The Recruit Scandal: learning from the causes of corruption,” Journal of Japanese
Studies 16, no. 1 (Winter 1990); and Jacob Shlesinger, Shadow Shoguns: the rise and fall of Japan’s
postwar political machine (Simon and Schuster, 1997).
11
Mushtaq Khan, "Rents, Efficiency, and Growth," in Khan and Jomo, eds., Rents, Rent-Seeking, and
Economic Development, p. 39.
12
Amsden, Asia’s Next Giant; Evans, Embedded Autonomy; and Michael Ross, “Indonesia’s Puzzling
crisis,” (Paper prepared for the conference “Asian political-economy in an age of globalization,” Tuck
School of Business, Dartmouth College, May 10-11, 2002).
13
For comparisons of Northeast Asia to Southeast Asia and Latin America, see Andrew MacIntyre, ed.,
Business and Government in Industrializing East and Southeast Asia (Sydney: Allen and Unwin, and
Ithaca, NY: Cornell University Press, 1994); and Gary Gereffi and Donald Wyman, eds., Manufacturing
Miracles: Paths of Industrialization in Latin America and East Asia (Princeton: Princeton University
Press, 1990).
42
14
See Oliver E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985);
Douglass North, “A Transaction Cost Theory of Politics,” Journal of Theoretical Politics 2, no. 4
(1990):355-367. For introductions to the NIE, see David Kang, "South Korean and Taiwanese Develoment
and the New Institutional Economics," International Organization 49, no. 3 (Summer 1995): 555-87; Terry
Moe, “The New Economics of Organization,” American Journal of Political Science 28 (1984): 739-777;
James E. Alt and Kenneth A. Shepsle, eds., Perspectives on Positive Political Economy (Cambridge:
Cambridge University Press, 1990); and Erik Furubotn and Rudolf Richter, “The New Institutional
Economics: An Assessment,” in Furubotn and Richter, eds., The New Institutional Economics (College
Station, TX: Texas A&M Press, 1991). For critiques, see Mark Granovetter, “Economic Action and Social
Structure: The Problem of Embeddedness,” American Journal of Sociology 91 (November 1985):481501; Richard Posner, “The New Institutional Economics Meets Law and Economics,” Journal of
Institutional and Theoretical Economics 149 (March 1993):73-121 (with replies from Ronald Coase and
Oliver Williamson); and Ronald Dore, “Goodwill and the Spirit of Market Capitalism,” British Journal of
Sociology 34 (1983):459-482.
15
See, for example, David C. Colander, ed., Neoclassical political economy : the analysis of rent-seeking
and DUP activities (Cambridge, Mass. : Ballinger Pub. Co., 1984); A. Breton, “Toward a presumption of
efficiency in politics,” Public Choice 77, no. 1 (September 1993):53-65; Robert Ekelund and Robert
Tollison, Mercantilism as a Rent-Seeking Society: economic regulation in historical perspective (College
Station: Texas A&M, 1981):18-19; and K.S. Jomo and Edmund Terence Gomez, “Rent Generation and
Distribution, and their Consequences in Malaysia,” (unpublished ms.)
16
Pranab Bardhan, “The New Institutional Economics and Development Theory: A Brief Critical
Assessment,” World Development 17, no. 9 (1989):1389.
17
See Douglass North, Structure and Change in Economic History.
18
Paul Milgrom and John Roberts, “Bargaining costs, influence costs, and the organization of economic
activity,” in James E. Alt and Kenneth A. Shepsle, eds., Perspectives on Positive Political Economy
(Cambridge: Cambridge University Press, 1990), Ha-joon Chang, The Political Economy of Industrial
Policy (London: St. Martin’s Press, 1994); and Yoram Barzel, “Measurement Cost and the Organization
of Markets,” Journal of Law and Economics 25 (April 1982):27-48.
19
Theoretically only the lowest-cost firm could afford the highest bribe. Pranab Bardhan, “Corruption and
Development: A Review of Issues,” Journal of Economic Literature 35 (1997), p. 1322.
20
For similar arguments about patron-client relations and cronyism, see Mushtaq Khan, "Rent-Seeking as
Process," in Khan and Jomo eds., Rents, Rent-Seeking, and Economic Development, pp. 114-7.
21
This argument is similar to the idea of bilateral monopoly in economics. Bilateral monopoly
exists when there is only one consumer and producer. In this situation, rents will be lower than
the potential maximum and there is no clear equilibrium. William Baumol’s work on
“contestable” markets is also similar. The presence of contestable markets limits, but do not
eliminate, the rents a monopolist can earn. See David Kreps, Microeconomic Theory (1992), p.
551-573; William Baumol, “Contestable markets: an uprising in the theory of industry structure,”
The American Economic Review 72 (March 1982): 1-15; and Roger Blair, David Kaserman, and
Richard Romano, “A Pedagogical Treatment of Bilateral Monopoly,” Southern Economic Journal
55, no. 4 (April 1989):831-841.
22
Robert Axlerod, The Evolution of Cooperation (New York: Basic Books, 1984).
23
Gordon Tullock, “Rents and Rent-seeking,” in C. Rowley, R. Tollison, and G. Tullock, eds., The
Political Economy of Rent-Seeking (Boston: Kluwer, 1988), p. 228.
43
24
See Khan, "Rent-Seeking as Process," pp. 91-114.
25
Chang, “Organising Development,” 120.
26
There is, however, variation across sectors (textiles versus steel). In relatively atomistic sectors that
approximate pure market competition, rents will be lower and the need for coordination among actors will
also lower.
27
See Mancur Olson, The Rise and Decline of Nations: economic growth, stagflation, and social rigidities
(New Haven: Yale University Press, 1982).
28
The argument presented here is similar to that advanced by Andrew MacIntyre regarding policy
fluctuation, and differs in its focus on cronyism. See Andrew MacIntyre, “Institutions and Investors: the
Politics of the Economic Crisis in Southeast Asia,” International Organization 55, no. 1 (Winter 2001): 81122.
29
Including an explicit discussion of the conditions under which dicators may be either efficient or
uncertain is beyond this paper. See Ronald Wintrobe, "The Tinpot and the Totalitarian: an economic theory
of dictatorship," American Political Science Review 84 (September 1990): 849-72.
30
On measuring transaction costs, see Oliver Williamson, The Economic Institutions of Capitalism (New
York: The Free Press, 1985), pp. 80-84 and 211. For measuring corruption, Daniel Treisman uses an index
of perceived corruption as his measure of actual corruption in “The Causes of Corruption: a cross-national
study,” (UCLA: ms, 1997); Robert Wade traces the sale of office in India in “The Market for Public
Office: Why the Indian state is Not Better at Development,” World Development 13, no. 4 (April 1985):
467-497; and Chalmers Johnson follows a series of corruption scandals in Japan in “Tanaka Kakuei,
Structural Corruption, and the Advent of Machine Politics in Japan,” Journal of Japanese Studies 12, no. 1
(Winter 1986).
31
Tun-jen Cheng, Stephan Haggard, and David Kang, “Institutions and Economic Growth in Korea and
Taiwan: the bureaucracy,” Journal of Development Studies 34, no. 6 (August 1998): 87-111; and
Doronila, The State, Economic Transformation, and Political Change in the Philippines, p. 5.
32
Jones and Sakong 1980.
33
See, for example, Park Kyung-suk, “Taet’ongnyÒng kukhoe wiwÒn sÒngo chagÚm (Campaign Funds
for Presidential and Assembly Elections),” Sindonga May 1967, especially pages 204-7; and Lee Youngsuk, “sÒngÒ chagÚm kwa chaebÒl (Election Funds and Chaebols),” Wolgan Chosun (November 1987),
222-239.
34
On the failed attempt to rationalize the auto industry in the 1970s, see Seok-jin Lew, “Bringing Capital
Back In: A case study of South Korean automobile industrialization.” (Ph.D. diss., Yale University, 1992).
35
On bribes, see Yoon Young-ho, “ChÒng Tae-su wa kÒmÚn ton (Chung Tae-soo and black money),”
Shindonga (March 1997), p. 201.
36
See Cheng, Haggard, and Kang, "Institutions and Economic Growth in Korea and Taiwan."
37
Federation of Korean Industry, ChÒnkyÒngnyÒn SamsipnyÒnsa (A Thirty Year History of the FKI)
(Seoul, FKI, 1992).
38
Federation of Korean Industry, ChÒnkyÒngnyÒn SamsipnyÒnsa, p. 35-49; and Lee Young-hwan,
“Hankuk Úi kyÒngje tanch’e wa chÒngch’aek kyÒlchÒng kujo (Corporatist Development and the
Structure of Policymaking in Korea).” in Lee Young-hwan ed., Hankuk kiÒpÚl segyehwa chÒllyak
(Strategies to globalize Korean industry) (Seoul: Chulpansa 1995), p. 304.
39
For more on this, see Author.
40
Author’s interview, October 22, 1996.
44
41
For an eyewitness account of lobbying with the Park regime, see Lee Byung-chull, Ho-am chachon (HoAm’s autobiography) (Seoul: Jungang Ilbo, 1986), p. 134.
42
Lee Young-hwan, "Hankuk Úi kyongje tanch’e wa chÒngch’aek kyÒlchÒng kujo (Corporatist
Development and the Structure of Policymaking in Korea)," in Lee Young-hwan, ed., Hankuk kiÒpÚl
segyehwa chÒllyak (Strategies to globalize Korean industry) (Seoul: Chulpansa, 1995). See also
Kyunghyang Ilbo, August 31, 1991.
43
For a discussion of this time, see Lee Sung-hyong, “Kukka kyekÚp mit chabon ch’ukchÒk: 8, 3
chochi’rÚl chungsimÚro (State, class, and capital accumulation: The president’s decree of 8-3-72),” in
Choi, ed., Hankuk Chabon juÚi wa kukka (Korean Capitalism and the State): 273-74; and Carter Eckert,
“The South Korean Bourgeoisie: A Class in Search of Hegemony,” in Hagen Koo, ed., State and Society
in Contemporary Korea (Ithaca: Cornell University Press, 1993), p. 108.
44
Karl Fields, “Strong States and Business Organization in Korea and Taiwan,” in Maxfield and
Schneider, eds., Business and the State in Developing Countries (Ithaca: Cornell University Press, 1997),
p. 136.
45
Pak Pyongyun, Chaebol kwa chÒnch’i (Chaebol and Politics) (Seoul: Hanguk Yongusa, 1982); and
Stephan Haggard, Byung-kook Kim, and Chung-in Moon, “The Transition to Export-led Growth in South
Korea: 1954-1966,” The Journal of Asian Studies 50, no. 4 (November 1991): 850-73.
46
Kyong-dong Kim, "Political Factors in the Formation of the Entrepreneurial Elite in South Korea," Asian
Survey 16, no. 5 (May 1976), p. 470.
47
See Park Byung-yoon, ChaebÒl kwa chÒngch’i (Seoul: Hanguk Yongusa, 1982), p. 210
48
For details of intrigue in the Marcos palace, see William Rempel, Delusions of a Dictator: The Mind of
Marcos as Revealed in His Secret Diaries (Boston: Little, Brown, 1993).
49
De Dios, "A Political Economy of Philippine Policy-Making," in John W. Langord and K. Lorne
Brownsey, eds., Economic Policy-Making in the Asia-Pacific Region (Halifax, Nova Scotia: Institute for
Research on Public Policy, 1990), p. 111. See also Carl Lande, Leaders, Factions and Parties, esp. pp. 12.
50
See Carl Lande, Leaders, Factions, and Parties: The Structure of Philippine Politics (Yale University
Southeast Asia Series, no. 6, 1964); Kit Machado, “Changing Aspects of Factionalism in Philippine Local
Politics,” Asian Survey 11, no. 12 (December 1971):1182-99, and Amando Doronila, “The Transformation
of Patron-Client Relations and its Political Consequences in Postwar Philippines,” Journal of Southeast
Asian Studies 16, no. 1 (March 1985): 99-116.
51
Gregorio A. Francisco, Jr., and Raul P. de Guzman, “The 50-50 Agreement,” in de Guzman, ed.,
Patterns in Decision Making: Case Studies in Philippine Public Administration (Manila: Graduate School
of Public Administration, University of the Philippines, 1963), pp. 93-102
52
Mark R. Thompson, The Anti-Marcos Struggle: Personalistic rule and Democratic Transition in the
Philippines (Quezon City: New Day Publishers, 1996).
53
Wurfel, Filipino Politics, Development and Decay, p. 80.
54
See Gabriella Montinola, “Politicians, Parties, and the Persistence of Weak States: Lessons from the
Philippines” (paper delivered at the American Political Science Association annual meetings, Washington,
DC, August 27-31, 1997).
55
Edita Tan, “Interlocking Directorates, Commercial Banks, and Other Financial Institutions and
Nonfinancial Corporations,” Discussion paper 9110 (September 1991), School of Economics, University
of the Philippines, p. 12.
45
56
John Doherty, “Who Controls the Philippine Economy: Some Need Not Try as Hard as Others,” in
Belinda A. Aquino, ed., Cronies and Enemies: The Current Philippine Scene Philippine Studies Series, no.
5 (Honolulu: University of Hawaii, Philippine Studies Program, 1982), pp. 12-33. Cited in McCoy, “RentSeeking Families and the State,” in McCoy, ed., An Anarchy of Families, p. 437.
57
Alfred McCoy and Michael Cullinane, eds., An Anarchy of Families: Political Elites and the Philippine
State (Madison: University of Wisconsin Center for Southeast Asian Studies, 1993).
58
Paul Hutchcroft, “Predatory Oligarchy, Patrimonial State," p. 321.
59
PAL, San Miguel, ABS-CBN, and Meralco are all examples of family-owned companies that have
changed hands through government intervention.
60
Hutchcroft, "Oligarchs and Cronies," p. 423. The study cited comes from Laurence Davis Stifel, The
Textile Industry: A Case Study of Industrial Development in the Philippines, Data Paper Number 49
(Ithaca, NY: Southeast Asia Program, Cornell University, 1963), p. 50. Thomas R. McHale wrote that
"business is born, flourishes or fails, not so much in the market place as in the halls of the legislature or in
the administrative offices of the government." Thomas R. McHale, "An Ecological Approach to Economic
Development" (Ph.D. diss., Harvard University, 1959), quoted in Stifel.
61
Hutchcroft, "Oligarchs and Cronies," p. 426. Hutchcroft cites an interview with Wilhelm G. Ortaliz,
former director of the Bureau of Industrial Coordination, Ministry of Industry. Ortaliz described the
preeminent business association, the Philippine Chamber of Commerce and Industries as a "mere post
office of diverse concerns, very personality oriented, and unable to formulate common positions on major
issues.”
62
Author’s anonymous interview, September 10, 1999.
63
Gary Hawes, The Philippine State, p. 82.
64
Robin Broad, Unequal Alliance: The World Bank, the International Monetary Fund, and the Philippines
(Berkeley: University of California Press, 1988), p. 45.
65
Doner, “Domestic Coalitions and Japanese Auto Firms,” p. 131. See also Overholt, “The Rise and Fall,”
p. 1143.
66
For historical discussion, see Benedict Anderson, “The Idea of Power in Javanese Culture,” in Claire
Holt, ed., Culture and Politics in Indonesia (Ithaca: Cornell University Press, 1972); and Harold Crouch,
The Army and Politics in Indonesia (Ithaca: Cornell University Press, 1986).
67
MacIntyre, "The Politics of Crisis in Southeast Asia," p. 115. See also Pranab Bardhan, "Corruption and
Development," p. 1325.
68
Michael Ross, “Indonesia’s Puzzling Crisis.”
69
John T. Sidel, “Macet Total: Logics of Circulation and Accumulation in the Demise of Indonesia’s New
Order,” Indonesia 6 (October 1998), p. 160. See also Jeffrey Winters, Power in Motion: Capital mobility
and the Indonesia State (Ithaca, NY: Cornell University Press, 1996).
70
Dwight King,” Corruption in Indonesia: a curable cancer?” Journal of International Affairs 53, no. 2
(2000), p. 604, 612.
71
For more detail on bureaucrats in Indonesia, see Jeffrey Winters, Power in Motion: Capital Mobility and
the Indonesian State (Ithaca, NY: Cornell University Press, 1996); and Andrew MacIntyre, “Investment,
Property Rights, and Corruption in Indonesia,” in J.E. Campos, ed., Corruption: The Boom and Bust of
East Asia (Manila: Ateneo University Press, forthcoming).
72
Jonathan Pincus and Rizal Ramli, “Indonesia: from showcase to basketcase,” Cambridge Journal of
Economics 22, no. 6 (November 1998), p. 729.
73
Adam Schwartz, A Nation in Waiting (Boulder, CO: Westview Press, 2000), p. 151.
46
74
Sidel notes that “This pattern of fluid sirkulasi…witnessed a steady erosion of the personal loyalty owed
by the military to the President himself.” Sidel, “Macet Total,” p. 163.
75
Alex Irwan, “Business Patronage, Class Struggle, and the Manufacturing Sector in South Korea,
Indonesia, and Thailand,” Journal of Contemporary Asia 19, no. 4 (1989): 398-434. See also Andrew
MacIntyre, “Power, Prosperity, and Patrimonialism: Business and Government in Indonesia,” in Andrew
MacIntyre, ed., Business and Government in Industrialising Asia(Ithaca, NY: Cornell University Press,
1994), p. 245.
76
Richard Robison and Andrew Rosser, “Contesting Reform: Indonesia’s New Order and the IMF,” World
Development 26, no. 8 (August 1998): 1593-1609.
77
Richard Robison, “Authoritarian States, Capital-owning Classes, and the Politics of Newly
Industrializing Countries: the case of Indonesia,” World Politics 41 (October 1988), p. 62.
78
Michael Ross, “Indonesia’s Puzzling Crisis,” p. 19.
79
Sofyan Wanandi estimates that Chinese-Indonesian business constitute 25 percent of economic activity.
“The Post-Soehart Business Environment,” in Geoff Forrester, ed., Post-Soehart Indonesia: Renewal or
Chaos (Netharlands: KITLV Press, 1999), p. 128-134. See also Kunio Yoshihara, The Rise of Ersatz
Capitalism in Southeast Asia (Oxford: Oxford University Press, 1988); and Jamie Mackie and Andrew
MacIntyre, “Politics,” in Hall Hill, ed., Indonesia’s New Order (Sydney: Allen and Unwin, 1994).
80
Sidel, “Macet Total,” p. 166. See also Jamie Mackie, “Towkays and Tycoons: The Chinese in Indonesian
Economic Life in the 1920s and 1980s,” Indonesia (1991): 83-96.
81
Bob Hasan, in 1998. David Cole and Betty Slade, Building a modern financial system: the Indonesian
experience (Cambridge: Cambridge University Press, 1996), p. 326.
82
Ross, “Indonesia’s Puzzling crisis,” p. 14.
83
Ross McLeod, "Soeharto Indonesia: A Better Class of Corruption," The Indonesian Quarterly 228, no. 1
(2000): 16-27.
84
J. Soedradjad Djiwandono, "Bank Indonesia and the Recent Crisis," Bulleting of Indonesian Economic
Studies 36, no. 1 (April 2000): 47-72.
85
See Linda Lim and Aaron Stern, "State Power and Private Profit: A review essay on the political
economy of corruption in Southeast Asia," Asia Pacific Economic Literature (November 2002).
86
Lim and Stern, "State power and private profit," p. 10.
87
Jonathan Temple notes that “so many variables could be used to explain growth that it is difficult to find
variables that are not only highly correlated with the endogenous variables but can also plausibly be
excluded from the regression.” Temple, “The New Growth Evidence,” Journal of Economic Literature 37
(March 1999), p. 129.
88
K.S. Jomo and Edmund Terence Gomez, “Rent Generation and Distribution, and their Consequences in
Malaysia,” (Unpublished manuscript, 1998); Barry Weingast, “Constitutions as Governance Structures,”
Journal of Institutional and Theoretical Economics 149, no. 1 (1993): 286-311; and Hilton Root, The
Fountain of Privilege: Political Foundations of Markets in Old Regime France and England (Berkeley:
University of California Press, 19994).
47