Issn 0143-6597 print/issn 1360-2241 online/03/020235-19

The role of domestic-owned capital in 

ASEAN

The different positions of the 

ASEAN

governments on the 

AIA

reflect the political

salience of domestic capital in these societies and the coalitions formed by the

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ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

latter with the political/ruling elite. Although Thailand and Singapore did not

actively champion a developmental clause in the 

AIA

, the absence of a challenge

from these governments on the issue needs to be explained. As the following

discussion shows, the Malaysian move to privilege domestic/

ASEAN

investors

through the 

AIA

was actually helpful to domestic capital in Singapore and

Thailand undertaking expansion in the regional market. 

Singapore

Although 

FDI

had been the principle source of growth for Singapore during the

1970s, the mid-1980s recession led the government to adopt a new growth

strategy that emphasised the expansion of domestic capital, particularly non-

manufacturing capital, through regionalisation, although 

FDI

remained important

(Yeung, 1999: 8). By the early 1990s the government had also planned to use

regional market expansion to groom a new generation of Singaporean 

TNC

s

capable of competing with global 

TNC

s (Wong & Ng, 1997: 136). The shift in

emphasis to domestic capital was seen as necessary to reduce Singapore’s over-

whelming reliance on 

FDI

. It also brought political benefits to the ruling govern-

ment by co-opting domestic private capital, mostly ethnic Chinese capital that

had for various reasons been sidelined in the past in favour of 

FDI

(Parsonage,

1994: 10). Domestic private capital was heavily concentrated in service-related

sectors, some of it was already going regional in 

ASEAN

. As a result of this shift in

economic strategy, domestic private capital became part of the ruling elite in the

1990s, albeit as the junior partner in the ruling coalition of political/state elites

and state capital. The privileging of 

ASEAN

investors in the 

AIA

did not contradict

the Singapore government’s strategy to support economic restructuring based on

the regional expansion of domestic capital. 

Thailand

In the case of Thailand domestic capital has played a key role in the Thai

economy from the 1950s. Although Thailand had experienced an 

FDI

boom since

1985, foreign capital did not overwhelm domestic capital, which also expanded

considerably after 1985, often in joint ventures with 

FDI

(Phongpaichit & Baker,

1996: 156). Most importantly, domestic capital, particularly urban (Bangkok-

based) big business had also begun to expand overseas. Unlike Singapore,

Thailand did not have a formal policy to develop domestic capital or a formal

regionalisation policy to support the overseas expansion of Thai private capital.

Nevertheless, the government’s commitment to 

AFTA

served the interests of the

Bangkok-based business elite, which was in close alliance during the 1990s with

both elected politicians and liberal technocrats in the bureaucracy, who advocated

open economic policies for Thailand, including regional trade liberalisation

(Krongkaew, 1997). Despite, or perhaps because of political democratisation, the

big business–politics coalition had become a crucial feature in Thai politics in the

1990s as electoral success had come to depend on access to huge financial

resources (Hewison, 2001: 9).

Overseas expansion in the 1990s by outward-focused elements of Thai

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HELEN E S NESADURAI

domestic capital was especially evident outside manufacturing industry, where

large family-based Thai conglomerates dominated (Phongpaichit & Baker, 1998:

28). The Shinawatra group, the Samart group, the Charoen Pokphand group and

the Ucom group, for instance, ventured overseas to Southeast Asian markets in a

variety of activities related to their core domestic business in telecommunications

and information technology. As in the case of Singapore, the decision to privilege

ASEAN

investors in the 

AIA

did not necessarily contradict the interests of the

political and state elites, nor that of its business allies, since it clearly benefited

internationally orientated Thai domestic businesses seeking to venture abroad. 

That was, however, the state-of-play in 1998 when the 

AIA

was initially

adopted and the effects of the 1997–98 financial crisis were still unfolding in the

country. Since then, the collapse of significant elements of Thai big businesses

lent new emphasis to the role of 

FDI

in spearheading growth in Thailand as

the Democrat Party under former Prime Minister Chuan Leekpai sought to

restructure the Thai economy towards greater market openness and competitive-

ness. Hence there was some move to de-emphasise the foreign–

ASEAN

distinction

in the 

AIA

through attempts to bring forward the deadline for full foreign equity

ownership in investment.

27

The Deputy Secretary General of the Thai Board of

Investment, Chakramon Phasukvanich, in fact suggested the crisis might force

ASEAN

to play down its intra-

ASEAN

investment area in favour of attracting 

FDI

from outside 

ASEAN

.

28

In the end, however, 

ASEAN

member governments adopted

a temporary and separate programme in March 1999 through which full foreign

equity rights were offered to all foreign investors for a two-year period in a

limited number of specially selected sectors, while the foreign–

ASEAN

distinction

in the 

AIA

was maintained.

29

Indonesia

In the case of Indonesia, the support given by Ginandjar Kartasasmita, Indonesian

Co-ordinating Minister for the Economy in the Habibie government to the

Malaysian proposal regarding the 

AIA

reflects economic nationalist thinking that

envisages a key role for the state in directing markets to achieve national economic

and political goals (Brown, 1998: 188). The liberal technocrats who had

dominated Indonesian policy making since the mid-1980s had rejected these ideas,

instead instituting market liberalisation and deregulation as the path to growth.

The Indonesian public, however, believed that these policies had dis-

proportionately benefited ethnic Chinese businesses, particularly the con-

glomerates, and those belonging to the President’s family (Borsuk, 1999).

Although deeply resented, ethnic Chinese big businesses were a crucial link in

Indonesian patronage politics (Habir, 1999). They gained their dominant economic

position through connections with politically influential persons, including

military elites and especially President Suharto, who also lent them protection

from an essentially hostile indigenous Indonesian society. In turn, ethnic Chinese

big businesses provided funds to Suharto, which he disbursed to selected organisa-

tions and individuals in return for political support (Liddle, 1999a: 51). 

This meant that the president and government became extremely sensitive to

anti-Chinese sentiment, which indigenous business exploited through its

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ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

demands for preferential business treatment. Suharto had, in the past, used

economic favours like preferential credit and import licences to indigenous

businesses during much of his tenure as president as a way to gain their political

support, which led to the creation of a second corporate elite group—indigenous

big business (Liddle, 1999a: 68). But the fortunes of the latter looked set to rise

further with the appointment of the economic nationalists to influential positions

in the 1994 cabinet reshuffle. The economic nationalists quickly adopted the

position that deregulation and liberalisation could be strategically integrated

with state-driven industrial policy to develop domestic, especially indigenous,

business capabilities (Robison, 1997: 53). 

The political salience of indigenous (and state) capital did not end with the

financial crisis and the fall of Suharto in May 1998. Many Indonesians regarded

further neoliberal reforms sanctioned by the 

IMF

as attempts by Western interests

to impose a form of capitalism on Indonesia that would, once again, ‘prevent

indigenous Indonesians from taking their rightful place at the economic table’

(Habir, 1999: 202). The redistributive imperative to achieve economic parity

between the ethnic Chinese and foreign investors on the one hand and indigenous

groups, particularly in business, on the other, remained strong. It was, in fact,

strengthened in the aftermath of Suharto’s fall, given the strong resentment

against ethnic Chinese and foreign investment in the country. Both Habibie,

30

Indonesian president in 1998 when the 

AIA

was adopted, and Ginandjar had long

been in favour of reducing Indonesian dependence on foreign investors and

in weakening the dominant position of the ethnic Chinese business elite by

building up state and indigenous businesses (Djidin, 1997: 26). While Habibie

championed state capital, Ginandjar championed indigenous business interests

(Liddle, 1999b: 20–21). Ginandjar’s open support of Malaysia’s developmental

approach to the 

AIA

emerged out of such ideas and the ascendance of indigenous

business interests. Nevertheless, the financial and political crisis in Indonesia

meant that the growth imperative, particularly to attract 

FDI

to the country,

became vital while 

IMF

reforms made it difficult to translate economic nationalist

ideas to firm policies.

31

Malaysia

In the case of Malaysia the political salience of domestic capital is tied up with

the country’s long-standing ethnic politics, as well as with the broader economic

nationalism of Prime Minister Mahathir that emerged in the late 1980s. Between

1970 and 1990, a state-directed development programme—the New Economic

Policy (

NEP

)—drove the Malaysian political economy. The 

NEP

was the outcome

of ethnic riots following the May 1969 general elections caused by the majority

Malay community’s concerns at their economic marginalisation and by fears that

they would lose their political dominance to the relatively better off minority

ethnic Chinese community as a result. Among the objectives of the 

NEP

was to

create a Malay business (and middle) class and to achieve a target of 30% Malay

equity in the corporate sector. The 

NEP

was vital to the legitimacy and security of

the United Malays National Organisation (

UMNO

)-dominated regime, since it

enabled both a more equitable distribution of wealth for the Malays as well as

247

HELEN E S NESADURAI

Malay political dominance through control of economic resources. 

UMNO

has

long been the leading Malay party in Malaysia, regarded as the champion of

Malay political rights in multi-ethnic Malaysia. Although the 

NEP

was replaced

by the National Development Policy in 1991 that scaled back ethnic preferences,

the goal of creating a Malay business community continued to be emphasised in

the 1990s (Tori, 1997: 236). Even the privatisation programme, undertaken as

part of the economic restructuring package adopted in response to the mid-1980s

recession, was actively used to create a Malay business class to fulfil the 

NEP

goal

(Crouch, 1996: 39). Privatisation largely benefited 

UMNO

-linked Malay business-

people, although a number of ethnic Chinese and Indian businesses gained as

well. This group, in turn, became a valuable source of political and material

support for various 

UMNO

political leaders, including the Prime Minister (Gomez,

1996). By the late 1990s therefore, this politically influential rentier domestic

business community had become part of the governing elite (Khoo, 2000: 221). 

The new Malaysian conglomerates that emerged out of privatisation and other

preferential policies were also a key component of the wider economic national-

ism of the prime minister. Especially after the mid-1980s recession, policy had

moved beyond the 

NEP

’s narrow focus on building a Malay  capitalist class to

advocate the growth of large Malaysian  firms (which would include ethnic

Chinese and Indian firms as well) as a means of meeting the competitive

challenges of the global economy, although 

NEP

goals remained salient (Khoo,

2000: 216). The policy shift reflected the strategic vision of the prime minister,

who had never been content with Malaysia remaining a Third World producer

of industrial commodities. Thus he emphasised the building up of Malaysian

corporations and conglomerates able to compete with foreign 

TNC

s in what was

perceived to be an intensely competitive world economy. 

Since foreign firms were dominant in the far more efficient, export-orientated

manufacturing sector, it was in the non-manufacturing sectors that domestic

capital, including ethnic Malay capital, found its niche, using market restrictions

as well as access to preferential treatment through political connections as a

means to profits (Khoo, 2000: 218). As already noted in a previous section, the

expectation among policy makers was that global rules would eventually allow

foreign corporations unrestricted access to the domestic market. It was clear that

Malaysian firms, including the politically privileged ones, would eventually have

to compete with global firms, not only in international markets but in the

domestic market as well. If politically important domestic firms were not ready

for global market competition, their demise would have significant political

repercussions for the 

NEP

goal of advancing a Malay business class, for

Mahathir’s personal authority and, ultimately, for the stability of Mahathir’s

ruling coalition, as well as the security of the 

UMNO

-dominated political system.

The developmental role envisaged for the 

AIA

by the Malaysian side was, there-

fore, intimately related to ensuring the survival of the domestic firms that were

key players in the Malaysian political economy.

Reviewing the 

AIA

: the growth imperative overwhelms

In September 2001 the 

ASEAN

governments agreed to remove the disparity in the

248

ATTEMPTING DEVELOPMENTAL REGIONALISM THROUGH AFTA

AIA

between foreign and domestic/

ASEAN

investors in the non-manufacturing

sectors, thus offering foreign investors full market access and national treatment

privileges by 2010 rather than in 2020.

32

How do we explain this policy shift?

Although the 

AIA

had been adopted in October 1998, right in the throes of the

financial crisis, it was at that time not expected to adversely affect manufacturing

sector 

FDI

since its discriminatory effects were largely, though not solely,

confined to the non-manufacturing sectors. It was the flow of 

FDI

to the manu-

facturing sector that was considered to be crucial during this period, since it had

been the main engine of growth and exports in 

ASEAN

from the mid-1980s and

was believed by political leaders to be the main means of recovery from the

crisis. Some member country officials as well as the 

ASEAN

Secretary General

believed that the 

AIA

as it was then designed would jeopardise the inflow of 

FDI

during such difficult times when the liberal reformist credentials of member

governments were at stake.

33

Nevertheless, the latter continued to maintain the

AIA

in its ‘original’ form. Instead, member governments accelerated 

CEPT

tariff

liberalisation in 1998 as a means of reassuring foreign investors that they were

committed to realising the single regional market, the main ‘carrot’ used to

attract 

FDI

flows to 

ASEAN

. Member governments also temporarily relaxed invest-

ment restrictions for a one-to-two-year period in selected manufacturing sectors

in their respective countries as a way of maintaining investor interest in the

region, as already noted. 

Nevertheless, member governments agreed to a one-year study on the 

AIA

beginning in August 2000 in view of the report presented in July 2000 by the

ASEAN

Secretary General, which revealed a fall in investment in 

ASEAN

from

US$28 billion in 1997 to $13 billion in 1999.

34

Moreover, the report also showed

that the 

ASEAN

economies received only 17% of 

FDI

flows to Asian developing

countries in 1999, compared to about 60% in the early 1990s. China, on the other

hand, received about 60% in 1999, up from 18% during the early years of the

decade. The negative correlation was not lost on 

ASEAN

officials and leaders.

35

China’s potential accession to the 

WTO

and the anticipated diversion of 

FDI

to

China as a result added to the sense of urgency among the 

ASEAN

leaders with

regard to the 

FDI

situation. 

Concern about the future of 

FDI

flows to 

ASEAN

became especially pronounced

by the middle of 2001, and it was this that finally prompted member governments

including Malaysia to review the 

AIA

in September 2001.

36

By this time it seemed

clear that growth in 

ASEAN

was in serious jeopardy as all the main engines of

growth in the global economy—the USA, Western Europe and Japan—seemed

headed into recession. In fact, it had become clear by early 2001 that a global

economic slowdown was imminent, threatening the recovery that most member

economies had experienced over 1999–2000 (

MIER

, 2001a, 2001b). Falling

demand in the USA, still the region’s main export market, during 2001 meant

that the 

ASEAN

region appeared to be facing a more severe downturn than the

1997–98 regional financial crisis. Then the US market had acted as a key engine

of recovery for the crisis-stricken 

ASEAN

economies as the latter attempted to

export their way out of the crisis. Not only were export markets threatened, but

foreign investment too was expected to slow as a result.

37

In short, growth and 

FDI

had, by the middle of 2001, emerged as the overwhelming priority for the 

ASEAN

249

HELEN E S NESADURAI

governments, including Indonesia and Malaysia. In addition, foreign investors,

notably American investors, pressed the 

ASEAN

governments to accelerate

national treatment under the 

AIA

by citing the need to counter the diversion of 

FDI

to China.

38

The 

ASEAN

decision of 16 September 2001 to allow market access and

national treatment for all  investors by 2010 in the non-manufacturing sectors

was, therefore, directed at re-affirming 

ASEAN

’s openness to 

FDI

.

39

The attempt at

developmental regionalism was halted, and open regionalism (at least, the 

FDI

variant) has re-emerged as the main feature of 

ASEAN

economic regionalism in

the quest for growth. 

Yet it is also important to bear in mind that member governments have

not agreed to implement complete regional investment liberalisation in non-

manufacturing sectors in the immediate future. This is targeted for 2010,

suggesting that at the national level full investment liberalisation will proceed

cautiously. Domestic capital, in short, remains a key focus in the individual

ASEAN

economies, but support for it will probably be addressed through national

instruments where possible and available rather than concerted regional ones.

The regional instrument has been reserved once again to realise the 

FDI

/growth

imperative, but this is not to suggest that domestic distributive priorities have

been marginalised across 

ASEAN

. In fact, the 

AFTA

experience confirms that the

tussle between growth and domestic distribution is a key dynamic driving

outcomes in regional co-operation. Although not discussed in this paper, the

delays in negotiating services liberalisation and Malaysia’s temporary withdrawal

of automobiles from 

AFTA

disciplines further reveal that there are sectors where

regional liberalisation will proceed cautiously, driven by domestic distributive

priorities despite the overall concern with growth. Thus, while governments in

Southeast Asia may turn to regionalism as a collective policy response to the

pressures associated with globalisation, as in the case of 

AFTA

, it remains the

tussle between growth and domestic distributive imperatives that will ultimately

shape regional co-operative outcomes and the precise form of regionalism.