A chapter on Chinese political identity in Southeast Asia may seem anomalous. Insofar as nationalism was ‘Chinese’ in Southeast Asia it was fixated on the fate of the Chinese state rather than a local identity. Yet Chinese, like the less numerous but more aggressive Europeans, carried to Southeast Asia a stronger sense of state-centred identity than was common in Southeast Asia, and developed particularly robust forms of supra-local community in market towns all over the region. Once a more balanced gender ratio and regular contact with China enabled them to reproduce that community in Southeast Asia, from the seventeenth century, they became ‘essential outsiders’ (Chirot and Reid1997), creating commercial and information networks essential to the birth of many nationalisms. The Chinese relationship to Southeast Asian nationalisms was crucial.

‘Chinese’ as a Southeast Asian concept

Labels have great power to unite and to divide, particularly when believed to be unproblematic and natural. One of the most divisive such labels in the long term has been ‘China’, which in Southeast Asian languages is both noun and adjective. Like many ethnonyms, this usage appears to have been fixed by outsiders, and pre-eminently in Southeast Asian encounters. The subjects of the Middle or Flowery Kingdom themselves had little need of it. It was in Southeast Asia that such subjects became detached from the imperial framework and began to be defined as if they were an ethnie.

The mid-twentieth century marked one of the greatest watersheds of Asian history. The relatively brief Japanese occupation of Southeast Asia and much of China, and its sudden ending with the atomic bombs of August 1945, telescoped what might have been a long-term transition into a dramatic and violent revolution. In essence, imperial constructs were declared to be nation-states, the sole legitimate model of twentieth century politics, sanctioned in the ‘sovereign equality’ principle of the United Nations charter (1945).

The world system of competitive, theoretically equal sovereign states, inadequately labelled the ‘Westphalia system’, had been carried into Asia over several centuries under the ‘organised hypocrisy’ of imperialism (Krasner 2001), which held that only ‘civilised states’ could be full members of the sovereign equality club. After 1945 that exclusivist hypocrisy was replaced by a more optimistic one, which held that every corner of the planet should be divided into theoretically equal sovereign states, in reality an extension to the planet of the system of sovereign equality which European states had painfully learned to practise among themselves. In Asia, which had very different experience of international relations of a largely unequal kind, what units would emerge to play this game of nominally equal sovereign states?

The growing literature on nationalism would suggest that the winners from the collapse of empires would have to be ethnically homogeneous nation-states.

Anti-imperial nationalism was strong in twentieth century Southeast Asia partly because there was little of the older state nationalism to balance it. Burmese, Siamese, Vietnamese, Cambodian, Aceh and Lombok kings had generated some degree of commonality with the majority people they ruled, partly by manipulating religious symbols. But unlike the Northeast Asian rulers, they employed abundant foreigners and utilised broader sacred or trade languages (Pali, Sanskrit, Arabic, Malay) often in preference to the vernacular which united them to their people.

The model for anti-imperial nationalism was the Philippines, where three centuries of Spanish rule and shared religion made the imperial unit appear persuasive as early as the 1860s. By the time of José Rizal and his fellow-ilustrados in the 1890s, the case they made in Spanish for a Filipino national unit as a focus for passionate loyalty was sufficiently convincing to dominate the anti-Spanish revolution of 1896 and the war of resistance against American occupation that followed. At more populist levels, there were naturally tremors of ethnie nationalism carried by Tagalog and Cebuano, but these never seriously shook the conviction that the boundaries established by colonial fiat were the correct ones.

Indonesian nationalism, as we shall see, initially coexisted with embryonic Javanese, Minangkabau, Batak and Minahasan ethnie nationalisms. But without the stiffening of state nationalism, these were quickly swallowed up in the anti-imperial mood.

In chapter 1, I argued that most pre-colonial Southeast Asian societies were relatively state-averse. The identities which gave human societies a sense of belonging were shaped by forces other than those of the bureaucratic state. Kinship networks, market cycles, water-sharing for irrigation systems, sacred sites, religious rituals and popular performance helped to shape coherences which in most cases were more enduring and concrete than the states which competed over them. Before the nineteenth century, most of the Indonesian Archipelago's populations were in uplands away from the dangerous coast, and its states were not theirs; they were coast entrepots dependent on international commerce and ideas (Reid 1997: 67–77). Sriwijaya, Majapahit, Melaka and the Batavia-based Dutch Company (VOC) all developed some economic power and political charisma from their role as mediators of international commerce to populated interior regions. But they did not ‘rule’ those hinterlands in a sense which could create permanent identities in their subjects. Their legacies were a charisma to which various subsequent dynasties laid claim, not the shaping of a single self-conscious ethnie-state.

Within this pattern, however, Burma and to a lesser extent Siam went some way down a path of equating ethnic identity with the state. In Southeast Asia's ‘age of commerce’, a few Archipelago port-states also developed enough internal power as novel ‘gunpowder empires’ to give rise to new ethnies.

Malaysia's authoritarian regime survived the severe economic crisis that brought down Indonesia's New Order. Mahathir Mohamad retained firm control over Malaysia's political machine throughout Malaysia's crisis, even as contestation over Malaysia's political future rocked Malaysian society. In addition to implementing Malaysia's controversial capital controls and ringgit peg, Mahathir oversaw the arrest and conviction of his erstwhile deputy Anwar Ibrahim, as well as the regime's clampdown on a Malaysian reformasi movement. By December 1999 the BN had won its seventh election since 1969, easily retaining a two-thirds majority in the Dewan Rakyat (DR). Economic recovery through 1999 and 2000 reaffirmed UMNO's position at the top of Malaysia's political hierarchy. With the loyal and famously clean deputy prime minister Abdullah Ahmad Badawi prepared to succeed Mahathir on Mahathir's own terms, the stability of Malaysia's authoritarian regime was assured.

There are many existing explanations for the Malaysian regime's ability to withstand pressure for democratization. In this chapter, I argue that this political stability is the product of the regime's adjustment policies, which fulfilled the demands of each of its political supporters, poor Malays and the new Malay business class. Capital controls enabled expansionary policies, fulfilling the demands of fixed capital and the Malay masses. The effect of this radical adjustment measure for Malaysia's political opposition was striking. Having received their preferred adjustment policies, the regime's coalition of supporters had no incentive to withdraw support. So Malaysia's regime survived the crisis, despite the BN's most significant political challenge since the racial riots of 1969.

This chapter shows the development and logic of the different coalitions supporting authoritarian regimes in Indonesia and Malaysia. Indonesia's New Order rested on an alliance between the military and a small coterie of ethnic Chinese Indonesian entrepreneurs. Malaysia's Barisan Nasional coalition depended on (and still continues to depend on) an alliance between the Malay masses and a class of Malay entrepreneurs. These systems were stable and predictable. Each regime used largely informal exchange relationships to regularize mutual reward for leaders and supporters and also to systematize the threat of repression and violence for members of the polity outside of the support coalition. This stability enabled each regime to engineer rapid economic growth at rates nearly unparalleled in the developing world while embedding these support coalitions directly into the apparatus of political rule.

In the terms of the model of an economy introduced in Chapter 2, Indonesia's coalition was one between mobile and fixed capital, whereas Malaysia's coalition is one between fixed capital and labor. The broad actor categories – mobile capital, fixed capital, and labor – are theoretical ideal types, but in this chapter I link each ideal type to a concrete group with clear political allegiances. These mappings reveal the importance of the country-specific histories in understanding political coalitions and their economic interests. In the case of Malaysia, for instance, the regime depends not on “labor” writ large but specifically on the unorganized Malay masses. In Indonesia, fixed capital comprised both military-linked businesses and new pribumi (roughly, “indigenous”) entrepreneurs.

In Chapter 2 of this book, I noted that the twin crises in Indonesia and Malaysia are examples of a phenomenon that has become common as emerging market economies have opened their borders to capital flows and privatized their financial sectors. Nothing in my theory, however, is specific to Southeast Asia during the Asian Financial Crisis. Can this theory help us to make sense of financial crises, economic adjustment, and regime survival elsewhere in the world?

In this chapter, I show that it can. My theory uncovers two fundamental regularities in the politics of twin crises. First, coalitional politics determines adjustment policy. By taking seriously the preferences of supporters of autocratic regimes across the world, we can understand adjustment policies in a wide range of authoritarian regimes. Second, preferences for adjustment are at the heart of political conflict over autocratic regime survival. I demonstrate empirically that regimes that impose capital account restrictions during twin crises are more likely to survive these crises than regimes that do not. This finding holds up across countries and when controlling for alternative explanations for regime breakdown. These findings each lend crucial support to the theory that I derived from the experiences of Indonesia and Malaysia, and they reassure us that their experiences are indicative of a larger trend across the world, one that until now has escaped the notice of political scientists.

The methodology employed in this chapter differs from that used elsewhere in this book. Here, I focus on large-n quantitative analyses complemented by briefer case studies.

Malaysians often remarked during the early months of 1998 that every time Prime Minister Mahathir Mohamad opened his mouth, the ringgit depreciated. It was not hard to see why. As the Kuala Lumpur Stock Exchange (KLSE) tumbled and the ringgit depreciated, Mahathir's public demeanor ranged from defiant to vitriolic. He blamed Malaysia's currency and financial crisis on hostile “rogue” factions from George Soros to Western colonialists to the International Monetary Fund to a global Jewish conspiracy. In contrast to the positive reviews of Soeharto's crisis management in the first months of Indonesia's crisis, Mahathir's outbursts earned him condemnation from the foreign investment community. Confronted with what seemed to be an increasingly unhinged autocrat, foreign observers lambasted Mahathir for ignoring his regime's own failures in macroeconomic planning, and for downplaying the policy mismanagement that became ever more apparent as foreign investors took a second look at Malaysia.

Mahathir's public persona hid the regime's struggles over adjustment policy. The government's initial steps were actually encouraging from the IMF's perspective and included a vow to eliminate wasteful public expenditures and pledges of fiscal discipline by Anwar Ibrahim. In his words, these adjustment measures amounted to “IMF without the IMF.” Yet the regime's commitment to IMF-style policies was short-lived. Interest rate hikes to encourage capital inflows were temporary and not nearly as sharp as those in other crisis countries. The regime restarted many of the postponed infrastructure projects, using the logic of “strategic investment” to excuse what were clearly uneconomic ventures.

Soeharto resigned from the office of president of Indonesia on May 21, 1998, some ten months after the onset of currency speculation against the rupiah. His resignation signaled the end of the New Order regime and the beginning of a period of transition toward democracy. His successor, B. J. Habibie, who had been serving as vice president, was an aeronautical engineer known more for his nationalist economic ideology and loyalty to Soeharto than for any independent political skill. By the end of 1999, Abdurrahman Wahid (Gus Dur) assumed the country's presidency, and Indonesia's transition to democracy was complete. One of the world's most enduring dictatorships became the world's third most populous democracy.

Yet a firm understanding of why the New Order collapsed as it did, when it did, remains elusive. The theory advanced in Chapter 2 shows how political conflict over adjustment policy drove the breakdown of the New Order. The New Order collapsed because mobile capital – in the Indonesian context, ethnic Chinese konglomerat – withdrew its support from the regime. This fracture in the New Order's support coalition took place gradually, during the first six months of 1998, during which time Indonesia saw a dramatic upsurge in anti-Chinese violence. It culminated in anti-Chinese riots during May 13–14, 1998, which drove most of the konglomerat overseas. Many factional alignments existed in Indonesia along which the regime might have fractured: capital (mobile and fixed) versus labor, or Muslim versus non-Muslim, or even political Islam (“green”) versus secular nationalism (“red and white”).