On October 13, 1997, the World Bank's representative in Jakarta, Dennis de Tray, remarked that “Indonesia is not Thailand.” The comment was supposed to inspire confidence in Indonesia's ability to manage the crisis sweeping through East Asian financial markets, drawing a sharp contrast between the rigidity of Thailand's political institutions and the flexibility of Indonesia's centralized political structure. Indonesia was in negotiations with the IMF, which would provide Indonesia with emergency funds and reassure foreign investors of the government's resolve to bring the economic troubles to a quick end. International media characterized Soeharto's decision to seek IMF aid as a positive, proactive step. Foreign governments worried about the Soeharto family's involvement in inefficient enterprises that the IMF sought to eliminate, but they remained optimistic that the agreement would help Indonesia, with its history of “sensible macroeconomic policies,” to return to healthy growth.

Indonesia completed the IMF agreement (IMF I) on October 31, 1997. Yet within weeks, troubling signs had emerged that suggested that the New Order would resist many of the conditions upon which the IMF and other foreign governments had insisted. Bank Indonesia (BI), the Indonesian central bank, raised interest rates sharply but shortly thereafter reduced them again. It further undercut its high interest rate policy by providing emergency liquidity support to troubled banks. In a bid to increase efficiency and without explicit deposit insurance, the Finance Ministry announced closures of sixteen small and troubled banks, but later allowed one to reopen under a new name.

This book has investigated how authoritarian regimes grapple with financial crises. I argue that different coalitions of regime supporters yield predictably different adjustment policy responses, which in turn have powerful impacts on regime survival. Coalitions vary according to their economic profiles. I study the preferences of three types of economic actors that can support nondemocratic regimes – mobile capital, fixed capital, and labor – and argue that the twin pressures of an insolvent banking sector and currency depreciation put the interests of mobile capital at odds with fixed capital and labor. The key is mobile capital's ability to redeploy assets abroad in response to poor economic conditions or unfavorable economic policies at home. Both fixed capital and labor, unable to divest and move overseas, will welcome capital account restrictions to facilitate expansionary macroeconomic policies. Accordingly, mobile capital prefers an open capital account with neutral macroeconomic policy (orthodoxy), whereas fixed capital and labor prefer a closed capital account with interventionist macroeconomic policy (heterodoxy). Across financial crises in emerging markets, we observe struggles over adjustment policy that follow this split between holders of fixed capital – often in alliance with labor, or strategically forming “nationalist” or “populist” alliances – and mobile capital, usually painted as disloyal, manipulative, or unpatriotic.

When authoritarian regimes have support coalitions that include both mobile and fixed capital, they face mutually incompatible adjustment policy pressures. Adjustment policy conflict in such regimes ultimately brings them down, with the support coalition fracturing across the cleavage of mobile capital versus fixed capital.

Two Countries, Two Trajectories

On the morning of July 14, 1997, citizens of Jakarta and Kuala Lumpur awoke to a new world. The difference from the previous day was seemingly minor and distant – several hundred miles to the north, the government of Thailand had abandoned its long-standing informal currency peg of the baht to the American dollar. Few would have believed that this decision was the first in a chain of events that would fundamentally remake the political economy of Southeast Asia. Even as foreign investors turned their eyes toward other Asian countries, reconsidering the health of their financial systems, political and economic upheaval seemed unlikely. Indonesia and Malaysia had long embraced the world economy. They were competently run economies with popular leaders who had engineered decades of impressive economic growth. Despite their excesses, authoritarian rule in each country bred stability, prosperity, and development.

A year later, Indonesia and Malaysia were in turmoil. Sustained capital outflows and currency speculation had led to massive depreciation of the rupiah and ringgit and heavy losses in each country's stock market. Economic growth, which for a decade had been among the highest in the world, became economic collapse – GDP contracted nearly 8 percent in Malaysia and more than 13 percent in Indonesia during 1998. In each country, thousands of borrowers in the business community were unable to service their debts. Financial upheaval forced both countries to seek emergency funds from foreign donors to keep their once-buoyant economies afloat.

The literature on economic crises is replete with stories of divided authoritarian regimes and hotly contested adjustment strategies. Crises often prompt reform and at the same time can provide openings for regime change. Few images are more powerful than the People's Power movement in the Philippines, which arose amid economic crisis and political intransigence to push Ferdinand Marcos from power. Financial collapse in Mexico under Ernesto Zedillo foreshadowed the end of one of the world's most durable and highly institutionalized authoritarian regimes. But for every Marcos there is a Pinochet, for every Zedillo a Mugabe and a Mubarak: an authoritarian ruler whose regime clamps down on its political challengers, breaks from the international economic consensus with radical policies, and survives. These failures of reform and political liberalization are normally treated as missed opportunities, nothing more. Yet these cases hold the keys to understanding the links between crises, adjustment, and regime collapse, for they illuminate why crises have one impact in some countries and a different impact in others.

This chapter introduces my argument of how authoritarian regimes grapple with economic crises. The theory holds that, during such crises, coalitional preferences determine adjustment policy and that conflict over adjustment policy determines the likelihood of regime survival. Specifically, when currency and banking crises co-occur, regimes whose support coalitions include both mobile and fixed capital face contradictory demands over adjustment policy, and as a result authoritarian regimes are likely to break down across this political cleavage.

The massive economic and social changes begun in the American era spilled into politics over the last quarter of the 20th century.

After 1976, the senior bureaucracy, palace, and military still clung to the model of a passive rural society that accepted the hierarchical social and political order, and that needed to be protected against both communism and capitalism. The generals and bureaucratic elite laid plans to engineer social harmony and guide ‘democracy’ from above. But economically and culturally, the country was rapidly becoming more urban than rural, more dominated by business than bureaucracy, and more assertive than passive. The paternalist vision was swept away by the advance of industrialization, urbanization, globalization, and the growth of mass society.

Through the 1980s, business politicians inside the parliamentary system, and a new ‘civil society’ outside it, pushed the military back towards the barracks, but reluctantly, slowly, and incompletely. An attempt to halt this trend over 1991–92 proved to be a critical transition. Thereafter, the military’s role declined steeply. Political spaces widened. High expectations arose for wide-reaching changes aided by the forces of globalization, and the new assertiveness in parts of mass society. The political forces that prioritized the well-being of society and nation seemed set to flourish in the broader political space. But the traditions of the strong dictatorial state had been deeply embedded. When big business and a rural-based populism made a bid to sweep away the old bureaucrat-dominated state, it unleashed a conflict that brought the military back to the front line and placed both liberal democracy and economic growth in peril.

The Cold War in Asia eased after the US departure from Indochina. The USA remained Thailand's military patron, but at much greater distance. Thailand's orientation to a liberal market economy, established in the American era, strengthened as the socialist alternative declined on a world scale. After an initial period of economic and political adjustment to the US departure, Thailand caught the tail of an Asia-wide boom led by Japan and the East Asian ‘Tiger’ economies. The liberalization of first trade and then finance accelerated the pace of industrialization and urbanization, and incorporated Thailand more firmly within a global economy. The close of the Cold War also transformed neighbouring countries from enemy territory into economic hinterland – as markets, and as sources of human and natural resources. In the late 1980s, China emerged from its four decades of partial eclipse, and again became a major factor in Thailand's economy and position in the world.

The pace of economic transformation quickened over the last quarter of the 20th century. The balance of economy and society shifted decisively from rural to urban, and from parochial to open and globalized. The peasantry declined steeply as an element in the national economy, more moderately as a factor in the demography, and very markedly in the national culture. The rural remnant became an increasingly marginalized and truculent part of a society whose dynamism was decidedly urban.

After the Second World War, the USA became a new foreign patron, more intrusive than anything Siam had experienced in the colonial era. While Britain had focused on its colonies and never taken more than peripheral interest in Siam, the USA seized on Thailand as an ally and base for opposing the spread of communism in Asia. To build Thailand's capability for this role, the USA helped to revive and strengthen the military rule, which had faltered at the close of the Second World War. To consolidate Thailand's membership of the ‘free world’ camp in the Cold War, the USA promoted ‘development’, meaning primarily economic growth through private capitalism. To achieve ‘national security’, US funding helped to push the mechanisms of the nation-state more deeply into society than before.

Under this regime, a new elite emerged consisting of ruling generals, senior bureaucrats, and the heads of new business conglomerates. Strengthened by the ideology of development and unconstrained by democracy, business was able to exploit both people and natural resources on a new scale. The countryside was transformed again, by driving the agrarian frontier through the upland forests, and subjecting the smallholder decisively to the market. Against this backdrop, the old Thai social order faded into history.

The nation-state was new. So too were its citizens, as a result of two sweeping social changes. Beginning in the early 19th century, the landscape and society of the lower Chao Phraya basin was transformed by a frontier movement of peasant colonization. Uniquely in Asia, new land was being opened up faster than population growth from the mid-19th century right through to the 1970s. As a result of political decisions in the late 19th century, this frontier society was characterized not by landlords but by peasant smallholders. Until urbanization accelerated in the last quarter of the 20th century, this smallholder peasant society represented four-fifths of the population, and the main driving force of the economy.

Much of the urban population was also new, especially in the capital city of Bangkok. Continuous immigration from southern China made Chinese a dominant element in the city's economic life. Western merchants and advisers formed a new semicolonial segment of the elite. A fledgling commoner middle class began to form around the city's new role as capital of a nation-state.

In the latter part of his reign, Chulalongkorn and his supporters repeatedly justified the creation of a strong state and its absolutist management on grounds of the need for Siam to progress and be a significant country in the world. This formulation marks the start of one of the two recurring visions in modern Thai politics. The same idea, adapted to changing international and local contexts, would reappear over decades to come. The Chulalongkorn era had also created the key vocabulary of this theme, particularly the notion of samakkhi, unity, and its highly masculine and militaristic imagery exemplified by Chulalongkorn's equestrian statue, and Damrong's account of Thai history as a series of wars.

An opposing vision took shape in the early 20th century, in the new urban society created by colonial commerce and by the nation-state itself. Old relationships of patronage were replaced by contracts in the marketplace. People evolved new ideas on man and society by reflecting on their own status as independent merchants and professionals, and by grabbing the increasing opportunities to compare Siam to an outside world undergoing tumultuous change. The new men and women of early 20th-century Siam took up the ideas of nation, state, and progress, and recast them. They challenged the definition of the nation as those loyal to the king. They demanded that ‘progress’ be more widely shared. They redefined the purpose of the nation-state as the well-being of the nation's members.

History was invented for the nation-state. It has a tendency to imagine ‘the false unity of a self-same, national subject evolving through time’ (Prasenjit Duara). All too easily, the nation becomes something natural that always existed but was only properly realized in the nation-state. In reaction against this tendency, historians today prefer to write about people, things, ideas, localities, regions, or the globe – anything but the nation. Or else they write reflective histories about the interplay between the nation and the production of its own history.

The approach adopted here is to make the career of the nation-state the explicit focus of the story. One of the themes of this book is about how the idea of the nation and the machinery of the nation-state were established in Thailand, and then how different social forces tried to make use of it – by reinterpreting what the nation meant, and by seeking to control or influence the use of state power. The second major theme is about the evolution of the social forces involved. After the introductory chapter, the chapters alternate between these two themes, though the division is rough not rigid.