Why do windfalls lead to policy failures? Since the 1950s, scholars have offered two types of explanations: cognitive explanations, which suggest that windfalls induce either laziness or euphoria among policymakers; and societal explanations, which suggest that windfalls encourage nonstate actors – such as interest groups, political clients, and rent seekers – to demand a share of the windfall from the state.

This chapter begins by summarizing these two approaches. It then describes my own explanation, which is that resource booms lead to rent seizing by state actors. It explains some of the assumptions behind the concept of rent seizing, how it may hurt institutions, how it differs from other types of rent seeking, and how it is influenced by a state's regime type. The chapter concludes by explaining how and why I use the cases of the Philippine, Malaysian, and Indonesian timber sectors to illustrate my argument.

COGNITIVE EXPLANATIONS FOR WINDFALL POLICY FAILURES

Cognitive approaches suggest that windfalls produce a type of myopia among public or private actors, which in turn leads to institutional or policy failures. Some observers imply that windfalls lead to myopic sloth; others argue that windfalls produce myopic exuberance. Wallich (1960) and Levin (1960), for example, argued that periodic commodity booms in sugar-exporting states led to careless economic planning, which inhibited export diversification.

The Philippines has been the East Asian capitalist laggard. Its economic performance after the 1950s, and particularly after the early 1980s, was consistently less impressive than that of the other commodity-rich economies of Southeast Asia. The country squandered an early head-start in its industrialization and, beginning in the 1960s, steadily lost ground relative to other East Asian developing countries. Yet, neither in the late 1940s nor in the early 1970s did observers expect the Philippines to fare less well economically than other regional economies. Its inferior performance resulted in considerable part from public policies, including ones that limited the economy's openness, that were motivated largely by distributional concerns and had the effect of retarding economic efficiency. In no other case considered in this book was the disjuncture between the interests of the dominant few and the policy requirements of sustained economic growth so sharp.

From 1950 to 1965, the Philippine government, a fairly stable democracy with regular alteration of parties in office, had controlled the Huk rural insurgency while keeping military spending at modest levels. Until the late 1950s, the country had one of the highest rates of economic growth in East Asia. In 1965, President Ferdinand Marcos, a gifted politician and lawyer, came to office apparently determined to overcome those obstacles that had begun to hinder Philippine economic growth in the late 1950s and to launch an economic takeoff. He appeared to some to be Manila's Park Chung Hee (the South Korean president who helped to launch his country's rapid growth in the early 1980s).

The international economic and strategic environments have presented both opportunities and constraints for growth and economic development in the Southeast Asian region. Exploiting these opportunities successfully has required some degree of openness, at least to foreign technology and foreign markets. As the cases of Japan in the 1950s and 1960s and South Korea into the 1980s make clear, however, success has not required full openness of capital and trade regimes.

This chapter presents a broad overview of the changing global and regional context for Southeast Asian development during the postwar years, and discusses how that context has shaped economic possibilities and affected economic openness among the ASEAN Four. We discuss the economic, political, strategic, and international institutional forces at work. We reserve for chapters 3 through 6 a more detailed and analytic consideration of the impact of the external environment on state policymaking and business planning in the individual countries. In those chapters, we also describe the nature of specific policy responses and seek to explain the reasons for individual countries responding to the external context in particular ways.

The initial section of this chapter concentrates on the Japanese and, in particular, US roles in shaping the context for early postwar Southeast Asian development. These include US commitment to the containment of communism, backed by high levels of US aid and military spending, and establishment of an open international economy featuring rapid growth and trade expansion.

This book attempts to explain why some developing countries adopt economic policies that are relatively open to cross-border movements of goods, services, and capital. In particular, it focuses on national economic policy responses to changing external economic conditions and asks what factors account for the propensity of some countries to maintain or increase their economic openness while others opt to reduce it. The analysis is limited to the economic policies of four Southeast Asian states – Indonesia, Malaysia, the Philippines, and Thailand (the ASEAN four) – during the half-century following the end of the Pacific War.

Indonesia, Malaysia, the Philippines, and Thailand are, along with Vietnam, the most populous members of ASEAN. Unlike Vietnam, they have chosen market-oriented development strategies since they gained independence (Thailand never was colonized). As a group, their economic performance has been very strong over the last thirty years (see table 1.1). While the Philippines stands out within this group as a laggard, its record, when measured against the entire population of developing economies, has been at least average (see table 1.2). For these and other reasons (explained below), we have chosen to use these four countries to understand better those factors that lead officials in developing countries to maintain or adopt open economic policies.

Our interest in developing countries' open economic policies stems in considerable part from the relative rareness of such policies before the 1980s.

Through the early postwar period until the late 1960s, Thai politics remained tightly circumscribed, with top officials of the bureaucracy governing a small and relatively nonintrusive state. Ethnic, geographic, and historical factors enabled these leaders to collect necessary levels of state (and personal) revenue and foreign exchange without launching ambitious state programs or directly mobilizing large segments of Thai society. Strong comparative advantage in rice production allowed officials to garner significant government revenue from the country's leading foreign exchange earner by taxing exports. Steady expansion in land under cultivation produced both revenue and foreign exchange. Exports of commodities grew rapidly and generally without state promotion. As a result, by the 1960s observers were lauding Thailand's “outward-looking” economic growth.

The legacy of conservative fiscal, monetary, and exchange rate policy choices dating back to the nineteenth century exercised a powerful influence on state officials making policy choices in later periods in response to novel external conditions. Nonetheless, by the latter 1960s, inflationary pressures in Thailand increased along with external imbalances. Then, in the mid-1970s, externally induced pressures following the first oil shock and newly mobilized domestic demands for economic redistributive policies began to shift state officials away from their traditional cautious macroeconomic policy orientation. For the first time, political leaders with roots in business began to have strong influence over government policies. During the 1970s and early 1980s, a significant clash emerged among officials and political leaders concerning the country's development strategy.

For more than a decade following its independence in 1957, Malaysia was dominated politically by a small multi-ethnic elite that employed economic development to maintain political stability and avoid ethnic strife. This elite controlled a state apparatus that, for historical reasons and in contrast to the cases of Indonesia, the Philippines, and Thailand, was both extensive and relatively competent.

State resources came from import tariffs and from domestic sources, such as corporate income taxes, which were borne most heavily by the non-indigenous, commercial sector – foreign companies and those owned by immigrant Chinese and Indian minorities. These resources were applied to developing the rural sector and improving agricultural productivity as means to improve living conditions for the indigenous, largely rural, Malay community, the largest but least advantaged ethnic group.

This resource allocation was politically consequential: it ensured majority Malay support for the United Malays National Organization (UMNO), the largest of the three ethnic parties in the ruling coalition government. It also succeeded in making it more difficult for groups opposed to the governing elite – including those on the left, whose armed efforts in the guerilla insurgency known as the Emergency were defeated in the early 1950s, and those advocating an Islamic state for the largely Muslim population – from mobilizing popular movements among the poor and rural populations to oppose the ruling elite.

We have traced the policy responses of four Southeast Asian developing countries to four different sets of external events, allowing us, therefore, to examine sixteen cases of policy response. The four countries had diverse economic and political conditions at the time they faced the first of these external events. Moreover, the external impacts did not affect the four countries in the same ways. In particular, higher oil prices affected the four economies in very different fashion. The combination of diverse initial conditions, common external influences, and different external effects provided us with comparative bases for assessing the intervening impact of our specified domestic economic, institutional, and political variables. In particular, we now are in a position to gauge the influence of those variables on economic openness.

Our independent variables explaining degrees of openness include ones relating to state resources and capacities, domestic institutional arrangements, political disjunctures, and political coalitions. We also looked at the impacts on openness of those institutions linking business interests to policymaking officials and of foreign development models. So as to isolate those domestic factors that most influence policymakers' responses to changing external economic constraints, we limited the number and range of independent variables from which we developed our hypotheses. Our choice of four broadly similar economies in a single region had a similar effect. It reduced the range of possible variables that might be responsible for divergent policy responses across the four economies we studied.

Indonesia is the world's fourth most populous nation, with approximately 190 million inhabitants. Its geographic size – 14,000 islands spread across 3,000 miles with a land area of three-quarters of a million square miles – and extensive natural resources have ensured the continuing attention of foreign powers. More importantly for our purposes, Indonesia's natural bounty affords policymakers a broader palette of potential development strategies (closedness, as well as openness) than in resource-poor and energy-dependent Japan or East Asia.

The Indonesian state is authoritarian in character and its officials suspicious both of private business and of foreigners. In the late 1950s, the first president, Sukarno, ordered the confiscation of assets belonging to citizens of the former colonial power, the Netherlands. The armed forces seized control of former Dutch operations after independence. Leaders of the anticolonial struggle did not want to hand former Dutch firms to those seen as Dutch lackeys, namely the immigrant Chinese. More broadly, the quasi-socialist rhetoric of the Indonesian independence movement supported state management of the nationalized foreign (Dutch) firms. Besides, some of the firms were involved in activities of significance for national security, such as oil production and transportation, suggesting that they should appropriately come under the direction of the armed forces.

This example suggests the broad orientation of state actors to the issues of state/private roles in the economy and the degree to which official economic policy should emphasize openness/closedness.