1. Socialist transformation of the southern economy and the decline of Chinese business

After the collapse of the Republic of Vietnam (ROV) regime in Saigon (30 April 1975), the socialist government of a united Vietnam embarked on a programme to transform the capitalist economy of the South from one based on the market principle to a centrally planned one. An ideological requirement of this exercise would be the removal of a wealthy class of people at the top and the redistribution of their wealth. That being the case, the prosperous business community of the entire South, whether Vietnamese or ethnic Chinese, were affected. However, the Chinese suffered more because of their disproportionately high involvement in business. The effort to convert the southern economy proceeded in stages in this order: the anti-compradore bourgeoisie movement and first currency reform in late 1975, and then the socialist transformation of private capitalist industry and trade, accompanied by another currency reform in 1978.

a. The anti-compradore bourgeoisie movement and first currency reform in September 1975

One of the first things the Hanoi government did after liberating the South was to start eliminating the compradore bourgeoisie. “Compradore” bourgeoisie (from the Portuguese word for “buyer”) was the formal communist term for those local agents acting on behalf of foreign capitalists and who had made money through playing such an economic role. In the context of Vietnam, the southern compradore bourgeoisie were said to be big businessmen who were “reactionary in politics”, who colluded with imperialism and the Saigon regime. This was a political criterion to define that class. There was also an economic criterion which typified compradore bourgeoisie as people who made their fortunes in contract work or commerce in support of the U.S. and Saigon administrations. They were also guilty of using their economic clout to establish monopoly control over markets. They were regarded as an “instrument of the U.S. imperialists for carrying out their neocolonialist policy” and as the “principal social basis” of the Saigon regime “which in turn relied on it to grow rich”.

A comparison between Indonesian President Soekarno and Egyptian President Nasser reveals fascinating similarities in the common search for legitimacy of a modern state, based on both religious and historical traits rather than on communal and traditional patterns of solidarity. In this respect, an analysis, for instance, of the discursive level of the Bandung conference would be much more significant to understanding political rule in post-colonial countries than “anthropologistic” interpretations (for the discourses of the Bandung conference, see Bennabi 1956). Both Soekarno and Nasser referred strongly to Islam as well as to Afro-Asiatism as a form of nationalism. Both men often stated that they were believers. Yet, it is interesting to note that, as they matured, they developed a growing suspicion towards the intermingling of religion and politics. Islam, thus, remained in the rhetoric to enhance the idea of secular nationalism (cf. Lacouture 1971, p. 166; and Legge 1975, p. 251). Both leaders then played an ambivalent role in the use of religious symbols for the purpose of etatization.

It is important to mention here that as in colonial times, the bargaining over the legitimacy of Islamic discourse was divided between Egypt and Saudi Arabia. Nasser claimed an Islam which entailed an Arab dimension but also “with Socialist principles of Justice and Equality” (Vatikiotis 1965, p. 123), whereas Saudi Arabia claimed a more Salafi, and capitalistoriented type of Islam. In the sixties, Nasser and Soekarno tried to establish a coalition against the Salafi-oriented movement. This led in 1965 to the creation of the Islamic World Organization in Jakarta. In turn, in 1962, 111 of the Salafi ‘Ulama politicians and intellectuals of thirty-one Muslim countries met to oppose the Soekarno/Nasser alliance and to enforce the Wahabi vision of Islam (Schulze 1983, p. 35). It is in the context of the creation of these new nation-states and their attempts to manage Islam that we should understand the institutional exchange between Egypt and Indonesia.

FOREIGN CAPITAL INFLOWS to developing countries constitute part of the world's saving. Over the past two decades, world saving as a proportion of world income has fallen. A comparison of the periods 1968-81 and 1982-88 illustrates this worldwide decline in saving ratios (Aghevli et al. 1990, pp. 9 and 36-37): saving in developed countries has fallen from 25 to 20 per cent of GNP and developing country saving has fallen from 25 to 22 per cent of GNP. One important reason for the worldwide decline in saving is rising government deficits: up from 2.9 per cent in the period 1972-80 to 4.5 per cent in the period 1981-88 (International Financial Statistics Yearbook [1988, p. 156; 1991, p. 156]).

The decline in world saving implies that not every country can maintain its level of domestic investment by increasing foreign capital inflows. Overall, the decline in saving has to be matched by an equal decline in investment. In fact, saving and investment ratios have fallen in all geographical regions of the world since 1982, but least in developing countries of Asia and the Pacific. As world saving has shrunk, so the world real interest rate has risen from 1.5 per cent during the period 1970-80 to 4.8 per cent in the period 1981-91. With no signs of a reversal in the declining trend in global saving and the immediate saving-reducing impacts of the war in the Gulf, reunification of Germany, reconstruction of Eastern Europe, and deliberate current account-reduction policies being implemented by Japan, Korea, and Taiwan, the costs of foreign borrowing can be expected to rise still higher in the 1990s.

The decline in foreign capital inflows to developing countries has necessitated structural adjustment in the form of an increase in export earnings or a reduction in import expenditure. The national accounting identities imply that the adjustment has to raise national saving or reduce domestic investment.

THE BALANCE-OF-PAYMENTS ACCOUNTS show that a current account deficit is financed by capital inflows or decreases in official reserves. One way of presenting this identity is:

CA + KA ≡ ΔR,

where CA is the current account, KA is the capital account, and ΔR is the change in official reserves. As an item in the balance of-payments accounts, foreign direct investment (FDI) is one of several capital flows. Other things equal, therefore, an increase in FDI increases capital inflows. If the change in official reserves is unaffected, the increased capital inflow is matched by a smaller current account surplus or a larger current account deficit.

The current account itself can be defined as the difference between national saving S and domestic investment I:

CA ≡ S – I.

The most obvious link between FDI and the current account in equation 2 is through domestic investment. If FDI finances additional capital formation in the host country, it raises domestic investment I. Equation 2 shows that this worsens the current account as required by equation 1.

The current account can also be denned as the difference between exports of goods and services X plus net factor income from abroad NFI and imports of goods and services IM:

CA ≡ X + NFI – IM.

If FDI increases capital formation in the host country, the increased investment could involve increased imports of raw materials or capital equipment. Alternatively, it could reduce exports by diverting them into the additional investment. In either case, the current account must deteriorate in equation 3 by exactly the same amount as it does in equations 1 and 2.

If FDI finances additional capital formation, equation 2 demonstrates that the current account deteriorates to the same extent that FDI increases capital inflows. In such case, FDI cannot provide additional foreign exchange to finance a pre-existing current account deficit. The extra foreign exchange is entirely absorbed in financing a larger current account deficit.

How does the organization and regulation of the financial system, notably the role of banks, influence critical dimensions of domestic and international economic performance through the process of corporate control? That is, how does the institutional design of the financial system influence the character of the capital-allocation process, national economic performance, and international economic and financial relationships? In order to address this question, we must first consider alternative stylized models of financial-industrial control structures as well as alternative stylized models of banking organization. We can then apply the models to four quite different approaches of bank-industry linkages—the Japanese, German, French and Anglo-American. Each can be evaluated against a set of performance benchmarks of the real sector of the economy, with the role of financial institutions as the centre-piece of the discussion. Finally, each can be assessed by its implications for the liberal international economic order that has been so painstakingly constructed over almost half a century, particularly in international structural adjustment, trade liberalization and market access, and the evolution of international finance and capital markets.

Banks as a Central Element in Corporate Control Systems

Corporate control has to do with the management of enterprises. A classic assumption underlying market capitalism is that management acts consistently in the best interests of shareholders, maximizing their long-term wealth as measured by the stock price. Agency problems—defined in terms of potential divergence between the interests of owners and those of managers—do not arise. Managers consistently meet their fiduciary responsibilities to owners in a firm's purchasing and marketing decisions, in investment projects and financing decisions, in the use of human resources, and in maximizing available economies of scale and scope.

In the real world, of course, agency problems can and do arise, and present one of the most difficult problems in market economics. How these problems are resolved, therefore, is of great importance, whether the issue is assessing the performance of mature market economies, or designing and executing effective privatization in the Eastern European or Asian transformation economies.

Democracy is the legitimating myth of the 20th century. It does not take long for a beginning student in Political Science to learn there is a bewildering list of democratic claims. There is “constitutional democracy”, “liberal democracy”, “populist democracy”, “democratic centralism”, “people's democracy”, “guided democracy” among many. Once it has been declared that all men are created equal, it is impossible to roll back the belief, Pareto and Hayek notwithstanding. And it develops into “the sovereignty of the people” and “the will of the people”. Performance legitimacy is an alternative but, by itself, is neither sufficient nor enduring. Even totalitarian or authoritarian regimes do not rely on performance alone for their legitimacy. For that matter, neither is democracy by itself enough. The de-legitimizing of a non-performing democratic regime has led to its replacement by other forms of government. This has happened not only in developing states, but in established industrialized democracies as well.

This paper takes off where Professor Huntington's The Third Wave left off. Professor Huntington made a valuable and significant contribution by tracking the patterns of democratization and their reversals, and explaining the hows and whys of democratization of the most recent wave. For the many now engaged in the democracy debate, it was useful to be reminded by Professor Huntington that the Schumpeterian formulation of democracy as a procedural arrangement, an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people's vote”, is the definition of democracy that has gained the widest consensus today. Democracy is the selection of leaders through competitive elections, or put another way, a democratic system is that which practices free and fair elections.

Although Schumpeter meant his definition to be a “value free” functional specification, even this definition contains a margin of ambiguity and requires value judgement. The ambiguity lies in the degree of freedom and degree of fairness considered essential, for not only is the electoral process itself scrutinized, evaluating accompanying political rights is a source of debate and differences as well.

Symbolically, the 1970s represent an era when “Third Worldism”, nation-state building, and secularist ideologies came to be criticized for failing to achieve their stated goals. The Nasser regime seemed to have played an ambivalent role in religion. The state had always made compromises with religion: Islam was declared the religion of the state, but shari'a law was interpreted under the cover of secular law. In short, the regime wanted to formulate religion according to its own political aims (Rodinson 1966, p. 240). This ambivalence and “utilization of religion” to promote foreign politics and to mobilize the clergy to propagate the ideology of the regime so as to create missionaries of socialism among the people (ibid., p. 242) became problematic in the seventies and eighties, when the state, through its use or manipulation of religious symbols ended up creating its own opposition.

It was during the seventies and eighties, therefore, that many intellectuals, in the centre as well as in the periphery, became even more critical of “Third Worldist” ideology and secularism. This, however, was felt more strongly in the Middle East than in Southeast Asia. Perhaps the defeat of the Arabs in the 1967 Arab-Israeli war represented the climax for all Middle Eastern societies, when all previous values were criticized. Secularism and modernism, as well as Pan-Arabism were debated, and a strong return to religious values was expressed. According to Laroui, many intellectuals attributed the Arab defeat to the fact that any type of imported social organization, such as that under Nasser, could only lead to failure. This explains the birth of the concept of Asala (authenticity), which was held to be an indigenous reaction against the West. It should also be noted that this trend was not only expressed by the Islamists but also by many disappointed liberals and Marxists who seem to have suffered from successive crises of ideology beginning as early as ‘Abduh's time (see Laroui 1988, p. 83).