Pol. Sci 1o7: The Miracle: The epic story of Asia’s quest for wealth (Schuman, M )

The miracle: The epic story of Asia’s quest for wealth
(Schuman, M
. [2010]. New York: HarperCollins)


MINISTER MENTOR'S ASIAN VALUES

By nature and experience, we were not enamored 
of theories. What we were interested in were 
 real solutions to our problems. 
— LEE KUAN YEW

Lee Kuan Yew was exhausted, but he still could not sleep. He tossed and turned, unable to calm his mind. Lee had good reason to worry. The next day—August 9, 1965—he would become the first prime minister of a brand-new country, the city-state of Singapore.

Lee took on this task with trepidation. Unlike Nehru, Park, or most other post-colonial leaders, who saw their freedom as an op¬portunity to achieve national greatness, Lee doubted the viability of tiny Singapore as an independent state. For the previous two years, Singapore, once a British colony, had been part of a federa¬tion with neighboring Malaysia. The partnership, Lee believed, was crucial to Singapore's survival. But the match proved ill-fated. His relations with the federal government in Kuala Lumpur grew so acrimonious that it became impossible for the union to continue. Furious last-ditch negotiations over the separation wore Lee down, and the weight of the responsibilities that lay ahead overwhelmed him. Throughout that night, he woke every hour or so, reached for his notepad, and added more entries onto his lengthy to-do list.

At 10 a.m., Singapore declared independence. Lee was too busy to read the proclamation before it was released to the world. Two hours later, Lee appeared at a press conference at Singapore's television station. He took a few questions and then recounted the dramatic events of the previous days. The end of the federation with Malaysia would be regarded as "a moment of anguish," Lee told the journalists. "All of my life I have believed in merger and the unity of these two territories," Lee continued. "It's a people connected by geography, economics, and ties of kinship." Then he paused. Tears welled in his eyes. "Would you mind if we stop for a while?" he plaintively asked. It took him twenty minutes to regain enough composure to continue the conference. "Among Chinese it is unbecoming to exhibit such a lack of manliness," Lee later wrote. "But I could not help myself."



Despite his feeble emotional state, Lee launched himself into building his new country. His first priority was defense. That morning, he gave a letter to the Indian deputy commissioner asking if New Delhi would send officers to train a Singaporean army. Not only was Lee concerned about the island's hostile neighbors, but he also doubted the loyalty of his own people. Singapore's population was composed mainly of immigrants from China with small com¬munities of Indians and local Malays. None of them had any con¬cept of a Singaporean identity. Uncertain of even his own ministers, Lee required that each of them sign the separation agreement as proof of their commitment to the new government. Lee spent most of his first day huddled with his closest aide and colleague, Goh Keng Swee, an old friend from college, discussing the country's future course. "We were in a daze," Lee wrote, "not yet adjusted to the new realities and fearful of the imponderables ahead."

Lee's attention quickly turned to the Singapore economy, which he called his "biggest headache." Since its founding by Great Brit¬ain in 1819, Singapore had been the center point for trade in the region. With the end of empire came the end of Singapore's main occupation. Nationalist Malaysia wanted to develop its own com¬merce, and due to a political dispute, Indonesia was cutting off its usual trade with Singapore. "I used to see our godowns!” (warehouses) filled with rubber sheets, pepper, copra, and rattan and workers laboriously cleaning and grading them for export," Lee wrote. "There would be no more imports of such raw materials from Malaysia and Indo¬nesia." Something had to be done. Unemployment was 14 percent and rising. Singapore had no natural resources to export, and its population of two million was too minuscule to support much in¬dustry on its own. "We inherited the island without its hinterland," Lee lamented, "a heart without a body." The stark realities left Lee despondent. "We faced tremendous odds with an improbable chance of survival," Lee believed.

If Singapore was to endure, Lee resolved, it would need a unique approach to economic development. "We had to create a new kind of economy, try new methods and schemes never tried before anywhere else in the world, because there was no other country like Singapore," he wrote later. "I concluded an island city-state in Southeast Asia could not be ordinary if it was to sur¬vive. We had to make extraordinary efforts to become a tightly knit, rugged, and adaptable people who could do things better and cheaper than our neighbors. . . . We had to be different."

No one would accuse the Singapore that Lee built of being anything else. Singapore's transformation from down-and-out tropical outpost to vibrant metropolis of international stature is one of the great tales of the Miracle. The island today is one of the world's busiest ports, a major regional finance hub, and a glob¬ally recognized center for stem-cell research. The constant factor throughout Singapore's entire story has been the combative Lee, who guided his nation with expansive vision and indomitable will. Lee, like his island, has been uplifted from the insecure local official of 1965 into Asia's greatest statesman, a man who pos¬sesses far more influence on the world stage than his micro-nation should warrant. His wisdom and insights are sought out by every¬one from American presidents to African politicians. Former U.S. President George H. W. Bush called Lee "one of the brightest, ablest men I hare ever met," while former U.K. Prime Minister Margaret Thatcher, after reading "every speech" of Lee's, pro¬claimed that "he was never wrong."

Lee himself is a complicated cocktail of contrasting character¬istics. He has shown himself wise and petty, open-minded and myopic, tough and finicky. He is a socialist who fostered one of Asia's most vibrant capitalist societies and a self-styled devotee of multiculturalism who preaches Chinese superiority. The para¬doxes continue with the physical man as well. Though born in the sultry tropics, the sensitive Lee cannot tolerate its heat and humidity, and he says a "turning point" in his life came when he first installed an air-conditioner in his bedroom. This fussiness extends to every aspect of his life. "He is incapable of doing any¬thing slovenly or carelessly," wrote Alex Josey, a journalist and Lee chronicler, "whether it is putting on a highly polished shoe, or reaching an important decision." Perhaps Lee's single most dominating trait is his computer-like pragmatism. Josey says that Lee "is by nature and by reasoning an attacker of problems, not a student of the abstract." During his decades in politics, Lee has displayed an extraordinary ability to ditch policies and invent new ones, based solely on the results he is striving to achieve. Time magazine once described Lee's "basic personality" as "sharp intel¬ligence allied with an unsentimental, almost clinical rationality and supreme confidence in his own judgment." Yet even though Lee can be remarkably generous to his citizens—Singapore has undertaken the most successful public housing program in histo¬ry—he also possesses an equally remarkable arrogance, and has shown a die-hard belief that only he knows what is best. As one British diplomat once said, Lee is "the most brilliant man around, albeit just a bit of a thug."

Though Lee adopted some aspects of the "Asian model" of de¬velopment—primarily a heavy role of the state in the economy— his version had crucial differences. One distinction concerns the relationship between local private enterprise and the state. Unlike in Japan and Korea, Singapore's bureaucrats did not focus as much on nurturing Singaporean firms run by local entrepreneurs. When Lee and his team wished to enter into a new business, the state often undertook the venture directly. In this regard, Lee's intervention in the economy was arguably greater than either MITI's or Park's. In fact, Singapore was probably the most care¬fully crafted and highly engineered of all of the newly industrial¬ized states of Asia.

Lee's most important deviation from the "Asian model" as practiced in Japan and Korea was his use of foreign investment to generate rapid growth. Lee was willing to accept a level of foreign influence in the economy that a xenophobic nationalist like Park would never have stomached. Lee turned the government into a foreign investment promotion machine that aggressively pursued international companies. Through this process Lee and his eco¬nomic team "picked winners" like professional Japanese MITI men, but they did so through "targeting" certain types of mul¬tinationals that could create the largest number of jobs, import new technologies, train Singaporeans in advanced technical and management skills, and produce exports. In this way, Singapore replaced the activities of the chaebols in Korea or the keiretsu in Japan with multinational corporations. It was an ingenious plan, and one that shows the transformative power of foreign invest¬ment in making poor countries rich.
In following this path, Lee linked the future of his tiny coun¬try to the forces of globalization to a greater degree than either Japan or Korea. Singapore hooked onto the emerging concept of offshoring, in which multinational corporations transfer opera¬tions from their home economies to foreign countries, usually in search of lower costs. The beginning of Singapore's Miracle coincided with the technological innovation—better communi¬cation systems and faster, more reliable transportation—that made offshoring less costly and risky. Lee's strategy therefore was based on a paradox. The government both intervened in the economy and integrated into international markets, making Singapore simultaneously more state-driven yet more exposed to shifts in the global economy than either Japan or Korea. Lee took the interplay of the state and market inherent in the "Asian model" to new levels of complexity.

Singapore has received a tremendous amount of attention from policymakers and economists who have studied whether Lee's model can be transferred to other countries. Lee believes it can. The basic building blocks of development, Lee contends, are straightforward. The starting point, he argues, is an environment of meritocracy. "It is important to establish a system in which the more a person educates himself, trains himself, develops skills and contributes to the economy, the more he is rewarded," says Lee. He also takes an extreme view on the power of markets, more so than Asia's other export-oriented leaders. "Never believe you can go against market forces," Lee explains. "If you try, then nothing will happen."

Here, however, we run into the first of many contradictions in Lee's economic philosophy. While he preaches the universality of development, he is simultaneously the chief proponent of the con¬tentious argument that culture and economic success are linked. Lee believes that the Miracle was an Asian phenomenon based on certain aspects of Asian, and specifically Confucian, culture, which cannot be easily transplanted around the globe. He argues that economic or policy-focused explanations of the Miracle leave out this crucial cultural factor. Certain societies, Lee believes, are inherently more capable of rapid development than others. Con¬fucian and Confucian-influenced societies possess a devotion to education and savings, a spirit of self-sacrifice, and a societal co¬hesion based on common social norms, and these "Asian values," Lee believes, laid the groundwork for the Miracle. Other devel¬oping countries "will not succeed in the same way as East Asia did because certain driving forces will be absent. If you have a culture that doesn't place much value in learning and scholarship and hard work and thrift and deferment of present enjoyment for future gain, the going will be much slower," Lee told journalist Farced Zakaria in a 1994 interview.

Lee creates the most controversy, however, with the tight-fisted fashion in which he has governed Singapore, and the complex "Asian values" argument he uses to justify it. Singapore's eco¬nomic development has come with a price—the limitation of civil liberties and human rights. The Singaporean state intervenes in the personal lives of its citizens to a degree that would be unac¬ceptable in the West. Officially, Singapore is a parliamentary de¬mocracy with regular elections, which Lee's People's Action Party has won since 1959. In reality, Singapore is a one-party state. Lee and the PAP leadership use government power to stamp out op¬position, as well as much public debate. A favorite tactic of gov¬ernment leaders is filing defamation lawsuits against opposition politicians who criticize them. These suits, commented the U.S. State Department, "had a stifling effect on the full expression of political opinion and disadvantaged the political opposition."10 The press, both foreign and domestic, comes under similar pres¬sure. In its 2008 press freedom index, Reporters Without Borders ranked Singapore 144th out of 173 countries, languishing behind the authoritarian regimes of Sudan and Kazakhstan. Singapore has faced its greatest international criticism over its use of capital punishment. A 2005 United Nations report revealed that Singa¬pore has "by far" the highest rate of executions on a per capita basis of any country in the world—nearly twice that of Saudi Arabia, which has the second-highest rate. Those who escape the executioner are often sentenced to caning. Lee feels little guilt for imposing such treatment. "Between being loved and being feared, I have always believed Machiavelli was right," he once said. "If nobody is afraid of me, I'm meaningless."13 In a conversation with Chris Patten, the last British governor of Hong Kong, Lee said that he eradicated Singapore's problem with triad organized crime syndicates by tossing several hundred people in prison. Patten was taken aback. "Several hundred?" Patten asked. "Were they really all triads?" "Probably," Lee responded.

Lee, like Park, sees his method of governing as a necessary in¬gredient in Singapore's Miracle. "With a few exceptions, democracy has not brought good government to new developing countries," Lee explained in a 1992 speech in Tokyo. "Democracy has not led to development because the governments did not establish the stabil¬ity and discipline necessary for development." Lee, however, goes much further than Park. Democracy like that practiced in the United States, he argues, is a bad fit with the culture and history of Asian societies. Asians, he contends, prefer to be governed based on "Asian values"—a desire for order, a loyalty to family and community, and an acceptance of hierarchy. Lee says that, as an Asian, he expects government to be "honest, effective and efficient in protecting its people, and allowing opportunities for all to advance themselves in a stable and orderly society, where they can live a good life." In this way, Lee implies, Asians favor the rights of the greater community over individual rights, and they therefore prefer a government that preserves social stability over personal liberties. "In Eastern socie¬ties, the main objective is to have a well-ordered society so that ev¬eryone can enjoy freedom to the maximum," he wrote.16 Lee goes so far as to dismiss the fundamental tenets of Western democracy as misguided. "It is assumed that all men and women are equal or should be equal," Lee said in his Tokyo speech. "But is equality real¬istic? If it is not, to insist on equality must lead to regression.... The weakness of democracy is that the assumption that all men are equal and capable of equal contribution to the common good is flawed."17 Democracy, as it is understood in America, is therefore not univer¬sal, nor is it a requirement for a market-based economy. Any effort to make it such is cultural imperialism, an attempt by the West to impose its value system on the rest of the world. "America should not foist its system indiscriminately on other societies where it would not work," Lee wrote.18 As Michael Barr, a professor of international re¬lations, wrote in his study of Lee Kuan Yew, "Lee is at the forefront of both practical and theoretical efforts to reconcile undemocratic, illiberal elitism with the requirements of a prosperous capitalist state operating in the global economy."

For many in the West, Lee's "Asian values" argument is simply a fancy concoction to legitimize and perpetuate authoritarian regimes in Asia—including his own. "Asian values . . . were in¬creasingly summoned in aid in recent years as a sort of all-purpose justification for whatever Asian governments were doing or wished to do," blasted Chris Patten. "Old men who wanted to stay in power,. . . old regimes that feared the verdict of the ballot box—-all could pull down the curtain between East and West and claim that whatever they were doing was blessed by an ancient culture and legitimized by the inscrutable riddles of the East." Lee dis¬misses such criticism as the West's cultural arrogance, but other Asians have been infuriated by Lee's ideas, the most passionate of whom is Kim Dae Jung, the South Korean democracy activist. In a 1994 article in the journal Foreign Affairs, Kim argues that "Lee's view of Asian cultures is not only unsupportable but self-serving." Contrary to Lee's assertions, Kim contends, democratic ideals have been part of Asian political systems long before they took root in Europe and therefore are, in fact, a natural outgrowth of Asian values, not an imposition from the West. "Asia should lose no time in firmly establishing democracy and strengthening human rights," Kim wrote. "The biggest obstacle is not its cul¬tural heritage but the resistance of authoritarian rulers and their apologists."

Such attacks have had little impact in Singapore. More than four decades after Singapore's independence, Lee remains un¬challenged. Though he retired from the prime minister post in 1990 after thirty-one years of uninterrupted rule, he has not fully retired from governing. Today he holds the enigmatic title of "Minister Mentor," while his son, Hsien Loong, has served as prime minister since 2004. Lee and his family have thus achieved a level of control in Singapore unmatched anywhere else in non-Communist Asia.

Yet in 1965, on that first independence day, all of this success and controversy was beyond Lee's wildest imagination. That eve¬ning, Lee put off sleep once again and whacked 150 golf balls from a practice tee outside his official residence, which made him feel better. Yet Lee was still racked by doubt and worry, and his sleeping problems became so severe that on one occasion he held a meeting with the British high commissioner while in bed. "There are books to teach you how to build a house, how to repair en¬gines, how to write a book. But I have not seen a book on how to build a nation out of a disparate collection of immigrants . . . or how to make a living for its people when its former economic role as the entrepot of the region is becoming defunct," Lee wrote. "On that 9th day of August 1965, I had started out with great trepidation on a journey along an unmarked road to an unknown destination."

FOR A MAN who professes the virtues of Confucianism, Lee shows no filial piety. He was born on September 16,1923, in a large two-story bungalow in Singapore to a sixteen-year-old mother and a father, Lee Chin Koon, who Lee once snarled had "little to show for himself." Chin Koon grew up with enough money to splurge at Singapore's ritziest department stores, but when the family fortune was lost during the Great Depression, Chin Koon, with limited formal education, ended up a mere shopkeeper for the Shell Oil company. The elitist Lee found his father's failings unacceptable.

He felt similarly about his family's Anglophile tendencies. The British ruled Singapore at that time, and his grandfather decided to give Lee the Christian name "Harry." Few Chinese took En¬glish names and the added "Harry" made Lee a target of teasing in school. But Lee still excelled and earned admission to a prestigious secondary school, the Raffles Institution, named after Singapore's founder, Stamford Raffles. Ironically, the discipline-obsessed Lee was a troublemaker as a youngster. "There was a mischievous, playful streak in me," Lee wrote in his memoirs. "Too often, I was caught not paying attention in class, scribbling notes to fellow stu¬dents, or mimicking some teacher's strange mannerisms." On one occasion, such antics got him into serious trouble. The school had a rule that any student who was late three times in one term would receive three lashes of a cane. Lee was always a late riser—"an owl more than a lark," he later wrote—and he broke that rule in 1938. The principal administered the lashes, perhaps a foreshadowing of Lee's use of this same punishment on his own populace. "I have never understood why Western educationists are so much against corporal punishment," Lee wrote. "It did my fellow students and me no harm."

Lee planned to study in England, but when World War II broke out, he took a scholarship at local Raffles College instead. His stud¬ies there, too, were interrupted by the war, and Lee joined a volun¬teer military medical unit. On the last day of January 1942, with the Japanese advancing toward the city, Lee and a fellow student were on duty on the parapet of a Raffles College administrative building when they were rocked by a tremendous explosion. Stunned, Lee blurted out: "That's the end of the British Empire." His off-the-cuff remark was not entirely incorrect. The explosion was the sound of the British blowing up the causeway that linked Singapore to the Malay Peninsula. Singapore was under siege, and surrendered in February 1942.

The British defeat—one of the most embarrassing the empire ever suffered—altered Lee's view of the world. Since the founding of Singapore, "the white man's supremacy had been unques¬tioned," Lee wrote. "The superior status of the British in govern¬ment and society was simply a fact of life." However, with the Japanese victories, "British colonial society was shattered, and with it all the assumptions of the Englishman's superiority," Lee believed. The British defeat was a seminal moment in Lee's life. "The fundamental thing that made him go into politics," Maurice Baker, a college friend, said of Lee, "was the fact that the Japa¬nese defeated the British in thirty days or so. ... I remember him saying: 'We must not let this happen again. We must defend our¬selves and look after ourselves. Let us get control of the country and run it ourselves.' "

With the war's end and the return of the British, Lee enrolled at Cambridge to study law. Lee became politically active, partici¬pating in an informal study group of students from Malaya and Singapore called the Malayan Forum. During a speech at one ses¬sion, Lee told his fellow students that they should pursue the end of British rule. "Our duty is clear," he said, "to bring home to even the most diehard imperialist that his is an untenable position." Upon his return to Singapore in late 1950, however, he discovered the local Communist Party had become the leading political force on the island. Lee determined to prevent Singapore from falling into its hands. Like Park, Lee, though left-leaning in his younger years, also found Communism detestable. "I rejected it because it was coercive," he once said, "it used methods which I disapproved of.... A chap disagrees and you stab him and kill him. There is no give and take."

Lee began building a political base while representing the city's unions in labor disputes. After a few victories, Lee became a champion of Singapore's working class. By 1953, he collected an assortment of leftists into meetings in the stifling heat of the base¬ment of his home to discuss the formation of a new political party. These sessions led to the founding of the PAP in 1954. Over the next five years, Lee's PAP managed to outmaneuver its opponents in a complex series of alliances and negotiations with the Brit¬ish authorities, rival political movements, and even the Commu¬nists. Lee's rise coincided with Great Britain's withdrawal from empire. The British allowed Singapore a great degree of self-rule, and Lee's PAP won a spectacular victory in legislative elections in 1959. Lee became prime minister.

In 1961, Tunku Abdul Rahman, the prime minister of the Federation of Malaya—newly independent from British rule—of¬fered Lee's Singapore an opportunity to forge a union. Lee be¬lieved the merger would provide economic benefits by making tiny Singapore part of a wider market, and in 1963, the two joined with other British colonies on the island of Borneo, to form the state of Malaysia. The union was doomed from the start. The chief aim of the Tunku, a Malay nationalist, was to uplift the backward Malay community. He saw the new Malaysia as a vehicle to promote Malay dominance. Lee, on the other hand, considered Malaysia a modern state that should pursue equality of opportunity for all of its communities. This progressive position left Lee frustrated at his treatment by the Malaysian government. Relations between Lee and the Tunku deteriorated, and Lee reluctantly accepted that the federation was finished. He agreed to negotiations for separa¬tion in 1965. Singapore was on its own.

IN THE EARLY days of Singapore's independence, Lee floun¬dered about for a solution to the country's economic problems. He asked the finance minister to send a delegation to Africa to drum up trade, but the results were not encouraging. It was clear Singapore could not depend on its traditional trading businesses anymore. The city would have to follow the same path as South Korea. "All of us in the cabinet knew that the only way to survive was to industrialize," Lee wrote.

Industrialization was made even more imperative by the contin¬ued influence of the Communists in Singapore. As in South Korea, the Communist threat motivated the government to achieve rapid economic growth. In Park's case, the fight was against an external foe, Communist North Korea; in Lee's Singapore, the war was internal, but the challenge was the same. If Lee did not strengthen the economy, deliver jobs and better welfare, and thereby bol-ster support for the PAP administration, the Communists could topple his regime. "If over the next decade the Communists begin to outstrip the non-Communist states, Asians are going to ask themselves: 'What's all this free society mean? Does it mean that politicians are free to loot and plunder, that people are free to be hungry and ill-fed and ill-educated?'" Lee said in 1965.

To Lee's great benefit, he had a strong ally in this contest, his old college friend, Goh Keng Swee. Lee describes Goh as "my alter ego." "We were two different personalities but we shared certain common perspectives, common values, on what we thought should be done," Lee says. "Without him to help me on the economic side and on the organizational side, I don't think we would be half as developed" as the country is today." Those who worked with Goh found his broad intellect intimidating, yet he also had a reputation for acting as a father figure and mentor for many civil servants. Goh was born in the town of Melaka, now in Malaysia, in 1918. When he was a baby, his family relocated to Singapore, where he spent part of his childhood on a rubber plantation. Even at an early age, Goh possessed a fascination with economic development. In college in 1939, as president of the Economics Club, he delivered an address on the reconstruction of Germany. Like Lee, Goh studied in the United Kingdom—at the London School of Economics— and the two were active in the Malayan Forum, which Goh helped found.J4 Lee named Goh his first finance minister after the PAP won the 1959 elections, and from then on he held a series of top government posts for the next twenty-five years. Less flamboyant than Lee, Goh was the technocrat of the two, the hands-on, nuts-and-bolts policymaker behind Singapore's Miracle.

Though Goh spoke often of the power of free enterprise, he did not trust market forces to develop Singapore quickly enough on their own. Like MITI's Sahashi, he believed the state had to inter¬vene to produce the right results. Colonial-era laissez-faire policies "had led Singapore to a dead end," Goh once wrote, "with little economic growth, massive unemployment, wretched housing, and inadequate education. We had to try a more activist and interven¬tionist approach." Heavily influenced by European socialism, Goh expected the government to start and own important companies and ensure the betterment of its citizens, especially through the provision of public housing. In fact, Goh once stated that "the most important single factor in determining the rate of economic prog¬ress in an LDC [less developed country] is the government." Goh wasted no time getting directly involved in Singapore's  industrialization. In 1960, he asked the United Nations (UN) to send a delegation of experts to Singapore to consult the govern¬ment on a program to develop industry. Goh was specifically interested in advisors from other small states that had built in¬fluential economies, like Belgium and the Netherlands. The UN asked Dutch economist Albert Winsemius to lead the study team. At first, Winsemius was wary about accepting the position. He called another UN official, I. F. Tang, who had fled China when Mao took over in 1949, and said he had heard at a dinner with oil executives that Singapore might go Communist. "Who told you so?" Tang asked. "It's not true." Two weeks later, Winsemius, still dubious, agreed to take the offer—on the condition that Tang join him. The two arrived in Singapore near the end of 1960. Lee hosted them at a dinner soon after their arrival. "I don't smell any communists in there," an impressed Winsemius commented after¬ward.36 Winsemius would remain an economic advisor to Lee for over two decades.

The choice of Winsemius was lucky for Lee. The Dutchman had a much different ideological background than many econo¬mists of the day. Prior to earning his doctorate in economics, Win¬semius had been a cheese salesman,37 leading him to once quip that "it is more difficult to sell cheese than to run an economy."38 This frontline business know-how, combined with his experi¬ence of the postwar reconstruction of Europe, gave Winsemius a market-oriented and practical outlook on economic development that ran counter to the conventional anti-trade, pro-state phi¬losophies popular among development experts during that era. Winsemius's knowledge of the international business scene was invaluable to Lee. Lee praised Winsemius as "a practical, hard-headed businessman" who made "many contributions that were to be crucial in Singapore's development."

Singapore's pitiful state took Winsemius and Tang aback. "We had not quite expected the severity of Singapore's problems," Tang later wrote. Of special concern was the frightening degree of Communist influence. The country's "future was literally hanging in the balance, suspended by opposing ideological winds," Tang wrote. "The running joke was that a factory would be set up on Monday and all sorts of banners screaming 'Exploitation of Workers' would be hung up by Friday."

Nevertheless, the team began crafting an industrial blueprint for Singapore. Winsemius recommended the government form a single agency to attract and assist private investors. The Nether¬lands had experimented with a similar organization, which had proven highly successful. Lee agreed and formed the Economic Development Board, or EDB, in 1961. The EDB would become the engine of Singapore's Miracle, an efficient and inventive task force that coordinated among various government ministries and departments to make foreign investment as smooth and attrac¬tive as possible. To back up the EDB, Goh developed an indus¬trial park for new factories on a stretch of wasteland in Jurong in the island's southwest with water, power, and port facilities and transportation links.

Companies, though, did not come knocking. Investors, Win¬semius warned, considered Singapore "a lemon, not a Rolls Royce." Government officials encouraged local businessmen to set up factories to make vegetable oil, cosmetics, mosquito coils, hair cream, and even mothballs. The EDB formed joint ventures to recycle paper products and make ceramics, but both failed due to a lack of management experience. Locals derided the near-empty Jurong estate as "Goh's Folly." Even Lee admitted his program had "an unpromising start."

Goh tried to make the best of the situation. When asked years later if he held any doubts about Jurong's success, he simply re¬sponded: "When you have so many things to resolve, you do not worry about whether the thing will succeed or not." Goh staged public relations tricks to create an impression that Singapore was a hot destination for new investment. He attended every factory launch, no matter how small the facility. Sometimes he generated multiple publicity events off a single investment by holding cer¬emonies at various stages of a factory's development—one at the groundbreaking, another at the beginning of construction, and another at the start of production. His staff made sure journalists and photographers were always present. The packed schedule of such events, combined with intense stress, took a toll on Goh's health. Whisky was a common feature at these ceremonies and Goh's alcohol consumption led to liver ailments. His wife tried to convince him to switch to Chinese tea, but Goh, afraid to scare off potential investors, refused.

The state stepped into the industrialization effort directly. In 1962, Goh began building a steel mill in Jurong, which became National Iron & Steel Mills. The government also invested in shipbuilding and a shipping line, and founded an airline and a state development bank.44 Singapore's economic prospects, however, did not improve enough to lift Lee out of the doldrums. During a 1968 trip to London, a senior executive at retailer Marks & Spen¬cer, Marcus Sieff, visited Lee at his hotel. Sieff had seen Lee on the BBC and he came with a business proposition. The nimble fingers of Singapore's Chinese would be well suited to making high-value lures and fishhooks for trout fishing, Sieff noted, and Marks St Spencer would be willing to market them. "I must have looked forlorn on television for him to have taken the time to see me," Lee wrote. "I thanked him but nothing came of it."

LEE, HOWEVER, WAS formulating a strategic vision that would finally spark Singapore's Miracle. The inspiration, oddly enough, came not from Japan or Asia's other high-growth countries, but from Israel. Lee was impressed by how the Jewish state built a thriv¬ing economy in the face of a full boycott from its Arab neighbors by linking itself to the United States and Europe. Lee believed Sin¬gapore should pursue a similar strategy—to "leapfrog the region," as he put it. That strategy required a shift in industrialization. The island's attempts to develop industry before its separation from Malaysia were based on a kind of import-substitution—producing goods for the larger population of the federation. Singapore's in¬dependence rendered this plan useless. In its place, Lee adopted a Japan-style export-led program, aimed at selling into the giant markets of the industrialized countries. Unlike Japan and Korea, however, Singapore could not develop its own companies to export to the West quickly enough. "Had we waited for our traders to learn to be industrialists we would have starved," Lee wrote. The answer, then, was to find other people to create the compa¬nies and markets for Singapore.

This line of thinking led Lee to pursue foreign investment. The world's giant multinationals (MNCs), Lee figured, could provide exactly the capital, jobs, and training Singapore needed. These MNCs would bring ready-made markets for the goods pro¬duced in Singapore. The factories these MNCs built would export to their home countries and other industrialized nations. "We were getting companies from highly developed industrial socie¬ties with state-of-the-art technologies," Lee explains. "They were going to bring to us second or third generation technologies, but that was good enough for us, and they were bringing us manage¬ment skills which we didn't have." Lee was especially interested in wooing American MNCs, which he called Singapore's "best hope." American MNCs could create more jobs with larger in¬vestments and provide better technology than investments from other countries. A two-month sabbatical at Harvard University in 1968 convinced Lee this strategy was promising. He spent his time there discussing the global economy with business leaders and economists. American companies, he found, "were on the ex¬pansion, they were in a dynamic mode, going abroad. The econ-omy was in full steam. I saw that they were looking for ways to cut costs and expand their business, widen markets, and bring back products to America and sell to the rest of the world," Lee says. "I suddenly saw this was perhaps an answer to my problems." Of special influence, professor Ray Vernon woke Lee up to the power of low wages in the global, free-market economy. These wages, Vernon explained, could be used to attract investment from Corporate America, which was willing to capitalize on such opportunities much more rapidly than Lee had ever believed pos-sible. Vernon "dispelled my previous belief that industries changed gradually and seldom moved from an advanced country to a less-developed one," Lee wrote. "Reliable and cheap air and sea trans¬port made it possible to move industries into new countries." In other words, Lee came to understand the tremendous potential economic benefits of offshoring, both for his tiny nation and for the global economy.

At the time, this kind of thinking was radical. Many develop¬ment economists and leaders of postcolonial countries considered MNCs—and especially American MNCs—the devil's spawn. They were the standard-bearers of neocolonialism, ruthless ex¬ploiters of the resources and labor of poor nations which would condemn a developing economy like Singapore's to perpetual servitude to the West. Lee, however, did not agree. In building Singapore's Miracle, he was guided not by ideology or textbooks, but simple pragmatism. He was perfectly willing to go against convention—if he thought his method could work. "By nature and experience, we were not enamored of theories. What we were interested in were real solutions to our problems and not to prove somebody's theory right or wrong," Lee says. "All we had was our labor and our location and our skills, and if [the MNCs] can turn that into a profit, and make a living for us, good luck to them." In this way, Lee differed from Korea's Park and Japan's nation-building bureaucrats, whose priority was to create world-class corporations of their own. "Japan's paradigm was to learn from Europe and America and re-create in Japanese fashion what they saw there," Lee says. "We had no such ambition. We were prepared to learn from everybody. Just get us there, never mind if it is not an original Singaporean product." The mix of ideas and policies that generated Singapore's Miracle, Lee believes, became a new model for development. "In the process, we produced a new doctrine," Lee says. "We had not reinvented the wheel, but picked up ideas from many sources and put the pieces together to produce something useful for ourselves and the world."

The truly hard part came next—convincing American com¬panies to bet their money on Singapore. A big part of that re¬sponsibility fell onto the inexperienced shoulders of a young but persistent former English teacher.

CHAN CHIN BOCK arrived at John F. Kennedy Airport in New York City on a bitter cold day in January 1968. He was sent by the EDB to open its first overseas office in New York to promote Singapore as an investment destination. It was a daunting task. "I didn't know anything about how to do this job," he says. "No one knew what to do." As he trudged through the New York snow, the possibility of failing his country chilled him even more than the freezing temperatures. "The prospect of having to set up home, live alone by myself, and worse still, convince hard-headed American executives that Singapore was the best place for them to put their money . . . sent a shiver through my almost frozen body," he later wrote.

A typical Singaporean government official of that time, Chan was not an economist, nor did he have any special training to help him in his mission. His route to the EDB began with a misplaced pair of sunglasses. Chan had been working as the communica¬tions manager for the local operation of Ford Motor when he met S. Dhanabalan, an EDB staffer. Dhanabalan had come to Ford's offices for a meeting with its manager, and left his sunglasses sit¬ting on a conference table. Chan returned them to Dhanabalan, who then mentioned to Chan that the EDB needed to hire a liaison to work with potential investors. Interested in the challenge, Chan joined the EDB in 1964.

As Lee's vision for the economy became clearer, so did the EDB's role in bringing it to life. The EDB became the command center in Singapore's effort to industrialize through foreign invest¬ment. Winsemius suggested that the EDB open an office in New York to act as a contact point for potential American investors. The Netherlands had wooed American companies the same way. Chan, with his Ford experience, was tapped to open it. "Nobody else had even the slightest inkling of how an American MNC works or thinks," he says. He immediately ordered a heavy suit and a thick wool sports jacket from his favorite tailor. It was the first cold-weather clothing he ever owned.

Once in New York, Chan worked from a one-room office on Fifth Avenue with a Cuban immigrant as his secretary and sole staff member. With no contacts in the United States, he began cold-calling company headquarters seeking meetings.52 Some CEOs he met did not even know where Singapore was. He had to point out the island as a speck on a globe.53 But slowly, Chan formed a network. He scheduled lunch meetings with senior executives almost daily, and even if they were not rushing to invest in Singapore, they still shared their thoughts on how American corporations were chang¬ing and what options Singapore might have. Chan took advantage of what he called the "open door" spirit of American business.

Lee was an important ally in Chan's efforts. Whenever Lee vis¬ited the United States, Chan put him in front of senior U.S. execu¬tives, often over lunch. Chan met the participants in advance to inform them about Singapore and gauge their interest in investing. Winsemius briefed Lee on what these executives wanted to hear. "They looked for political, economic, and financial stability and sound labor relations to make sure that there would be no disrup¬tion in production that supplied their customers and subsidiaries around the world," Lee wrote. The quick-witted Lee was always a hit. "Word got around that I was worth listening to, and the numbers swelled," Lee boasted. Hundreds of businessmen some¬times showed for Lee's speeches.54 Lee staged an equally impres¬sive performance for those executives who investigated Singapore in person. He made sure that the roadways along the usual route a visiting CEO would travel in Singapore—from the airport to doctrine," Lee says. "We had not reinvented the wheel, but picked up ideas from many sources and put the pieces together to produce something useful for ourselves and the world."3
The truly hard part came next—convincing American com¬panies to bet their money on Singapore. A big part of that re¬sponsibility fell onto the inexperienced shoulders of a young but persistent former English teacher.

CHAN CHIN BOCK arrived at John F. Kennedy Airport in New York City on a bitter cold day in January 1968. He was sent by the EDB to open its first overseas office in New York to promote Singapore as an investment destination. It was a daunting task. "I didn't know anything about how to do this job," he says. "No one knew what to do." As he trudged through the New York snow, the possibility of failing his country chilled him even more than the freezing temperatures. "The prospect of having to set up home, live alone by myself, and worse still, convince hard-headed American executives that Singapore was the best place for them to put their money . . . sent a shiver through my almost frozen body," he later wrote.

A typical Singaporean government official of that time, Chan was not an economist, nor did he have any special training to help him in his mission. His route to the EDB began with a misplaced pair of sunglasses. Chan had been working as the communica¬tions manager for the local operation of Ford Motor when he met S. Dhanabalan, an EDB staffer. Dhanabalan had come to Ford's offices for a meeting with its manager, and left his sunglasses sit¬ting on a conference table. Chan returned them to Dhanabalan, who then mentioned to Chan that the EDB needed to hire a liaison to work with potential investors. Interested in the challenge, Chan joined the EDB in 1964.

As Lee's vision for the economy became clearer, so did the EDB's role in bringing it to life. The EDB became the command center in Singapore's effort to industrialize through foreign invest¬ment. Winsemius suggested that the EDB open an office in New York to act as a contact point for potential American investors. The Netherlands had wooed American companies the same way. Chan, with his Ford experience, was tapped to open it. "Nobody else had even the slightest inkling of how an American MNC works or thinks," he says. He immediately ordered a heavy suit and a thick wool sports jacket from his favorite tailor. It was the first cold-weather clothing he ever owned.
Once in New York, Chan worked from a one-room office on Fifth Avenue with a Cuban immigrant as his secretary and sole staff member. With no contacts in the United States, he began cold-calling company headquarters seeking meetings. Some CEOs he met did not even know where Singapore was. He had to point out the island as a speck on a globe. But slowly, Chan formed a network. He scheduled lunch meetings with senior executives almost daily, and even if they were not rushing to invest in Singapore, they still shared their thoughts on how American corporations were chang-ing and what options Singapore might have. Chan took advantage of what he called the "open door" spirit of American business.

Lee was an important ally in Chan's efforts. Whenever Lee vis¬ited the United States, Chan put him in front of senior U.S. execu¬tives, often over lunch. Chan met the participants in advance to inform them about Singapore and gauge their interest in investing. Winsemius briefed Lee on what these executives wanted to hear. "They looked for political, economic, and financial stability and sound labor relations to make sure that there would be no disrup¬tion in production that supplied their customers and subsidiaries around the world," Lee wrote. The quick-witted Lee was always a hit. "Word got around that I was worth listening to, and the numbers swelled," Lee boasted. Hundreds of businessmen some¬times showed for Lee's speeches.54 Lee staged an equally impres¬sive performance for those executives who investigated Singapore in person. He made sure that the roadways along the usual route a visiting CEO would travel in Singapore—from the airport to the main hotels to his office—were carefully landscaped. The government complex that housed Lee's office, called the Istana, was a showpiece, a gated oasis of green lawns and woodland with a nine-hole golf course right in the center of the city. "Without a word being said, [CEOs] would know that Singaporeans were competent, disciplined, and reliable," Lee wrote.55 Many CEOs got an audience with Lee himself. Lee says his message to them was straightforward: "We are a society that is determined to make things work. When we invite you to invest, we are going to help you to make your investment successful."

The effort began to pay off in the months after Chan arrived in New York. Chan learned during his informal lunches that the semiconductor industry could be a potential target for Singapore. Under extreme pressure from low-cost Japanese competitors American chip makers were looking to cut their own expenses. Chan employed an agent in California to visit chip outfits and lobby them to consider Singapore as a base for new facilities.

Chan's big break came unexpectedly. On a flight from Taipei to Hong Kong, I. F. Tang happened to be sitting next to Mark Shep¬herd, president of Texas Instruments (TI). Shepherd explained that he was in Taiwan examining a possible investment in a chip assembly plant there. Tang, taking advantage of his captive audi¬ence, pitched Singapore as an alternative. Upon landing in Singa¬pore, Tang had the EDB shoot off a telegram to Chan telling him to expect a phone call from TI. When it came, Chan was ordered to drop everything and do whatever it took to get the company to invest.

The call came through and Chan flew to Dallas, TI's home city. Whisked into a meeting with Shepherd and other execu¬tives, Chan gave his best pitch. He stressed Singapore's English-language skills, low labor costs, and tax incentives, and argued that the country's small size would allow the government to orga¬nize what TI needed quickly. Speed was on Shepherd's mind. The executives told Chan that TI wanted the operation up, running, and exporting within fifty days of the decision to invest. Could Singapore make that happen? Chan was stunned. It was a com¬mitment he could not make, but he promised Shepherd: "We will try our best." After the meeting, Chan warned his EDB colleagues in Singapore about the fifty-day deadline in a telegram. "You must get your act together," Chan says he told them.

Shepherd decided to investigate Singapore in person. When he arrived in September 1968, the EDB was ready. Shepherd had flown in from Taipei and was in a grumpy mood. The proposed site for TI's factory was still just rice paddies. The EDB had a chance to outmaneuver the Taiwanese. Shepherd was shown a ready-made factory building, developed by the government, which could quickly be converted into TI's assembly plant.

Shepherd was convinced. TI opened its plant in Singapore in 1969, as did two other major chip firms, National and Fairchild, making semiconductors a major export for the island. "The future began to look promising for the first time since Singapore became independent," Chan later wrote. The do-whatever-it-takes spirit shown in wooing TI became a regular feature of Singapore's in¬vestment promotion drive. In 1969, Dutch electronics giant Philips planned to build a factory for the machines and tools it used in its production sites in Asia. Taiwan was already short-listed for the investment, but the EDB wanted the factory as well. Philips would add a big European name to its list of investors and bring in an operation that used skilled workers. The EDB was tipped off by a Philips's local employee that a vice president was planning an overnight stop in Singapore on his way to Taiwan. The EDB staffers went to work. When the executive landed at the airport, the EDB convinced him to take a look at Singapore as a possible location. Its officers brought the vice president to a training center the EDB had founded to teach Singaporeans metal-industry skills. The Philips executive was so impressed that he decided to invest in Singapore instead of Taiwan. Chan, meanwhile, continued to hustle in the United States. Between 1968 and 1970, he went on a nationwide campaign to attract investment from General Electric, flying around the country to visit the chiefs of the conglomerate's far-flung divisions. He secured ten GE investments in those three years, and by 1972, the U.S. multinational was the largest foreign investor in Singapore, employing thirteen thousand people.

LEE FINALLY ALLOWED himself to relax. Growth had reached Miracle heights, and the economy weathered the oil shock and the other disruptions of the early 1970s. His Communist opponents were defanged. The onetime labor activist feared the Communist-leaning unions would scare off potential investors. Using the fragile state of the economy as an excuse, he had launched a relentless crackdown on labor unrest. "In newly independent Singapore, on its own and highly vulnerable, the government could not allow any union to jeopardize Singapore's survival," he wrote. To break a 1967 clean¬ing workers strike, Lee arrested the union's leaders and sacked the strikers. At a 1968 union conference, he warned that he would treat a dockworkers strike as "high treason." Lee's PAP passed new laws beginning in 1968 that curtailed worker benefits and gave more power to companies to hire and fire. By 1969, Singapore had no strikes at all.

The crucial factor behind Lee's success was the foreign invest¬ment pouring into the country. The Jurong industrial estate that had been mocked as "folly" was a laughingstock no more. By late 1972, the estate housed 417 plants employing 48,000 people, with another 74 being built or planned. Much of the investment that would come to Singapore was in high tech—computer peripherals, disk drives, semiconductors, and other IT equipment. "We welcomed everyone," Lee wrote, "but when we found a big investor with potential for growth, we went out of our way to help it get started."62 As a result, Singapore compressed the development pattern engineered in Japan and South Korea—that transition from low-wage, low-tech, labor-intensive industries into more capital-intensive, high-skill industries. "Instead of doing textiles and garments and slowly climbing up the technology ladder, we moved into a whole of IT items which were very high tech at the time,” Lee explains.

How Lee attracted all of this investment is perhaps the most important lesson of the Singapore story. Lee's goal was "to create a First World oasis in a Third World region." If Singapore could develop top-rate security, infrastructure, telecommunications, education, transportation, and health services, it could attract engineers, managers, and entrepreneurs who wanted to do business in the region. Singapore differentiated itself from other emerging countries by creating a climate that bolstered the confidence of foreign investors. “We had one simple guiding principle for survival,” Lee wrote, “that Singapore had to be … better organized and more efficient than others in the region. If we were only as good as our neighbors, there was no reason for businesses to be based here.”


A DOSE OF DR. M'S TOUGH MEDICINE
/ don't care what people think. I wanted
to help develop this country.
—MAHATHIR MOHAMAD

Mahaleel Ariff's nerves were frayed. Mahaleel had been vice chairman of Malaysian carmaker Proton for only a few days in April 1996 when he was summoned to brief Prime Min¬ister Mahathir Mohamad on the firm's future. As a newcomer to the car manufacturing business—Mahaleel had been an oil exec¬utive—he put himself on a crash course to learn the ins and outs of Proton's operations. It was a stressful few days, especially since what he discovered about the car company was not encouraging. Mahaleel harbored doubts about Proton's ability to survive.

This news was not what Mahathir wanted to hear. Proton was Mahathir's baby, an enterprise that he had nurtured since its birth as the ultimate symbol of a modern, industrialized Malay¬sia. Proton had thrived, a great degree due to government support, such as high tariffs that kept foreign competition to a minimum. The hard-headed former doctor, the most dominant political figure in Malaysia's history, expected his small Southeast Asian nation to excel. Defeatism was never welcome.

Mahaleel, however, figured he could not shield Mahathir from the hard truth. So he calmed his nerves as he entered Mahathir's office and began his briefing with as much confidence as he could muster. The problem with Proton, Mahaleel told Alahathir, was that it still was not a truly independent carmaker. Though Proton had been manufacturing cars under its own name since 1985, it relied on its Japanese partner, Mitsubishi, for many components as well as engineering and design. This situation, Mahaleel be¬lieved, could not persist. MahaJeel delivered his verdict: "You can continue to do the same way you're doing it and then you will die," he says he told Mahathir. "Or you can create your own products and your own technology and then you have a chance, but it will be very difficult."

Mahathir sat silently through the entire forty-five-minute pre¬sentation. Mahaleel girded himself for the worst. Finally, Mahathir asked him: "Which option do you recommend?" "The second," Mahaleel answered. He wanted Proton to develop its own cars. Mahathir then gave Mahaleel his marching orders: produce a 100 percent Proton-designed car by the year 2000.

Mahaleel was stunned. The company, he believed, possessed only about 20 percent of the technology and know-how necessary to design a vehicle itself. He thought the three-and-a-half-year deadline could not possibly be met. "Sir," he responded. "Do you realize we don't know how to start?" Mahathir said nothing; he only gave Mahaleel a wry smile.

The next three years, Mahaleel says, were "a nightmare." Ma¬haleel and his engineers feverishly worked toward Mahathir's goal, helped along by an important infusion of technology from Proton's 1996 purchase of the U.K.'s Lotus. Mahathir acted as a shadow CEO, incessantly studying financial reports, visiting the factory, and demanding new briefings. Mahaleel spoke at length with Mahathir on everything from the craftsmanship of the Lexus to the possibility of hydrogen-powered cars. In the end, Mahathir got what he wanted. In 2000, Proton introduced its first purely Malaysian car, the Waja sedan.

If the manner in which Mahathir press-ganged Mahaleel feels familiar, it should. During his twenty-two years as Malaysia's prime minister, Mahathir reigned over the tropical nation much like Park Chung Hee had over South Korea. A virulent national¬ist, Mahathir was as hell-bent as Park on transforming his agrar¬ian country into an industrial powerhouse. He tried many of the same tactics. The saga of the Mahathir era in Malaysia is the prime example of how the "late movers" in the Miracle strove to copy the policies of the "early movers." Mahathir makes no secret of trying to adopt practices from Japan and South Korea. Even after Japan entered its Lost Decade, the influence of the "Asian model" endured across the continent. In fact, Mahathir used the term "Malaysia Inc." to describe his country's economic system in an effort to re-create the close business-government ties of Japan. His goal was "to bring government and the private sector together and to regard Malaysia as a corporation where everybody has to work in order to make it a success," Mahathir once explained.

Yet in no other country in Asia did the active application of the "Asian model" produce more questionable results. The goal of Mahathir, like MITPs Sahashi, Park, and Taiwan's Li Kuo-ting, was to shift the Malaysian economy away from low-end goods and natural resource exports into higher-technology industries. Like Park, Mahathir wanted steel mills and car factories. Hoping to leapfrog Malaysia into the world of high tech, Mahathir dreamed up the Multimedia Super Corridor, a 31-mile (50-kilometer) swath of land near Kuala Lumpur with top-notch information infra¬structure meant to house technology start-ups, an envisioned rival to Silicon Valley in a Southeast Asian jungle. Much of Mahathir's version of the "Asian model" centered on Mahathir himself. In the same fashion as Park, he often generated or sponsored proj¬ects he personally considered key to the economy, then scrutinized their implementation in excruciating detail. Time magazine once dubbed him the "Master Planner."

Yet unlike Park's creations, Mahathir's never quite became the global competitors he had hoped. There are no POSCOs in Ma¬laysia; Proton has not been as successful as Hyundai Motor. What went wrong? Part of the problem was that Mahathir's projects had a much hearier state role than MITI's targeted industries or Park's chaebol-led enterprises, which drained away some of the discipline important in making the "Asian model" work. In that way, they resembled Habibie's misguided efforts in Indonesia.
But Mahathir also provides a lesson in development all his own. One key element in all of the Miracle stories was that the leadership of each country made economic development their top priority and pursued it with an uncanny pragmatism and flexibility that al¬lowed them to adapt policy to the needs of the moment. Mahathir felt similarly, but his pursuit of rapid growth had an additional motive that to him was no less important—to uplift the Malay community in Malaysia's multicultural society. Mahathir was part of one of modern history's greatest experiments at social engineer¬ing. The Malays were the majority ethnic group in the country, but they were also the poorest, with most business controlled by a minority of Chinese immigrants. Mahathir, and the Malaysian leaders before him, implemented all kinds of convoluted policies to try to "right" this situation by expanding the role of the Malays in the economy. Growth was a crucial part of the attempt, but the benefits from that growth were meant to be skewed in favor of one social group over others. Mahathir was not just a nationalist, like the other leaders of the Miracle, he was also a Malay activist. He sometimes made decisions that undermined the modernization of Malaysia's economy in pursuit of his communal preferences.

Despite Mahathir's failures, Malaysia still experienced the Miracle, and Mahathir is unquestionably the father of it. The credit should not go to his high-profile pet projects, copy-cat "Asian model" endeavors, or pro-Malay programs. Malaysia's rapid growth is due more to Mahathir's lesser-known efforts at promoting private enterprise and foreign investment. Despite his devotion to the Malay cause, Mahathir's boldest decisions were the ones that removed regulation and altered government policy that had been set in place to bolster the community's fortunes. Malaysia provides another case of how the forces of globalization trump the power of government in creating economic Miracles.

Mahathir's willingness to participate in a Western-dominated free-trade system was even more unusual due to his oft-stated crit¬icism of that system. Fiery and witty, Mahathir has been called a "spokesman for Asia." He has proved fearless in defending what he perceives as the rights of the developing world. In his view, the global economy has been purposely organized to operate to the detriment of emerging nations. Globalization, he once claimed, "has been introduced, designed by the Western countries to facili¬tate their control of the world economy." In one address, delivered in 2003, he described Europeans as innate warmongers who prac¬tice genocide and "are ready to invent false allegations in order to go to war to kill children, old people, sick people and just anyone." Malaysia, he insisted, cannot feel safe from these untrustworthy ogres. "The world that we have to face in the new decades and cen¬turies will see numerous attempts by the Europeans to colonize us either indirectly or directly," he continued. "If our country is not attacked, our minds, our culture, our religion and other things will become the target."4 His most notorious comments have come against Jews, who he has described as "monsters" and "pupils of the late Doctor Goebbels." In a 2003 speech to an Islamic confer¬ence, Mahathir blasted that "Jews rule this world by proxy. They get others to fight and die for them.. . . They invented and suc¬cessfully promoted socialism, Communism, human rights and de-mocracy so that persecuting them would appear to be wrong, so they may enjoy equal rights with others."

Though Mahathir can sometimes sound like the most radi¬cal of Islamic leaders, he is not. Here is where Mahathir's story takes on significance well beyond Asia and economics. The Ma¬laysia that Mahathir created is a rare find in the Islamic world—a Muslim-dominated state with a vibrant economy and an interna¬tional outlook. Mahathir may bluster against the West and criti¬cize U.S. foreign policy, but he has also been willing to embrace Western economic ideals. Mahathir welcomed U.S. multinationals into Malaysia in a similar fashion as Lee Kuan Yew in Singapore, and hitched his country's fortunes to the trends of free trade and offshore production championed by American government offi¬cials and business leaders. Mahathir has been able to detach his views on international politics from the development needs of his nation. The result has been the formation of what is quite likely the Muslim world's most modern economy. Mahathir's Malaysia is not perfect, of course. Relations between the Muslim Malay, Chinese, and Indian communities remain strained. Yet compared to large swaths of the rest of the Islamic world, Malaysia is a guid¬ing light of stability, of modernity, of internationalism. It is inter¬esting to ponder what the world today, with its religious conflicts and Islamic terrorist movements, would look like if more Muslim leaders followed Mahathir's lead, and if the West found a way of tolerating them as they have Mahathir.

This is not to say that Mahathir is wildly popular within Ma¬laysia. He is as divisive a figure at home as he is internationally. To his supporters, he is the beloved "Dr. M," the architect of modern Malaysia who provided the strong leadership necessary to guide a fractious nation into prosperity. To his enemies, he is an ego¬tistical autocrat whose administration was tainted by cronyism and corruption. "Maybe they'll remember me, maybe they won't. I don't care what people think," Mahathir says about his long career. "But I do care about being able to do what I set out to do. I wanted to help develop this country."
DURING HIS CHILDHOOD, Mahathir's family "lived in what would be called a slum area today," he once wrote. He was born December 20,1925, in the town of Alor Setar, which is now in the northern Malaysian state of Kedah. They lived in the poor, south¬ern part of town in a timber house divided into rooms with fold¬ing screens. He slept huddled together in the tropical heat with his eight brothers and sisters under mosquito nets. His father, Mohamad Iskandar, was a schoolteacher and later a government auditor who, Mahathir wrote, "brought up his family to be very orthodox, very disciplined." A devotee of education, he gave Ma¬hathir lessons in mathematics and other subjects at home and sent him to the town's only English school. Islam was also a major part of his early life. Though his family "was not fanatically religious," they "did adhere very closely to the Islamic faith." His mother, who had a religious education, taught him the Koran.

Even as a child, Mahathir realized that something was horribly amiss in his country. Malaya, as the territory was then called, was part of the British Empire. The British residents of Alor Setar lived in a secluded community, complete with a golf course and private clubs, and rarely fraternized with the locals.8 Mahathir was even more upset by the disparity between Malaya's ethnic communi¬ties. In Alor Setar, the young Mahathir noticed that Chinese im¬migrants dominated local business and were much wealthier than the indigenous Malays, who tended to be simple rice farmers. "I noticed that the Malays were far behind the Chinese," Mahathir recalls. "I felt that this was not right. As the people of the country we should have at least an equal level of development. I felt quite humiliated that, in my own country, I was not highly regarded. I felt that something had to be done. So I became a nationalist."

At that time, though, Mahathir says that he and most Malays had little confidence that they could alter their fate. "Our entire world view was that we had no capability to be independent," he wrote. "We thought that only the Europeans could run our coun¬try, and felt we had to accept their superiority." However, much like Lee Kuan Yew in Singapore, he changed his mind during World War II, when the Japanese invaded Malaya and booted the British out. "The British troops blew up bridges as they retreated and the Japanese troops shot and bayoneted British soldiers who were left behind," Mahathir remembered. The Japanese success "convinced us that there is nothing inherently superior in the Eu¬ropeans. They could be defeated, they could be reduced to grov¬eling before an Asian race. . . . Thus there was a new awakening amongst us that if we wanted to, we could be like the Japanese. "We did have the ability to govern our own country and compete with the Europeans on an equal footing."

Though the Japanese invaders brutalized many of the commu¬nities they conquered, the years under the Japanese went by in relative peace for Mahathir. When his English school shut down, he sold bananas at a stall in a local market until his education-minded father forced him into a new Japanese school. But Ma¬hathir, like many Malays, was still happy to see the return of the British after Japan's defeat, hoping it signaled a return to easier, more prosperous times. It did not. The British proffered a plan to unify the disparate sultanates on the Malay Peninsula and the island of Borneo into a "Malayan Union" as a prelude to self-rule. The scheme created an uproar. Malay political leaders opposed the British intention of granting full citizenship to the region's Chi¬nese and Indian minorities, seeing the union as a ploy to tighten British control on Malaya.

Mahathir was among the outraged. Back in his reopened En¬glish school, he joined his fellow students in fomenting opposition to the union plan. A talented comrade carved potatoes into print¬ing blocks that they lathered with Chinese ink and used to print posters. They rode their bicycles through villages to form protest groups at other schools  and warn villagers of the dangers of the British union plan. Mahathir, never one to suffer from modesty, wrote that "I always ended up taking a leading role, and my class¬mates naturally accepted my self-projected leadership." In 1946, he joined the United Malays National Organization, or UMNO, which later became the country's chief political party. UMNO led the charge against the Malayan Union, and the furor over the Brit¬ish plan was so severe that it was scrapped in favor of a looser form of federation.

Despite UMNO's success, Mahathir decided to put his politi¬cal career on hold. In 1947, he accepted a scholarship to study medicine at a university in Singapore.16 Higher learning, he be¬lieved, would help his future career. "Unless I had some qualifications, I couldn't become a credible leader," he explains. After graduating in 1953, he returned to Malaya and became a govern¬ment doctor.

Meanwhile, Malaya's quest for independence was picking up pace. A triumvirate of political parties, led by UMNO, negoti¬ated a deal with the British that resulted in Malaya's independence on August 31, 1957.19 Mahathir, barred from political activity as a civil servant, played no significant role in these events. But shortly before independence, Mahathir quit his government job, opened his own medical practice in Alor Setar, which he named the MAHA Clinic, and began to build a political base. While he performed minor surgery and made house calls,20 he became well acquainted with the local Malay farmers. They came out to vote for him in 1964 when he won a seat in parliament.

Mahathir made a name for himself by championing Malay causes, but his route to the top of Malaysian politics got fast-tracked, ironically, as a result of disastrous events that appeared at first to doom his career. In the 1969 national election, Mahathir lost his parliament seat in part because Chinese voters rejected him as too overtly pro-Malay. Mahathir's defeat was part of a wider decline in support for UMNO and Malaysia's prime minis¬ter and UMNO chief, Tunku Abdul Rahman. The Malays, who expected rapid gains in welfare and power after independence, found the slow pace of Malaysia's development frustrating. Their resentment toward the rich Chinese grew. The simmering com¬munal tensions exploded in May in Kuala Lumpur. Armed Chi¬nese and Malay rioters clashed for two days, burning, looting, and fighting. Soldiers were deployed to quell the riots, and the government declared a state of emergency. Officially, 177 people died, though other estimates put the death toll higher.

The race riots were the final straw for Mahathir. He led a revolt against the Tunku, claiming the prime minister pandered to the Chinese minority at the expense of his own Malays. He wrote a strongly worded letter to the Tunku demanding his res¬ignation. Mahathir's gambit backfired. The Tunku expelled him from UMNO. "I was exiled from politics in my own country," Mahathir wrote. He remained unrepentant, and summed up his views in an influential book, The Malay Dilemma.
Published in Singapore in 1970, the book was so controversial that it was banned in Malaysia until Mahathir became prime minister eleven years later. This odd treatise details the woeful tale of how Brit¬ish imperialists and aggressive Chinese immigrants marginalized the placid and hapless Malays in their own country. Mahathir argues the Malays were genetically disadvantaged in economic competition with other groups due to excessive inbreeding and other outdated marriage practices that perpetuated bad genes. He called for a "revolution" to rehabilitate the Malays and give them economic rights commensurate with their majority status. His prescriptions included undertaking state development projects to provide jobs for Malays and teach them new skills, building "satellite towns" to urbanize them and instituting regulations to protect Malay shopkeepers from Chinese interlopers. Mahathir even advocated a ban on "haggling" in shops so the inexperienced Malay merchants could better compete against their more savvy Chinese counterparts. He also insisted that the Malay community had to participate in its own resurrection by reforming its culture. "There must... be a conscious effort to destroy the old ways and replace them with new ideas and values," he wrote. "The whole process must be planned and executed with speed and thorough¬ness to produce a complete and radical change in the Malays."

In the early 1970s, Mahathir's political fortunes revived. The Tunku never recovered from the 1969 riots and Mahathir's revolt, and he was forced to resign in 1970. Meanwhile, Mahathir's po¬sition was enhanced by The Malay Dilemma and his rebellion against the Tunku. He became a living symbol of Malay national¬ism. UMNO invited Mahathir back in 1972. From there, his rise to the top was swift. He won back his parliament seat in 1974 and was named minister of education. Three years later, he became minister of trade and industry, and by 1981, he was the primary choice for the country's new prime minister.

WHEN HE TOOK the country's top job, Mahathir inherited an economic platform so strongly ingrained that it was more like a sacred ideology. Called the New Economic Policy (NEP), it aimed to correct the glaring imbalances in income between the poor Malays and the wealthier Chinese. Like a massive, nationwide af¬firmative action program, the NEP was devised in the wake of the 1969 race riots when a shaken government realized that much of the Malay anger stemmed from poverty. In 1970, the Malays and other indigenous peoples (called the bumiputera in Malay) had a monthly household income less than half that of the Chi¬nese and controlled a mere 2.4 percent of total corporate assets. The rest was owned by Chinese and Indian immigrants or foreign companies.

Under the NEP, officially launched in 1971, the government employed a wide range of policies intended to lift the Malays' po¬sition in the economy, including preferential allocations of gov¬ernment jobs and contracts and regulations that ensured Malay investors got 30 percent of the shares of any new venture or initial public stock offering. The policy led to heavy state intervention in the economy. When the Malays did not have the cash to buy the mandated 30 percent of a company, the government set up trusts to purchase the shares for them. The central and state govern¬ments also created development corporations that launched in¬dustrial companies and filled their staff rosters with Malays. The NEP, however, did not degenerate into nationalization or expro¬priation of the assets of Malaysia's minorities. Instead, the NEP put a premium on economic growth to ensure that all communi¬ties enjoyed improved livelihoods while the government reordered the economic relationships between the country's ethnic commu¬nities. "It was to be a process of leveling up, not leveling down," Mahathir explained.

Mahathir was not directly involved in the formulation of the NEP—it was developed by UMNO while Mahathir was expelled from politics—though it was influenced by Mahathir's ideas in The Malay Dilemma. Upon his return to government, Mahathir backed the NEP's goals. He once credited the NEP with making Malaysia "one of the very few countries where a multiracial people have been able to build a prosperous nation."28 However, he had strong reservations about its policies. The NEP, Mahathir feared, made the Malays dependent on government programs. Many Malays, Mahathir complained, "perceive the NEP as an open-ended opportunity machine, where what you want you just pick up" or "as a means to get rich quick." The NEP was not enough, Mahathir determined, to ensure the Malays' economic success. "The weakness of the bumiputera in the economic field can be overcome, not by government aid, but by their own upgrading of their abilities to compete," Mahathir believed.30 Malays "had a lackadaisical, even naive, attitude towards money and business. A cultural reformation, involving new skills, new approaches and new values, was essential," Mahathir wrote.31 His goal was to create the Malayu Baru, or New Malay, who is "sophisticated, disciplined, trustworthy and efficient," "willing to face all chal¬lenges," and who "can compete without assistance."

The tools to forge the New Malay could not be found within Malaysia, Mahathir determined. He had to look elsewhere for models to follow, and he found the answers he sought in the other Asian economies that had already experienced the Miracle, such as South Korea, Taiwan, and especially Japan. The rising East, bursting with economic vibrancy, seemed a much better act to follow than the West, still recovering from the oil shocks and stag-flation of the 1970s when Mahathir became prime minister. "The Western nations appeared to have lost their drive," he wrote. "It was a natural conclusion, that if we were to emulate the success of foreign nations, the most valuable role models were no longer in Europe or the United States, but rather in our own backyard." Ma¬hathir's fascination with the Japanese, first fostered during World War II, only intensified as Japan's economy became a world power. He marveled at the Japanese devotion to quality, their insistence on self-reliance, and, most of all, their diligent work ethic. Shortly after taking office, Mahathir launched his "Look East Policy." The idea was to copy aspects of the Japanese economy that Ma¬hathir thought might work well at home. It was primarily a propa¬ganda campaign designed to inculcate Malaysians with the same relentless work habits and spirit of self-sacrifice that Mahathir believed underwrote the Miracle in Japan and South Korea. "We wanted Malaysians to work as hard as the Japanese," he wrote. The Malaysian worker would "set the economy on a steady course of growth and development." He exhorted Malaysian companies to adopt the tight-knit executive-worker relationships, consensus-based decision making and other management practices prevalent at Japanese firms.

Mahathir also copied Japan and Korea in more concrete ways, especially their "Asian model," government-led efforts to develop industry. Like MITI's Sahashi, Mahathir believed there was no way Malaysia could ever catch up with the West without gov¬ernment intervention. State aid and direction was necessary, he argued, in order to shift the structure of the Malaysian economy into high-value heavy industries such as automobiles. The indus¬trialized nations "have all the competitive advantage," Mahathir said. "They have the capital, more power, market, technology, ev¬erything. What do we have? Nothing."
Mahathir introduced an "Asian model" centered to a great degree on his own personal power. Like Park, he almost single-handedly fashioned a heavy industrialization program. His main tool was the Heavy Industries Corporation of Malaysia, or HICOM, a state investment company he formed while trade min¬ister. To maintain control of its activities, he transferred oversight of HICOM to the prime minister's office when he ascended to the country's top job. Many of HICOM's projects were joint ventures with Japanese firms, including Perwaja, a steel company forged with Nippon Steel, and carmaker Proton.

The idea for a homegrown Malaysian car first occurred to Mahathir during visits to Japan in the 1960s. He marveled at the Toyotas and Nissans on the streets of downtown Tokyo. His fer¬tile mind imagined all of the "spin-off" benefits such an industry could spawn back in Malaysia—engineering expertise, manage¬rial training, and marketing know-how. Learning how to build a car "will enable us to leapfrog and catch up with the developed countries," Mahathir says. When he became prime minister, he decided to make his dream a reality. Several private initiatives were discussed, but Mahathir believed Malaysian businessmen did not possess the financial muscle to get the job done on their own. The state would have to take the lead.

Mahathir decided to take charge of the project himself. His first preferred partner, Japan's Daihatsu, turned him down. Then he met with executives at the giant keiretsu Mitsubishi and of¬fered them a share of the national car project. Mitsubishi, he told the executives, would gain a larger presence in the Malaysian market by participating in Mahathir's plan than marketing its own imports. In 1983, two Mitsubishi companies formed Proton with HICOM. Mahathir believes his direct involvement ensured the project's success. "We needed a kind of heavyweight to push this idea forward. If some minor officials were to propose it the automotive companies wouldn't have taken them seriously," Ma¬hathir explains. "As prime minister, I can gain access" to the right people.

Few in Malaysia shared Mahathir's enthusiasm for Proton, however. Critics lambasted the national car project and the rest of his big-ticket industrial programs as expensive luxuries with little hope of ever becoming profitable or competitive. Malaysia's domestic market, with fewer than 14 million people in 1980, could not possibly sustain a car company, they contended, and the sub¬sidies and tariffs needed to keep it afloat would so tax the econ¬omy, and especially consumers, that it would be more efficient to import Malaysia's cars from overseas. He faced resistance even within his own cabinet. His No. 2 official, Deputy Prime Minister Musa Hitam, cautioned Mahathir that there was a "danger of the Japanese taking over if you did not know how to do it."

Mahathir brushed off his critics. Malaysia, he believed, had no chance of ever becoming an independent economic power unless it developed companies like Proton. "We are always being told that it is cheaper to buy than produce yourself," Mahathir complained. "This is, of course, the propaganda of the developed countries." He was not looking at heavy industries in purely dollars-and-cents terms. The new skills and know-how Proton would generate within the economy were worth the potential extra expense, he argued. "It is cheaper to buy a foreign car but it may be necessary for us to pay the price of having cars made more costly," he once explained.37 Mahathir also saw Proton as an opportunity to for¬ward the NEP and his goal of the Malayu Baru. Its ranks would be filled with Malays eager to absorb the technical and manage¬rial expertise he believed the Malay community needed.

In 1985, the first Proton car, the Saga, rolled off the assembly line. Far from the homemade Malaysian car Mahathir envisioned, the Saga was merely an adaptation of an existing Mitsubishi mod¬el. Mahathir watched proudly nonetheless. A thankful Proton awarded him the first car off the line. "I felt that I had been vindi¬cated," Mahathir recalls. The car showed that "we have arrived, that we can do what we promised to do."

DESPITE MAHATHIR'S EFFORTS, however, the Malaysian economy hit a serious wall in the mid-1980s. In 1985, the econ¬omy contracted by 1 percent.40 Malaysia was still dependent on exports of commodities such as palm oil and rubber for growth, and global prices declined steeply. Malaysia's exports in 1985 were 40 percent smaller than policymakers had expected. Mahathir, in one of his standard diatribes, blamed the West for manipulating prices to the detriment of the developing world. Earlier, in a 1980 speech, he had called commodity trading on global exchanges a "sordid game."

Yet, rhetoric aside, Mahathir realized that the economy needed serious reform. It was at this point that he showed that unexpected pragmatic side. Deviating from his earlier trajectory, Mahathir boldly began to liberalize the economy.

His partner in this effort was an eccentric businessman, Daim Zainuddin, who became finance minister in 1984. Daim grew up in the same town as Mahathir, though they did not know each other well in their youth. They met in 1947 when Daim joined his older brother, who was friendly with Mahathir, at the local train station to wish Mahathir farewell when he departed to Sin¬gapore for school.42 Daim went on to study law in Great Britain and practice in Malaysia. Unhappy with his meager lifestyle, how¬ever, he gave up the law for property development, through which he made a substantial fortune. Daim built a relationship with Mahathir in the late 1970s while studying urban planning at the University of California at Berkeley. He wrote letters to Mahathir with his thoughts on political events and economic policy.44 The two were so tight by the mid-1980s that Daim became Mahathir's closest advisor on economic affairs, and they called each other almost daily. Charming and affable, Daim became famous in in-ternational circles for dressing in flip-flops and a Hawaiian shirt to greet visitors.

The two friends' first target was the bloated state sector. The number of government-run firms had exploded by the mid-1980s to some eight hundred. Many were losing money, a worrisome drain on national finances.46 Mahathir had been a proponent of these NEP-inspired public firms, but, sickened by the losses, he changed his position and decided to let private business take the lead. "At one stage before I became prime minister, I thought that government would be able to get both the tax and the profits, for itself" by developing its own enterprises, Mahathir explained. "But in fact what happened, you were not making any profits. ... So I thought that this was completely wrong." Mahathir and Daim began selling off state companies and projects to entrepreneurs or through the stock market beginning in 1984. By the mid-1990s, most major government enterprises, including the country's larg¬est port and the national telecommunications system, were in pri¬vate hands. Their performance for the most part improved.

Yet the privatization program caught flak nevertheless. Ma¬hathir created the problems by mixing a policy based on sound economic principle with a social agenda that was not. Most of the divested government assets ended up in the hands of Malays. Ma¬hathir never gave up on his desire to craft a Malay business elite; he just altered the methods of fostering one. His steadfast desire to promote his own community mired the privatization drive in charges of cronyism. State assets were sold to a relatively small group of entrepreneurs and managers. Sometimes the procedures for these divestments were murky with little public disclosure;50 other times, the entrepreneurs themselves recommended deals to the government.51 Daim, as finance minister, was point man on the program,52 and since the deals needed cabinet approval, ultimately Mahathir had to give his nod as well. As a result, critics claimed that contracts and assets went to companies and business¬men with close political connections to the Mahathir regime. Ma¬hathir and Daim deny such nefarious dealings took place. What looked like cronyism, they say, was sound commercial decision making. The projects were large, the enterprises complex, and only a few businessmen in the country had the skills and experi¬ence to successfully manage them, Mahathir argues. "We had to be very selective about who takes on the projects. We must find people who were capable," Mahathir complains. "The moment you identify someone, he becomes your crony!"

The most famous and controversial of these favored entrepre¬neurs was the cigar-chomping Halim Saad. At one time an obscure accountant, Halim was a Daim protege who managed UMNO-linked companies in the mid-1980s. In 1987, a political dispute forced UMNO to disgorge its business assets, and, through a series of transactions, Halim ended up in control of many of them as a private investor. One of the choicest assets was an engineering firm called United Engineers, which had won a government con¬tract to build the lion's share of a cross-country expressway in 1985. Halim consolidated some of UMNO's holdings into a com¬pany called Renong, which continued to make acquisitions and win government contracts, including other major "national" proj¬ects such as a new road-link to Singapore. By 1995, Renong was the tenth-largest firm on the Kuala Lumpur stock market.5i
While privatization was causing rancor, Mahathir's boldest policy decision was yet to come. The main source of Malaysia's economic malaise was a lack of investment. Malaysia was never going to take off until Mahathir found a way of convincing inves¬tors, both foreign and domestic, to bet their money on his country. Yet funds were flowing in the wrong direction. The wealthy Chi¬nese community was pulling money out of Malaysia rather than investing in new ventures at home.

The stumbling block to reversing this trend was the NEP. Its mandated quotas on share ownership for bumiputera was a disin¬centive for investors, who could find more attractive climates else¬where in Asia. Why would an American multinational turn over 30 percent of its local operation to a Malay businessman when it could open shop elsewhere and own 100 percent? Mahathir came to see that the share-reservation policy was enriching a few Malays who could afford to buy shares while depriving the masses of the new jobs foreign investment would bring.

Mahathir and Daim huddled on the matter in 1986 and came to a stark and politically dangerous conclusion: Parts of the NEP had to go. Mahathir realized the consequences of this step. "I had to make sure that my decisions wouldn't end up with my being thrown out" of office, he says. "It was a hard decision, but it was also realistic. I had to make it." At the time, Mahathir was care¬ful not to blame the NEP for the country's downturn. The NEP, he said, was simply being held "in abeyance." The cabinet ap¬proved the reforms, says Daim, because "if we cannot improve the economy, we'd all go down together. We had to be brave."

Mahathir announced the new policy during a lunch at New York's Waldorf-Astoria with U.S. business leaders in Septem¬ber 1986. The package of reforms suspended the 30 percent-bumiputera ownership requirement on certain foreign investments. (The new policy was meant to be temporary, but in the end, the NEP stipulations were never reinstated.) "To achieve our goals,... Malaysia needs the help of our friends, especially those from the industrialized countries, in the East as well as the West,"
Mahathir told the assembled businessmen. The response was spectacular. Over the next decade, Malaysia wooed $38 billion of foreign direct investment, nearly five times greater than that earned during the ten years before Mahathir's liberalization. Mahathir had propelled the economy forward by setting aside ideology and channeling the ra¬tionalism of Singapore's Lee Kuan Yew. The decision by Mahathir to reform the NEP solidified Malaysia's Miracle.

MAHATHIR MAY HAVE ignored his critics, but they never came around to his economic thinking. While the cabinet approved of Mahathir's decisions, its meetings were not a forum for open debate. Ministers, including those closest to him, dared not dis¬agree with Mahathir in public. Even Daim approached him gently and quietly when he wished to sway the prime minister's think¬ing. "Most fellows weren't able to argue with him. In the end they got scared," Daim says. "If you don't agree [with Mahathir], you resign."

Underneath this false consensus, resentment was brewing. In 1987, Mahathir faced the greatest challenge to his leadership, and his economic policies were one of the chief targets of his critics. The forum was the UMNO General Assembly. His trade minis¬ter, Razaleigh Hamzah, contested Mahathir's position as party president. Mahathir's opponents criticized his liberalization ef¬forts as counter to the spirit of the NEP, and attacked his big-ticket projects such as Proton as expensive and unnecessary.63 "Money is misused, power abused," said Musa Hitam, who quit the government and allied himself with Mahathir's enemies. "We have to come out clean and open our books."

Mahathir fiercely defended his record, even releasing minutes of cabinet meetings to show that all of the ministers—including his opponents—had approved of his policies. In the end, Ma¬hathir was victorious, but just barely. He defeated Razaleigh by only 1.5 percent of the vote. It was a stunning rebuke. But Ma¬hathir did not take it that way. While challenged within the party, he was still prime minister, and he purged his cabinet of all the ministers in the opposing camp. Abdullah Badawi, one of the losers in this battle (but eventually Mahathir's successor), noted that Mahathir operated on "the corporate concept, whereby the majority shareholder gets his way." That was the last real threat to Mahathir and his policies for another decade.

Some of the criticism leveled by Musa and his allies, however, was valid. Mahathir's favored heavy industrial projects showed few of the supposed economic benefits Mahathir had hoped. They were losing money and poorly managed. In 1988, Mahathir, fed up with Proton's mounting losses, fired its Malay manager and asked a Japanese Mitsubishi executive to take over. The worst off was Perwaja, the steel joint venture. Originally founded in 1982, Perwaja's mill was set up with an imported Japanese pro¬duction process that had not been tested commercially. It proved to be a disaster, producing at a cost significantly higher than the price of imported steel. In 1988, Mahathir brought in a new man¬agement team to try to engineer a turnaround, but the situation only worsened. In 1996, the government admitted that Perwaja was insolvent, with accumulated losses of almost $1.2 billion and debts of $2.8 billion.69 Even Mahathir confesses Perwaja was a failure. Mahathir's Park Chung Hee—style industrialization drive never matched the success of Park's own.

Mahathir pressed on regardless, indulging in one megaproj-ect after the next. In 1991, the government decided to build a glossy new international airport, which cost $3.8 billion. In 1993, he revived a project to build the largest dam in South¬east Asia, on the island of Borneo. In 1995, he launched Putra-jaya, a satellite city 16 miles (25 kilometers) outside of Kuala Lumpur to house the central government. When state oil com¬pany Petronas was planning a new headquarters in Kuala Lumpur's city center in the mid-1990s, Mahathir says he "casu¬ally" recommended to its managers, "Why not make it the highest towers in the world?" Such a monument, he believed, would serve as "a symbol for a growing country." The result was the Petro¬nas Twin Towers, the world's tallest buildings from 1996 to 2003. The Towers were just the trophy to satisfy Mahathir's passion to elevate the stature of his nation. "If you're a short person, you stand on a soapbox to speak to people," Mahathir says. "This is our soapbox."

But again, concerns bubbled up inside the cabinet. Anwar Ibrahim, who became finance minister in 1991, worried Ma¬hathir was going to blow out the national budget. He approached him privately to try to alter his plans. "Can we do this project in phases?" Anwar asked him. "Can we defer?" But once again, Anwar feared confronting him directly. “I wouldn’t approach it that way. I know him. He wouldn’t accept that.” Anwar says.
___________

IN KUALA LUMPUR, Mahathir Mohamad was beside himself. The stock market was tanking, the currency sinking, and some of the country's most prominent corporations were spiraling toward bankruptcy. After sixteen years as prime minister, he believed his dream of a modern, industrialized Malaysia was in reach. With¬out warning, all of his hard work appeared to be vanishing. "No one seemed to understand what was happening," he later wrote Mahathir came to his own conclusion: Greedy and unscru¬pulous currency speculators were behind the Crisis. He called them "rogues." "The currency manipulators with large amounts of borrowed funds were not interested in recognizing Malaysia's strength," he wrote. "They decided to make a profit on the back of this nebulous concept of contagion." Mahathir placed special blame on American financier and democracy advocate George Soros, who he claimed was purposely undermining the currencies of Southeast Asian countries. "As much as people who produce and distribute drugs are criminals because they destroy nations, people who undermine the economies of poor countries [are too]," Mahathir ranted. "We spent our time building up these nations, trying to give our people a good life and trying to increase their income. But this man, in a matter of a few days, destroyed every¬thing that we have done."

Mahathir and Soros went head to head at the annual meet¬ing of the World Bank and International Monetary Fund in Hong Kong in September 1997. Angry and bitter, Mahathir stood before the world's financial elite and issued a blistering rebuke. "It would seem that the old beggar-thy-neighbor instinct is still around, is still the guiding principle of a group of ultra-rich people," he blasted. "For them wealth must come from impoverishing others." The Crisis, he implied, was a concerted conspiracy by industrial¬ized nations to undermine Asian economies that had become a threat to the dominance of the West.

The next day, Soros took the same podium and fired right back. The source of Malaysia's problems was not some wild conspiracy, Soros said, but the faulty policies of Mahathir himself. "Dr. Ma¬hathir is a menace to his own country," Soros said. "He is using me as a scapegoat to cover up his own failure." The New York Times quipped that Mahathir and Soros faced off "like gunfighters on a dust-blown street." But behind the war of words was a very fun¬damental question: Who really was to blame for the Crisis?
Soros was expressing a view widely held within Western capitals, the International Monetary Fund, and the global financial community. The Crisis, the thinking went, was a result of mis¬guided policymaking. Asian countries had embarked on expensive projects they could not afford, propped up weak and often politi¬cally connected companies, and, in the process, had taken on too much debt. The Tigers had made the mistake of intervening with market forces; their failings were, therefore, an outgrowth of the "Asian model." The Crisis erupted when free markets took hold and played the role of economic policeman. By fixing broken poli¬cies and punishing weak companies and banks, the international marketplace was scrubbing Asian economies clean and restoring them to health. This argument reflected the die-hard Western confidence in the sanctity of market forces.

Mahathir and some other Asian leaders believed the oppo¬site. Asia's economies, they argued, were humming along before the Crisis hit. The disaster was caused when fickle foreign inves¬tors withdrew their support and their money. The supposedly poorly led Tiger economies and their equally inept corporations seemed perfectly sound investments only a few months before. What changed was not the real economic condition of Asia, but the perception of Asia among international financiers. The blame, therefore, should be fixed on the irrational behavior of the world's bankers and investors.

There is more than enough blame to pin on everyone involved. Both Asian policymakers and international financial institutions exhibited poor judgment that turned what should have been noth¬ing more than a minor speed bump on the road of the Miracle into a region-wide catastrophe. The underlying cause of these mistakes was the same as in Japan—excessive optimism. The Miracle had been so miraculous that investors, executives, and government policymakers believed it would never end. Any project, any in¬vestment, no matter how outlandish, seemed a sure bet. As Robert Rubin later wrote, the large flows of capital into these emerging markets "were ... a textbook example of the kind of speculative excesses that can take hold when investors become seized with some idea .. . and lose their discipline."

The Tiger economies were, in fact, far riskier investments than most investors realized in the mid-1990s. Despite Mahathir's pro¬tests to the contrary, they had become riddled with imbalances and susceptible to outside shocks. At the center of the problem were their financial sectors. Asian banks borrowed from over¬seas at a faster clip than their countries were stockpiling the cur¬rency reserves needed to pay down the loans, or they maintained a persistently high level of debt to available reserves, as in Indo¬nesia. They compounded the problem by lending these funds to local businessmen for ventures that proved uncompetitive and uneconomic. In Thailand, money rushed into speculative prop¬erty development; in South Korea, funds were invested in excess manufacturing capacity. As these investments failed to generate profits, businessmen were not able to pay back their loans and the level of bad assets rose dangerously. When the external shock of the Crisis slammed into these fragile financial sectors, there was no cushion to buffer the blow.

Many of the Tigers' weaknesses were a legacy of the "Asian model." As in Japan, those close links between government and business and overbearing bureaucratic interference in the alloca¬tion of finance led to unproductive investments and unsustainable debt burdens. Even though by the 1990s the "Asian model" had undergone some reform—bureaucratic control was softened by liberalization—the practices and incentives the model had fos¬tered, as in Japan, remained in place. Banks lent to politically con¬nected companies simply because they always had, not because they were certain they would get paid back. Executives invested in the industrial capacity that their government overseers had always favored, whether it was profitable to do so or not. The result was a terminally ill Asian corporate sector. In South Korea, for example, the average debt-to-equity ratio at the thirty largest chaebols surpassed 300 percent by 1997; by contrast, American companies rarely maintain ratios of much more than 100 percent.

Meanwhile, the profits of these companies were practically non¬existent. Thirteen of the thirty biggest Korean business groups lost money in 1997. Several went bankrupt in 1997 even before the Crisis hit Korea.17 The problem with the "Asian model" was not the model itself, but the inability of Asia's policymakers to adapt it to new circumstances. What worked just fine when Asia was poor no longer had the same positive impact once its economies advanced. Then the state's meddling with markets hindered, not helped, development.

Still, whatever the defects of the "Asian model," the interna¬tional financial community cannot escape criticism. As the saying goes, it takes two to tango, or, in this case, start a financial melt¬down. If Asian banks and companies borrowed too heavily from abroad, someone, obviously, had to lend to them. Foreign bank¬ers and investors, for all of their sanctimonious censure of Asian policy, had handed over billions of dollars to Asia before the Crisis. Once the Crisis began, these same foreign financial institu¬tions withdrew that money at a fantastic pace. In 1996, $93 billion of foreign funds flowed into the five countries that the Crisis had the most impact on—South Korea, Thailand, Indonesia, Malay¬sia, and the Philippines; in 1997, $12 billion flowed out—a $105 billion swing. That represented some 11 percent of the GDP of those five countries. This mammoth shift in capital flows desta¬bilized the region and made the Crisis much more severe than it otherwise should have been. Economists Steven Radelet and Jef¬frey Sachs argued that panic by foreign investors and banks was as important a factor as, if not even more important than, suspect Asian policies and business practices in making the Crisis as di¬sastrous as it became. "These imbalances [in Asian economies] were not severe enough to warrant a financial crisis of the mag¬nitude that took place," they wrote. "The crisis is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence."

Whatever blame deserves to be laid at the feet of the interna¬tional financial community, Asian countries were forced to turn to this same community to stem the Crisis. The affected coun¬tries signed on for IMF-sponsored rescue packages—Thailand in August 1997 ($17 billion) and Indonesia in October ($43 billion). In return, their governments gave up control of their own eco¬nomic policy and adopted a list of painful measures imposed by the IMF that, its economists believed, would restore confidence in their economies and halt the Crisis. These steps included hiking interest rates, slicing government budgets, and closing troubled banks. The policy gurus of Asia, once feted for their wisdom, in¬genuity, and success, became the IMF's paper-pushers.

NOT MAHATHIR MOHAMAD, however. As the Malaysian economy continued to crumble, he became only more recalcitrant. In October 1997, he returned to one of his favorite subjects—the Jews. "We may suspect that [the Jews] have an agenda," he said while addressing villagers in Malaysia. "The Jews robbed the Palestinians of everything, but in Malaysia they could not do so, hence they do this, depress the ringgit."19 His tirades did little to improve investor sentiment. A not-so-funny joke circulated that every time Mahathir opened his mouth, the ringgit's value fell further. Still, Mahathir resisted an IMF bailout. "We were not willing to surrender the management of our economy to the IMF," Mahathir later wrote. His position, he realized, was making Ma¬laysia "a pariah nation to be avoided by everyone," but if East Asia succumbed to the dictates of foreigners, he believed, "the 21st cen¬tury was not going to be the Asian Century."

Mahathir's stubbornness was not just hubris. He had real con¬cerns about the benefits of IMF programs. Anwar Ibrahim, the finance minister, had adopted similar policies to those advocated by the IMF to try to shore up the ringgit, including raising in¬terest rates, restricting credit, and toughening accounting stan¬dards at Malaysian banks. Anwar even put some of Mahathir's beloved megaprojects on hold. Yet by early 1998, Mahathir believed these policies, which he derisively called a "virtual IMF" program, were making matters worse. The high interest rates and tight credit squeezed the private sector to the choking point, while consumption cuts further depressed growth. "The sum effect of all the measures . . . was that the banks and businesses which were already suffering from the currency crisis were pushed into a situation of due distress," Mahathir wrote. "Malaysia's economy plunged deeper in recession."

Mahathir and Anwar began to clash over the direction of policy. Anwar insisted his course was the right way to end the Crisis. Ma¬hathir was rankled that the ringgit and stock market were still plunging despite Anwar's harsh policies. He wanted to ease credit and boost consumption to relieve the pressure on Malaysian com¬panies and banks.21 Simultaneously, Mahathir came under intense pressure from the international financial community to succumb to the IMF. Washington officials and international bankers had an evangelical faith in the sanctity of IMF expertise. Openly con¬demning the IMF, as Mahathir was doing, was a major affront to investor confidence.

Since then, however, this steadfast belief in the omnipotence of the IMF has wavered, to a great degree due to the fund's handling of the Crisis. New thinking has emerged that, in certain ways, Mahathir was correct. By deflating economies, the IMF tightened the already viselike grip strangling the private sector and made the Crisis and the resulting recession much worse than they had to be. The astronomical interest rates and demand-squashing measures mandated by IMF programs reduced revenues to companies while fattening their debt burden, shoving perfectly viable firms to the edge of a financial abyss.

How did the IMF go so wrong? Call it institutional inertia. The IMF imposed measures on Asia that were ideologically pre¬determined and applied without adapting them to the real prob¬lems facing Asian economies. Some conditions mandated by the IMF had nothing to do with the underlying causes of the Crisis and were unlikely to solve it—for example, forcing governments to liberalized import regulations and end domestic monopolies. The IMF was issuing prescriptions far the wrong disease. By fo¬cusing attention on the supposed structural flaws of Asian econo¬mies, the IMF also further undermined investor confidence in the region. Yet despite the mounting evidence that its policies were not working as designed, the IMF stuck to its agenda. "The IMF itself had become a part of the countries' problems rather than part of the solution," Joseph Stiglitz, chief economist at the World Bank during the Crisis, later wrote.

Back in 1997, however, Mahathir was isolated, searching for his own way out of Malaysia's Crisis. He discovered one possible solution in an unlikely place: China. The Communist giant had remained unfazed by the Crisis. Mahathir noted that the coun¬try had an aspect to its economic structure absent from Malay¬sia, Thailand, and Indonesia—strict controls on capital flows and currency trading. Could this be the answer? He realized he did not understand enough about currency markets to know for sure. "I had this idea that money flowing out of the country means people carrying bags of money," he says. While on an official visit to Argentina in October 1997, Mahathir invited a Malaysian cen¬tral banker to join him in Buenos Aires to give him a briefing on global currency markets. He realized that the speculators' trades were just marked in the books of the foreign institutions and local banks. Those stacks of ringgit he envisioned changing hands across the border never existed. The government, he figured, may not be able to control the speculators—but if Malaysian banks could be prevented from engaging in currency transactions, the speculators would be helpless. Mahathir decided Malaysia needed capital controls.

He proposed this idea to his policy team. Everyone was op¬posed, including Anwar and Daim, who rejoined the government as an advisor and then a special minister in the cabinet. "We gave him forty reasons why it shouldn't be done," Daim says. They feared that the foreign investors the country needed to sustain its growth would flee. There was a chance the move would precipi¬tate total economic collapse. In an era in which liberal financial regimes were considered an absolute good, Mahathir's capital controls idea was heresy. "We are going against the whole world," Mahathir realized.

Mahathir stood his ground, however. "He was quite adamant," Daim recalls. For six months, the economic team wrangled over capital controls. Daim eventually came around to Mahathir's thinking, to a great degree by default. All other steps had failed to stem the Crisis. "There was no option in the end. We had tried everything," Daim says.

On September 1,1998, Mahathir took the plunge. The trading of ringgit offshore was banned. Foreigners holding ringgit could use it only for local transactions. Ringgit held outside of the coun¬try was worthless. The controls were not overly strict—foreign investors who wanted to repatriate profits or sell assets could still take their money out of the country. For these purposes, the ring¬git was fixed at 3.8 to the U.S. dollar, one-third below its pre-Crisis level.

Mahathir's decision created outrage at home and abroad. The governor of the central bank, never supportive of the idea, re¬signed.29 Internationally, Malaysia became a leper. The Wall Street Journal labeled the capital controls policy a "massive miscalcula¬tion" and warned that Malaysia "appears destined to spend an unhappy period stumbling in the dark."

The most powerful opponent of the controls was Anwar Ibra¬him, the finance minister. Mahathir and Anwar had continued to spar over the direction of Malaysia's Crisis policy, and the dis¬agreement widened a rift between them. Anwar had been a protege of Mahathir's since the mid-1980s, and he was widely seen as the most likely successor to the aging prime minister. Anwar, though, was a much different personality than his mentor. An internation¬alist and intellectual, Anwar was considered a more democratic figure than the heavy-handed Mahathir. He also possessed softer views toward the West.31 The two still somehow remained so close that Mahathir put: Anwar in charge of the government when the prime minister took a two-month sabbatical in mid-1997. By the time of the Crisis, Anwar was the most influential politician in the country, save for Mahathir himself.

As the Crisis deepened, however, a full-fledged contest for con¬trol ensued between the two men. Anwar says his break with Ma¬hathir came over bailouts of companies. Some of the worst-affected corporations were those that had benefited from Mahathir's poli¬cies, such as Halim Saad's Renong and other politically connected firms. Mahathir and Anwar disagreed over how to handle these troubled companies. Anwar believed that the firms and their man-agers should take their lumps and be allowed to fail. Mahathir argued that corporate Malaysia was heading for disaster not of its own making and government support was necessary to preserve it. "Companies that can survive should be helped to survive," he says." Beginning in late 1997, a series of financial deals raised cries among Mahathir's critics that he was bailing out his friends. In one controversial case in 1998, a state firm purchased the shipping assets of a debt-laden company controlled by Mahathir's son. The situation became "unmanageable," Anwar says.35 (Mahathir denies that there were any special favors granted by the govern¬ment, adding that he personally did not have "one single cent" in any firm that got aid.)

As the Crisis ate away at Malaysia's economy, public sentiment began turning against Mahathir. Anwar took advantage. He and his supporters believed that more than sound economic policy was needed to stem the Crisis. Malaysia required political reform as well, including a crackdown on corruption and improvements in civil rights.37 The vulnerable Mahathir was aware that if he did not solve the Crisis, his long reign over Malaysia would end. "My job was on the line," he says.

The battle between the two men burst into the public arena in UMNO meetings in June 1998. On the conference's first day, an Anwar loyalist gave a blistering speech denouncing corruption

within the party—a not-so-veiled assault on Mahathir. But Ma¬hathir's faction came well prepared. UMNO delegates received booklets titled 50 Reasons Why Anwar Cannot Become Prime Minister. Included in the list were long-running accusations that Anwar engaged in sexual impropriety, including an illicit affair with his family's male chauffeur. Anwar's rebellion was squashed. Mahathir survived the meeting in control of UMNO.

The matter did not rest there. On September 2, one day after the announcement of capital controls, Anwar says Mahathir con¬fronted him with a choice—resign or get sacked. Anwar refused to submit."You are obsolete in many of your views," he says he told Mahathir.40 Later that day, Mahathir fired Anwar from his minis¬terial posts. That, however, only elevated Anwar's public standing as the champion of reformasi, a Malay word signifying political and social democratization. Protests against Mahathir broke out onto the streets of Kuala Lumpur. On September 20, Anwar spoke before a crowd of eighty thousand and demanded Mahathir's res¬ignation. That same night, police kicked down the front door to Anwar's home and whisked him away while helicopters swirled overhead. Anwar claims he was then handcuffed, blindfolded, and beaten until he passed out. Nine days later, Anwar appeared in court with a badly bruised black eye. He was charged with abuse of power and sodomy, both of which he denied. That made little difference. Anwar was found guilty on both charges and sen¬tenced to fifteen years in prison.

In the end, Mahathir's heretical economic policies were vin¬dicated. The capital controls he devised stemmed the collapse of the currency and the economy began to revive.44 "The objective fact is that whatever you think of Mahathir, Malaysia has gotten away with its economic apostasy," wrote Paul Krugman. "You can question whether that apostasy was necessary, but you cannot claim that it has been a disaster—and you cannot disguise the fact that those who predicted disaster were letting politics and ideology cloud their judgment.” Even the IMF admitted the wisdom of the move. One year after controls were imposed, the IMF announced “that the regime of capital controls … had produced more positive results than many observers had initially expected.”


THE FATHER OF DEVELOPMENT AND HIS MAFIA
Development is a fierce struggle. —SUHARTO

The death threats kept coming. Each day, AH Wardhana received a new batch of hate mail from irate civil servants decrying his recent reforms. Hundreds of them arrived, for weeks on end, some with thinly veiled threats that his life was in danger. "I know when you leave in the evening," some warned. "I know the route you take to your house," others menaced. Wardhana was unperturbed. He had no intention of backing down to a bunch of bureaucrats he considered incompetent and crooked. Wardhana did not even bother to enlist bodyguards or police protection. "I left it to God," Wardhana says.

The kerfuffle was over a 1985 decision to dramatically over¬haul Indonesia's customs service. The organization was so corrupt that the country's economic policymakers saw it as a restraint on trade. Wardhana, then the coordinating minister for the econo¬my—a sort of deputy prime minister with oversight over all eco¬nomic policy—was in the midst of a major reform effort to liber¬alize the economy and boost exports. The customs service was in the way. Radius Prawiro, finance minister at the time, wrote that customs was a "law unto itself."

The scheme Wardhana and his team devised was daring and brilliant. He planned to shut down much of the customs service and replace it with a Swiss firm that would inspect cargo and collect duties on goods entering Indonesia at the ports of origin, not in Indonesia itself. That would end the endless haggling over duties and outright extortion commonplace at Indonesia's ports. It would also render many of the customs officials redundant.3 The plan would create an inevitable uproar.

Before implementing his plan, Wardhana needed the approval of Indonesia's president, Suharto."' Though Wardhana had already been one of the president's top economic advisors for nearly two decades, he could never be sure how the enigmatic Suharto would react to a new policy initiative. Suharto was no economist—a former general, he had gained power in a military coup—and he sometimes had trouble choosing between the differing policy rec¬ommendations offered by his various advisors and cabinet minis¬ters. He also had a cryptic method of communicating his wishes—a traditional Javanese way of guiding people through careful hints to avoid direct confrontation. In the words of his official biographer, a smile from him could mean "yes," "no," "maybe," or "never."

Still, Suharto, like Deng, Park, and the other leaders of the Miracle, had long understood the value of economic develop¬ment for knitting the fragmented country together and legitima¬tizing his own rule. "Development is a fierce struggle," Suharto once wrote. "At home I think about it; in the office I act upon it. Even when I am at leisure, I am always pondering new means and ways." Suharto had also grown to trust that Wardhana and the other members of his hypereducated team of economic min¬isters would counsel him wisely. This group had been together more or less since the beginning of Suharto's rule in 1966. Since several key members, including Wardhana, had received doctor¬ates in economics from the University of California at Berkeley, they became known as "the Berkeley Mafia." When Wardhana approached him to talk policy, Suharto listened. After Wardhana laid out his customs plan, an impressed Suharto asked if the coun¬try could hire a foreign company to replace the equally useless internal tax administration as well. Politely, Wardhana said that would not be possible.

With Suharto's blessing, Wardhana went after the customs ser¬vice with a vengeance. He sacked the director-general of the ser¬vice, and Radius assumed the job on top of his finance minister duties. Two months later, the Swiss company was brought on and about half of the customs officers were placed on indefinite leave. Then the hate mail started pouring in.

It was another stunning victory for the Mafia, one of the many that set Indonesia on its Miracle. The relationship between Suharto and the Mafia produced a remarkable record of economic progress. In the early 1970s, about 60 percent of Indonesia's population—or 70 million people—lived in abject poverty. By 1990, that figure had fallen to 27 million, or only 15 percent of the total populace. In 1984, the country became self-sufficient in rice for the first time in its history, an accomplishment Suharto considered among his great¬est achievements, one, he proclaimed, that was "the result of a vast undertaking by all of the people." Indonesia's economic ascent was also among the Miracle's most unlikely success stories, ranking with South Korea's. In the mid-1960s, Radius estimates that Indonesia was the least industrialized of the world's large developing countries. Its huge population—with 235 million citizens today, Indonesia is the world's fourth most populous country—and widely disparate ethnic, religious, and linguistic groups spread over a tremendous distance made the development of Indonesia a far stiffer challenge than the more controlled environments in Singapore, Taiwan, or Korea. Indonesia became the leader in a second wave of entrants to the Miracle that also included Thailand and Malaysia. The conven¬tion in Indonesia that selected the nation's president once voted to award Suharto the title of "Father of Development."

Yet the Mafia deserves the lion's share of the credit. This group of economists held most of the country's top economic posts from the mid-1960s until the late 1980s. Some remained Suharto's  economic advisors into the next decade, an amazing record of longevity and consistency. Though of diverse social backgrounds, the Mafia's common education and close personal ties gave its members a unified perspective on economics and development—a belief in free markets and private enterprise, a focus on poverty alleviation, and, like Taiwan's technocrats, a pragmatic flexibil¬ity in shaping and altering policy. "Intellectually, we grew in a common climate," says Emil Salim, a Berkeley alum and core Mafia member.

The members of the Mafia could not have differed more from their patron, Suharto. The economists were urbane, English-speaking, outward-looking, and skilled; the president, a onetime poor farm boy, was autocratic, traditional, quiet, and intelligent, but not well educated. Even as president, Suharto maintained many aspects of his former village life. He rose each day before 5:30 in the morning as "is routine for a farmer or soldier," he said, and enjoyed resting in the afternoon while smoking his distinctly Indonesian clove-laced kretek cigarettes, sometimes rolled in a corn husk. His favorite food remained the simple local dish of vegetables cooked in coconut milk, prepared by his wife. Singa¬pore's Lee Kuan Yew once described him as a "careful, thoughtful man" who "speaks calmly and softly," maintained a "somewhat taciturn expression," and "did not set out to impress people with his oratory or his medals." But Lee felt that Suharto was "clearly a tough-minded man who would brook no opposition to what he set out to do."

This unlikely tandem of old-fashioned general and high-powered Berkeley PhD's formed an indissoluble relationship. The Mafia found Suharto open-minded and willing to make difficult and potentially unpopular decisions. "He was a humble man," ex¬plains Salim, "knowing that Tm from the village and I don't have the formal education.' But he asked the right questions." When the Mafia first began advising Suharto, he behaved like an eager student, showing up at meetings with a ledger and large ballpoint pen. "He wrote down everything we said," recalls Wardhana. "He was trying to learn, to understand, what economics is all about." The bond between Suharto and the Mafia was based on mutual respect, and, even more, strong personal friendship. Suharto in¬vited the Mafia members to his holiday retreat on Monkey Island off the coast of Java along with his own children. "It's not like boss and employee. You're part of the family," says Salim. "We're like friends, fighting a battle together. He relied on you, you relied on him."

The Mafia's unofficial don—"the head of the village," in Salim's words—was Widjojo Nitisastro, who spent much of his career in charge of the government's economic planning board. A brilliant economist, humble and unassuming, Widjojo, according to Wardhana, was "the driving force" behind the policymakers, who prodded them to put their knowledge of economic theory to practical use. Widjojo taught them that "it isn't enough to just be a good teacher. We also have to think of how to increase the welfare of the population and develop the nation," says War¬dhana. "He didn't want us to be in an ivory tower," Endlessly patient, Widjojo had the most intimate bond with Suharto of any of the technocrats, and also the highest degree of influence over the president.
A careful strategist, he would send colleagues to Suharto to confront him on touchy issues to preserve his own re-lationship with the president. As Salim says, quoting a famous Javanese phrase, Widjojo was a master of "how to be victorious without defeating." Widjojo's economic beliefs were primarily pro-market. Unlike many economists in the developing world, he doubted the ability of the state to run companies. His focus was much more on village development and human welfare—the schools, water systems, and market roads that the Suharto govern¬ment built in abundance. "Throughout his career, he deliberately kept a low profile and yet if there is anyone who deserves the title of 'architect of Indonesia's economic development,' it is Widjojo," Radius wrote.

Widjojo and the Mafia played a role in Indonesia similar to Deng's in China. Both reversed leftist, state-led economic programs that had failed and redirected their giant populations toward the international marketplace. Indonesia, also like China, then benefited tremendously from the economic booms of the "early movers." As costs rose in Japan, South Korea, Taiwan, and Hong Kong, their companies began to seek out lower-cost environments for basic manufacturing. They moved parts of their operations into Indonesia, in the same way as they shifted produc¬tion into China's SEZs.

The Miracle in Indonesia shared many of the same elements of those in the rest of Asia, especially China, Hong Kong, and Singapore. Indonesia's spectacular record was a result of export-led growth and foreign investment. Yet the Miracle in Indonesia eventually proved to be the most fragile in Asia as well. At the heart of the problem was Suharto himself, who strayed from key principles that had created the Miracle in other Asian countries.

One problem created by Suharto was a lack of consensus on policy direction within his government, a crucial element in the success of the "early movers." The Mafia represented only one view on development within the Suharto regime—the market-driven, outward-looking philosophy. Another group pressed for more inward-looking, state-driven strategies. They have been called the "nationalists." The Mafia and the nationalists fought it out with a third faction—the "cronies." This clique of businessmen pressed the president for special favors, such as monopoly rights on trade and production, which distorted markets, impaired Indo¬nesia's competitiveness, and ran counter to the Mafia's efforts to open the economy.

"Everybody was fighting for Suharto's atten¬tion," explains Salim. "It was a battle of ideas." Sometimes the Mafia commanded Suharto's thinking and the economy headed toward the international marketplace; at other times, the Mafia lost out to other competing groups, and economic policy changed course. Suharto, unlike Deng, never utilized his political power to impose a clear direction on these squabbling factions. The perpet¬ual conflict cultivated something of a siege mentality in the Mafia, a belief that they were fighting a life-and-death struggle for the future of the nation. "There were a lot of people who were against us," Wardhana says.

The story of Indonesia also goes some way toward debunking the theory that authoritarian rule is a crucial prerequisite to rapid development. Though Suharto's grip on political power allowed the government to make quick, clean decisions, as in Park's Korea and Chiang's Taiwan, he often did not make the right decisions. Suharto held only vague ideas on the direction of economic policy and he would pick and choose among competing policy menus like he was loading up a plate at a smorgasbord. Since he was an auto¬crat, however, there was no way to implement policy without him. The result was often the introduction of contradictory policies or dramatic shifts in policy direction based entirely on Suharto's preference for one faction over another. The different themes that brought development to Asia—state-led initiatives, the embrace of market forces and globalization, and personal connections be¬tween government and business—fought for dominance instead of working together. In his personalized rule, furthermore, Su¬harto sometimes favored the interests of his family and friends over the good of the nation. In this way, Suharto's one-man reign was as much a detriment as a benefit to overall development.

IN SUHARTO'S EARLY years, he never seemed destined to command such power and responsibility. His journey began in-auspiciously on June 8, 1921, the day he was born in an isolated village called Kemusuk on the island of Java to a poor, unhappy couple. Suharto's father, an irrigation officer, and his young wife quarreled over his gambling habit; the two eventually divorced. Still, his father's hopes for the newborn were encapsulated in the name he gave him: Suharto means "better wealth."

His mother was too ill to breast-feed, so she entrusted the care of the infant Suharto to his great-aunt when he was only a month old. The next several years were among the happiest of Suharto's life. He would often accompany his great-uncle when he went to labor in the rice fields. "Sometimes he carried me on his back while working the land, and when I grew, let me ride the plough," Suharto later recalled. "It was great fun, moments that I will always treasure, when I would sit on the plough and spur the buffalo on, steering them left or right. I would leap into the paddy field, playing in the water, getting covered in mud." He also caught eels in the paddies, which remained a favorite food his entire life. When he was four and "hadn't even begun to wear trousers," Suharto's mother returned to take him back, and after that, he spent the remainder of his childhood passed among dif¬ferent family members. He ended up attending school in the large city of Yogyakarta, where he, like other poor students, sported the bare feet of the countryside.

After he graduated in 1939 from secondary school, his family could not afford the expenses for further education. He spent a short, unhappy stint as a bank clerk, which ended when he tore the traditional Javanese sarong he was required to wear on a bicy¬cle spring and he did not have the money to replace it. "My future seemed bleak," he later wrote. The deprivation he faced in his youth was a major influence on the economic policies he favored as president. "This is why a great feeling and wish arose in me to help people avoid hardship," he wrote. "I know how it is; I've gone through it."

With few other options, Suharto enlisted in the Dutch army and enrolled in a cadet school. In the middle of his studies, World War II broke out, Japan invaded the Dutch colonies, and the Eu¬ropean colonialists surrendered. Again unemployed, he rejoined a reconstituted national army under the Japanese. Suharto grew to detest his Japanese overlords (though he remained a devotee of their food his whole life). The officers treated the local recruits with cruelty, and Japan's oppressive rule "only increased within us, the youth of Indonesia, the burning desire to defend our own country."

Suharto would soon get his chance. An Indonesian independence movement was taking shape, led by a larger-than-life firebrand, Sukarno. One of the developing world's strongest anticolonial voices, Sukarno became a mythical figure to the av¬erage Indonesian. Hundreds of thousands would wait to catch a glimpse of the man they called "Brother Karno" whenever he toured the country. The collapse of the Japanese empire gave the movement a chance to take power. On August 17,1945—two days after Japan's surrender—Sukarno stood outside his home in Jakarta and, in a simple ceremony, read out a two-sentence proc¬lamation announcing the independence of the Republic of Indone¬sia. Suharto played no role in the nationalist movement, but when he learned of Sukarno's proclamation, he vowed to protect the republic. He collected other military officers in a defense unit later absorbed into a new national army. His services were needed. The Dutch, ignoring Sukarno's proclamation, returned to reclaim their colony. The national army and Dutch forces fought on and off until December 1949, when the Dutch, pressured by Washington, conceded and recognized Indonesia's independence.30 Suharto performed well during the conflict and rose up the ranks of the military, as he continued to do throughout the 1950s. By 1965, he was among the most senior generals in the army.

The catalyst for Suharto's move into political power came while he was asleep. For several years, a political contest for influ¬ence within Sukarno's regime had simmered between the military and the expanding Communist Party. On the night of Septem¬ber 30, 1965, the maneuvering broke into open warfare. Left-leaning junior officers ordered a clandestine assault on the army's top brass and executed six of their superiors while their troops claimed key parts of Jakarta. Roused from bed at 4:30 a.m. by a television cameraman who reported hearing gunshots in the city center, Suharto donned his uniform and drove to his headquar¬ters in his Toyota jeep. Familiar with the revolt's leadership, who called themselves the 30 September Movement, Suharto suspected that they were part of a Communist plot to take control of the nation. "If we don't fight them," he told a meting of a military brass, "we'll die a futile death anyway." With loyal troops, he launched attacks to retake the national communications centers and overrun the rebels' headquarters at a nearby airbase. By the
next morning, the Movement had melted away, leaving Suharto in charge of the capital. Though the exact role of the Communists in the failed coup has never been established, the army and its civilian supporters, at the encouragement of Suharto, moved against the Communist Party in an orgy of violence. Over the next several months, an estimated 500,000 suspected leftists were killed in a slaughter the CIA called "one of the worst mass murders of the 20th century." "I felt that my primary duty was to destroy"

the Communists, Suharto later wrote, "to smash their resistance everywhere."

The destruction of the Communists left Sukarno severely weak-   I ened and touched off a duel for power between the president and Suharto. Suharto moved cautiously against the still-popular presi¬dent. During one meeting, Sukarno asked Suharto: "Just what are you going to do with me?" A deferential Suharto answered: "I was taught... to show respect for people we hold in high esteem."

 In January 1966, when Sukarno, attempting to stem a rapid eco¬nomic decline, raised fuel prices and devalued the national cur¬rency, large student protests erupted demanding drastic changes in Sukarno's regime. On March 11, the military decided to act. Students surrounded the presidential palace while Sukarno calmly presided over a cabinet meeting in slippers. He was handed a note. The palace, it said, was surrounded, not just by students, but also soldiers. Sukarno, in a near panic, left the cabinet session and fled by helicopter to his other presidential mansion in the mountain town of Bogor, south of Jakarta.

That same day, three generals took a helicopter to Bogor to meet Sukarno, praying along the way. They had just visited Su¬harto at home, where he was resting throughout the dramatic events with a bad flu. Suharto asked the three men to pass on his "kind regards" to Sukarno and "convey that if he trusted me, I would handle the situation." When the generals met Sukarno, he criticized them for allowing the demonstrations to continue and asked what could be done. After an awkward silence, one of the generals, Amir Machmud, said that Sukarno should "give in easily" and govern with Suharto. The generals wrote up a draft order that gave Suharto the power to restore order and security in the country. Sukarno read it carefully. "In the name of Allah," he said and signed the order.37
That signature unceremoniously ended the Sukarno era. Though he lingered on as official president for two more years, he had effectively transferred presidential authority to Suharto, whose administration called itself the New Order.

WHEN SUHARTO STEPPED into power, he inherited a bank¬rupt economy. Sukarno and his leftist supporters had taken the country toward socialism and away from the international econ¬omy. The government nationalized the assets of most foreign investors, doled out subsidies on basic goods such as rice and petrol, favored state enterprises, and, in the process, built up mon¬strous budget deficits. The country's foreign debt burden swelled, at first on loans from Western countries, then increasingly from the Communist bloc. The tilt away from capitalism was rooted in Sukarno's anticolonial fervor. In a country that had fought a vicious war for freedom against a European power, joining a Western-dominated, free-market system was distasteful. By 1965, however, the economy had slammed into a wall. Inflation ran at 650 percent, foreign reserves evaporated, and the central bank defaulted on a letter of credit. "Although Indonesia had recently been freed from the bondage of colonialism, through its own poli¬cies the country was slipping back to pre-colonial economic con¬ditions of several centuries earlier," Radius wrote.

At this crucial moment, Widjojo and the Mafia took control of policymaking. The team was well prepared. While at Berkeley, the Indonesian group met weekly beginning in the late 1950s to discuss possible development strategies for their home country,39 and they had written papers on everything from balancing the budget to improving transport systems.40 Highly influenced by their classi¬cal economics training at Berkeley, they also tried to merge these laissez-faire ideas with economic concepts rooted in Indonesian culture. One was gotong royong, which means "mutual assis¬tance." A basic element of Indonesian village life, gotong royong describes how a rural community comes together to help its mem¬bers, especially those in need. Such concepts provided "a 'home-grown' ideological basis for gaiding economic policy that was so¬cially responsible, solicitous of the welfare of each individual, and generally compatible with free-market economics," Radius wrote. The rapid industrialization in Japan, South Korea, and the other original Tigers also influenced the Mafia, especially their success in using exports to drive growth, though they believed Indonesia was too large and poor to adopt their neighbors' policy programs in full.41 The methods that created Indonesia's Miracle resemble those of China, Hong Kong, and Singapore rather than of Japan and South Korea. Trade and foreign investment were the domi¬nant factors, not a MITI-style industrial policy.

The Mafia put its theory into practice as soon as Suharto gained power. After returning from Berkeley in the early 1960s, several Mafia members, including Widjojo, Salim, and War-dhana, were asked to teach economics at an army command school, where they met many of the generals who became promi-nent in the New Order. Suharto, too, was briefly a student at the school, though most of the Mafia members did not get to know him well at the time. That changed at a conference held by the New Order in Bandung in August 1966. The generals invited the Mafia to present its ideas on the economy to the new national leadership. Suharto, impressed with its common purpose, soon collected the Mafia into an advisory team for economic policy that consulted him directly. Suharto put it to work resurrecting the Indonesian economy.

The Mafia drew up a plan to break with the past. Socialism, state enterprise, and nationalistic policies were out; free markets and foreign investment were in. The first priority was suppressing inflation, which required curtailing government spending. The team realized such cutbacks would contract demand and send the economy into a possible recession, inflicting further suffer¬ing. It devised a scheme to maintain, and even accelerate, over¬all economic growth while fighting inflation at the same time by reducing certain types of spending drastically, mainly that of the government, while directing the banking sector to maintain credit to selected industries that could drive new growth. The central bank lent to commercial banks at below-market interest rates to stimulate investment. The goal, explains Radius, was to "create purchasing power from almost nothing." The slate of policies was "unorthodox and radical," Radius says. "To some, this idea was preposterous. To the economic planners, however, stabiliza¬tion without growth was tantamount to finishing fourth in the Olympics—no medals, no parades, just a glorious achievement perceived as a failure. . . . No one—not even the economic team— knew whether the measures would work."

The Mafia had to sell the plan to Suharto. He had no problem with the shift away from socialism. He later blamed the disor¬der of the Sukarno years on the country's deteriorating economic conditions. "The decline of the social and economic life of the community that we experienced all along was due to the absence of economic development," Suharto wrote. Economic growth, he realized, would go a long way toward fostering loyalty to the New Order regime and strengthening the nation itself. "The New Order had to give top priority to economic development, and with economic progress, nation-building in a broad sense could be enhanced," he wrote. Perhaps most of all, Suharto, like Park, Chiang, and Lee, figured that improvements in the welfare of the country's giant population would assist him in his fight against the hated Communists. Suharto "always put his interest in the community, in the people, in the farms," says Bob Hasan, a long¬time friend of Suharto. "Otherwise, if you're poor, everyone leans Communist." Radius wrote that "the New Order staked its existence on its ability to build the Indonesian economy. If it failed in this effort, its credibility and the basic platform on which it was founded would have been destroyed."

Yet some of the specific measures the Mafia suggested were politically dangerous for the new regime. The most sensitive was a proposed reduction of subsidies on consumer goods. The gov¬ernment spent so much to cap the cost of petrol, says Wardhana, that the "price was even cheaper than a glass of ice water." Cut¬ting subsidies was crucial to bring the budget in control, but could also spark public anger, even unrest. The Mafia pressed its case. Wardhana says the team told Suharto: "You have to do this: Oth¬erwise, the economy would be in the doldrums."

In the end, Suharto approved the Mafia's plans. "The eco¬nomic team couldn't do it alone," explains Wardhana. "You had to have a very strong man behind [the policies]." Suharto "made it possible to undertake those unpopular measures," In October 1966, the first elements of the stabilization plan were put in place. The technocrats used this concrete program to convince the coun¬try's foreign creditors to restructure its onerous debt burden. The Mafia backed up these efforts with a new investment law in 1967 that welcomed back foreign investors. The government even re¬stored some assets that had been nationalized under Sukarno to their original foreign owners.

The Mafia's controversial scheme worked. By 1969, inflation had fallen under 10 percent, but the economy also returned to growth. GDP advanced a robust 5.8 percent a year between 1966 and 1970. These early steps, says Wardhana, were "the begin¬ning of successful economic policy." Suharto and his Mafia had set Indonesia on the path to the Miracle.

FOR THE NEXT two decades, the Mafia maintained a viselike grip on the country's top economic posts. Ali Wardhana was finance minister from 1968 to 1983, then spent another five years as coordinating minister for the economy. The portfolios of trade, industry, and the environment as well as the governorship of the central bank and the top post at the planning board were almost always in the hands of a Mafia member or its proteges. The Mafia seemed as entrenched as Suharto and the New Order itself.

Yetthe Mafia never had full control over economic policy. That power Suharto held. And he was often lured off course by people who disagreed with the Mafia's free-market route to growth. The most influential was Bacharuddin Jusuf (B.J.) Habibie, the chief of the nationalist faction. Habibie and Suharto first met in 1950. Suharto was participating in an army operation to quell a rebellion on the eastern island of Sulawesi, and the Habibies lived across the road from where his brigade was camped. Habibie's mother was originally from Java, and she would entertain the soldiers by telling them stories in Javanese. "The atmosphere at the Habibie house made us really feel at home," Suharto later wrote. Merely a teenager at the time,Habibie went on to become Indonesia's most prominent engineer. He set off for Ger¬many in 1955 to attend the Rheinisch-Westfalische Technische Hochschule Aachen, where he got a doctorate in aeronautical en¬gineering. He then joined a German aircraft manufacturer that later merged into Messerschmitt-Bolkow-Blohm. The talented Habibie achieved important breakthroughs in aircraft design and rose to be the firm's vice president and director for technology application. His experience in the aircraft industry in Germany, during a period when that country was experiencing its own type of economic miracle, influenced Habibie's ideas on development. He made a. link between technology and growth that he carried with him to Indonesia.

Suharto stayed in touch with Habibie throughout this period. In 1970, the two met during Suharto's state visit to Germany, and the president told Habibie to "broaden his knowledge and expe¬rience in areas that might be of benefit to his own country and people." Three years later, Suharto sent a note to Habibie saying that the time was ripe for his return. One month later, in January 1974, he moved home." Suharto told Habibie: "You can do what¬ever you want [in Indonesia] short of fomenting a revolution."

Habibie's economic message came in direct conflict with the Mafia's. Widjojo, Wardhana, and their colleagues wanted to hitch Indonesia to the world economy and capitalize on the forces of globalization. Habibie thought the Mafia's strategy lacked an industrial policy. By following the Mafia, Indonesia would grow based on its cheap labor and other natural advantages, but Habibie saw this process eventually running out of steam. For In¬donesia to continue to develop, the country needed to adopt high technology and "pick winners," that is, target strategic industries, MITI-style, which would build new comparative advantages in Indonesia. Habibie wanted to re-create the industrial development programs of Korea's Park, though with an even heavier state role. He believed the private sector was incapable of long-term invest¬ment. The state would have to take the lead.
The engineers and specialists trained in these government enterprises would then span out across the economy and spark new high-tech ventures. "Promoting value-added manufacturing and high-technology in-dustries won't bring high growth in the short run . . . but in the long run national interest will have been well served because na¬tional economic development will no longer be determined by the international division of labor," he said in a 1993 speech. Habibie wanted to adopt elements of the "Asian model" to shift the struc¬ture of Indonesia's economy into high technology.

Suharto installed Habibie at the state oil company Pertamina as the chief of its advanced technology division upon his return. After Pertamina defaulted on massive foreign debts and needed a Mafia-organized rescue, Suharto promoted Habibie to minis¬ter for research and technology in 1978. Habibie developed and managed a government-owned empire of ten firms in armaments, telecommunications, steel, and heavy equipment—all backed by nearly limitless government funds. He also commanded a planning commission for high-technology industries that competed with the planning board controlled by the Mafia. Widjojo, Wardhana, and their compatriots opposed Habibie's plans and used their formidable influence to block his program. They be¬lieved the high-tech industries favored by Habibie were far too advanced for a country just beginning to feed itself, nor were they comfortable with the state taking the primary role in building these new industries.

The Mafia's message began to fall on Suharto's deaf ears. Part of the reason was the intimate personal relationship Habibie forged with Suharto, one that easily rivaled, and most likely surpassed, the connection he had with Widjojo and the Mafia. "He regards me as his own parent," Suharto once wrote of Habibie.61 Habibie also knew how to sell his ideas to his patron. He was a brilliant speaker who could mesmerize Suharto with his technical exper¬tise while still appearing humble before the autocrat. Habibie "is not a man who thinks he knows best," Suharto wrote. "Whenever he reports to me, he spends hours with me only because he wants to understand what I think of the matters he puts forward; what my philosophy is."

The real secret of Habibie's success was his shared penchant for megaprojects with Suharto. Much like Park, Suharto had a fascination with heavy industry. Part of this interest came from his military background—like Park, he thought steel mills were good for national defense. Even more, he equated an industrial¬ized Indonesia with a unified and peaceful Indonesia. Suharto wrote, "[Indonesia] must be viewed as one national entity," and "this requires the development of our own strategic industries in order to free ourselves from dependence on foreign sources." Suharto became increasingly partial to Habibie's view of devel¬opment. Compared to Habibie's plans, the Mafia's philosophy of market-oriented growth and small-scale private enterprise seemed neither sexy nor sustainable. "History has shown that only by the command of science and technology can a nation advance,"

Suharto wrote. "Abundant natural resources alone are not suf¬ficient to bring our nation into a high standard of living and an extensive welfare program," he continued. The development of Habibie-style industries "stems from our awareness of the serious problems and weaknesses we would have in the future if we were to remain constantly dependent upon the science and technol¬ogy of other nations." Emil Salim believes Suharto was thinking about his legacy, one that could be made grander by homegrown arms factories than palm oil plants. "Great leaders all suffer the same thing," he says. "They want to be remembered eternally." Habibie's plan "satisfies your ego."

No other project better symbolizes Habibie's influence than Indonesia's attempts to develop its own airplane, an idea gener¬ated during a meeting between Habibie and Suharto shortly after Habibie's return from Germany. Habibie suggested he employ his expertise in aerospace and start an aircraft firm. Suharto ap¬proved the plan on the spot. Pertamina parented the project at first, but after its financial debacle, a new state company, Nurtanio Aircraft Industry, later renamed IPTN, formed in 1976, with Habibie as its chief. Habibie decided to skip intermediate steps into the industry, like component manufacturing, opting for full-on assembly of planes instead. At first, Habibie secured licenses to assemble planes and helicopters designed by three Eu¬ropean firms (including his former employer, Messerschmitt). In 1979, he inked a joint venture with a Spanish company to design, develop, and manufacture an Indonesian plane, a forty-seater called the CN-235. The first one rolled off IPTN's assembly line in 1983. Suharto was enthralled with Habibie's airplanes. By the mid-1990s, he expected IPTN to have forty thousand employees. "Is there any other government industry that can do the same?" Suharto asked. "There is none." He made it a national priority to purchase Habibie's planes to support his budding firm. "It is our duty to buy our own products, even though they may not be perfect," he wrote.

WHILE CONTENDING WITH Habibie, the Mafia also battled the "cronies." This small coterie of business leaders, almost ex¬clusively from the country's Chinese minority, built massive em¬pires based to a great degree on their personal access to Suharto. In return, Suharto called on them for financial favors. Suharto's family entered into business deals with the cronies as well. They generated inefficiencies that perturbed the Mafia and, eventually, threatened the very existence of the New Order.

The prototype crony was Mohamad "Bob" Hasan. Born to a Chinese family, Hasan converted to Islam at a young age and became the "adopted" foster son of a senior general who happened to be Suharto's commanding officer in central Java in the mid-1950s. Hasan spent this period, as he says, "learning about busi¬ness." At the time, the army controlled large swaths of the local economy, and Hasan helped the area's military officers undertake business ventures. Suharto and Hasan engaged in a controver¬sial smuggling operation in which they illegally shipped sugar to Singapore in return for fertilizers, military equipment, and other supplies. The two became fast friends. No other businessman in Indonesia enjoyed such a rapport with Suharto. They played golf together two or three times a week for the entire New Order era. Hasan, in the words of journalist Raphael Pura, was "a presiden¬tial crony who can make even other cronies uneasy."

Hasan's break came in 1972 when he got an opportunity to enter the timber industry. He was on a flight to Singapore with a government official when they were approached by another pas¬senger, an executive at Georgia Pacific. The American firm wanted to develop a forestry concession in Indonesia and was looking for a local partner to help manage the business. Could they recommend anyone? the executive asked. The official pointed to Hasan.

Hasan flew to Georgia Pacific headquarters, then in Portland, Oregon, for discussions with senior management. Hasan signed on, and was given a 10 percent equity stake in Georgia Pacific's Indonesian unit, which Hasan was allowed to pay for from future dividends. He received his first piece of the timber business for noth¬ing. This seemingly minor event would have tremendous implica¬tions for the Indonesian economy and the New Order regime.

The joint venture had a concession for a large tract of forest on Indonesian Borneo. Hasan had much greater plans for the indus¬try. He became dismayed that Indonesia had no timber processing businesses of its own. Timber firms simply shipped raw logs over¬seas to Singapore, South Korea, or Taiwan to be manufactured into plywood boards and other products. He felt that, as a result, Indonesia was losing much of the potential value from its timber exports.

Hasan says he began discussing the matter with Suharto. Re¬stricting exports of raw logs, Hasan recommended, would create incentives for companies like Georgia Pacific to invest in local timber-processing facilities. Beginning in the late 1970s, the gov¬ernment began adopting such policies, first raising export taxes on logs, then, in 1981, imposing a phased ban on the export of logs entirely. The result was a massive wave of timber investment. Between 1978 and 1985, plywood production capacity increased eightfold. Meanwhile, Hasan expanded his own business interests with investments in new factories and concessions—on occasion, he partnered with members of the Suharto family. In 1983, Geor¬gia Pacific pulled out of Indonesia as part of a shift in strategy. Hasan secured the multinational's shares for himself, paying for them with future plywood shipments, and took full control of the large operation.

The real source of Hasan's wealth and power, however, was his dominance over the plywood industry's business organization, the Indonesian Wood Panel Producers Association, known by its Indonesian acronym, Apkindo. In the early 1980s, amid a global economic downturn, plywood prices declined, competition among the many new Indonesian producers intensified, and Hasan and the government worried about the industry's health. Beginning in the mid-1980s, the state gave Hasan, Apkindo's chair, a wide-ranging mandate through a series of policy decisions to transform the asso¬ciation into a cartel to minimize competition and stabilize prices. Hasan set up a commission to study different export markets and determine proper prices, then organized the plywood producers into marketing boards and allocated export quotas among the many firms. The system became so strict that Hasan and Apkindo had power over how much plywood each firm could export to key markets. Apkindo priced its plywood very aggressively, undercut¬ting competitors and running them out of business. As a result, the cartel turned Indonesia into the dominant producer in the global plywood trade. In 1980, Indonesia accounted for only 7 percent of world plywood exports; by 1991, that share had grown to 79 per¬cent. Hasan tightened his personal grip on the industry by setting up trading firms for different export markets that were given mo¬nopoly rights by Apkindo to import Indonesian plywood. By one estimate, more than half of all tropical plywood exports in the world passed through Hasan's hands. In a detailed study of Hasan and Apkindo, Christopher Barr contends that Hasan effectively placed himself between Indonesia's plywood producers and the global market, and in the process "secured very substantial profits for himself, the Suharto family, and military interests with whom he is aligned." Perhaps Hasan himself put it best during one of history's most bizarre rounds of golf, featuring Hasan, Suharto, and Hollywood action star Sylvester Stallone. "I told Rambo," Hasan later recounted, " 'I'm King of the Jungle.'"

Hasan denies that he ever had any role controlling Indonesia's timber industry. Apkindo, he claims, was not a cartel, but just of¬fered guidance to the local exporters. Nor, he says, did he control a network of firms with monopoly marketing rights for Indone¬sian plywood. Suharto, he also says, never intervened to award him forestry concessions. "I was just trying to develop the local industry," Hasan says.

Whatever the true extent of Hasan's influence over the timber industry, Suharto's relationship with businessmen like Hasan took a toll on the New Order's popularity and legitimacy. Throughout large sectors of the Indonesian economy, a small group of busi¬nessmen with close ties to the Suharto regime were able to capital¬ize on their connections to create massive business empires. The cronies became symbols of the regime's lack of transparency, cor¬ruption, and nepotism. The story of Hasan and his fellow cronies begs an important question about how the Miracle manifested itself in different countries. Government favoritism toward cer¬tain businessmen or corporations was a standard feature of the Miracle, and especially the "Asian model." MITI had its favor¬ite keiretsu, Park his Chung Ju Yungs. Governments across the region gave companies that pursued priority projects cheap credit and other perquisites. So what made Suharto's chosen ones "cro¬nies" and these other darlings "entrepreneurs"? Why were some government-business relationships considered positive for the economy and others negative?

The differences between the role of the "cronies" in Indonesia compared to state-backed businessmen elsewhere were crucial to the course of the country's development. First, many of the favors granted to the cronies were monopoly rights on trade, distribu¬tion, and production of goods important to the economy. In some cases, the cronies used these privileges to build successful enter¬prises. However, these monopolies often allowed the cronies to reap massive profits above what open competition would have cre¬ated. The way in which Hasan sat himself on top of the plywood trade is a perfect example. The cronies' activities often added costs and inefficiencies into the economy, making Indonesia less competitive. Second, Suharto allowed the cronies to expand their economic clout whether or not they were successful in building in¬ternationally competitive industries or forwarding the overall bet-terment of the economy. Park may have protected companies he considered core to his industrialization program, but he also held Chung and the other chaebols to often lofty standards. If they did not perform up to snuff, he pulled the plug on them. One indis¬pensable factor behind the success of the "Asian model" was the government's insistence on performance. Suharto did not impose this strict discipline.

The most important difference with Indonesia's cronies, how¬ever, was that they included members of Suharto's own family. As the New Order aged, so did Suharto's six children, and at least some of them began to pursue their own business ventures, many of which were linked to government projects or companies. Like the other cronies, the Suharto family received special licenses, monopoly rights, choice contracts from government firms, and other sweetheart deals. At various times, Suharto family members controlled, with partners, soymeal production, tin plate supply, and plastic materials imports. They also held stakes in insurance, sugar, plywood, toll road, milk powder, baby food, television broadcasting, and cooking oil ventures. The most notorious of the Suharto children was Tommy, the youngest son. After dropping out of school in the United States, he formed a company called Humpuss in 1984 with an older brother, Sigit. At first he got lucrative petrochemical distribution deals from the state oil com¬pany Pertamina. Later, Tommy and Bob Hasan teamed up to ac¬quire a charter airline from the military that they turned into the first privately owned carrier in the country. His most controversial, and destructive, venture came in 1990 when he wrangled control of the clove industry. An important commodity for Indonesians, cloves are the key ingredient in their beloved kretek cigarettes. The idea was to buy up all of the country's cloves and then sell them to the cigarette manufacturers at inflated prices, allowing Tommy and his partners to pocket the profits. Tommy, together with some local traders, secured a monopoly from the government on the distribution of cloves. He promised to pay clove farmers significantly more for their crop and thereby painted himself as the defender of the poor against the big cigarette makers. In need of finance, Tommy appealed to his father to pressure a recalcitrant central bank to allocate money.

The scheme was doomed from the start. The cigarette produc¬ers used their existing stocks of cloves to avoid the excessive prices charged by Tommy. Meanwhile, the higher clove prices enticed farmers to grow more and supply increased. By 1992, Tommy's monopoly had failed. His stocks rose to the point where Tommy stopped buying new cloves, leaving the farmers with large har¬vests and no place to sell them.

Despite the controversy over his business activities, Tommy remained unrepentant. In 1992, he admitted to the Asian Wall Street Journal that being a Suharto made it "easier for me to make an appointment or discuss the business with ministers or govern¬ment officials," but he considered this "normal" for a person of stature anywhere in the world. "I don't rob or steal something from the government," Tommy said, "so why should I feel worried or embarrassed?"

One of the enduring mysteries of Suharto's reign is his willing¬ness to condone—and often encourage—his children's economic exploits even as they undermined his political support. Suharto biographer R. E. Elson speculates that Suharto wished that his children could enjoy happier—and wealthier—lives than he had as a poor youngster in rural Java, or that he failed to recognize how his political dominance was responsible for his children's success. Suharto was always extra considerate about his fam¬ily's needs. When he first became president, he chose not to move into the presidential mansion, the Merdeka Palace, and instead remained in his home in downtown Jakarta, hoping his children could in this way have greater freedom. What is clear, however, is that Suharto either was fully deluded about the nature of his children's activities or thought he could snow the public. "None of my children has been pampered. Not one," he boldly wrote in his autobiography. "On the contrary, they take a low profile and do not feel or act as if they are children of a President."

THE MAFIA TRIED to fight back. Wardhana recalls Suharto asking him to grant a tax holiday for a hotel development project being undertaken by one of his sons. "I said no," Wardhana said. Suharto "was angry, but he cannot do anything."84 Because of their long relationship with Suharto, the Mafia was not afraid to confront the president. Emil Salim says the technocrats would meet with Suharto, usually in a group, and outline for him the economic damage being done by a certain monopoly or special license. Suharto would always listen, but all too often he would stand by his friends, saying of the favors, "I deem it necessary."

Despite such impediments, the Mafia found a way to dominate much of the economic policy of the 1980s. The reason was that the economy was once again headed for trouble. The cause was oil. Indonesia was East Asia's sole member of the Organization of the Petroleum Exporting Countries, or OPEC, and the country experienced a windfall with the oil boom of the 1970s. Radius wrote that Indonesians saw the oil as "a fountain of gold." The flood of foreign exchange led to an attempt at "Indonesianiza-tion" of the economy. The government forced many foreign inves¬tors to forge joint ventures with Indonesians to do business in the country, and barred them from some sectors entirely. A maze of li¬censes, non-tariff barriers, and prohibitions restricted trade. Such inward-looking policies did not create many problems as long as oil prices stayed high, but by the early 1980s, crude prices began to decline. Indonesia was heading for yet another crisis.

The Mafia divined the solution. It was sweeping in scope and highly controversial. As in the late 1960s, it proposed another, major reorientation of the economy toward the free market— deregulation of trade and investment and a smaller government role in the economy. The Mafia "recognized that the state could no longer serve as the dominant generator of economic growth," Radius wrote.87 The goal was to boost non-oil exports and re¬create a more hospitable environment for foreign investors in order to replace the hard currency lost from reduced oil prices. The plan would integrate Indonesia into the world economy more than ever before.

In order to proceed, the Mafia needed to win over Suharto. In a series of meetings around 1983, the team presented its plans to Suharto, and told him bluntly of the consequences of not adopting them. "In the past, you can do [certain policies] because we had a lot of oil revenues. But you can't do these again, you can't afford the same policies," Ali Wardhana says the team told Suharto. "You have to give the market a free hand to operate." The team's recommendations presented Suharto with some tough choices. Some of the Mafia's prescriptions would quite likely undermine the business interests of some of the president's close associates. The Mafia, however, kept preaching its message. Suharto "was fully aware of the seriousness of the economic situation" and "it took him not too long to make the decision," says Wardhana.89 In the end, Suharto gave his approval.

The result, wrote Radius, was a "paradigm shift." Starting in 1983, the Mafia deregulated Indonesia's financial sector to strengthen the banks and capital markets. Then, beginning in the mid-1980s, it embarked on an intensive campaign of trade and investment reform. Exporters were allowed to bypass import mo¬nopolies on raw materials. The Mafia even scored some victories against the cronies, abolishing the costly plastics import monop¬oly in which two of Suharto's sons were partners. In a bid to at¬tract more international capital, the Mafia also raised ceilings on foreign ownership in local operations, especially in export indus¬tries, granted foreign firms tax breaks and access to special credit schemes, and lifted restrictions on foreign investment in specific sectors. "The deregulation movement," Radius wrote, "took on an aura that was both revolutionary and almost mystical."
The reforms worked wonders. Non-oil exports soared by 650 percent between 1985 and 1996. Foreign investment was twenty-four times greater in 1996 than a decade earlier. The Mafia's free-market thinking was proven correct once again.

The Mafia, however, did not receive many thanks. Its liberal¬ization drive proved to be its swan song. In a new cabinet formed in 1993, many technocrats were replaced, including Radius, and they surrendered several of their traditional posts to Habibie's supporters. The nationalists and cronies finally had the upper hand.

Habibie's influence expanded. In November 1994, he unveiled Indonesia's first airplane designed entirely in-house, the seventy-seat N-250. After it was rolled out of its hangar in Bandung cov¬ered in dry-ice mist, a proud Suharto broke a traditional clay jug over its nose and christened it "Gatotkoco," after a mythical Ja¬vanese flying warrior. Habibie's ambitions for IPTN continued to grow. He plotted to open an airplane factory in the United States  and pledged $2 billion to develop a 130-seat jetliner."

Much like his conciliatory treatment of the cronies, Suharto never demanded that Habibie produce profits or top-quality prod¬ucts. The finances of Habibie's airplane venture, though opaque, were most likely poor. Nor were Habibie's companies forced to compete on an international scale, as Park had insisted with his chae¬bols. With few exports, Habibie relied heavily on local, and espe¬cially state-linked, customers. Suharto protected Habibie against all criticism. In 1994, finance minister and Mafia protege Mar'ie Muhammad tried to limit funding for Habibie's airplane company; Suharto simply diverted state funds from a reforestation project. When a. local magazine criticized a Habibie-led deal to purchase old East German warships in 1994, Suharto shut it down.

The cronies, too, ran amok. In 1996, the government granted Tommy the right to develop a national car called the Timor. His chief competition in the bidding was an older brother, Bambang. The actions of Habibie, Tommy, and the other cronies led to two Indonesian economies running in parallel—one organized by the Mafia and based on a strong link to the international economy, rule of law, and sound fundamental economic practices, while the other was centered on heavy state resources, private connections, and the personal rule of Suharto. The two economies were natu¬ral antagonists. The deregulation, competition, and foreign in¬vestment favored by the Mafia ate away at the special privileges of the cronies and the protection of state enterprises. As the cronies pressed Suharto to preserve their positions, they hamstrung the technocrats' efforts to reform the economy. It was a vicious and self-destructive cycle, one that would soon prove catastrophic.