This chapter analyzes government policies in the three principal Japanese colonies in the five decades up to 1945. It examines the extent to which the Japanese colonial governments in Taiwan, Korea and Manchuria succeeded in centralizing tax and other revenues, in leveraging these revenues in order to borrow, in establishing accountable government fiscal systems and in using revenues from taxes, non-tax sources and from loans to fund not just administration and policing but also expenditures on capital works. We also assess the important body of literature developed over the past five decades that emphasized the more positive aspects of the Japanese legacy, including the agricultural transformation, and the development of industry and transport infrastructure. When viewed in a broader Asian context, Japanese colonial policies were not as exceptional as some scholars have argued. There were a number of similarities with both revenue and expenditure policies in other Asian colonies, and while economic policies did diverge in the 1930s as the military-industrial complex in Japan became more powerful, the outcomes for indigenous populations in Korea, Taiwan and Manchuria were not always positive.

This chapter introduces and motivates the main theme of the book and the key questions related to the development of fiscal capacity in colonial Asia and Africa. We situate the colonial fiscal state in the context of the changing world order in the long century between 1850 and 1960. We discuss the historiography and existing theoretical perspectives on fiscal development, arguing that these remain biased towards the European, or Eurasian experience at best. We also summarize the key insights of all the chapters in light of the general patterns that emerge from the comparative perspective adopted in this book. Finally, we formulate a brief future research agenda which identifies the next steps to be taken to improve our understanding of the various ways in which fiscal states have developed across the globe since the mid-nineteenth century.

This chapter examines the changing role of the state in Southeast Asia in the decades from 1900 through to 1960, a period which covers the last phase of colonialism in the region, and the transition to independence. To what extent did colonial governments establish modern fiscal states in the region? By the end of the nineteenth century the three main European colonial powers, Britain, France and the Netherlands, all controlled substantial territories in the region. The Spanish, who had occupied the Philippine islands since the seventeenth century, ceded control to the Americans after their defeat in the Spanish-American War at the end of the nineteenth century. Siam, which became Thailand at the end of the 1930s, had managed to remain independent, although at the cost of losing territory to both British and French possessions. This chapter compares and contrasts revenue, expenditure and borrowing policies across the major colonial territories and Thailand, and examines the transition to independence in the years from 1946 to 1963, when the Federation of Malaysia was formed.

A decade of struggle

In 1942, the armed forces of imperial Japan swept through British Malaya, Indonesia and the Philippines, inflicting humiliating defeats on the colonial governments and armies. The myth that European colonialism was invincible was destroyed in a few weeks of conflict. In many parts of Indonesia the Japanese were greeted as liberators and especially in Java there was little overt opposition until 1944 (Abdullah 2010). Nationalists were released from prison; Sukarno and Hatta cooperated with the Japanese, mainly ‘in the interest of the greater goal of independence’ (Ricklefs 2001: 251). Other prominent nationalists, including Sjahrir, avoided overt cooperation with the Japanese, and built up an underground network based on former colleagues. For their part the Japanese promoted many Indonesian government officials into more senior posts to replace Dutch nationals who had either fled or been imprisoned.

The Japanese placed considerable emphasis on mobilising and indoctrinating youth. Following Japanese policy in both Taiwan and Korea, the school system was used to instil Japanese values into children along with a sense of nationalism. The evils of Dutch colonial policy were also stressed (Kurasawa 2010: 323). On the economic front, the Japanese gave top priority to the petroleum sector, where they urgently needed supplies to replace imports from the USA and elsewhere. Technicians quickly repaired the damage inflicted on the oilfields in Sumatra and Kalimantan by the departing Dutch. Crude oil production doubled between 1942 and 1943. Rubber production was also encouraged, but other export crops including sugar, spices, coffee and tea were not accorded high priority. Sugar was procured from Taiwan, and scarce shipping capacity could not be used to transport luxury goods such as coffee and spices to the Japanese mainland.

The Japanese paid little attention to the colonial borders and governed Southeast Asia according to their own strategic needs. Sumatra along with peninsular Malaya was governed from Singapore, while Borneo and most of the eastern islands were controlled by the navy. Problems of food supply rapidly emerged across the archipelago (Sato 2010: 267–79). Indonesia as a whole had been a net rice importer prior to 1942, relying on Thai, Burmese and Vietnamese imports to supply deficit areas in Sumatra, Java and elsewhere. These supplies were greatly reduced, partly because the Japanese needed the rice to supply to their own troops and partly because it was decreed that regions should be ‘self-sufficient’.

Challenges facing Suharto's New Order

By the mid-1960s, most economists were painting a dismal picture of the Indonesian economy. In one of the most widely read textbooks of the decade, Higgins characterised Indonesia as the ‘chronic dropout’ and claimed that the country ‘must surely be accounted the number one economic failure among the major underdeveloped countries’. He pointed out that all the available evidence pointed to prolonged stagnation throughout the colonial era, the Japanese occupation and the first two decades of independence and argued that such stagnation

At the time these words were written, few expected that there would be any dramatic improvement in Indonesia's economic fortunes. In September 1965 an attempted coup resulted in the murder in Jakarta of six senior generals. This provided an excuse for the military to begin to purge members of the Communist Party and ultimately Sukarno himself. In March 1966, the hitherto obscure Lieutenant-General Suharto together with the former diplomat Adam Malik and the Sultan of Yogyakarta assumed effective power. The new regime was backed by most of the army and also had the support of many groups within the intelligentsia, the student body and the Islamic community. Its anti-communist complexion guaranteed the new government considerable support from major Western bilateral and multilateral donors, support which had been spurned by Sukarno. But Indonesia's ‘New Order’ faced daunting tasks in rehabilitating the economy.

Per capita GDP in 1967 was lower, in real terms, than in 1941, and lower than in many other Asian and African countries (Table 4.1). Gross domestic capital formation had sunk to 6 per cent of GDP in 1962, and remained at below 10 per cent until 1968 (CBS 1970: 47). The failure to invest was evident not just in the absence of new infrastructure and productive enterprises, but also in the poor condition of existing factories, roads, railways, electricity generation facilities, ports, airports, irrigation systems and so on.

Estimates of poverty and income distribution after 1965

In Chapter 3, it was argued that there was considerable evidence that poverty and malnutrition were widespread in Indonesia by the mid-1960s, although the Sukarno government appeared to be in denial about the problem. The Indonesian Communist Party had drawn support from both the rural landless and employees in the estates sector and in the urban economy, but had no clear strategy for improving living standards beyond redistribution of land. The party supported the occupation of former estate land in parts of Java, but most Indonesians, even those on the left, realised that there was insufficient land in Java to give all rural households even one hectare, let alone the two hectares which the 1960 Basic Agrarian Law stipulated should be the minimum holding size. When pressed about the problem of ‘too many people and not enough land’, Sukarno and his ministers tended to fall back on the old colonial solution of moving people from Java, Bali and the eastern islands to the supposedly ‘empty lands’ in Sumatra, Kalimantan, Sulawesi and the newly acquired West Irian, later to become Irian Jaya, and now the two provinces of Papua and Papua Barat.

After power was wrested from Sukarno in 1966, economic policy was concerned primarily with macroeconomic problems. It was expected that a reduction in inflation and a return to growth would alleviate the problem of poverty, and lead to a general improvement in living standards. The first Five Year Plan of the Suharto era placed most attention on the agricultural sector, especially on increasing rice production. The Plan also stressed the need to rehabilitate and extend rural infrastructure, especially roads and irrigation. But it was criticised for its neglect of non-rice food crops, including both corn and cassava, as well as soybean and vegetables, which are important sources of protein and vitamins for the poor. By the early 1970s, some academic commentators, worried about the evidence of widespread and persistent poverty and malnutrition in Indonesia, were arguing that economic growth alone would not be sufficient to reduce poverty in Indonesia.

At this time there was a growing international debate over ‘redistribution with growth’ encouraged by the World Bank, the International Labour Organization and by a number of well-known academics in various parts of the world.

Economic nationalism after 1945

It was argued in Chapter 3 that the terms of the financial agreement finally agreed in 1949 were considerably harsher than those negotiated with the former colonial powers by other newly independent governments in Asia, including India, Pakistan and the Philippines. An Indian economist pointed out that, along with an impoverished economy, newly independent India ‘also inherited some useful assets, in the form of a national transport system, an administrative apparatus in working order, a shelf of concrete development projects and substantial reserves of foreign exchange’ (Vaidyanathan 1983: 948). Independent Indonesia had few such assets after almost four years of Japanese occupation followed by four more years of war against the Dutch army. The terms under which power was transferred caused bitterness among even the more moderate leaders, and after 1950 the continuing Dutch economic presence fuelled nationalist sentiments in the parliament and in the business community. An issue which was bound up with resentment against the Dutch was the position of the Chinese, whose economic role seemed to many nationalists to be way out of proportion to their relatively small numbers compared with the indigenous population.

The 1930 Population Census had enumerated 1.233 million Chinese in the whole country, which was only about two per cent of the population of 60 million. The percentage was probably slightly higher after 1950, as in-migration from China, although restricted, did continue until 1940. In addition, the Chinese tended to have large families and lower rates of infant and child mortality than most indigenous Indonesians. Mackie (2005: 98) suggested that the ethnic Chinese could have numbered around two million, or 2.5 per cent of the total population, in the early 1950s. As a result of their better access to education in the late colonial era, and the emphasis that many assimilated, Dutch-speaking Chinese families placed on professional qualifications, the Chinese were over-represented in occupations such as medicine and law. It was also widely believed that Chinese owned many of the medium- and large-scale businesses not controlled by the Dutch or other foreign interests. Those Chinese who had migrated to Indonesia in the 1920s and 1930s often went into business using contacts with other members of their extended families or dialect groups.