In chapter 1, I argued that most pre-colonial Southeast Asian societies were relatively state-averse. The identities which gave human societies a sense of belonging were shaped by forces other than those of the bureaucratic state. Kinship networks, market cycles, water-sharing for irrigation systems, sacred sites, religious rituals and popular performance helped to shape coherences which in most cases were more enduring and concrete than the states which competed over them. Before the nineteenth century, most of the Indonesian Archipelago's populations were in uplands away from the dangerous coast, and its states were not theirs; they were coast entrepots dependent on international commerce and ideas (Reid 1997: 67–77). Sriwijaya, Majapahit, Melaka and the Batavia-based Dutch Company (VOC) all developed some economic power and political charisma from their role as mediators of international commerce to populated interior regions. But they did not ‘rule’ those hinterlands in a sense which could create permanent identities in their subjects. Their legacies were a charisma to which various subsequent dynasties laid claim, not the shaping of a single self-conscious ethnie-state.

Within this pattern, however, Burma and to a lesser extent Siam went some way down a path of equating ethnic identity with the state. In Southeast Asia's ‘age of commerce’, a few Archipelago port-states also developed enough internal power as novel ‘gunpowder empires’ to give rise to new ethnies.

Malaysia's authoritarian regime survived the severe economic crisis that brought down Indonesia's New Order. Mahathir Mohamad retained firm control over Malaysia's political machine throughout Malaysia's crisis, even as contestation over Malaysia's political future rocked Malaysian society. In addition to implementing Malaysia's controversial capital controls and ringgit peg, Mahathir oversaw the arrest and conviction of his erstwhile deputy Anwar Ibrahim, as well as the regime's clampdown on a Malaysian reformasi movement. By December 1999 the BN had won its seventh election since 1969, easily retaining a two-thirds majority in the Dewan Rakyat (DR). Economic recovery through 1999 and 2000 reaffirmed UMNO's position at the top of Malaysia's political hierarchy. With the loyal and famously clean deputy prime minister Abdullah Ahmad Badawi prepared to succeed Mahathir on Mahathir's own terms, the stability of Malaysia's authoritarian regime was assured.

There are many existing explanations for the Malaysian regime's ability to withstand pressure for democratization. In this chapter, I argue that this political stability is the product of the regime's adjustment policies, which fulfilled the demands of each of its political supporters, poor Malays and the new Malay business class. Capital controls enabled expansionary policies, fulfilling the demands of fixed capital and the Malay masses. The effect of this radical adjustment measure for Malaysia's political opposition was striking. Having received their preferred adjustment policies, the regime's coalition of supporters had no incentive to withdraw support. So Malaysia's regime survived the crisis, despite the BN's most significant political challenge since the racial riots of 1969.

This chapter shows the development and logic of the different coalitions supporting authoritarian regimes in Indonesia and Malaysia. Indonesia's New Order rested on an alliance between the military and a small coterie of ethnic Chinese Indonesian entrepreneurs. Malaysia's Barisan Nasional coalition depended on (and still continues to depend on) an alliance between the Malay masses and a class of Malay entrepreneurs. These systems were stable and predictable. Each regime used largely informal exchange relationships to regularize mutual reward for leaders and supporters and also to systematize the threat of repression and violence for members of the polity outside of the support coalition. This stability enabled each regime to engineer rapid economic growth at rates nearly unparalleled in the developing world while embedding these support coalitions directly into the apparatus of political rule.

In the terms of the model of an economy introduced in Chapter 2, Indonesia's coalition was one between mobile and fixed capital, whereas Malaysia's coalition is one between fixed capital and labor. The broad actor categories – mobile capital, fixed capital, and labor – are theoretical ideal types, but in this chapter I link each ideal type to a concrete group with clear political allegiances. These mappings reveal the importance of the country-specific histories in understanding political coalitions and their economic interests. In the case of Malaysia, for instance, the regime depends not on “labor” writ large but specifically on the unorganized Malay masses. In Indonesia, fixed capital comprised both military-linked businesses and new pribumi (roughly, “indigenous”) entrepreneurs.

In Chapter 2 of this book, I noted that the twin crises in Indonesia and Malaysia are examples of a phenomenon that has become common as emerging market economies have opened their borders to capital flows and privatized their financial sectors. Nothing in my theory, however, is specific to Southeast Asia during the Asian Financial Crisis. Can this theory help us to make sense of financial crises, economic adjustment, and regime survival elsewhere in the world?

In this chapter, I show that it can. My theory uncovers two fundamental regularities in the politics of twin crises. First, coalitional politics determines adjustment policy. By taking seriously the preferences of supporters of autocratic regimes across the world, we can understand adjustment policies in a wide range of authoritarian regimes. Second, preferences for adjustment are at the heart of political conflict over autocratic regime survival. I demonstrate empirically that regimes that impose capital account restrictions during twin crises are more likely to survive these crises than regimes that do not. This finding holds up across countries and when controlling for alternative explanations for regime breakdown. These findings each lend crucial support to the theory that I derived from the experiences of Indonesia and Malaysia, and they reassure us that their experiences are indicative of a larger trend across the world, one that until now has escaped the notice of political scientists.

The methodology employed in this chapter differs from that used elsewhere in this book. Here, I focus on large-n quantitative analyses complemented by briefer case studies.

Malaysians often remarked during the early months of 1998 that every time Prime Minister Mahathir Mohamad opened his mouth, the ringgit depreciated. It was not hard to see why. As the Kuala Lumpur Stock Exchange (KLSE) tumbled and the ringgit depreciated, Mahathir's public demeanor ranged from defiant to vitriolic. He blamed Malaysia's currency and financial crisis on hostile “rogue” factions from George Soros to Western colonialists to the International Monetary Fund to a global Jewish conspiracy. In contrast to the positive reviews of Soeharto's crisis management in the first months of Indonesia's crisis, Mahathir's outbursts earned him condemnation from the foreign investment community. Confronted with what seemed to be an increasingly unhinged autocrat, foreign observers lambasted Mahathir for ignoring his regime's own failures in macroeconomic planning, and for downplaying the policy mismanagement that became ever more apparent as foreign investors took a second look at Malaysia.

Mahathir's public persona hid the regime's struggles over adjustment policy. The government's initial steps were actually encouraging from the IMF's perspective and included a vow to eliminate wasteful public expenditures and pledges of fiscal discipline by Anwar Ibrahim. In his words, these adjustment measures amounted to “IMF without the IMF.” Yet the regime's commitment to IMF-style policies was short-lived. Interest rate hikes to encourage capital inflows were temporary and not nearly as sharp as those in other crisis countries. The regime restarted many of the postponed infrastructure projects, using the logic of “strategic investment” to excuse what were clearly uneconomic ventures.

Soeharto resigned from the office of president of Indonesia on May 21, 1998, some ten months after the onset of currency speculation against the rupiah. His resignation signaled the end of the New Order regime and the beginning of a period of transition toward democracy. His successor, B. J. Habibie, who had been serving as vice president, was an aeronautical engineer known more for his nationalist economic ideology and loyalty to Soeharto than for any independent political skill. By the end of 1999, Abdurrahman Wahid (Gus Dur) assumed the country's presidency, and Indonesia's transition to democracy was complete. One of the world's most enduring dictatorships became the world's third most populous democracy.

Yet a firm understanding of why the New Order collapsed as it did, when it did, remains elusive. The theory advanced in Chapter 2 shows how political conflict over adjustment policy drove the breakdown of the New Order. The New Order collapsed because mobile capital – in the Indonesian context, ethnic Chinese konglomerat – withdrew its support from the regime. This fracture in the New Order's support coalition took place gradually, during the first six months of 1998, during which time Indonesia saw a dramatic upsurge in anti-Chinese violence. It culminated in anti-Chinese riots during May 13–14, 1998, which drove most of the konglomerat overseas. Many factional alignments existed in Indonesia along which the regime might have fractured: capital (mobile and fixed) versus labor, or Muslim versus non-Muslim, or even political Islam (“green”) versus secular nationalism (“red and white”).

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

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

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

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

Two Countries, Two Trajectories

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

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

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

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