This article explores the origins of local governance in postcolonial contexts. Focusing on migrant communities in the Indonesian island of Java and the networks of elite political and economic relations that emerged under colonial rule, I develop a theory of social exclusion and competition that specifies the conditions under which trading minorities will forge cooperative relations with local political elites in the absence of well-functioning property rights institutions. These informal relationships under colonial rule affect contemporary economic governance. To clarify the importance of social exclusion rather than other factors that may differentiate colonial districts with large Chinese populations, I exploit variation in the settlement patterns of Chinese and Arab trading minorities in Java, which played comparable roles in the island’s colonial economy but faced different degrees of social exclusion. These findings contribute to recent work on colonialism and development, ethnicity and informal institutions, and the origins of democratic performance.