I Introduction Goethe is often quoted as having declared that all intelligent thoughts have already been thought and that all that is required is to think them over again. If we interpret this phrase as insinuating that the future does not bear room for intellectual surprises, then the simple fact that it was proffered by one of the greatest minds of all time ought to be sufficient to confute it. But if on the other hand we take it to signify that what we believe to be radically new ideas are often in reality elaborations of classic themes then as economic historians attentive to the most recent evolution of what constitutes the possibly most innovative theoretical doctrine to have surfaced in recent decades, the New Institutional Economics (NIE), we may find ourselves in fundamental agreement with it. With their claims that “economists seldom put the problem of order and disorder at the centre of enquiry [although] historical – and contemporary – experience suggests that they should,” that “although most economists ignore the problem of order, creating order is a task necessary to establishing the foundations of 1
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I
Introduction
Goethe is often quoted as having declared that all intelligent thoughts have already been
thought and that all that is required is to think them over again. If we interpret this phrase as
insinuating that the future does not bear room for intellectual surprises, then the simple fact that it
was proffered by one of the greatest minds of all time ought to be sufficient to confute it. But if
on the other hand we take it to signify that what we believe to be radically new ideas are often in
reality elaborations of classic themes then as economic historians attentive to the most recent
evolution of what constitutes the possibly most innovative theoretical doctrine to have surfaced in
recent decades, the New Institutional Economics (NIE), we may find ourselves in fundamental
agreement with it. With their claims that “economists seldom put the problem of order and
disorder at the centre of enquiry [although] historical – and contemporary – experience suggests
that they should,” that “although most economists ignore the problem of order, creating order is a
task necessary to establishing the foundations of long-term economic growth,” leading exponents
of the NIE have recently revealed that is indeed a rather ‘old’ problem that intimately concerns
them: the old, ‘Hobbesian’ ‘problem of order.’1
It is by approaching the NIE from this ‘old’ perspective that this essay examines what has
been exposed as possibly the most visible Achilles’ heel of the ‘new institutionalist’ doctrine: the
spectacular economic success of Soeharto’s ‘New Order’ Indonesia (1966-98). In defiance of the
NIE’s emphasis, an emphasis that has been elevated into prescriptive orthodoxy by the rational-
1The author wishes to express his most sincere gratitude to Dr. Gareth Austin for invaluable advice and support. The author is, of course, alone in shouldering the onus of all this paper’s flaws. ? The two quotes have been extracted from North, Douglass C., William Summerhill, and Barry R. Weingast, “Order, Disorder, and Economic Change: Latin America Versus North America” in Bruce Bueno de Mesquita and Hilton L. Root (eds.), Governing for Prosperity (New Haven: Yale University Press, 2000), p. 17, and North, Douglass C., Understanding the Process of Economic Change (Princeton: Princeton University Press, 2005), p. 103.
1
choice ‘governance’ paradigm espoused by multilateral development institutions such as the
World Bank,2 on democracy, federalism, institutional transparency and power decentralisation as
means of ensuring “order,” the protection of property rights, the containment of corruption and
rent-seeking and hence the productive engagement of entrepreneurial élan in both investment and
innovation, Soeharto’s Indonesia was in fact capable, within the institutional parameters set by an
intensely centralised authoritarian polity in which corruption was endemic,3 of alchemically
transforming itself from the dismal “basket case” of the late-‘50s to one of the World Bank’s
‘miracle’ economies of the early-‘90s.4 How was this possible?
The present essay seeks to address this puzzle by comparing and contrasting Indonesia’s
experience with that of the ‘New Society’ Philippines during the Marcos’ fifteen years of martial
law (1972-865). In the latter case, in fact, institutional ‘inputs’ seemed to have been translated into
developmental ‘outputs’ in a way that appears to be much more consonant with the orthodoxy’s
predictions. Fifteen years of similarly authoritarian-cum-patrimonial politics, ‘crony’ capitalism
and erosion of the legal system’s independence coincided with the harvesting of what Bello et al.
have described as a “development debacle,” a failure that ultimately undermined the reproduction
of the regime itself.6 Since the ultimate value of any theoretical model, however, is a function of
2 On the relationship between the ‘new institutionalism’ and the ‘governance’ prescriptions espoused by multilateral development institutions, see Leys, Colin, The Rise and Fall of Development Theory (London: Currey, 1996), chapter 4. 3 On corruption in Indonesia, see, for example, Schwartz, Adam, A Nation in Waiting: Indonesia’s Search for Stability (Boulder, Colorado: Westview Press, 2000 [2nd edition]), chapter 6. On the earliest official probe into the matter, see Mackie, J.A.C., “The Commission of Four Report on Corruption” Bulletin of Indonesian Economic Studies VI/3 (1970), pp. 87-101.4 World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press, 1993). 5 Martial law was formally lifted in January 1981; this passage, however, did not lead to any “difference in the power of the regime over the people.” (Wurfel, David, Filipino Politics: Development and Decay [Ithaca, N.Y.: Cornell University Press, 1988], p. 248-9). Also, Harold, Crouch, Domestic Political Structures and Regional Economic Co-operations (Singapore: Institute of Southeast Asian Studies, 1984), p. 47. 6 Bello, Walden, David Kinley and Elaine Elinson, Development Debacle: the World Bank in the Philippines (San Francisco: Institute for Food and Development Policy, 1982). As with the Indonesian case, the literature on the political economy of Marcos’ Philippines is replete with anecdotal illustrations of corruption. See, for example, Aquino, Belinda A., Politics of Plunder: The Philippines under Marcos (Quezon City: Great Trading Books and the University of the Philippines National College of Public Administration and Governance, 2nd ed., 1999).
2
its epistemological ‘inclusiveness,’ the orthodoxy’s inability to explain Indonesia’s success
cannot but, by reflection, severely dampen down the plausibility of any explanation, drawn from
the same theoretical premises, of the Philippines’ relative failure.
Though referring to the Northeast Asian cases, Robert Wade’s assertion that “anyone
who claims to offer an explanation for the wealth of nations must be concerned to show how the
East Asian capitalist cases fit the general theory, for if the fastest growers cannot be
accommodated the theory itself is cast in doubt”7 does not shed any of its relevance when applied
to the successful Southeast Asian cases. Rather than abandon the new institutionalism’s “general
theory,” this thesis proposes that, if approached from the Gerschenkronian philosophical
perspective of “substitution for missing prerequisites,” the NIE’s conceptual tools may be
substantially more malleable than the World Bank’s governance prescriptions may seem to allow
for. The profits of this endeavour are plural: a radically fresh interpretation of both the NIE and of
the secondary literature on the political economy and economic history of Soeharto’s Indonesia
and Marcos’ Philippines, the formulation of a model capable of being applied to other scenarios
and, above all, an empirically-supported explanans.
The argument proceeds according to the following mode: Chapter II outlines the
explanandum, the comparative economic performance of the two economies in terms of a variety
of growth and investment indicators; Chapter III presents the theoretical dimension of the
problem and formulates an eclectic Hobbesian model capable of transcending the NIE’s puzzle;
Chapter IV is devoted to the explanans and thus empirically corroborates our model on the basis
of a qualitative and quantitative dissection of the fiscal and political natures of the two regimes. It
finally concludes by proposing further research suggestions, pointing out some unresolved issues
and mentioning some of the contradictions that are ineluctably intrinsic to Indonesia’s
‘substitutive’ path to development.
7 Wade, Robert, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialisation (Princeton: Princeton University Press, 1990), p. 4.
3
II
4
The Explanandum
Growth and Investment in a Comparative Perspective
The comparative growth experience of Indonesia and the Philippines during the period
under consideration stands as a monument to the future’s strenuous unwillingness to conform to
even the most erudite of forecasts. Writing in the aftermath of the economic collapse that
coincided with Sukarno’s dethroning and on what eventually turned out to be the eve of
Indonesia’s economic miracle, Gunnar Myrdal, in his classic Asian Drama, had in fact opined
that “as things look at the beginning of 1966, there seems to be little prospect of rapid economic
growth in Indonesia.”8 Clifford Geertz’s influential works of the 1960s similarly conveyed a
visibly sober and pessimistic assessment of Java’s potential for economic development, an
assessment ultimately epitomised by his concept of “agricultural involution.”9
Such a widely accepted identification, during the 1960s, of Indonesia as a “chronic
dropout” (Benjamin Higgins) was paralleled by a similarly widely accepted identification of the
Philippine economy as the one incubating the greatest potential for development in Southeast
Asian region.10 Structurally, for example, the Philippines of the mid-‘60s were not characterised
by the highly asymmetric relationship between a suffocating bureaucratic apparatus and a feeble,
“pariah” entrepreneurial class so intensely stigmatised at the time by Riggs in his model of the
“bureaucratic polity.”11 Additionally, in terms of human capital accumulation, sophistication of
8 Myrdal, Gunnar, Asian Drama: An Enquiry into the Poverty of Nations (New York: Twentieth Century Fund, 1968). p. 489. 9 Geertz, Clifford, Agricultural Involution: The Process of Ecological Change in Indonesia (Berkeley and Los Angeles: University of California Press, 1970, 4th ed. [1963]). In Higgins’ “Foreword” to Geertz’s volume, this scepticism is subtly reiterated by the idea that “the story of Java seems to be one of repeated nipping off of a budding entrepreneurial upsurge by a political elite essentially hostile to it” (p. ix). 10 Cfr. Haggard, Stephan, “The Political Economy of the Philippine Debt Crisis” in Joan M. Nelson (ed.), Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World (Princeton: Princeton University Press, 1990), p. 215.11 Riggs, Fred W., Thailand: The Modernization of a Bureaucratic Polity (Honolulu: East-West Centre Press, 1966). Although Riggs’s developed this model in the context of Thai history, most of his insights can be expanded to include the Indonesian experience. See McVey, Ruth, “Materialisation of the Southeast
5
formal institutions, and participatory content an of the middle class and civil society, the
Philippines seemed to enjoy a wide set of ‘preconditions’ shared by very few other countries in
the developing world, Indonesia most certainly not featuring amongst the latter. The enthusiastic
optimism expressed by the World Bank in support of Marcos’ declaration of martial law stands as
a further example of the chasm that came to separate expectations from realities.12
Figures 1 to 5 and Tables 1 to 3 illustrate the comparative growth experience of Indonesia
and the Philippines according to several indicators, derived predominantly from International
Monetary Fund (IMF) and World Bank data, that most directly pertain to our concern with
growth per se, on the one hand, and the relationship between property rights security and growth
as expressed through investment patterns, on the other. As Figures 1 and 2 indicate, in both its
absolute and per capita dimensions, Gross Domestic Product (GDP) growth achieved noticeably
higher levels in Soeharto’s Indonesia than in Marcos’ Philippines. Whilst the 14 years of martial
law in the Philippines, according to World Bank figures, displayed a 3.4% absolute and a 0.8%
per capita average annual growth rates of GDP, the Indonesian rates in the Soeharto era reached
6.5% and 4.3%, respectively. As a percentage of U.S. GDP (Figure 3), these trends translated
into, on the one hand, a virtually stationary performance of the Philippine economy (a modest rise
from 14.7% to 15.3%) and, on the other, a stead narrowing of the U.S.-Indonesian income gap
(from 4.3% to 13.3% in the thirty years after 1966).
Figure 1
GDP Growth (annual %), 1966-97
Asian Entrepreneur” in Ruth McVey (ed.), Southeast Asian Capitalists (Ithaca, N.Y.: Cornell University Southeast Asian Program, 1992). 12 The relationship between the Marcos regime and the World Bank is most comprehensively analysed in Bello at al., Development Debacle (see, for example, chs. 1, 5).
6
-10
-5
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5
10
15
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66
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96
Year
%
Indonesia Philippines
Source: World Bank, World Development Indicators (2002, CD-ROM).Note: The bold segment coincides with Marcos’ martial law rule; this
stylistic device has been utilised throughout this paper.
Figure 2
GDP Per Capita Growth (annual %), 1966-97
-15
-10
-5
0
5
10
15
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19
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75
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90
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96
Year
%
Indonesia Philippines
Source: World Bank, World Development Indicators (CD-ROM, 2002).
Figure 3
GDP of Indonesia and the Philippines as a Percentage of U.S. GDP, 1966-97
7
0
3
6
9
12
15
18
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66
19
68
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70
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72
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82
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Year
%
Indonesia Philippines
Source: World Penn Tables, version 6.1 (www.nber.org).
Though meagre if approached from Indonesian and regional standards, Philippine economic
performance per se was, however, far from being insignificant during the Marcos era. As the
above Figures indicate, it was only with the dawning of the 1980s that degeneration unmistakably
prevailed over growth. Between 1972 and 1980, for example, Philippine GDP grew by slightly
less than 6% per annum (in per capita annual terms, this amounted to 3.1%), certainly a
noticeable achievement by developing world standards; in the five years after 1980, on the other
hand, GDP recorded negative growth rates of, on annual average, 1.1% (absolutely) and 3.5%
(per capita). A spiralling series of shocks, in fact, thrust the Philippine economy down this path in
the early ‘80s: a financial crisis in early 1981, a balance-of-payments crisis in late-1983, and the
assassination of opposition leader Benigno Aquino, all three set in the midst of growing rumours
about Marcos’ declining state of health.13 After the Aquino assassination (August 21st, 1983),
typically described in the literature as the trigger that precipitated the economic crisis of the
mid-‘80s and the ‘People’s Power’ revolution of 1986, contraction became patent, as the GDP
growth rate declined from 1.9% in 1983 to -7.2% in 1984.
13 For a succinct exposition of this spiralling plunge into crisis during the final years of Marcos’ rule, see Haggard, “The Political Economy,” pp. 235-244.
8
Complementary inferences can be drawn from evidence pertaining to the comparative
performance realised by these two economies with respect to domestic savings and investments.
Figure 4 reveals both the superior accomplishment attained by the Indonesian economy relative to
that of the Philippines as a whole and the arch-shaped physiognomy of the latter. Between 1972
and 1985, whereas Indonesia was able to annually average gross domestic savings equal to almost
30% of GDP, the Philippines displayed an average of c. 24%. Another interesting measure relates
to the extent to which these two self-proclaimed ‘developmental’ autocrats were able to raise this
percentage from the level at which it stood at the time they acquired ‘control’ over it: in this
respect, Soeharto’s ability to lift gross domestic savings from below zero to almost 40% of
Indonesian GDP between 1966 and 1980 vastly overshadowed Marcos’ success in raising his
respective figure from 21% to 28% between 1972 and 1978.
Figure 4
Gross Domestic Savings (% of GDP), 1966-97
0
10
20
30
40
19
66
19
68
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70
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Year
%
Indonesia Philippines
Source: World Bank, World Development Indicators (2002, CD-ROM).
9
Figure 5 unveils a similar disparity in Soeharto’s and Marcos’ abilities to actively transform the
respective inheritances bequeathed to them by their predecessors.14 Whereas Soeharto was
capable of displaying this ability in an unambiguous fashion as he came to preside over a truly
dramatic rise of total investment measured as a percentage of GDP (from c. 8% in 1967 to more
than 35% by the early ‘90s), Marcos’ transformative disposition seemed to have expressed itself
in rather meeker tones; after a very pronounced initial rise, concentrated in the space of two years,
investment assumed a gently declining trajectory with the result that, by 1983, its levels
approximated closely those it had achieved eight years earlier.
Figure 5
Total Investment (% of GDP), 1967-97
0
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97
Year
%
Indonesia Philippines
Source: IMF, International Financial Statistics Yearbook (1997).
By restricting the focus to evidence concerning foreign direct investment (FDI) exclusively, an
even more transparent demarcation of Indonesia’s finer performance relative to that of the
Philippines’ can be evinced. Although the declaration of martial law was greatly welcomed by
14 In the case of the Philippines’, Ferdinand Marcos’ pre-1972 ‘predecessor’ was, of course, Ferdinand Marcos himself, democratically elected to the presidency in 1965.
10
foreign investors,15 this event did not seem to have provoked an inflow of new FDI into the
Philippines equal in magnitude to that contemporaneously charmed by Indonesia. According to
Table 1, whilst net inflows of FDI, cumulatively, amounted to over US$ 1526 million in
Indonesia between 1973 and 1979, over the same period of time the Philippines were able to
attract slightly over one-third of this amount, a mere US$ 607 million. By focusing exclusively on
American foreign investment in these two countries, as Table 2 does, an even wider disparity can
be observed.
Table 1
Foreign Direct Investment (current US$, million), 1970-1997
Year Indonesia Philippines Year Indonesia Philippines
1970 83 -25 1984 222 9
1971 139.4 -1.0 1985 310 12
1972 207.4 -11.9 1986 258 127
1973 15.5 54.8 1987 385 307
1974 -49.3 3.6 1988 576 938
1975 475.9 98.3 1989 682 563
1976 344.2 131.6 1990 1093 530
1977 235.3 211 1991 1482 544
1978 279.1 101 1992 1777 228
1979 226 7 1993 2004 1238
1980 180 -106 1994 2109 1591
1981 133 172 1995 4346 1478
1982 225 16 1996 6194 1517
1983 292 105 1997
Source: World Bank, World Development Indicators (CD-ROM, 2002).
Table 2
U.S. Investment (current US$, millions), 1972 and 1984
15 Cfr. Jayasuriya, S.K., “The Politics of Economic Policy in the Philippines during the Marcos Era” in Richard Robison, Kevin Hewison and Richard Higgott (eds.), Southeast Asia in the 1980s: The Politics of Economic Crisis (London: Allen and Unwin, 1987), p. 96.
11
1972 1984 Growth Factor
Indonesia 563 4409 7.83
Philippines 644 1185 3.00
Source: Overholt, William H., “Pressures and Policies,” p. 100.
A better specification of this phenomenon can be obtained from an enquiry, such as the one
presented in Table 3, into various relative measurements of the FDI inflows accruing to these two
economies.
Table 3
Three Relative Measures of Foreign Direct Investment (average %), 1970-92
YearsFDI as % of Total
Capital InflowsFDI as % of Gross Capital Formation
FDI as % of Gross Domestic Product
Indonesia Philippines Indonesia Philippines Indonesia Philippines
1972-78 3.5 9.7 3.1 1.6 0.7 0.4
1979-85 11.2 2.0 1.0 0.8 0.3 0.1
1986-92 24.6 66.8 2.6 5.6 0.8 1.1
1972-85 7.3 5.9 2.1 1.0 0.5 0.3
1970-80 11.3 2.5 3.4 0.7 0.7 0.2
1980-90 15.2 38 1.5 3.0 0.4 0.6
Sources: IMF, Balance of Payments Statistics, various issues; World Bank, World Development Indicators (CD-ROM, 2002).
In the course of the fourteen years across which Marcos’ martial law regime spanned, Indonesia
succeeded in attracting inflows of FDI that, as a proportion of gross capital formation and gross
domestic product, amounted to approximately twice the levels obtained by the Philippines (2.1%
vs. 1.0% of gross capital formation, and 0.5% vs. 0.3% of GDP). In relation to total capital
inflows, the gap was narrower, yet still noticeable. Once again, these aggregate measures ought
not be allowed to obscure the heuristic necessity of dividing these fourteen years into two distinct
segments; as the Table reveals, the magnetic allure exercised by the Marcos’ Philippines vis-à-vis
foreign investors was, in fact, remarkably more pronounced in the earlier years. Even if drawn
exclusively from the 1970s, that is, from the decade during which the ‘developmental’ attributes
12
of Marcos’ authoritarianism seemed to have perspired less ambiguously, the evidence on FDI
would, nevertheless, all but dissipate empirical support for the proposition that Soeharto’s
Indonesia perceptibly outperformed Marcos’ Philippines; as indeed illustrated by Table 2,
between 1970 and 1980, Indonesia recorded levels of FDI that, as a proportion of GDP, amounted
to more than thrice those respectively achieved by the Philippines. Concordant inferences that
sustain the proposition were indeed similarly extractable from Figures 1 to 5. It is thus this
uncompromising consistency with which Soeharto’s Indonesia, according to growth, investments
and savings indicators, outperformed Marcos’ Philippines that, as the explanandum, animates our
present research.
The Wealth and Poverty of Business Surveys
In recent decades, the resurgent interest in the institutional foundations of growth and the
growing acceptance of growth regression models seem to have posed, one in conjunction with the
other, a very interesting methodological dilemma for those economic scientists concerned with
explication of the sources of growth: whilst the incorporation of the ‘institution’ as an
independent variable has inevitably expanded the room for indeterminacy and intangibility at the
analytical level, the growing identification of the statistical ‘regression’ as the appropriate
instrument for the study of economic growth has severely curtailed the explanatory legitimacy of
any variable that lends itself only refractorily to quantitative expression.16
16 Neither Douglass North nor Moses Abramovitz, as Crafts has noted, have attempted to quantify their ideas about the relationship between institutional quality and growth: the indeterminacy that surrounds their respective conceptualisations of ‘institution’ and ‘social capability’ has certainly played a major part in this. See, Crafts, Nicholas F.R., Development History (London School of Economics, Department of Economic History Working Paper No. 54/00, 2000), p. 19. In Abramovitz’s conceptualisation, “social capabilities” refer to a complex amalgamation of “technical competence” and “political, commercial, industrial, and financial institutions.” The “trouble” with such a conceptualisation, Abramovitz acknowledges, “is that no one knows just what it means or how to measure it” (Abramovitz, Moses, “Catching Up, Forging Ahead, and Falling Behind” The Journal of Economic History XLVI/2 [1986], p. 388).
13
A pioneering paper composed by Knack and Keefer published in 1995 demonstrated how
the employment of indices obtained from country risk guides published for international investors
could bring this dilemma to a resolution.17 The indices provided by the International Country Risk
Guide (ICRG) and the Business Environment Risk Intelligence (BERI), in fact, seemed both to
embody numerical manifestations of various dimensions of institutional quality and, thus, to be
able to express these dimensions in a form that was congruous to the strict requirements of
regression analysis.18 Their results presented strong support for the NIE’s hypothesis that the
protection of property rights is crucial to economic growth in its positive effect on both the
magnitude and efficiency of investment.19 That same year also witnessed the publication of an
influential paper by Paolo Mauro in which the corroboration of thesis that corruption is
detrimental to growth was established on the basis of indices published by Business International
(BI) relating to the early-‘80s.20 The body of econometric literature concerned with the
quantification, on the basis of such indices, of the rapport between institutional quality and
economic growth has expanded substantially in the past decade, its growing volume of evidence
increasingly being interpreted as offering, according to Crafts, a “strong vote of confidence to
those economic historians who have always stressed that institutions matter for economic
growth.”21
17 Neither Douglass North nor Moses Abramovitz, as Crafts has noted, have attempted to quantify their ideas about the relationship between institutional quality and growth: the indeterminacy that surrounds their respective conceptualisations of ‘institution’ and ‘social capability’ has certainly played a major part in this. See, Crafts, Nicholas F.R., Development History (London School of Economics, Department of Economic History Working Paper No. 54/00, 2000), p. 19. In Abramovitz’s conceptualisation, “social capabilities” refer to a complex amalgamation of “technical competence” and “political, commercial, industrial, and financial institutions”. The “trouble” with such a conceptualisation, Abramovitz acknowledges, “is that no one knows just what it means or how to measure it” (Abramovitz, Moses, “Catching Up, Forging Ahead, and Falling Behind” The Journal of Economic History XLVI/2 [1986], p. 388). 18 Knack, Stephen, and Philip Keefer, “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures” Economics and Politics VII/3 (1995), pp. 207-227. See also Hall, Robert E., and Charles I. Jones, “Why Do Some Countries Produce So Much More Output per Worker than Others?” Quarterly Journal of Economics CXIV (1999), pp. 83-116.19 Knack and Keefer, “Institutions and Economic Performance”, p. 223. Some of their regressions pointed to institutional effects on growth which rival even those of education.20 Mauro, Paolo, “Corruption and Growth” Quarterly Journal of Economics CIX (1995), pp. 681-712. 21 Crafts, Nicholas F.R., “Economic Growth” in Joel Mokyr (ed.), Oxford Encyclopaedia of Economic History (2003), p. 144.
14
The following three Tables, derived from a variety of secondary sources, present the
comparative institutional ‘performance’ of Indonesia and the Philippines (alongside that of other
major economies of the region) as perceived and ‘measured’ by international investors:
Table 4
ICRG and BERI Index Scores
ICRG(1984)
BERI(1972)
Hong Kong 49.0 N.A.Indonesia 15.0 6.6
Korea 28.7 9.2Malaysia 41.2 9.4
Philippines 13.0 7.8Singapore 47.5 12.2
Taiwan 44.0 11.0Thailand 30.9 N.A.
Source: Crafts, Nicholas, “East Asian Growth Before and After the Crisis” IMF Staff Papers XLVI/2 (1999), p. 157. Note: BERI (Business Environment Risk Intelligence) is an index aggregating “bureaucratic delays,” “nationalisation potential,” “contract enforceability” and “infrastructural quality”; it has a maximum score of 16. ICRG (International Country Risk Guide) is an index aggregating “quality of bureaucracy,” “corruption in government,” “rule of law,” “expropriation risk” and “repudiation of contracts by government”; it has a maximum score of 50.
Table 5
Business International Index Scores (1980-83)
Efficiency of the
Judiciary System (1)
Red Tape
(2)
Corruption
(3)
Political Stability
Bureaucratic Efficiency (average
of
15
1-3)Hong Kong 10 9.75 8 9.50 9.25
Korea 6 6.5 5.75 7.50 6.08Indonesia 2.5 2.75 1.5 7.46 2.25Malaysia 9 6 6 8.42 7.00
Philippines 4.75 5 4.5 6.08 4.75Singapore 10 10 10 10 10
Taiwan 6.75 7.25 6.75 8.58 6.92Thailand 3.25 3.25 1.5 5.63 2.67
Source: Mauro, Paolo, “Corruption and Growth” Quarterly Journal of Economics CIX/3 (1995), Appendix 3, pp. 709-710.
Table 6
An Additional Index of Foreign Investors’ Perceptions
Political Stability
Government Policies
Economic Health and
PoliciesLack of
Red TapeLack of
CorruptionTotal
Indonesia 3 3 2 2 1 11Malaysia 3 4 4 4 3 18
Philippines 3 3 3 3 2 14Singapore 5 5 5 5 4 24Thailand 3 2 2 2 1 10
Source: Hill, Foreign Investment and Industrialisation in Indonesia, pp. 141-2 (original source: Allen, T.W., The ASEAN Report, Asian Wall Street Journal, Vol. 1, Hong Kong [1979], pp. 140-1). Note: The maximum score is 5.
Two major conclusions can be immediately evinced: firstly, the two countries under this paper’s
spotlight consistently occupy the most infamous positions in terms of institutional quality and,
secondly, scarcely do these indices, according to which Marcos’ Philippines consistently
‘outperformed’ Soeharto’s Indonesia, seem reconcilable with the evidence presented in the
previous section. The most interesting and striking results emerge from the BI data reproduced in
Table 5, where the composite measure of “bureaucratic efficiency” for the early-‘80s in the
Philippines is recorded as being equivalent to almost double the measure achieved by Indonesia:
such a far-from-exiguous difference, if the theoretical premises are correct, ought to have
reverberated substantially in the behaviour of foreign investors. All three Tables, furthermore,
concur in classifying Indonesia as the country characterised by the least transparent and most
16
cumbersome administrative and bureaucratic apparatuses, a predicament that the nation seemed to
share intimately, during the 1970s and ‘80s, with Thailand. Thus, in terms of the correspondence
between ex ante investors’ perceptions of risk and ex post developmental outcomes, a profoundly
ambiguous picture is yielded by the coalesced evidence presented so far: whilst seemingly
holding in the case of (most of) the top performers in Asia (Hong Kong, Taiwan, Singapore), this
correspondence appears as much more obfuscated in the context of the ‘Tigers’ of Southeast
Asia. The comparative experience of Indonesia and the Philippines certainly expresses this
indistinctness in the most appreciable of fashions.
A conspicuous set of problems have, in fact, ornamented this methodological approach
to the econometric investigation of institutions. Firstly, international business surveys can be
faulted for constituting subjective evaluations rather than objective renditions of institutional
reality; secondly, and perhaps most importantly, these surveys, by their very nature, neglect the
domestic dimension of investment; thirdly, such highly aggregative measures that seek to
quantify variables that are not directly quantifiable might conceal as much as illuminate reality.
Relating to the quandaries of subjectivity is the problematic recognition of the fact that
international investors, furthermore, do not judge in a social vacuum; their perceptions and
evaluations are indeed constructed on the basis of particularistic individual/class interests and are
embedded within a mosaic of interconnected but independent nation-states: both these factors
inescapably introduce elements of distortion and relativity in foreign investors’ evaluative
processes. Whilst dampened by the case of polar extremes, these limitations acquire substantially
greater significance in the more intermediate cases in which ‘success’ and ‘failure’ coexist in a
non-manichean fashion. The contradictory image portrayed by Tables 4 and 5 concerning the
relative ‘performance’ of Indonesia and Thailand could be taken as a symptomatic manifestation
of such concerns.
Yet, usually, it is precisely in such ‘intermediate’ cases, in which economic
theory/models and historical reality combine most uncomfortably, that economic history, as a
17
scientific discipline, most distinctly affirms its raison d’ être. Case-studies and growth regression
models deal with two separate layers of historical reality: whilst the former primarily focus on the
historical idiosyncrasies of individual economies, the latter are solely concerned with general
patterns, underlying currents. This, however, implies that both are necessary but neither is
sufficient; if the discipline of economic history is conceived as a form of ‘communication’ and
‘mediation’ between the two layers of historical reality, growth regression models ought to be
approached, in the quest for historical knowledge, as a starting point rather than a final
destination. Nowhere in Southeast Asia is this requirement for further communication between
theory and history and for further specification of models via case-studies as marked as in the
‘intermediate’ case of Soeharto’s Indonesia. The analysis of the thin subtleties that characterise
the rapport between institutional structures and growth ought, in other words, to celebrate the
strengths as well as illuminate the weaknesses of the original model. It is precisely to the
theoretical deconstruction of the ‘original model’ that we now turn.
III
Theory
“Tying the King’s Hands”:
The ‘New Institutionalist’ Political Economy
18
The study of the “political assumptions necessary to maintain secure property rights” has
recently emerged as one of the most stimulating and influential branches of the NIE.22 Inspired by
the principles that “it is the polity that defines and enforces the formal economic rules of the
game and therefore is the primary source of economic performance,”23 and that formal
“constitutions” are the embodiment of “governance structures,” the NIE has both radically
redressed the state of neglect to which theorisations of the political foundations of growth had
been traditionally confined by neo-classical economists and has contributed incommensurably to
the recent resurrection of the faith in the positive correlation between “freedom and growth.”
“Thriving markets,” Weingast argues, require not only “the appropriate property rights system, an
unfettered price mechanism, and a law of contracts,” but also the institutionalisation of “a secure
political foundation that limits the ability to (sic) the state to confiscate wealth by altering those
rights and systems,”24 not only, thus, “a range of positive incentives for productive and
entrepreneurial activity” but also the creation of “political order” via the institutional
emasculation of the state’s predatory, discretionary impulses.25 It is the conviction that this
fundamental political requirement of economic growth can most proficiently be fulfilled by a
structural decentralisation of power at the level of political institutions that animates the NIE’s
predilection for democratic/federalist forms of government.
Though only explicitly addressed in recent times by its leading exponents, the “problem
of order and disorder,” which can be specified as the problem of how to ensure convergence
between individual and social rationality, is at the analytical heart of the NIE.26 By compounding
22 Quote taken from North, Summerhill and Weingast, “Order, Disorder, and Economic Change,” p. 21. 23 North, Douglass, C., Understanding the Process of Economic Change, p. 57. 24 Weingast, Barry R., “Constitutions as Governance Structures: The Political Foundations of Secure Markets” Journal of Institutional and Theoretical Economics CIL/1 (1993), p. 287. 25 North, Summerhill, Weingast, “Order, Disorder, and Economic Change,” p. 21. 26 For the most recent and possibly most thorough analysis of this “problem” by the leading exponent of the NIE, see North, Understanding the Process of Economic Change, chapter 8.
19
the neo-classical axioms of scarcity and maximising behaviour with ‘transaction costs,’27 the NIE
has resuscitated the problem of how to reconcile these two rationalities, a reconciliation upon
which economic efficiency is premised; when positive transaction costs preclude optimal Coasian
bargains, the NIE reasons, markets are no longer capable of exercising the coordinating role they
display in the neo-classical world. “Non-market institutions” are thus necessary to generate
“order,” to overcome the “social dilemmas” that arise when radical individualism becomes
inconsistent with social welfare.28 Thus, North posits, “throughout history, institutions have been
devised by human beings to create order and reduce uncertainty in exchange.”29 Although the
idea that “there is little or no production in the absence of a peaceful order”30 is commonsensical,
the NIE has raised the theoretical sophistication of the issue by approaching the age-old question
of “order” from the perspective of ‘transaction costs’; disorder, in fact, by reducing the ex ante
predictability of alterations in variables exogenous to the economic agent and, hence, erratically
impinging upon ex post expectations, raises transaction costs, undermines investment and
innovation, and thus shrinking the scope for economic growth.
The theoretical sequence that terminates with the prescriptive proclivity towards the
decentralisation of political power is rooted in the “paradox” that Weingast has identified as “the
fundamental political dilemma of an economic system”: “a government strong enough to protect
property rights,” and, thus, reduce transaction costs and promote economic efficiency, “is also
27 Transaction costs are commonly defined by Douglass North as the costs of specifying and enforcing contracts. According to Matthews’ more precise definition, “the fundamental idea of transaction costs is that they consist of the cost of arranging a contract ex ante and monitoring and enforcing it ex post, as opposed to production costs, which are the costs of executing a contract.” See, Matthews, R.C.O., “The Economics of Institutions and the Sources of Growth” Economic Journal XCVI/384 (1986), p. 906. For a succinct overview of the fundamental principles of the NIE, see Eggertsson, Thainn, Economic Behaviour and Institutions (Cambridge: Cambridge University Press), pp. 3-32. 28 Cfr. Bates, Robert H., “Social Dilemmas and Rational Individuals: An Assessment of the New Institutionalism” in Colin M. Lewis, Janet Hunter and John Harriss (eds.), The New Institutional Economics and Third World Development (London: Routledge, 1994), p. 29.29 North, Douglass C., “Institutions” The Journal of Economic Perspectives V/1 (1991), p. 97 (emphasis added). “Constraints,” North has written, “in the form of economic institutions, by limiting certain types of behaviour, make human organisation and civilisation possible” (North, Douglass C., “Three Approaches to the Study of Institutions” in David C. Colander [ed.], Neoclassical Political Economy: The Analysis of Rent-Seeking and DUP Activities [Cambridge: Ballinger Publishing Company, 1984], pp. 33-34). 30 Olson, Mancur Jr., “Dictatorship, Democracy, and Development” The American Political Science Review LXXXVII/3 (1993), p. 567.
20
strong enough to confiscate the wealth of its citizens.”31 Indeed, when scrutinised through the
conceptual prism of ‘property rights,’ ‘transaction costs,’ and ‘order,’ the nature of state
intervention in the economy and the notion of state “strength” acquire a radically novel, aporetic
timbre: although a strong state is essential in reducing the costs of transacting by means of its
centralised provision of indispensable ‘public goods’ (order, security, justice, defence,
standardisation of weights and measurements), the ‘capture’ of the state’s coercive faculties by
interests predatorily inimical to social welfare provokes, as history has exhaustively confirmed,
deleterious escalations of transaction costs that are, in regards to their intensity, directly
proportional to the state’s strength itself.32 This underlying tension between order and disorder,
between the state’s exclusive progressive faculties and its genetic predatory tendencies33 help to
reveal why the “control of coercive power by the state for social ends has been a central dilemma
throughout history.”34
In its determination to offer a structural ‘solution’ to this tensely ‘paradoxical’ condition
of the state vis-à-vis the economy, the ‘new institutionalist’ political economy has approached the
question of the government’s role in the process of economic development from the perspective
of the form of constitutions and political institutions rather than the content of authority,
revivifying thus the conceptual distinction between representative and authoritarian political
institutions that political scientists of the 1960s, with their accent on “degree of government”
rather than “form of government,” had largely suffocated.35 By differing in terms of the
distribution and institutionalisation of power, representative and authoritarian governments
31 Weingast, “Constitutions as Governance Structures,” p. 287. 32 Thus Douglass North, in the same sentence, expresses both his belief that “the existence of the state is essential for economic growth” and his acknowledgement that “the state, however, is the source of man-made economic decline.” See, North, Douglass C., Structure and Change in Economic History (New York: W.W. Norton and Co., 1981), p. 20. 33 On the rational-choice theory of the “predatory state,” see Levi, Margaret, “The Predatory Theory of Rule” Politics and Society X/4 (1981), pp. 431-465, and North, Structure and Change, chapter 3. 34 North, Douglass C., and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England” The Journal of Economic History XLIX/4 (1989), p. 805. 35 Cfr. Huntington, Political Order in Changing Societies (New Haven: Yale University Press, 1968), p. 1.
21
diverge substantially in terms of their respective structural abilities to limit the state’s faculty to
act opportunistically by confiscating wealth it had previously promised to protect, that is, to yield,
in the NIE’s jargon, “credible commitments” to the security of private property; in transposing
the logic of ‘incentives’ from the economic to the political sphere implies, the NIE argues that,
whilst democratic constitutions with their decentralised administrative apparatus and separation
of powers guarantee formal, “self-enforcing” checks to the state’s will for discretion,36
autocracies, on the other hand, in which “by definition […] there can be no power above that of
the autocrat”37 can only marginally succeed in structurally establishing the “political order” and
“governance structures” that investors and innovators demand.38 “Increases in centralised
authority carry with them increases in the discretionary power to intervene,” 39 thus rendering, a
priori, the “political risk generated by the possibility that the state will alter economic rights in
the future”40 more dire in an authoritarian than in a representative setting. This idea of order and
economic growth being ultimately positively dependent upon the redefinition of the distribution
of power in society in the direction of greater symmetry in order to tie the “king’s” predatory
“hands” comprises what is probably the defining feature of the NIE’s perspective on the political
foundations of economic growth.41
36 North and Weingast, “Constitutions and Commitment,” p. 805; Weingast, “Constitutions as Governance Structures,” p. 288; North, Summerhill and Weingast, “Order, Disorder, and Economic Change”, pp. 26-6; Root, Hilton R., The Fountain of Privilege: Political Foundations of Markets in Old Regime France and England (Berkeley and Los Angeles: University of California Press, 1994), pp. 163-78. It is from the latter volume that the expression “tying the king’s hands” has been taken. 37 Olson, Mancur, Jr., Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (New York: Basic Books, 2000), p. 36 (emphasis added). 38 There are two important constraints that not even the most genuinely autocratic sovereign is capable of evading: first, the structural constraints imposed by the inexorable dependence of the state on capital (see, for example, the exposition of the “business-as-capital” thesis in Haggard, Stephen, Sylvia Maxfield, and Ben Ross Schneider, “Theories of Business and Business-State Relations” in Sylvia Maxfield and Ben Ross Schneider [eds.], Business and the State in Developing Countries [Ithaca, N.Y.: Cornell University Press, 1997], pp. 38-42) and, second, the constraints imposed by the existence of ‘rivals’ (cfr. North, Structure and Change, p. 27). 39 Milgrom, Paul, and John Roberts, “Bargaining Costs, Influence Costs, and the Organisation of Economic Activity” in James E. Alt and Kenneth A. Shepsle (eds.), Perspectives on Positive Political Economy (Cambridge: Cambridge University Press, 1990), p. 79. 40 Weingast, “Constitutions as Governance Structures,” p. 287. 41 The notion that, in a bargain, the powerful party will enthuse a structural redistribution of power in favour of the weaker party, and thus endow the latter with the capability of organising itself and exert countervailing force, in order to strengthen his own commitment to certain mutually beneficial
22
Importantly, it is also indirectly, via their impact on ‘rent-seeking,’ that the structure of
political institutions, according to the NIE, affects economic growth. The “political order” yielded
by “successful constitutions,” North, Summerhill and Weingast have recently postulated, by
“assigning citizen rights and other limits on government decision making,” and thereby placing
“bounds […] on the stakes of politics,” reduces the “value of capturing the state and […] the risks
of not holding to power,” stymieing, thus, the competitive quest for the capture of economic
privileges that in the neo-classical literature is known as “rent-seeking.”42 “Political order,” in
other words, contributes to economic efficiency by inhibiting the “directly unproductive,”
competition for rents, and thus the wasteful, dissipation of resources and social value that this
competitive endeavour amongst uncoordinated individuals/groups is deemed by the theoretic
literature to occasion.43 The institutional decentralisation of political power is regarded as being
similarly instrumental in reducing the scope for bureaucratic (“public”) rent-seeking, that is, the
“decentralised search for private gain” by government officials that manifests itself in the form of
red tape and corruption and that, as Murphy et al. have explained, by rendering property rights
insecure injures both investment and innovation.44 Weingast’s apologia of federal political
arrangements can be found, in its most vigorous theoretical expression and empirical confirmation, in Greif, Avner, Paul Milgrom and Barry R. Weingast, “Coordination, Commitment, and Enforcement: The Case of the Merchant Guild” Journal of Political Economy CII/4 (1994), pp. 745-776. See also, Root, The Fountain of Privilege, pp. 177-8. 42 North, Summerhill and Weingast, “Order, Disorder, and Economic Change,” pp. 26-27. 43 Cfr. Krueger, Anne O., “The Political Economy of the Rent-Seeking Society” The American Economic Review LXIX/3 (1974), pp. 291-303; Bhagwati, Jagdish N., “Directly Unproductive, Profit-Seeking (DUP) Activities” Journal of Political Economy XC/5 (1982), pp. 988-1002; Tollison, Robert D., “Rent Seeking: A Survey” Kyklos XXV/4 (1982), pp. 575-602. The waste implied by the “competition” for these privileges is, of course, in contrast with the competitive dissipation of natural economic rents, which plays a critical role in the dynamics of a market economy. 44 Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny, “Why is Rent-Seeking So Costly to Growth?” The American Economic Review LXXXIII/2 (1993), pp. 409-414. Although, in the literature, “rent-seeking” and “corruption” are often used interchangeably, and, indeed, there is a large area of overlap between the two, it is always important to spell out clearly the conceptual distinction: whilst “corruption” involves the general abuse of public power for private gain, “rent-seeking” originates in the concept of “rent” (usually defined as the surplus of income over opportunity cost), and thus refers more specifically to the more or less competitive effort to acquire control over opportunities for earning rents. Since “rents” are, according to McCloskey, the “life of capitalism,” the “seeking” of “rents” per se, unlike corruption, is neither necessarily immoral nor illegal. See, McCloskey, Donald, “The Economics of Choice: Neoclassical Supply and Demand” in Thomas G. Rawski et al. (eds.), Economics and the Historian (Berkeley: University of California Press, 1996), pp. 134-5.
23
institutions from the perspective of rent-seeking/corruption and economic growth epitomises the
NIE’s devotion to political decentralisation; by obliging lower units to compete in the task of
attracting investments and by decentralising administration so that “regulation qua rent-seeking”
can only be local, federalism “limits the success from rent-seeking,” thus diminishing both the
latter’s level and pervasiveness.45
“L’ état c’est moi!”:
A Hobbesian Alternative
As Bernholz has observed, these recent excursions into the realm of “political
institutions,” “power” and “order” have brought the NIE in close contact with theoretical
concerns that had intensely engaged the minds of eminent thinkers such as Hobbes and Locke,
and have yielded normative prescriptions that echo those proposed centuries ago by Montesquieu
and de Tocqueville.46 It is, in fact, not in the formulation of a new problematic or in the
concoction of new prescriptive propositions but rather in the re-examination of an “old,” vexed
problem with novel conceptual instruments derived from economic theory that the genuine
innovativeness of the NIE rests. Rather than reject in toto, in view of Indonesia’s unambiguously
successful post-‘65 authoritarian and centralist experiment, the ‘new institutionalist’ conceptual
framework, the present paper builds its own framework upon the presumption that the unease
with which the NIE’s ‘governance’ dimension suits the content of history stems largely from an
excessively crude mode of prescriptive prognosis rather than with blemishes intrinsic to the
theoretical premises per se, which it takes, on the contrary, unlike John Toye for example,47 to be
incontrovertible; rather than dispute the contention that long-run growth intimately relies upon
45 Weingast, Barry R., “The Economic Role of Political Institutions: Market Preserving Federalism and Economic Development” The Journal of Law, Economics and Organisation XI/1 (1995), p. 6. 46 Bernholz, Peter, “Constitutions as Governance Structures: The Political Foundations of Secure Markets: Comment” Journal of Institutional and Theoretical Economics CIL/1 (1993), pp. 312-314. 47 Toye, John, Dilemmas of Development: Reflections on the Counter-Revolution in Development Theory and Policy (Oxford: Basil Blackwell, 1987), chapter 8.
24
the establishment of representative political institutions and an independent legal system, this
paper evokes the possibility that the short-/medium-run may hold room for ‘experimentation’ in
second-best institutional solutions to the “problem of order.”48 The ‘novel conceptual
instruments’ introduced by the NIE in its study of the relationship between order and growth,
indeed, somewhat paradoxically, seem precisely to allow for the possibility that the underlying
logic may acquire a plurality of forms in revealing itself to consciousness through history.
In the attainment of prosperity, the function of ‘order’ (sensu latu), the NIE claims, is to
institute a sense of predictability in human interaction by containing ‘opportunistic’ behaviour, to
stabilise the relationship between ex ante expectations and ex post outcomes, a relationship that
defines the essence of the concept of ‘transaction costs.’ The latter can, therefore, be employed in
the dissection of what could be identified as the two fundamental types of ‘order’: the economic
order, as espoused by Adam Smith and neo-classical economists, and the political order, as
espoused, notably, by Thomas Hobbes. Central to this distinction is a fundamental disagreement
over, once again, the rapport between ‘order’ and ‘power’: since a “right,” Hobbes believed,
amounts to “the liberty each man hath, to use his own power,” the dispensation of rights among
his subjects fundamentally amounts to a dilution of the sovereign’s power and this, whilst
constituting the fundamental premise for economic order based on “tolerable security [of
property]” and for the concomitant beneficial expression of Smith’s “invisible hand,” is
instrumental in corroding the monolithic foundations upon which political order in Hobbes’
schema is erected, since “powers divided,” Hobbes claimed, “mutually destroy each other.”49
48 The ideas presented here, in fact, do not seek in any way to challenge the orthodoxy concerning the optimal institutional prerequisites for long-run growth. Concerning the general relationship between the short- and the long-run in the catch-up process it is important to refer to recent econometric analyses that have led to the suggestion that the Tigers’ disappointing total factor productivity performance may have been rooted in certain weaknesses inherent to the neo-Gerschenkronian state, most notably the capture of government policies by special interest groups (Crafts, Development History, pp. 21-2): institutional solutions to short-run deficiencies, in other words, may be incompatible with the longer-run requirements of growth. These unassailable considerations, however, ought not to be treated as pretexts for a neglect of the equally interesting short-/medium-run. 49 Smith, Adam, The Wealth of Nations (London: Everyman’s Library, 1991 [1776]), Book II, Ch. I, pp. 249-250, and Hobbes, Thomas, Leviathan (Oxford: Oxford University Press, 1996 [1651]), Ch. XIV/1, p. 86, and Ch. XXIX/12, p. 216. “What is it to divide the power of a commonwealth”, Hobbes asks, “but to
25
From the NIE’s perspective, Hobbes and Smith, though diverging radically in terms of the
prescriptions proposed, seem to be concerned with the same conundrum, that is, how to ensure
the institutional conditions for low transaction costs in a society composed of ‘atomised,’
‘opportunistic’ subjects; in Hobbes’ schema, the opportunistic behaviour by which the “state of
nature” is permeated, and that renders the life of man “solitary, poor, nasty, brutish, and short,”50
is obviated by the centralisation of coercive power in the hands of the sovereign, whilst in
Smith’s view, on the other hand, as in the NIE’s, injurious behaviour is taken to be the
prerogative of the sovereign and it is thus by emasculating the government’s discretionary power
to expropriate possessions and impose onerous taxation that order and growth are to be achieved.
An acknowledgement that Smith’s “invisible hand” and Hobbes’ ‘iron fist’ are steered by
the same underlying logic, however, endows history with a creative potential that transcends that
conceded to it by the rational-choice ‘governance’ prescriptions. Recognition of the fact that the
exercise of coercive power lies within the exclusive prerogatives of the state implies that it is the
latter that detains the means to establish order and predictability in the system and that, therefore,
in the absence of an optimal Smithian order, the power to thwart the deleterious impact of
opportunistic individual behaviour and thus to prevent an escalation of transaction costs may
derive from coercive, ‘Leviathanic’ pressures centrally exercised at the political level. As Olson
has noted, the transition from Hobbes’ “war of all against all” to the “order” provided by an
autocratic government fundamentally represents “a shift from a destructive to a constructive use
of central power.”51 This insight has presented its theoretic significance with most candour in
Olson’s analysis of the distinction between the effects on the economy of a ‘roving bandit’ and
those of a ‘stationary bandit’; neither of these two ‘bandits,’ in fact, have their predatory ‘hands’
structurally ‘tied,’ and, yet, the stationary autocrat’s “encompassing interest” in his “domain,”
coupled with his “monopolisation and rationalisation of theft,” inspires him to provide a
dissolve it?”50 Hobbes, Leviathan, Ch. XIII/9, p. 84. 51 Olson, Mancur, Jr., Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (New York: Basic Books, 2000), p. 13.
26
“peaceful order and other public goods that increase productivity” that the roving brigand, on the
other hand, does not have an incentive to supply.52 From our strict perspective on rent-seeking, a
“constructive use of central power” could, firstly, provoke a redefinition of “rent management,”
that is, the principles by which rents are allocated, by stimulating a shift from “competitive rent-
seeking” to a more coordinated, less dissipative and less inefficient system of “purposive rent
allocation,”53 and, secondly, coercively prevent excesses in bureaucratic “theft” and thus reduce
property rights insecurity. Once a suboptimal institutional structure is taken as given, in other
words, the institutional centralisation of power may thus act, in quasi-Gerschenkronian fashion,54
as a “substitute” for the missing ideal. The challenge presented by this idea to the new
institutionalist political economy rests in its underlying notion that asymmetries of power do not
translate univocally and inexorably into developmental failure.
In light of public choice theory, Hobbes’ supposition that an individual unburdened by
structural constraints on his will for discretion could incarnate a society’s ‘common-wealth’
52 Olson, Mancur, Jr., “Dictatorship, Democracy, and Development” The American Political Science Review LXXXVII/3 (1993), pp. 568-9, and Olson, Power and Prosperity, chapter 1. A similar principle is employed by Coolidge and Rose-Ackerman when discussing the economic difference between a ‘benevolent autocrat’ and a ‘kleptocrat’ (Coolidge, Jacqueline, and Susan Rose-Ackerman, High Level Rent Seeking and Corruption in African Regimes: Theory and Cases [World Bank Research Working Paper No. 1780, 1997], pp. 6-22). There is a risk of offering a caricatured portrayal of Olson’s view, which is in fact more nuanced; although he shares North’s general ideas about the developmental virtues of democracy (compare his opinion that “the conditions necessary for a lasting democracy are the same necessary for the security of property and contract rights,” with North’s identical idea that “well-specified and enforced property rights, a necessary conditions for economic growth, are only secure when political and civil rights are secure”), he has in fact also enquired into the possibility that autocracies, structural weaknesses notwithstanding, may be conducive to growth. See, for example, Clague, Christopher, Philip Keefer, Stephen Knack, and Mancur Olson, “Property and Contract Rights in Autocracies and Democracies” Journal of Economic Growth I (1996), pp. 243-276. The two quotes were, respectively, taken from “Dictatorship, Democracy and Development,” p. 567, and North, North, Douglass C., “The Paradox of the West” in R.W. Davis (ed.), The Origins of Modern Freedom in the West (Stanford: Stanford University Press, 1995), p. 7. 53 The expression “rent management” has been drawn from MacIntyre, Andrew J., “Funny Money: Fiscal Policy, Rent-Seeking and Economic Performance in Indonesia” in Mushtaq H. Khan and Jomo K. Sundaram (eds.), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000), p. 267. The two categories of rent-seeking are examined in Hutchcroft, Paul D., “Obstructive Corruption: The Politics of Privilege in the Philippines” in Mushtaq H. Khan and Jomo Kwame Sundaram (eds.), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000), p. 222. 54 For Gerschenkron’s exposition of the theory of “substitution for missing prerequisites” in the process of catch-up, see Gerschenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge, Mass.: Belknap Press, 1962).
27
sounds naïvely optimistic. Returning to the preceding paragraph, this ‘political incentives’
difficulty represents itself: why would a highly centralised political regime feel compelled to
render more stable and predictable the process of rent-seeking? An economic model that is
capable of offering an answer to this question can be found in Shleifer and Vishny’s analysis of
corruption in the context of different political structures and distributions of power, an analysis
that be expanded to include the wider phenomenon of rent-seeking.55 By applying the economics
of industrial organisation theory to bribery and the government’s sale of regulatory goods (i.e.
licenses and permits required by firms), they draw an analogy, on the one hand, between a
centralised government and a single monopolist selling complementary goods and, on the other,
between a politically fragmented government and an economy composed of numerous individual
monopolists each producing only one of the complementary goods, and then model the effects of
different pricing decisions taken in the two cases on the economy. Whilst in the latter case the
situation, because of a ‘prisoner’s dilemma’ condition, will come to resemble the ‘tragedy-of-the-
commons’ model as individual monopolists will raise prices of their respective goods regardless
of the impact of these decisions on the overall state of the economy, the more “encompassing
interest” of a strongly centralised state will yield more predictable outcomes as the political
leadership will come to adopt the pricing decisions of a single monopoly with an incentive to
price its goods in a concerted fashion. To put it more prosaically: where rent-seeking and
corruption are endemic, the insecurity of property rights can be attenuated by the centralisation of
power and political institutions and the concomitant strengthening of the political leadership’s
incentives and abilities to prevent regulatory agencies from acting independently and engaging in
an uncoordinated, rent-seeking “war of all against all.” Political centralisation in fact seems to
also offer, furthermore, a solution to the principal-agent problem implicit in rent-seeking and
55 Shleifer, Andrei, and Robert W. Vishny, “Corruption” The Quarterly Journal of Economics CVIII/3 (1993), pp. 599-617. MacIntyre has argued that this model may be useful in understanding how ‘government failure’ in Indonesia may have been minimised by the centralization of political power in the hands of Soeharto (see his “Funny Money,” pp. 264-268). ‘Power’ and ‘centralisation,’ however, are relative concepts: the full potential of this line of enquiry can only be realized if embedded in a comparative framework.
28
corrupt behaviour, for the more muscular is the coercive power of the top political hierarchies, the
more thorough their monitoring/enforcement faculties and thus their ability to prevent such ‘war’
amongst ‘independent monopolists.’56
Implicit in Shleifer and Vishny’s model, however, is the assumption that corruption and
rent-seeking are predominantly carried out by state officials/bureaucrats, that the “economic
base,” as Hutchcroft would define it, of the major beneficiaries of such rent capitalism is
primarily located within the politico-bureaucratic apparatus of the state.57 Implicit, in other words,
is a specific depiction of the distribution of power between state and society/business interests in
which the former is overwhelmingly dominant vis-à-vis the latter. Inseparable from the study of
the rapport between political institutions and rent-seeking outcomes, in fact, is the analysis of the
structural distribution of power between state and business interests which, in turn, determines the
“direction of [rent] extraction,” i.e. who enjoys the privileges deriving from the prevailing form of
rent-seeking.58 The Hobbesian ‘solution’ to the problem of rent-seeking ‘disorder’ discussed
above can only be logically founded upon a fully centralised control by the state over the process
of rent management: the vaster the amount of rents that are controlled by and flow towards the
‘centre’ (relative to the total resources of the economy), the greater the leverage possessed by the
centre to coordinate, streamline and contain the ruinous competition for them. The appreciation of
the fact that different forms of rent-seeking bear different implication in terms of the capacity of
centralised political institutions to act as second-best institutional ‘substitutes,’ and that these
different ‘forms’ are determined by what Joel Migdal would refer to as the “structure of society”
and how it reverberates on state “strengths” and “capabilities,”59 is indicative of the need to
56 Cfr. MacIntyre, Andrew J., “Institutions and the Political Economy of Corruption in Developing Countries” (unpublished paper available at http://apseg.anu.edu.au/pdf/macintyre_papers/inst_polcorr.pdf), p. 5. 57 Hutchcroft, Booty Capitalism, p. 21. 58 Ibid. 59 Migdal, Joel, Strong Societies and Weak States: State-Society Relations and State Capabilities in the Third World (Princeton: Princeton University Press, 1988), p. 33.
29
recalibrate Shleifer and Vishny’s model by compounding it with an enquiry into the structural
nature, in terms of state-society relations, of different forms of capitalism.
Hutchcroft’s typology of capitalist systems on the basis of both the extent of patrimonial
inclinations within the state and the relative power of the state apparatus vis-à-vis business
interests is thus highly relevant for the present purposes (Table 7).60 The lower portion of the
matrix, in fact, represents the ‘suboptimal institutional structure’ of rent capitalism that both
Indonesia and the Philippines shared during the period under consideration. The innovativeness
of Hutchcroft’s approach rests in his partitioning of rent capitalism into two fractions on the basis
of the aforementioned “direction of [rent] extraction” and the location of the “economic base” of
the main actors involved in rent-seeking. Under a regime of “booty capitalism,” such as that
traditionally prevailing in the Philippines, the state is enfeebled by centrifugal forces deriving
from powerful business interests residing outside the state; “‘bureaucratic’ capitalism,” on the
other hand, such as that characteristic of traditional Thai and Indonesian polities, is dominated by
the centripetal forces nourished by the absence of significant extra-bureaucratic nodes of power.61
Table 7
Hutchcroft’s Heuristic Typology of Capitalist Systems
State apparatus relatively strong vis-à-vis business
interests
State apparatus relatively weaker vis-à-vis business
interests
60 Paul Hutchcroft has pursued these arguments at length in Hutchcroft, Paul D., “Booty Capitalism: Business-Government Relations in the Philippines” in Andrew MacIntyre (ed.), Business and Government in Industrialising Asia (Ithaca, N.Y.: Cornell University Press, 1994), pp. 216-243; Hutchcroft, Booty Capitalism; Hutchcroft, Paul D., “Obstructive Corruption: The Politics of Privilege in the Philippines” in Mushtaq H. Khan and Jomo Kwame Sundaram (eds.), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000), pp. 207-247. 61 Hutchcroft, Booty Capitalism, pp. 18-21, 46-48. See also, McVey, Ruth, “Materialisation of the Southeast Asian Entrepreneur” in Ruth McVey (ed.), Southeast Asian Capitalists (Ithaca, N.Y.: Cornell University Southeast Asia Program, 1992), pp. 15-17.
30
Relatively more “rational-legal” state
Statist Capitalism(Developmental State)
Laissez-faire Capitalism(Regulatory State)
Relatively more patrimonial state
“Bureaucratic” Capitalism(Patrimonial
Administrative State)
Booty Capitalism(Patrimonial Oligarchic
State)
Source: Hutchcroft, Booty Capitalism, p. 21
Olson’s principles of ‘collective action’ acquire particular significance in this context; a
sovereign’s ability to enforce a collective solution to the problem of rent-seeking ‘disorder’ is, in
fact, a function of the extent to which he can exercise direct, coercive control over such
practices.62 It is, therefore, primarily the “patrimonial administrative state” that can act according
to the logic set out by Shleifer and Vishny, since such a self-coordinating, self-correcting role is
placed in the much more problematic hands of disjointed oligarchic forces under a regime of
booty capitalism.63 The eclectic augmentation of Shleifer and Vishny’s model of corruption
hereby pursued thus identifies state-society relations as constituting a fundamental determinant of
a sovereign’s ‘incentives and abilities’ to act in accordance with our Hobbesian logic.
From our perspective, the study of these relations is thus the essential complement of the
enquiry into the central state’s quantitative control over the opportunities for acquiring privileges;
a sovereign’s ‘ability’ to generate order by purposively allocating rents and containing property
rights insecurity, we claim, derives from the degree to which (s)he exercises centralised control
over both the general rent-seeking efforts, of which state-business relations are a primary
determinant, and also over the economy-wide creation of wealth/rents, of which the centralisation
62 Olson, Mancur, Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965). 63 It is thus very interesting, if approached from Olson’s ‘logic,’ to see Hutchcroft specify that, traditionally, “oligarchic collectors of booty in the Philippines are well organised at the level of the family conglomerate, but very poorly organised at any broader level of aggregation” (Hutchcroft, Booty Capitalism, p. 21, emphasis added).
31
of the fiscal regime in its revenue dimension is the most immediate determinant/proxy. The
predominantly qualitative analysis of political substance of the New Order and New Society
states, in other words, has to be complemented by the quantitative deconstruction of the
respective fiscal regimes over which they presided and the structural leeway the latter allowed for
the development of centrifugal forces capable of dissolving the Leviathan. As far as the author is
aware, this binary procedure has not only never been applied to the Indonesian and Philippine
scenarios, but has also never been presented within a single, coherent model.
IV
The Explanans
Articulations of Power
Thus, to exhaustively fulfil its objectives, this paper has to ultimately follow Chairman
Mao’s advice to “walk on two legs,” in this case a qualitative and a quantitative one. The
following qualitative analysis, founded upon an critical and fresh treatment of the existing
secondary literature, crucially revolves around, first, the centralisation of power per se, as
expressed by power relations between state and extra-state (primarily business) actors but also,
second, the institutional instruments of coercion utilised by Soeharto and Marcos in materially
enforcing this centralisation and in communicating their will to the ‘periphery,’ as expressed by
32
the degree to which a state’s two fundamental “forces of coercion,” the bureaucracy and the
military, were rationalised and institutionalised by the respective dictators upon assuming power.
The quantitative analysis, on the other hand, founded upon primary material drawn from the
International Monetary Fund, the World Bank and official government publications, crucially
revolves around the fiscal breadth of the two states. The empirical study of fiscal centralisation is
here approached from its two fundamental dimensions: first, the absorptive capacity of the state
relative to the economy’s aggregate wealth, as a measure of society-wide ‘centre’-‘periphery’
relations, and, second, the acquisitive balance between the national and sub-national levels of
government, as a measure of ‘centre’-‘periphery’ relations within the state.
Of Nerves and “Skeletons”
Both Indonesia’s New Order and the Philippines’ New Society have been widely
interpreted as quintessential instances of the ‘triumph’ of the state over society.64 Two porous
states that had been besieged, during the 1950s and ‘60s, by an anarchic surfeit of particularistic
pressures were converted by General Soeharto and Ferdinand Marcos respectively into
thoroughly centralised and authoritarian entities ‘hardened’ by autonomy and declaredly
dedicated to a socially-aseptic, technocratic promotion of economic development.65 The
64 Anderson, Benedict R. O’G., “Old State, New Society: Indonesia’s New Order in Comparative Historical Perspective” The Journal of Asian Studies XLII/3 (1983), p. 487 (“the New Order is best understood as [the state’s] triumph vis-à-vis society”) and Abinales, Patricio N., and Donna J. Amoroso, State and Society in the Philippines (Lanham: Rowman and Littlefield Publishers, Inc., 2005), p. 205 (“the greatest dominance of state over society the Philippines has seen”). 65 For a brief overview of these developments, see Mackie, Jaime, and Andrew MacIntyre, “Politics” in Hal Hill (ed.), Indonesia’s New Order: the Dynamics of Socio-Economic Transformation (Sydney: Allen and Unwin, 1994), pp. 1-53, and Stauffer, Robert B., “The Philippine Political Economy: (Dependent) State
33
penetration and colonisation of the state’s political and administrative apparatuses by
competitively antagonistic fractions of civil society and the concomitant institutional “decay,” as
Samuel Huntington would have defined it, provoked by this process had in fact been twin
centrifugal processes that, although pursued, in the two cases, by different actors (mass political
parties in the case of Indonesia, predatory oligarchs in the case of the Philippines) within different
political settings (the authoritarianism of post-1957 Guided Democracy in Indonesia,
constitutional democracy in the Philippines), both nations had intimately shared before the
foundation of the New Order and the New Society.66 With the dissolution of Congress in 1972
and the concentration of power in the hands of an insulated executive, with depoliticisation, with
the corporatist containment of the independent formulation of interests, and with the growing
militarisation of neuralgic positions of the politico-administrative apparatus, the Philippines, once
celebrated as America’s ‘showcase of the democracy’ in the Pacific, seemed to have fully
converged with a regional pattern defined by development via political exclusion.67 In the
language of our paper, by inspiring a mutation in the nature of Philippine capitalism from a
‘booty’ to a more ‘bureaucratic’ variety, Marcos seemed to have joined Soeharto in presenting
himself an embodiment of an anthropomorphisation of our ‘unified monopolist’ ideal-type.
Beneath the surface of these shared phenomena, however, lay a substratum of crucial
dissimilarities in the respective natures of these two states, discernible essentially from the fact
that whilst the literature on the New Order exhibits a marked propensity to view the content of
state-society interaction purely as an expression of the will of the state, that concerned with the
Marcos era persists in approaching the ‘state’ from the perspective of ‘society. If approached
Capitalism in the Corporatist Mode” in Richard Higgott and Richard Robison (eds.), Southeast Asia: Essays in the Political Economy of Structural Change (London: Routledge and Kegan Paul, 1985), pp. 241-265. 66 Cfr. Anderson, “Old State, New Society”, pp. 480-486, and McCoy, Alfred W., “‘An Anarchy of Families’: The Historiography of State and Family in the Philippines” in Alfred W. McCoy (ed.), An Anarchy of Families: State and Family in the Philippines (Manila: Ateneo de Manila University Press, 1994), pp. 10-15. 67 For a brief overview, see Youngblood, Robert L., Marcos Against the Church: Economic Development and Political Repression in the Philippines (Ithaca, N.Y.: Cornell University Press, 1990), chapter 2.
34
from the theoretical perspective employed by the present paper, the emphasis persistently placed
by recent scholarship dedicated to post-war Philippine political history on structural continuity,
rather than transformation, in state-society relations acquires a particularly momentous
significance.68 This tendency, in fact, has largely emerged out of a growing scholarly
acknowledgement of the fact that the trend towards the increasing centralisation of political
institutions after 1972 was not accompanied by a drastic review of state-society power relations.
For the present purposes, more critical than Anderson’s ‘motivational’ allegation that
“Marcos had no interest in upsetting [an] established social order” founded upon the traditional
institution of the oligarchic family that since the beginning of the century had dominated a weak,
democratic state by means of a strong “economic base” in both agro-exporting and, as the century
progressed, industrial activities, is Hutchcroft’s contention that, although Marcos, as confirmed
by his manoeuvres against the important Lopez, Aquino, Osmena and Jacinto dynasties, “was
determined to undercut those well-entrenched oligarchic forces that might stand in the way of his
centralizing agenda,” he “was never able to contemplate the systematic destruction of
independent power bases.”69 It was the members of the so-called “old oligarchy,” according to
Hutchcroft, that personified “rival power centres”; except for those sections of the traditional
oligarchy, such as the aforementioned set of families, who had become Marcos’ sworn enemies,
in time most other factions in fact found representation within the regime. 70 “Marcos’s
authoritarian government,” Hutchcroft states, “did not bring fundamental change to the
particularistic, plunderous way in which dominant interests interact with the Philippine state”;
under martial law, in other words, the politico-economic centrifuge aroused by plethora of
68 Cfr. Hedman, Eva-Lotta E., and John T. Sidel, Philippine Politics and Society in the Twentieth Century: Colonial Legacies, Post-Colonial Trajectories (London and New York: Routledge, 2000), p. 6. 69 Anderson, Benedict R. O’G., “Cacique Democracy in the Philippines: Origins and Dreams” New Left Review CLXIX (1988), p. 12, and Hutchcroft, Paul D., “Oligarchs and Cronies in the Philippine State: The Politics of Patrimonial Plunder” World Politics XLIII (1991), pp. 442-3 (all emphases have been added). See also, Rivera, Temario C., Class, The State and Foreign Capital: The Politics of Philippine Industrialisation, 1950-1986 (Ph.D. dissertation, The University of Wisconsin - Madison, 1991), pp. 205-206 and, for an overview of the Philippines’ oligarchic families and their relationship with the pre-martial-law state, see McCoy, “An Anarchy of Families.”70 Hutchcroft, “Oligarchs and Cronies,” p. 443 (emphasis added), and Jayasuriya, “The Politics,” p. 93.
35
particularistic demands submitted to the state by the Philippines’ rent-seeking oligarchic families
had been partially restrained, but not suppressed.71
Though much vituperated in the economics literature,72 the phenomenon of ‘cronyism’
per se, if placed within the theoretical boundaries espoused by this paper, does not seem, as a
specific form of rent-seeking, to constitute an unassailable obstacle to economic growth; the
collective action problem inherent to any predominantly extra-bureaucratic form of rent-seeking
can in fact be obviated by the cronies’ inexorable state of dependency upon the centralised
distribution of privileges73 and by the smooth and steady flow of information engendered by the
intimately personal, familial relations between the dictator and his crony. 74 It is not to cronyism
per se, but rather to the perpetuation of a social ‘order’ still characterised by the presence of an
independent rent-seeking power centres that our perspective traces the origins of the Philippines’
post-1972 failure to shift after 1972 from a predominantly ‘oligarchic’ towards a more
‘bureaucratic’ form of rent capitalism, a failure gravid of implications when approached from our
Hobbesian viewpoint.
The reason behind so remissive a confrontation, on the part of Marcos, with the
oligarchic heritage of the pre-martial law époque seemed to have lay in the fact that the dictator,
according to Montes, simply “did not have enough power to threaten the economic power of the
groups that had been dominant in the pre-martial-law period.”75 Marcos’ unwillingness to
antagonise powerful business interests is strikingly revealed by evidence on levels and trends of 71 Hutchcroft, “Oligarchs and Cronies,” p. 448. On the “preservation rather than transformation” of the Philippines’ socio-economic system during the martial law era, see also, Hawes, Gary, “Marcos, His Cronies, and the Philippines’ Failure to Develop” in Ruth McVey (ed.), Southeast Asian Capitalists (Ithaca, N.Y.: Cornell University Southeast Asia Program, 1992), p. 153. 72 See, for example, Krueger, Anne O., “Why Crony Capitalism is Bad for Economic Growth” in Stephen Haber (ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence (Stanford: Hoover Institution Press, 2002), pp. 1-24. 73 It is important to note that in the Philippines’ case, this “new,” crony segment of the elite had, effectively been created by Marcos as part of his design to establish a reliable social base upon which the regime could be erected (cfr. Montes, “Financing Development,” p. 117). 74 Cronies were for the most part relatives or close associates of the president and Mrs. Marcos (cfr. Hawes, “Marcos, His Cronies,” p. 157). See also, McDougald, Charles C., The Marcos File: Was He a Corrupt Hero or a Corrupt Tyrant? (San Francisco: San Francisco Publishers, 1987), chapter 20. 75 Montes, “Financing Development,” pp. 117, 120; a similar rationale is presented by David Wurfel, (Filipino Politics, pp. 337-338).
36
direct and indirect taxation during the period under investigation (Figures 6 and 7). Between the
early-‘70s and the mid-‘80s, as to the respective balance between direct and indirect taxation,
Indonesia and the Philippines came to embody two diametrically opposite patterns; the
overwhelming relative dominance of direct taxes in Indonesia (up from c. 50% and c. 80% of
total revenue during the ‘70s) was paralleled by a similarly substantial relative dominance of
indirect excises in the Philippines (hovering around c. 60% of total for most of the duration of the
martial law period). Perhaps more pertinent, for the present purposes, than the mainly oil-inspired
meteoric rise, up to the mid-‘80s, of direct taxation in Indonesia is the low and stationary trend
displayed during the same period by the Philippines.
Figure 6
Direct Taxation (% of Current Revenue), 1972-96
0
15
30
45
60
75
90
19
72
19
74
19
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19
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82
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86
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88
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90
19
92
19
94
19
96
Year
%
Indonesia Philippines
Source: World Bank, World Development Indicators (2002, CD-ROM). Note: this is a composite measure of taxes on income, profits and capital gains.
Figure 7
Indirect Taxation (% of Current Revenue), 1972-96
37
0
10
20
30
40
50
60
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%
Indonesia Philippines
Source: World Bank, World Development Indicators (2002, CD-ROM). Note: this is a composite measure of taxes on goods, services and international trade.
In his discussion of the dynamics of change under different forms of ‘suboptimal’ capitalism,
Hutchcroft has argued that, owing to their subjection vis-à-vis business interests, “patrimonial
oligarchic states” are more resistant to reform than “patrimonial administrative states”: the above
evidence and Montes’ diagnosis that increases in effective tax rates were stalled during this
period by the state’s power deficit vis-à-vis oligarchic interests seems to offer strong support to
the idea that it is the former conceptual category that better defines the nature of Marcos’ state.76
Further corroboration of Hutchcroft’s abstractions can be garnered from another element
contained in the above evidence: the resurgence of the ‘direct’ component of Indonesia’s total
revenue after the early-‘80 decline in oil income. Central to this revival was in fact the successful
package of tax reforms (“national monuments,” as Soeharto portentously christened them)
gradually introduced throughout the early years of the 1980s.77 76 Hutchcroft, Booty Capitalism, p.53, and Montes, “Financing Development,” p. 120. On the political obstacles encountered by Marcos along the path of fiscal reform, see also Hutchcroft, “Oligarchs and Cronies,” p. 444. This “limited capacity to extract resources,” according to Haggard, “remained a basic weakness of the martial law regime (Haggard, “The Political Economy,” p. 225; see also p. 228). 77 For an account of the gradual assembly of these “monuments,” see Asher, Mukul G., and Anne Booth, “Fiscal Policy” in Anne Booth (ed.), The Oil Boom and After: Indonesian Economic Policy and Performance in the Soeharto Era (Singapore: Oxford University Press, 1992), pp. 42-47.
38
For indeed, if the literature on post-war Philippines generally presents what ultimately
amounts to an almost paradigmatic exemplification of the Migdalian conflict between a “strong
society” and a “weak state,” the vast and dense literature on Soeharto’s state, on the other hand,
converges in the portrayal of a political entity that ultimately seemed to embody with admirable
accuracy Migdal’s idea of “uncontested social control.”78 A virtually unanimous agreement on the
incontestability, under the New Order regime, of the central state’s power seems in fact to prowl
beneath the restless surface of the historiography of post-1965 Indonesian politics; shared, with
different degrees of emphasis, by all the major conceptualisations of the political dynamics of the
New Order era and epitomised by Anderson’s “state-qua-state” thesis, is a highly “monistic,”
state-centred interpretation of the power relations in post-1965 Indonesian society.79 The unitary
image conveyed is that of the New Order state as an “island cut off from the social sea
surrounding it,” a highly autonomous, “self-serving” entity that, owing to both its monopolisation
of power and the weakness of extra-bureaucratic “forces of resistance,” was much more
impervious to pressures exerted by society.80 In striking contrast to the ‘oligarchic’ Philippine
case, in New Order Indonesia, according to McVey, “power [did] not result from the articulation
of interests from the social and geographic periphery of society.”81 In preventing any meaningful
extra-bureaucratic articulation of interests, the “state” corporatist strategy, symbolised by the state
party GOLKAR (Golongan Karya, or Functional Groups), played a central role, as it ensured
78 For Migdal’s discussion of “social control,” i.e. the ability to “induce people to behave in their interactions according to certain rules or norms,” see his Strong Societies and Weak States, p. 32. 79 For a summary of the most influential theorisations of the politics of New Order Indonesia, see MacIntyre, Andrew, Business and Politics in Indonesia (Sydney: Allen & Unwin, 1990), pp. 6-18. For Anderson’s thesis, see his “Old State, New Society.” A partial exception to this “underlying consensus that relations between state and society [were] massively tilted in the direction of the former,” according to MacIntyre, is William Liddle’s “restricted pluralism” thesis. And yet, according to Rosser, not even Liddle departs “fundamentally from the view that members of the political and bureaucratic elite, rather than social groups, exercised dominant influence over policy in the New Order.” (Rosser, Andrew, The Politics of Economic Liberalisation in Indonesia: State, Market and Power [Richmond, Surrey: Curzon Press, 2002], p. 20). 80 Jackson, Karl D., “Bureaucratic Polity: A Theoretical Framework for the Analysis of Power and Communications in Indonesia” in Karl D. Jackson and Lucian W. Pye (eds.), Political Power and Communications in Indonesia (Berkeley: University of California Press, 1978), p. 4. 81 McVey, Ruth T. “The Beamtenstaat in Indonesia” in Benedict Anderson and Audrey Kahin (eds.), Interpreting Indonesian Politics: Thirteen Contributions to the Debate (Ithaca, N.Y.: Cornell Modern Indonesia Program, 1982), p. 88.
39
“that societal demand-making was contained within largely compliant representative
organisations,” and that, importantly for us, business representative bodies operated as
“instruments of the state rather than as vehicles for the advancement of business interests.”82
The above analysis of state and social structure would be incomplete if abstracted from
the examination of the instruments utilised by the regimes to materially enforce political order.
Although the armed forces, as the most tangible guardians of political order, are the central
component of these instrumental “forces of coercion,”83 an equally marked stress has to be
conferred to the bureaucracy, the institution that, like a nervous system, enables the
communicative flow of information between a polity’s ‘centre’ and its ‘periphery,’ and thus
transmits the corrective, coordinative impulses from the former to the latter. Countries as large as
Indonesia and the Philippines are “simply too vast to be run by one man,” and hence
“middlemen” become essential “for distributing benefits and for enforcing loyalty,”84 for
communicating power, in other words; this is the reason, Wurfel notes, why Marcos (and, by
implication, Soeharto) had to rely increasingly on the civil bureaucracy and the military.
There seems to be little doubt that the strengthening of such forces were the chief priority
of the New Order regime.85 Sukarno’s strategy of utilising bureaucratic inflation as an expedient
for cushioning conflict amongst the leading groups of the 1950s Indonesian political scene
jockeying for influence had induced a complete breakdown in administration, cripplingly rampant
corruption, and the translation of centrifugal forces into regional secessionist rebellions. 86
82 MacIntyre, Andrew, “Power, Prosperity and Patrimonialism: Business and Government in Indonesia” in Andrew MacIntyre, Business and Government in Industrialising Asia (Ithaca, N.Y.: Cornell University Press, 1994), p. 251-252 (emphasis added). See also, King, Dwight Y., “Indonesia’s New Order as a Bureaucratic Polity, a Neopatrimonial Regime or a Bureaucratic Authoritarian Regime: What Difference Does it Make?” in Benedict Anderson and Audrey Kahin (eds.), Interpreting Indonesian Politics: Thirteen Contributions to the Debate (Ithaca, N.Y.: Cornell Modern Indonesia Program, 1982), pp. 109-114. 83 This expression is utilised in Winters, Jeffrey A., Power in Motion: Capital Mobility and the Indonesian State (Ithaca, N.Y.: Cornell University Press, 1996), p. 44 (emphases added). 84 Wurfel, Filipino Politics, p. 153. 85 Unless otherwise stated, the information contained in this paragraph and in the next has been extracted from Emmerson, Donald K., “The Bureaucracy in Political Context: Weakness in Strength” in Karl D. Jackson and Lucian W. Pye (eds.), Political Power and Communications in Indonesia (Berkeley: University of California Press, 1978), pp. 82-136. 86 Two truly arresting examples can summarise this process: first, from some-quarter million employees in 1940, the bureaucracy swelled tenfold to two and a half million by 1968, the eve of Soeharto’s first five-
40
Soeharto’s immediate efforts to reverse these patterns, control the “gargantuan” size of
government and redirect bureaucratic loyalties towards the centre, were so effective that, already
by the 1970s, according to Emmerson, Indonesia, bureaucratically speaking, was effectively “no
longer a soft state”; the rationalisation drive had created a bureaucracy that was “less a milieu,
more a machine” and the strengthening of vertical loyalties, accompanied by a program of
complete depoliticisation and militarisation, had established an unprecedented degree of
centralisation. “Officers in office,” owing to the greater corporate identity and horizontal
solidarity of their institution of provenance, effectively “backboned” the bureaucracy and fortified
it against the pressures of society, testifying thus to the complementarity that these two forces of
coercion can assume. 87
At the same time that “officers were [being] recruited to toughen the bureaucracy with an
exoskeleton of military command,” the “armed forces themselves [were] reorganised to limit their
size, ensure their unity, and establish army control over the whole.” By toughening the chain of
command and “enabling the officers to play watchdog roles ‘underseeing’ civilian minister,” this
process tightly structured the vertical relationship between the ‘centre’ and the ‘periphery.’
Various devises, such as the centralised reorganisation of the army, early retirement of political
officers, and more frequent rotation of regional commands, enabled Soeharto gain a comfortable
seat at the summit of the pyramid of domination, acting thus as a “master rather than servant of
the military establishment.”88 This vertical strengthening of the bureaucracy’s nervous fibres was,
furthermore, accompanied by a horizontal extension of the apparatus that brought the military
year plan; second, by the time of the attempted coup on October 1, 1965, there were ninety-three ministers, more than eight times the number laid down by the constitutional convention twenty years before. 87 It is important to note that the thesis here presented does not necessarily contradict that entertained by Hal Hill, an author that has argued that it was precisely bureaucratic ‘weakness’ that stymied the effective implementation of industrial policies under the New Order (see, for example, Hill, Hal, “Indonesia’s Industrial Policy and Performance: ‘Orthodoxy’ Vindicated” Economic Development and Cultural Change XLV/1 [1996], pp. 147-174). There seems to be no logical contradiction, in fact, in the claim that the New Order bureaucracy was both a ‘strong’ medium for the transfer of our corrective impulses and a ‘weak’ medium for the implementation of industrial policy. It simply points to the contribution this paper can potentially make to the further relativisation of the concept of state ‘strength.’ 88 Jackson, “Bureaucratic Polity,” p. 13.
41
hierarchy to be replicated down to even the most peripheral of administrative levels, the village
(desa). The corporatist dimension of civil service militarisation was incarnated by KORPRI, 89 an
institution designed to “imbue the civil service with the kind of internal discipline, loyalty, and
esprit de corps the armed forces” enjoyed. With a formula that seems almost purposely designed
to address this paper’s concern with ‘power’ and ‘communication,’ Emmerson concludes his
analysis by claiming that these reforms had created a militarised bureaucracy “more answerable
to commands from a single centre.”90
In the Philippines, the introduction of martial law in 1972 seemed to have paved the way
for a similar fulfilment of the qualitative requirements implicit in the quantitative recalibration of
power in favour of the ‘centre.’ As his first presidential decree, for example, Marcos enacted the
introduction of the Integrated Reorganisation Plan (IRP), a “sweeping rationalisation of
Philippines administrative structures” designed to promote “simplicity, economy and efficiency
in the government,” and “ensure that nothing interfered with the [executive’s] exercise of
power.”91 Emblematic of the post-1972 drive towards administrative centralisation was the
unprecedented concentration of all economic planning and implementation within a single body,
the National Economic Development Authority (NEDA); by hermetically insulating the
economic policy-making process and hence minimising the scope for bureaucratic leakage, this
had the direct of enhancing the power of the technocrats.92 Even more spectacularly
unprecedented, for a country in which the army had traditionally displayed the lowest levels of
political participation in the Southeast Asian region, was the post-1972 expansion of military
participation into civilian areas of operation.93 As a result of this process of civilian-military
89 Korps Pegawai Republik Indonesia, or Corps of Civil Servants of the Indonesian Republic. 90 Emphasis added. 91 Celoza, Ferdinand Marcos, p. 77. Wurfel, Filipino Politics, p. 135, and De Guzman, Raul P., Alex B. Brillantes, Jr., and Arturo G. Pacho, “The Bureaucracy” in Raul P. De Guzman and Mila A. Reforma (eds.) Government and Politics of the Philippines (Singapore: Oxford University Press, 1988), p. 184. 92 Cfr. Stauffer, Robert B., “Philippine Authoritarianism: Framework for Peripheral ‘Development’” Pacific Affairs L/3 (1977), p. 376. 93 Cfr. Hernandez, Carolina Galicia, The Extent of Civilian Control of the Military in the Philippines, 1946-1976 (Ph.D. dissertation, State University of New York at Buffalo, 1979), p. 258. See also, Berry, William E., “The Changing Role of the Philippine Military During Martial Law and the Implications for the Future”
42
interpenetration, the military emerged as a “critical bureaucratic branch during martial law,” and
was elevated to the status of “force for development” in the implementation of developmental
policies.94 Expressive of this metamorphosis were growth rates in the army’s manpower and
financial outlays that surpasses those achieved by any other country in the region during this
period.95
By inquisitively piercing through the veil of mere appearances and rhetoric, however, and
by rephrasing these transitions from our comparative pose, a strikingly less monistic image of
Marcos’ Philippines can be obtained. Whilst the gargantuan size of Indonesian bureaucracy, for
example, was immediately trimmed down by Soeharto, in the Philippines, contrary to official
rhetoric, just after the IRP’s enactment government departments proliferated, and new offices,
which were not in the plan, and which often duplicated the functions of others, were created.96
Administrative scoliosis in martial law Philippines was epitomised by the establishment of the
Ministry of Human Settlements, an “umbrella ministry” headed by Mrs. Marcos whose
multifarious activities and functions often “intruded on the ministries of local government,
community development, education, and others areas, depending on Mrs. Marcos’ whims.” 97
Underlying this patent incongruity between the original letter of the IRP law and the “very
different government structure” actually generated were, according to Celoza, various “political
considerations,” chief amongst them Marcos’ desire to acquire uncontested supremacy over the
in Edward A. Olsen and Stephen Jurika, Jr., The Armed Forces in Contemporary Asian Societies (Boulder, Colorado: Westview Press, 1986), pp. 215-240, and Miranda, Felipe B., “The Military” in R.J. May and Francisco Nemenzo (eds.), The Philippines after Marcos (London and Sydney: Croom Helm, 1985), pp. 90-109. 94 Wurfel, Filipino Politics, pp. 142, 144.95 According to Miranda’s figures, from about 58,000 men in 1971, the Armed Forces of the Philippines (AFP) grew to 67,000 in 1975 and, by 1982, numbered approximately 113,000; in terms of constant 1979 dollars, Philippine military expenditures increased by 279%. According to these same figures, the thoroughly militaristic Indonesia displayed the lowest increase in the region (51%). See, Miranda, “The Military,” pp. 94-95. During the 1970s, defense gradually overtook education as the top item in the Philippine national budget (Wurfel, Filipino Politics, p. 151). 96 Celoza, Ferdinand Marcos, p. 86. According to the figures presented by De Guzman et al., between 1972 and 1984 membership in the national government grew threefold, from roughly 220,000 to slightly more than 660,000 (De Guzman et al., “The Bureaucracy,” Table 7.2, p. 187). 97 Ibid. See also, Aquino Belinda A., Politics of Plunder: The Philippines Under Marcos (Quezon City: Great Trading Books and the University of the Philippines National College of Public Administration and Governance, 2nd ed., 1999), pp. 68-70.
43
executive muscles of the state.98 Though they certainly succeeded in achieving enhanced
centralisation, Marcos’ “pseudoreforms,” and particularly what seemed to be divide-and-rule
logic implicit in them, ultimately achieved this objective at the expense of rationality, coherence,
and, thus, ultimately, communication. No such trade-off between centralisation and
rationalisation was intrinsic to Soeharto’s reform package. In introducing an apt metaphor to
illustrate the difference between Marcos and the leaders (Soeharto figuring amongst them) of
successful authoritarian regimes elsewhere in the region, Overholt states that, “by creating
institutions, such leaders created skeletons for their society and thereby endowed their societies
with form, continuity, predictability, and confidence,” whilst Marcos, “by crippling the
institutions and turning them into instruments of patronage, […] deprived Philippine society of its
skeleton.”99 A rough quantification of this effect from a bureaucratic perspective can be obtained
by returning to Figure 6, since rates of collection of direct taxes can be treated as indicators of the
extractive capacity of a bureaucracy.100
The tendency towards “deinstitutionalisation” enveloped the Philippine military
establishment as much as the civilian apparatus of administration, thus, pre-empting a
“backboning” therapy for bureaucratic flaccidity along the lines pursued by Indonesia’s New
Order. Although the suspension of Congress had increased the autonomy of military officers vis-
à-vis civilian politicians, this had been realised “only to limited extent,” with the result that the
98 Celoza, Ferdinand Marcos, p. 86. 99 Overholt, William H., “The Rise and Fall of Ferdinand Marcos” Asian Survey XXVI/11 (1986), p. 1149. A similar reason is adduced by Thompson in his rejection of Hawes’ suggestion that the most appropriate interpretative model for the analysis of the political economy of Marcos’ regime is that offered by the Latin American “bureaucratic authoritarianism” school: unlike most Latin American dictators of this period, Marcos did not seem in fact to have acted as superintendent to the thorough process of “state-building.” See, Thompson, Mark R., The Anti-Marcos Struggle: Personalistic Rule and Democratic Transition in the Philippines (New Haven: Yale University Press, 1995), pp. 3-4. For Hawes’ application of this Latin American model to the Philippine case, see Hawes, The Philippine State, pp. 36-39, and for the classic formulation of the “bureaucratic authoritarianism” thesis, see O’Donnell, Guillermo, Modernization and Bureaucratic Authoritarianism: Studies in South American Politics (Berkeley: University of California Institute for International Studies, 1973). 100 Direct taxes, in fact, are generally harder to gather than export, import, and excise taxes because they are not geared to a specific transaction and because they involve many more collection points (cfr., Emmerson, “The Bureaucracy,” p. 111).
44
“long experiment in presidential authoritarianism” inaugurated by Marcos, according to Hedman
and Sidel, unlike Soeharto’s, remained “profoundly civilian in nature” and defined by a military
that, unlike Indonesia’s, remained “weakly insulated from political controls and pressures.”101 It is
from the soil of the Philippine’s idiosyncratic trajectory of state formation that these two scholars
have exhumed the origins of this unique design; “the subordination of […] the coercive
apparatuses of the state to an American multi-tiered hierarchy of elected politicians,” they argue,
“prevented the autonomy and assertiveness of the military ‘as an institution’ seen in Latin
America and elsewhere in Asia.”102 It was only in the mid-to-late-‘60s, as rising challenges to law
and order arising from the Philippines’ rapid socio-economic change impelled Marcos to both
refashion and increase presidential leverage over the AFP, that an externally enforced coagulation
of an institutionally integrated coercive apparatus materialised.103 These dynamics differed
dramatically from those dictating the evolution of the Indonesian army; by the early ‘60s, in fact,
the latter had already undergone a process of internally coordinated institutional upgrading which
had promoted professionalism and corporate cohesion among its members, strengthened the
central authority of the high command in Jakarta, and suppressed the regional military dissidence
that had played a major role in the civil war of the 1950s.104 This heritage defined the role of the
two armed forces in the New Order and the New Society: whilst in the former the army, as a
result of its strong prior institutionalisation and its subsequent embedding within the state’s
structures of administration, acted as an effective promoter of order throughout the system, in the
latter it remained incapable of offering such a service and was rather itself a victim of
“deinstitutionalisation.” In the Philippines, personal preferences rather than objective
qualifications came to dictate appointments, as exemplified by the promotion of “palace pets”
(and Marcos’ cousins) General Fabian C. Ver and Fidel V. Ramos; intra-military personal
101 Hedman and Sidel, Philippine Politics, pp. 9, 46. 102 Ibid., p. 9, 38-40 (emphasis added).103 Ibid., p. 45. 104 Cfr. Anderson, “Old State, New Society,” p. 483. See also, Crouch, Harold, The Army and Politics in Indonesia (Ithaca, N.Y.: Cornell University Press, 1978), pp. 228-241.
45
rivalries and ethno-linguistic factionalism were furthermore fomented by the President in his
attempt to consolidate his own control.105 Once again, centralisation was achieved, but at the cost
of rationality: “over the course of its dramatic personnel growth and role expansion in the martial
law era,” Hedman and Sidel conclude, “the AFP evolved into Marcos’ ‘praetorian guard’ rather
than a professional military institution.”106 Neither nervous tissue nor skeletal matter.
Of Nourishment and Weights: Part I
A critical facet of the aforementioned ‘triumph over society’ actuated by the ‘state’ with
the inauguration of both the New Order in Indonesia and the New Society in the Philippines was
the expansion of the public sector’s weight and intervention in the economy. This process was
particularly noticeable in the Philippines, where “despite the influence of the technocrats, the
World Bank, and the IMF and various international financial institutions, state intervention in the
economy increased greatly” after the declaration of martial law.107 According to Hawes, three
factors lay behind this accentuation of “state capitalism” in martial-law Philippines, the first two
in particular also being relevant to the Indonesian case: first, the substantial increase in the
public’s share of ownership and control over product markets as a result, primarily, of the
proliferation of public monopolies throughout all the key sectors of the economy; second, the
supremacy of state institutions – such as the Philippine National Bank and the Development Bank
of the Philippines – in the Philippine financial sector; and, third, the salvaging operations of failed
crony empires in which the state’s stakes had become so conspicuous as to render the option of
their complete liquidation unthinkable.108 The ensuing “concentration of [economic] power” in
105 Hedman and Sidel, Philippine Politics, p. 47. See also, Wurfel, Filipino Politics, p. 149. 106 Hedman and Sidel, Philippine Politics, p. 47. 107 Jayasuriya, “The Politics of Economic Policy,” p. 104. 108 Hawes, The Philippine State, pp. 138. For an analysis of the growing monopolisation of both the sugar (through NASUTRA, the National Sugar Trading Corporation) and coconut (through UNICOM, the United Coconut Oil Mills, Inc.) industries, see de Dios, Emmanuel S. (ed.) An Analysis of the Philippine Economic Crisis: A Workshop Report (Quezon City, Philippines: University of the Philippines Press, 1984), pp. 42-51; on the rise of the public corporate sector (“one of the most prominent features of the fiscal history of
46
the hands of the government, de Dios has argued, became the “main characteristic distinguishing
the Marcos years from other periods in [Philippine] economic history.”109 Fiscally, the “dramatic
growth of the state” after martial law exhibited itself in the rise of the government’s share of total
expenditures from, according to NEDA figures, less than 10% in 1970 to more than 17.5% by
1984;110 in parallel, public expenditures on capital investment rose, according to Montes’ figures,
from 1.5% of GNP in 1970 to 7% by 1979.111
Such a comment would not shed any of its aptness if utilised to swathe the Indonesian
post-1965 experience. The neo-Marxist interpretative identification of the New Order regime as
an instrumental political formation inspired by a comprador economic ideology and devoted to
the promotion of neo-liberal policies in fact seems to have been invalidated not merely by
evidence of the underlying “anti-classical and socialistic inclinations” of leading technocrats but
also, primarily, by the performance of the state itself which, in its fiscal dimension, in the two
decades following the effective late-‘60s stabilisation phase, acquired the following semblances:
Figure 8
Indonesia: Components of Total Current Expenditure (% of GDP), 1970-90
the Philippines in the martial law period”), see Montes, “Financing Development,” pp. 122-134; on the public sector’s intervention in the financial system, see Yoshihara, Kunio, The Nation and Economic Growth: The Philippines and Thailand (Kuala Lumpur: Oxford University Press, 1994), pp. 84-87. 109 de Dios (ed.), An Analysis, p. 10. 110 National Economic Development Authority, Philippine National Account Statistics, 1984. The quote has been taken from Haggard, “The Political Economy,” p.225. 111 Montes, “Financing Development,” p. 120.
47
0
10
20
30
19
69
-70
19
71
-2
19
73
-4
19
75
-6
19
77
-8
19
79
-80
19
81
-2
19
83
-4
19
85
-6
19
87
-8
Fiscal Year
%
Routine Expenditure Development Expenditure
Source: Bank Indonesia, Report for the Financial Year, various issues.Note: Central government expenditure in Indonesia in this period was divided into two broad categories, routine and development, which roughly seemed to approximate a classification of expenditure into current and capital items, respectively.
A variety of measures, a large portion of them undoubtedly deriving from Sukarno’s Guided
Economy era,112 similar to those that would come to characterise “state capitalism” in martial-law
Philippines accompanied this fiscal expansionism: state enterprises came to dominate or
completely monopolise a very large proportion of the modern sector of the economy, state banks
were greatly enlarged at the expense of private banking, the oil sector was dominated by state-
owned Pertamina, state monopolies came to encompass the railway, electricity, and shipping
sectors, and, finally, public enterprise became prominent actors in rubber and palm oil estates,
textiles, “and many other areas.”113 Interestingly, although often defined as an ‘austere’ decade
due to the decline in oil prices, according to the above evidence it seems as though the 1980s
witnessed a check to any further fiscal expansionism rather than a strict curtailment of
government developmental expenditures.114
112 Cfr. Anderson, “Old State, New Society,” p. 484. 113 Glassburner, Bruce, “Political Economy and the Soeharto Regime” Bulletin of Indonesian Economic Studies XIV/3 (1978), pp. 29-33. 114 On the cyclical dynamics of fiscal policy and étatisme during the thirty years of the New Order, see Pangestu, Mari, “The Role of the State and Economic Development in Indonesia” The Indonesian Quarterly XXI/3 (1994), pp. 253-283.
48
Gravid of implications from our specific perspective on differentials in the ‘rent
management’ capabilities of the two states is the fact that, as the Figure 9 discloses, these
comparatively converging developments on the expenditure side of the fiscal equation coincided
with markedly diverging developments on the revenue side. Whilst the Philippine state, between
the early-‘70s and the mid-‘80s, did not expand its fiscal presence in the economy, the Indonesian
state conversely, during that same period of time, experienced a dramatic expansion of its
absorptive capabilities so that by 1981 its current revenue had come to represent almost one-
quarter of Indonesia’s national wealth. These diverging trends had come to yield a comparatively
stunning outcome by the mid-‘80s: as a proportion of respective GDPs, the New Order’s state
fiscal weight had come to be twice as sizeable as that attained by the Marcos’ state.
Figure 9
Current Revenue (% of GDP), 1972-96
0
5
10
15
20
25
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Year
%
Indonesia Philippines
Source: IMF, Government Finance Statistics Yearbook, various issues.
These spectacular differences in the degree of direct control over the respective pools of national
wealth capable of being exercised as result by the two states ineluctably translated into equally
49
spectacular differences in their respective structural abilities to tighten, along the lines presaged
by our model of the unified, Leviathanic monopolist, the area of opportunity for the blossoming
of centrifugal forces. Ultimately, thus, these quantitative conclusions relate once again to this
paper’s fundamental theme, that is, the ‘power of the state vis-à-vis society,’ in this way offering
thus a nice complement to the initial qualitative arguments pursued at length above. In no way, of
course, are these conclusions designed to imply that ‘competitive rent-seeking’ and ‘purposive
rent management’ had been entirely banished from Indonesia and the Philippines, respectively;
rather, the underlying argument is that the differences illustrated so far induced a greater relative
structural propensity in Indonesia for a more purposive and ‘predictable’ centralised streamlining
of rent-seeking. Relative to Marcos’ state, Soeharto’s state emerges as more monolithic in nature,
as a more unambiguous receptacle of purposive and imperious action vis-à-vis society.
These inferences can be further bolstered by a comparative enquiry into the internal
differentiation of the states’ total revenues. Different forms of revenue, by demanding different
degrees of state outlays in the form of a tax-gathering apparatus and by thus accruing to the
central state with different degrees of bureaucratic mediation and leakage, carry different
implications in terms of their individual abilities to directly bear upon the weight of the central
state. Crucial amongst those that contribute most effectively to the expansion of this weight is
foreign aid; by flowing directly to the centre, and hence by reducing the state’s ‘external’
dependence on ‘society,’ aid in fact vastly relieves the former of the nutritional (and, hence,
political) obligations to ‘compromise’ with the latter. If approached from our comparative
viewpoint, therefore, Anderson’s claim that it was primarily “massive inflows” of foreign aid that
allowed Soeharto to “build […] the most powerful state in Indonesia since Dutch colonial times”
acquires a radically refurbished look. In spite of the intensive lending programs immediately
instituted by the World Bank after the declaration of martial law115 and of the designation of
foreign borrowing as one of the “three central pillars” of the post-1972 economic development
115 Cfr. Bello et al., Development Debacle, pp. 23-24.
50
strategy,116 the New Society’s magnetic faculties, as Figures 10 and 11 illustrate, were perceptibly
outshined by the New Order’s. Whilst cumulative aid during the entire martial-law period of
“debt-driven growth” (Montes’ definition117) amounted to roughly $4.8 billion, in Indonesia that
same measure had grown to over $3 billion in the eight years that preceded the great OPEC
windfall alone. This rapid inflow that immediately succeeded the establishment of the New Order
lifted aid up to the point where it approached 6% of Indonesia’s Gross National Income (GNI), an
altitude that martial-law Philippines never scaled. Though constantly rising in current dollars, as a
percentage of GNI foreign aid in the Philippines stabilised annually at c. 1% for almost the entire
duration of Marcos’ regime.
Figure 10
Total Aid (Current US$, million), 1966-96
0
500
1000
1500
2000
2500
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
Year
Cu
rre
nt
US
$, m
illio
n
Indonesia Philippines
Source: calculated from World Bank, World Development Indicators (2002, CD-ROM).
Figure 11
Total Aid (% of GNI), 1966-96
116 Cfr. Boyce, James K., The Philippines: The Political Economy of Growth and Impoverishment in the Marcos Era (London: Macmillan Press Ltd. and OECD Development Centre, 1993), p. 1. The other two pillars were the ‘green revolution’ in rice agriculture and the continued reliance on export agriculture. 117 Montes, “Financing Development,” p. 90.
51
0
1
2
3
4
5
6
7
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Year
%
Indonesia Philippines
Source: World Bank, World Development Indicators (2002, CD-ROM).
Roughly coinciding with the steep decline in foreign aid inflows experienced by Indonesia after
1971/2 was the spectacular escalation of another variety of revenue which, by flowing directly to
the central government via state-owned Pertamina, more than compensated for this occurrence:
the oil company tax. By the early ’80s, revenues deriving exclusively from this source had grew
in excess of 15% of GDP, a dramatic augmentation of the state’s fiscal weight which its
Philippines counterpart, embedded as it was in a net oil-importing economy, was not in the
conditions to experience:
Figure 12
Indonesia: Components of Total Revenue (% of GDP), 1966-96
52
0
3
6
9
12
15
18
19
66
-7
19
68
-9
19
70
-1
19
72
-3
19
74
-5
19
76
-7
19
78
-9
19
80
-1
19
82
-3
19
84
-5
19
86
-7
19
88
-9
19
90
-1
19
92
-3
19
94
-5
Fiscal Year
%
Oil Company Tax Non-Oil Domestic Revenue
Source: Bank Indonesia, Report for the Financial Year, various issues.
Nourished by such a “vast and centrally channelled flow of revenue,”118 Soeharto’s state came to
display, analytically, a remarkably high degree of compliance with the structural preconditions
inherent to our Hobbesian model. So direct a control over so great a proportion of the nation’s
aggregate stock of wealth, revenue and rents, and thus so sizeable an ability to translate the
interest in the prevention of detrimental excesses in rent-seeking competition into reality, eluded,
on the other hand, Marcos’ state.
Of Nourishment and Weights: Part II
The dialectical content of ‘globalisation’ has come to express itself in a somewhat
curious fashion in the most recent decades: the simultaneous ‘rise,’ in both scholarship and policy
circles, of both the supranational and the subnational. “Induced by a variety of pressures,
including poor governmental performance, urbanisation, democratic transition, shifts in
international donor strategies, and societal demands,” in fact, as Hutchcroft has written, a soaring
118 MacIntyre, “Funny Money,” p. 267 (emphasis in original).
53
“wave” of economic and political decentralisation at the intra-national level has recently come to
envelop, “as a means of promoting both democratic and developmental objectives,” an
increasingly globalised world economy.119 Although, as Hill notes, “the issue of what constitutes
the most effective form of regional policy remains at least partly unresolved,”120 a growing
consensus amongst economists, in both policy-making and scholarly circles, with regards to the
positive developmental implications of fiscal decentralisation is unambiguously discernible.
Central to this process of fiscal decentralisation is the redistribution of revenue-generating
entitlements in favour of subnational layers of government. According to the World Bank, in fact,
many revenue sources are more easily harvested and cultivated by local government, user charges
and property taxes being prominent examples of these.121 In light of this fiscal ‘comparative
advantage’ thus enjoyed by local governments and the consequent enhancement of economic
efficiency that would by implication follow from the greater fiscal empowerment and autonomy
of local government, the World Bank’s exhortation that “local authorities could, and should, be
encouraged to raise more revenue locally”122 is rendered fully intelligible.
In light of our concern with power relations between ‘centre’ and ‘periphery’ sensu latu
in a ‘second-best’ world, however, fiscal federalism presents itself as receptacle for a rather more
problematic set of implications. The decentralisation of revenue-generating responsibilities, in
fact, implies the reduction of the centre’s ability to exert direct control over the economic and
political resources of the periphery and hence successfully coordinate and manage redistributional
rent-seeking pressures deriving from the latter. By emasculating the centre’s monopolistic control
over rent management, in other words, fiscal decentralisation can effectively come to act as an
obstacle for the attenuation/streamlining of centrifugal pressures. This problem is further
119 Hutchcroft, Paul D., “Centralisation and Decentralisation in Administration and Politics: Assessing Territorial Dimensions of Authority and Power” Governance: An International Journal of Policy and Administration XIV/ 1 (2001), p. 23. 120 Hill, Hal, “The Challenges of Subnational Diversity” Journal of the Asian Pacific Economy II/3 (1997), p. 264. 121 World Bank, World Development Report (Washington D.C., 1988), p. 157. 122 Ibid., p. 159.
54
accentuated by the weak administrative capacities of the local governments that populate our
‘second-best’ world; local fiscal autonomy in the context of suboptimal administrative structures
would, in fact, lead to the further dissolution of institutional coherence and coordination rather
than the efficiency-enhancing outcomes presaged by the federalist literature. A subtle historical
substantiation of these arguments can be derived from Epstein’s analysis of the “institutional
bottlenecks” that stunted pre-modern growth in Western Europe; a component of the “absence of
undivided sovereignty” to which he attributes the “coordination failures” that plagued the
activities of pre-modern states, in fact, was the decentralisation of ‘fiscal’ capacity, which meant
that “feudal lords, cities, corporations, and other ‘public’ chartered bodies derived income from
jurisdictional rights that constrained Smithian growth and challenged the theory and practices of
the sovereign state.”123 In our, and Epstein’s, ‘second-best’ world, in other words, the most
effective antidote for the insecurity of property rights generated by a competitive and
uncoordinated pattern of rent-seeking is therefore the centralisation, rather than decentralisation,
of fiscal power and sovereignty.
Representing, respectively, the world’s largest and second-largest archipelagic states in
the world, Indonesia and the Philippines lend themselves in a uniquely propitious fashion to the
study of fiscal decentralisation and intra-state centre-periphery power relations. As ecological,
economic and cultural mosaics moulded by the communion of vastly heterogeneous regional
fragments, these two countries have displayed, up to the present, truly “enormous” inter-regional
differences.124 In few developing countries have ecological, demographic, economic and ethno-
cultural differences both within and between regions been as impressive as those exhibited by
Indonesia, a country in which the ‘region’ (daerah), as Hill notes, has indeed always been a
“major preoccupation” and in which the task of reconciling national unity and regional diversity
(a dichotomy carved into the nation’s motto, Bhinneka Tunggal Ika, or “Unity in Diversity”) has
123 Epstein, S.R., Freedom and Growth: the Rise of States and Markets in Europe, 1300-1750 (London: Routledge, 2000), p. 36 (all emphases added except first one). 124 Hill, “The Challenges,” p. 262.
55
proved to be one of the most enduring political challenges that all post-independence
governments have had to confront.125 From the wealthy resource-rich ‘enclaves’ of north-west
Sumatra to the ‘African’ destitution of eastern Nusa Tenggara,126 from the crowded Java to
sparsely populated Kalimantan: demo-economic heterogeneity of so astounding a magnitude as
that captured by Table 8 was (and remains), arguably, an exclusive monopoly of the Indonesian
archipelago. The Philippines’ ability to match so extreme an intra-regional variance was
constrained largely by the absence of great concentrations of mineral deposits that could rival
those of Kalimantan and Sumatra and by the more uniform distribution of population throughout
the land mass. As Table 9 reveals, however, momentous inter-regional disparities nonetheless
defined the internal structure of this “unique geographical entity,” in Burnley’s definition, in
1980.127
Table 8
Riches and Population of Indonesia’s Provinces, 1980
ProvincesGDP,1980
(Rp. billion)
GDP Per Capita, 1980(Rp. ‘000)
Total Population,1980 (‘000)
Density, 1980(‘000 persons/
Sq. km.)
Aceh 1,698.2 666.4 2,611 47North Sumatra 2,471.3 298.1 8,361 118West Sumatra 712.9 210.8 3,407 68Riau 5,546.3 2,615.2 2,169 23Jambi 325.5 228.5 1,446 32South Sumatra 2,024.1 444.0 4,630 45Bengkulu 128.7 169.6 763 36Lampung 797.6 179.4 4,625 139SUMATRA 13,704.6 601.5 28,016 59Jakarta 3,988.1 624.7 6,503 11,023West Java 5,651.5 207.7 27,454 593Central Java 3,741.1 150.5 25,373 742Yogyakarta 409.7 148.3 2,751 868
125 Hill, Hal, The Indonesian Economy since 1966: Southeast Asia’s Emerging Giant (Cambridge: Cambridge University Press, 1996), p. 218. 126 Cfr. Booth, Anne, “Africa in Asia? The Development Challenges Facing Eastern Indonesia and East Timor” Oxford Development Studies XXXII/1 (2004), pp. 19-35. 127 Burley, T.M., The Philippines: An Economic and Social Geography (London: G. Bell and Sons Ltd., 1973), p. 170.
56
East Java 5,958.3 205.1 29,189 609JAVA 19,748.7 267.3 91,270 690West Kalimantan 528.3 214.1 2,486 17Central Kalimantan 320.6 346.4 954 6South Kalimantan 420.9 205.4 2,065 55East Kalimantan 3,540.2 3086.1 1,218 6KALIMANTAN 4,810 963 6,723 12North Sulawesi 522.1 257.9 2,115 111Central Sulawesi 215.9 173.8 1,289 18South Sulawesi 1,147.1 193.6 6,062 83South-east Sulawesi 142.9 161.6 942 34SULAWESI 2028 196.7 10,408 55Bali 486.0 197.9 2,470 444West Nusa Tenggara 299.8 111.0 2,725 135East Nusa Tenggara 281.2 104.2 2,737 57East Timor Not Available Not Available 555 37NUSA TENGGARA 1067 137.7 8,487 96Maluku 380.6 272.6 1,411 19Irian Jaya 705.9 601.4 1,174 3INDONESIA (Total) 42,444.8 433.9 147,490 77
Source: Biro Pusat Statistik, Statistik Indonesia (Jakarta, 1985).Table 9
Riches and Population of the Philippines’ Provinces, 1980
Provinces GDP,1980
(mln. pesos)
GDP Per Capita, 1980
(pesos)
Population,1980 (‘000)
Density, 1980(persons/Sq km)
NCR. Metro Manila 79,698 13,397 5,925.8 9,317.4I. Ilocos 10,712 3,017 3,540.9 164.2II. Cagayan Valley 7,665 3,443 2,215.5 60.9III. Central Luzon 24,563 5,098 4,802.8 263.4IV. Southern Tagalog 39,652 6,429 6,118.6 130.4V. Bicol Region 9,060 2,598 3,477.0 197.2VI. Western Visayas 20,266 4,465 4,525.6 223.8VII. Central Visayas 18,471 4,858 3,787.4 253.3VIII. Eastern Visayas 6,227 2,219 2,799.5 130.6IX. Western Mindanao 9,099 3,574 2,528.5 135.3X. Northern Mindanao 12,769 4,601 2,759.0 97.4XI. Southern Mindanao 18,438 5,471 3,346.8 105.6XII. Central Mindanao 8,032 3,527 2,270.9 97.5THE PHILIPPINES 264,652 5,477 48,098.5 160.3
Source: NEDA, Philippine Statistical Yearbook, 1986.
The absence of mineral enclaves, indeed, all but precluded a marked spatial unevenness in the
distribution of national production; the cultivation of both sugar and coconuts, the two leading
57
export crops, for example, was firmly concentrated in a handful of regions.128 This shared marked
decentralisation of productive structures and hence of the location of revenue-generating springs
implied by vast regional heterogeneities in natural-resource and factors-of-production
endowments has certainly played a pivotal role in elevating the political and economic
significance of the ‘region’ in these two countries beyond the point generally discernible in the
developing world, and most certainly beyond the point discernible in the other ASEAN nations; it
is similarly pivotal from our perspective on the structural coordinates of political centralisation.
Emblematic of the renewed interest in regional development that came to engage both
countries during the 1970s was the formulation and implementation of significant reforms
designed to reconfigure the structures of subnational administrative entities and rationalise the
streams of communication between the latter and the central government. The geographic
similarities that Indonesia and the Philippines had come to share as a result of their archipelagic
structures were matched by the equally noteworthy institutional similarities yielded by these
shared efforts at administrative reform. Indonesia’s twenty-seven provinces were administratively
subdivided, by Law No. 5/1974, into three levels: the regency (kabupaten) or the city
(kotamadya), the sub-district (kecamatan) and the village (kelurahan),129 numbering, respectively,
241 and 54, c. 3500 and c. 63,000.130 Although in theory provinces were given greater authority
128 In the early ‘70s, nearly 75% of sugarcane was planted on the islands of Negros and Panay; coconuts, on the other hand, are primarily found in Luzon south of Manila, the eastern Visayas and Mindanao (Wurfel, Filipino Politics, p. 53). Rice and corn are located “disproportionately” in the rich Central Luzon and Southern Tagalog (Hill, “The Challenges,” p. 294). Finally, bananas, which require fertile land in areas subject neither to flooding nor typhoons, are concentrated in the southern portion of the island of Mindanao, the area that fulfil these natural demands most comprehensively (cfr. Hawes, The Philippines State, p. 112). 129 MacAndrews, Colin, “The Structure of Government in Indonesia” in Colin MacAndrews (ed.), Central Government and Local Development in Indonesia (Singapore: Oxford University Press, 1986), p. 13, 16. The term ‘village’ varies in Indonesia according to the area. Emmerson, when discussing the village, refers to it as desa (“The Bureaucracy,” p. 103). The latter is as exquisitely Javanese organisation that, as MacAndrews notes, has no exact counterpart in other parts of the country; in West Sumatra, for example, the equivalent territorial unit is the negeri, in South Sumatra the marga (MacAndrews, “The Structure,” p. 39, footnote no. 23). 130 Devas, Nick, “Local Government Finance in Indonesia: An Overview” in Nick Devas, Brian Binder, Anne Booth, Kenneth Davey and Roy Kelly (eds.), Financing Local Government in Indonesia (Athens, Ohio: Ohio University Centre for International Studies, 1989), pp. 3-4, and MacAndrews, “The Structure,” p. 21.
58
over their own budgets and many other areas of decision-making,131 in practice the system
seemed to have largely retained, at least up to approximately the mid-‘80s, both its highly
centralistic disposition and, as emphasised by Devas, its strongly hierarchical structure.132
Centralisation and hierarchy seemed to have similarly encapsulated the essence of centre-
periphery relations in the government structures of martial-law Philippines. The twelve regions
into which the country was formally segmented by the Integrated Reorganisation Plan of 1972, 133
were, similarly, further subdivided vertically into three tiers, the province, the municipality or the
city, and the barangay, which, respectively, in 1986, numbered 73, 1,530, 60, and c. 42,000.134
Once again, although enshrined in the 1973 Constitution were ample guarantees of local
autonomy as means to ensure the fullest development of local government units as “self-reliant
communities,”135 “with the declaration of martial law, decentralisation flourished more in form
than in substance,” according to Manasan and Chatterjee.136 Indeed, so marked was the post-1972
erosion of the autonomy and responsibilities of local governments that Wurfel has argued that it
was primarily vis-à-vis the latter that the concentration of power in Marcos’ hands was
particularly noticeable.137
Fiscal malnourishment was amongst the most prominent symptoms exhibited by
Indonesia’s and the Philippines’ subnational administrative entities as a result of what most
economic scientists would have diagnosed as a case of ‘hyper-centralist’ malady. The
131 MacAndrews, “The Structure,” p. 16. 132 Devas, “Local Government Finance,” p. 4. In Shah’s very effectual description, “the centre holds real and effective power in most public matters and provincial-local governments act primarily on behalf of the centre in functions that are delegated to them by the centre.” See Shah, Anwar, “Indonesia and Pakistan: Fiscal Decentralisation – An Elusive Goal?” in Richard M. Bird and Francois Vaillancourt (eds.), Fiscal Decentralisation in Developing Countries (Cambridge: Cambridge University Press, 1998), p. 118. 133 Regions in the Philippines, it ought to be emphasised, are simply administered subdivisions and not regional governments with elected regional representatives. 134 De Guzman, Raul P., Mila A. Reforma, and Elena M. Panganiban, “Local Government” in Raul P. De Guzman and Mila A. Reforma (eds.) Government and Politics of the Philippines (Singapore: Oxford University Press, 1988), p. 208. 135 De Guzman et al., “Local Government,” pp. 215-216, 221. 136 Manasan, Rosario G., and Shiladitya Chatterjee, “Regional Development” in Arsenio M. Balisacan and Hal Hill (eds.), The Philippine Economy: Development, Policies, and Challenges (New York: Oxford University Press, 2003), p. 368. 137 Wurfel, Filipino Politics, pp. 138-139.
59
overcentralisation of Indonesia’s fiscal system has indeed constituted one of the most recurrent
themes underscoring the economic analyses of this country’s post-1965 history; with few
autonomous revenue sources of their own and as a result of penury of revenue and income
inelasticity that characterise the modest set of taxes that they have been allowed to locally raise,
regional and local governments have in fact come to display an “exceptional,” according to Shah,
degree of “fiscal deficiency” and revenue dependency on the centre.138 Similar criticisms, Booth
notes, are contained in the literature on local government finance in other developing country of
the region, including the Philippines.139 In this regard, Wurfel has in fact argued that “perhaps it
was in financial matters that local government as a whole was most fundamentally downgraded”
after the declaration of martial law.140 Although martial-law measures “provided improvements
on local government taxation, and local fiscal administration in general,” fiscal devolution was in
reality implemented only to a limited extent and subnational fiscal dependency on national
government (and external sources) only marginally reduced.141 Through the Ministry of Finance
and the Ministry of the Budget the national government retained undivided control and
supervision over local finance functions with the effect that, fiscally, the “local government had
become more than ever an appendage of the centre” after 1972.142
Rather than as a crippling malady, this paper, in accordance with the logic set out above,
interprets fiscal centralisation as the embodiment of a rather effective palliative. The comparative
degree to which this substitutive cure applied to our two cases can be gauged from the evidence
presented in Figures 13 and 14 which trace the comparative patterns of subnational government
(SNG) revenues as a proportion of GDP and as a proportion of central government total revenues.
In spite of the unambiguous emasculation of the subnational governments’ fiscal prowess in the
138 Cfr. Shah, “Indonesia,” p. 118. 139 Booth, Anne, “Efforts to Decentralize Fiscal Policy: Problems of Taxable Capacity, Tax Effort and Revenue Sharing” in Colin MacAndrews (ed.), Central Government and Local Development in Indonesia (Singapore: Oxford University Press, 1986), p. 93. 140 Wurfel, Filipino Politics, p. 139. 141 De Guzman et al., “Local Government,” pp. 228-232. 142 Ibid., p. 232Wurfel, Filipino Politics, p. 139.
60
Philippines (reduced, as a percentage of GDP, by circa one-third between 1978 and 1985 alone)
and in spite of the growing affinity inspired by this emasculatory process between the
Philippines’ and Indonesia’s fiscal structures and trajectories (between 1978 and 1984, the ratio
of Indonesian SNG revenues to Philippine SNG revenues – both measured as a proportion of
GDP – declined from 2.2 to 1.6), this evidence indicates that the fiscal weight of Indonesia’s
central state remained incomparably more sizeable than achieved by the Philippines’ central state
up to Marcos’ dethroning.
Figure 13
Total Revenue of SNGs (% of GDP), 1975-93
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
Year
%
Indonesia Philippines
Source: IMF, Government Finance Statistics Yearbook, various issues.
Figure 14
Total Revenue of SNGs (% of Total Revenue of Central Government), 1975-93
61
0
2
4
6
8
10
12
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
Year
%
Indonesia Philippines
Source: IMF, Government Finance Statistics Yearbook, various issues.
Figure 14 illustrates the vastly more pronounced centralised nature of Indonesia’s fiscal system in
a strikingly pronounced fashion: the average absorptive rate of SNGs as a percentage of that of
achieved by the central government was almost thrice as high in late martial-law Philippines
(8.5%) as that displayed throughout the entire period by Indonesia (c. 3%). Even at its martial-
law acme (1985), the fiscal prowess of the martial law central government amounted to less than
one-half that obtained by Soeharto’s state at its 1970s and ‘80s nadir (i.e. 3.8% in 1986).
A more direct quantification of this disparity in the structural distribution of power
between centre and periphery within these two states can be obtained from the empirical analysis
of the extent to which hierarchy concretely weighted on the character of SNG revenue in the two
cases, the extent to which, in other words, the two central governments directly spoon-fed their
respective subsidiary components and thus gained ascendancy over them. This operation can be
undertaken by utilising data, derivable once again from the IMF’s Government Finance Statistics
and once again unfortunately available for the Philippines only from 1978, pertaining to the share
of total SNG revenues accounted for by grants bequeathed by the national government.
Figure 15
62
Grants to SNG (% of Total Revenue of SNGs), 1972-96
0
15
30
45
60
75
90
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
Year
%
Indonesia Philippines
Source: IMF, Government Finance Statistics Yearbook, various issues.
The results obtained offer a spectacular affirmation of the conclusions derived from the more
indirect evidence presented above. The New Order central government’s fiscal ‘presence’ in its
periphery, according to these figures, was twice as great as that of Marcos’ central government;
this gap, the evidence also reveals, was only marginally reduced over the course of time. By
placing Indonesia alongside another economy usually categorised as another fiscally hyper-
centralised exemplar, this comparative examination reveals just to what extent the “centre came
decisively to dominate the periphery” within the New Order state.143 These relative
quantifications based on ratios ought not to obfuscate, nevertheless, what may well be the most
momentous finding: throughout the 1970s in Indonesia, grants bequeathed by the centre to the
periphery accounted for over 80% of the latter’s total revenue. In light of the sheer magnitude and
the scattered geographic structure of Indonesian archipelago, to discover so centripetal a mode of
local government finance is astonishing. Although often reproached in the literature for having
led, firstly, to the virtual obliteration of even the most modest of exertion on the part of provincial
and sub-provincial administrations in their search for possible augmentations of their respective
143 The quote is taken from Anderson, “Old State, New Society,” p. 489.
63
tax bases and, secondly, for having possibly accentuated, due to its neglect of differentials in
local taxable capacities, inter-regional income inequalities,144 this inimitably centralistic style of
conduct proposes, from our perspective on ‘order,’ some radically pristine implications. The
above evidence in fact ultimately points to an unbridgeable structural disparity between
Soeharto’s and Marcos’ respective abilities to centralise the management of ‘rents,’ control their
peripheries and transmit to these the coercively corrective impulses presaged by the above model;
the more pronounced fiscal malnutrition and dependency exhibited by Indonesia’s SNGs, in fact,
implied both a greater degree of political subjection to the will of the centre and much feebler
apertures for competition among uncoordinated independent monopolists along the periphery’s
fringes. Figures 13 to 15 thus complement the qualitative discussion of political centralisation
pursued above by exposing the innermost constituent of the Russian doll of power relations and
revealing how the greater ascendancy gained by the ‘centre’ over the ‘periphery’ at the level of
state-society relations in Soeharto’s Indonesia relative to Marcos’ Philippines was replicated,
according to our fiscal proxy, at the successive, intra-state level. At the nucleus of this doll,
Soeharto’s physical traits was much more distinctly recognisable than Marcos’.
144 Cfr. Booth and McCawley, “Fiscal Policy,” p. 151, and Booth, Anne, “Interprovincial Comparisons of Taxable Capacity, Tax Effort and Development Needs in Indonesia” The Malayan Economic Review XXII/1 (1977), p. 79.
64
V
Conclusion
In compelling the NIE and, by implication, the rational-choice governance paradigm, to
face the Indonesian puzzle, this paper has sought to fundamentally expose the conceptual
malleability that this theory’s principles are willing to bear if approached from a quasi-
Gerschenkronian angle espousing the creative potential of history. Sustained by a favourably
asymmetric configuration of power and by a pronouncedly centralised fiscal system and rent
management, it has argued, Soeharto’s regime approximated much more closely than Marcos’ the
prerequisites demanded by our ‘augmented’ Shleifer-Vishny model, thus provoking the
‘materialisation’ of a matrix of political incentives and material conditions much more conducive
to a more centralised, coordinated and less inefficient form of rent-seeking relative to that
prevailing in the Philippines. It might not be an exaggeration to claim that, in light of the
plausibility of the model presented, the unambiguous absence of anything remotely comparable to
65
what Weber would have defined as a ‘rational-legal’ institutional system and the remarkable
degree of political centralisation of Soeharto’s regime, this dissertation has presented what
possibly amounts to the only thesis capable of explaining why transaction costs in New Order
Indonesia were not intolerably onerous for investors.
Attempting to match the NIE’s conceptual rigour and devise a model applicable to other
scenarios, this paper has focused almost exclusively on ‘large structural considerations’ of the
balances between centrifugal and centripetal forces. As even Marx, however, acknowledged,
human agency bears an important role in translating ‘structure’ into ‘history,’ that is, ‘incentives,’
in other words, need to be physically translated into action;145 even though Indonesia’s ability to
fulfil all the structural preconditions demanded by the model is remarkable, the present analysis is
best approached as a preliminary venture anxiously awaiting micro-level reassurance. A possible
micro-avenue that could be pursued relates to the idea that corruption may be conceived of as a
‘tax’ on foreign direct investment and that what has been said throughout this paper with regards
to the ‘coordination’ of rent-seeking by a ‘unified monopolist’ may find expression in the latter’s
predilection for a less harmful ‘lump-sum’ form of ‘taxation’ rather than a deleterious ‘over-
fishing’ form.146
By proposing that order and progress in Indonesia depended intimately upon the
centralisation of power, this paper has pursued a theoretical perspective that does not merely
discord with Clifford Geertz’s often-quoted idea that “[Indonesia] flourishes when it accepts and
capitalizes on diversity and disintegrates when it denies it,”147 but also with some theses recently
145 In this act of translation, the personal motivations of the two dictators, their respective dedication to national development may certainly have played an important role. For an author that has repeatedly focused on this ‘personal’ aspect in Indonesia’s case, see Liddle, William R., “The Relative Autonomy of the Third World Politician: Soeharto and Indonesian Economic Development in Comparative Perspective” International Studies Quarterly XXXV/4 (1991), pp. 403-427. See also, by the same author, “Soeharto’s Indonesia: Personal Role and Political Institutions” Pacific Affairs LVIII/1 (1985), pp. 68-90. 146 Cfr. Wei, Shang-Jin, How Taxing is Corruption on Foreign Investors? (NBER Working Paper No. 6030, 1997), and Bardhan, Pranab, “Corruption and Development: A Review of Issues” Journal of Economic Literature XXXV/3 (1997), p. 1325. This idea has been proposed by Crafts (see his Development History, p. 19).147 Quoted in Hill, The Indonesian Economy, p. 220.
66
offered by some scholars of Southeast Asia concerned, as this paper was, with the difficulty of
rationalising the region’s path to development via established conceptual channels.148 The theories
of “competitive clientilism” and “mutual hostages,” for example, applied respectively to the case
of Thailand by Doner and Ramsay and to the comparative study of Korea and the Philippines by
Kang, noticeably diverge from our Hobbesian propositions; intra-elite rivalries in Thailand,
according to Doner and Ramsay, led to competitively efficient rather than monopolistically
inefficient market for state-supplied goods and services, whilst a “balance of power between a
small and stable set of government and business elites,” according to Kang, was instrumental in
allowing “money politics” to coexist with growth in postwar Korea.149 These discrepancies are a
testimony to the complexity of ‘rent-seeking’ as a conceptual category150 and to the fascinating
potential that Southeast Asian studies have of propounding interpretative keys with which this
complexity can be read, if only experimentation is allowed to replace dogma.
In its epilogue, however, this dissertation is compelled to confront two dilemmas. In his
critical review of the historiography of postwar Philippine politics, John Sidel has reproached the
‘strong oligarchy, weak state’ interpretation for failing to take into account “variation and
change” over the course of time.151 This is a critique that our thesis is similarly vulnerable to, for
it has sought, after all, to explain progress in Indonesia, of which a dynamic reconfiguration of the
state-society relations is almost by definition an integral part, by employing a static model of
these same relations. Recent “post-statist” approaches to Indonesian politics, such as those
148 The present thesis also contradicts, it ought to be mentioned, the federalist theses of China’s recent economic success. See, for example, Montinola, Gabriella, Yingyi Qian and Barry R. Weingast, “Federalism, Chinese Style: The Political Basis for Economic Success in China” World Politics XLVIII/1, pp. 50-81.149 Doner, Richard F., and Ansil Ramsay, “Competitive Clientilism and Economic Governance: The Case of Thailand” in Sylvia Maxfield and Ben Ross Schneider (eds.) Business and the State in Developing Countries (Ithaca, N.Y.: Cornell University Press, 1997), pp. 237-276, and, Kang, David C., Crony Capitalism: Corruption and Development in South Korea and the Philippines (Cambridge: Cambridge University Press, 2002), pp. 3-12 (emphasis in original). 150 For a pioneering and thorough engagement with this recently discovered complexity, see Khan, Mushtaq Q., and Jomo Kwame Sundaram, Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000). 151 Sidel, Capital, Coercion and Crime, p. 11.
67
advanced notably by MacIntyre and Doner, have argued that “the heavy analytical emphasis on
the state […] has blinded [scholars] to the political significance of organised business as a
variable in explaining policy outcomes” of the 1980s and ‘90s.152 The “rise of capital” and the
birth of a capitalist class in Indonesia starting from the 1970s had fashioned, by the 1990s, the
formation of an “oligarchy” that, according to Robison and Hadiz, had come to significantly
‘reorganise’ and redistribute power throughout the New Order society.153 Fortunately, however,
this transformation does not invalidate our thesis, but rather indicates that the model may have
become less relevant as time progressed and that its application would yield more fulfilling
results if confined to (approximately) the first two decades of the New Order’s life, the period
upon which the qualitative and quantitative evidence presented in this paper has, as a matter of
fact, concentrated most explicitly.154
The second contradiction, oddly enough, points towards the opposite direction: the
explanans pursued in this dissertation has been the same one that most scholars have identified as
being at the heart of the 1997-8 apocalypse. “The key to understanding why the crisis in
Indonesia was far worse than for any of its neighbours,” Hill has indeed claimed, “was the
nation’s domestic political economy equations”; once the erosion of market confidence
commenced, as a result of a vacillating leadership, ambiguous commitment to reform and absence
of a secure mechanism for political succession as rumours about Soeharto’s failing health
mounted, the absence of institutional constraints on the discretionary will of the leader was
instrumental in ensuring that this confidence could not have been regained without prior regime
152 MacIntyre, Andrew, Business and Politics, p. 4. Also, Doner, Richard F., “Limits of State Strength: Towards an Institutionalist View of Economic Development” World Politics XLIV/3 (1992), pp. 398-431. For a brief review of ‘post-statism’ in Indonesia, see Rosser, The Politics of Economic Liberalisation, pp. 24-26. 153 Robison, Richard, Indonesia: The Rise of Capital (London: Allen and Unwin, 1986), and, Robison, Richard and Vedi R. Hadiz, Reorganising Power in Indonesia: The Politics of Oligarchy in an Age of Markets (London: Routledge Curzon, 2004), pp. 40-66154 It is somewhat curious, it could be noted en passant, to discover that Andrew MacIntyre has been a leading figure amongst ‘post-statist’ scholars and yet, simultaneously, also the most resolute promoter of Shleifer and Vishny’s model for the study of the New Order.
68
change.155 The ‘substitutive’ path to growth Indonesia pursued under the New Order, with its
dependence on the behaviour of the leader, was “inherently fragile,” proof that “an institutional
framework which produces satisfactory outcomes in one set of circumstances may produce quite
different outcomes in other circumstances.”156 It is thus from within the logic of ‘substitution’ that
the second dilemma can be ‘solved’; as recent studies of the “downside risks of the
developmental state” in the context of East Asian catch-up confirm,157 ‘substitutes’ qua
‘substitutes’ carry costs, an acknowledgement that affirms thus rather than dispels the veracity of
the ‘ideal,’ whatever the latter is taken to be. The thaumaturgic faculties that institutional
‘substitutes’ have flaunted throughout East and Southeast Asia in the second half of the XX
century, nonetheless, exemplify the momentous bearing that these ‘deviations’ can potentially
acquire in the catch-up process, a bearing that ought to inspire economic historians as much as it
has inspired the region’s economies.
155 Hill, Hal, “Indonesia: The Strange and Sudden Death of a Tiger Economy” Oxford Development Studies XVIII/2 [2000], p. 135 (emphasis added). On the centralisation of decision-making in Indonesia and its relationship to the crisis from a comparative perspective, see MacIntrye, Andrew, “Institutions and Investors: The Politics of Economic Crisis in Southeast Asia” International Organisation LV/1 (2001), especially pp. 111-116. 156 MacIntyre, “Funny Money,” pp. 270-271. 157 Cfr. Crafts, “East Asian Growth,” pp. 156-158.
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