SE Asia still faces rent seeking problem

Ari A. Perdana, Center for Strategic and International Studies, University of Indonesia, Jakarta

"Happy families are all alike; every unhappy family is unhappy in its own way."

Just like the happy families in Leo Tolstoy's novel Anna Karenina, the Southeast Asian countries were similarly happy while achieving high economic growth, high export growth and increased industrialization for almost three decades. But each has their own story in dealing with the rent-seeking activities.

A number of studies comparing the rent-seeking patterns in Indonesia, Malaysia, Thailand and the Philippines, have shown different patterns of state-business interactions. This was due to the different degree of the business influence in state policy, which then caused different impacts on the economy.

The state-business relationship in New Order Indonesia was very state-centered. The state was able to distribute rents without significant influence from the non-state agents. Up to a certain degree, this centralized distribution of rent had enabled the New Order to play the role as a "developmental state".

For example, the government could induce the private sector to provide financing for projects, which the state budget could not cover. But this also brought about a lack of transparency, and in many cases rent distribution has been abused.

The growing role of the private sector handed business more power to influence decision-making. The rent-seeking pattern had been more decentralized as a consequence. "Crony capitalism" emerged, especially after the mid-1980s. But the emerging crony capitalism has does not necessarily alter the patrimonial type of rent distribution -- which the state continued to monopolize.

In Malaysia, too, rent distribution had been state-centered. This had been mostly due to the government's interest to create a strong Malay-ethnic middle class after ethnic tension in the late 1960s. Instruments such as protection or other government affirmative policies aimed to redress the economic imbalance between Malays and Chinese.

There had been positive effects of this ethnic redistribution policy, particularly in enhancing human resource development within a segment of society. However, a number of studies have noted that the Chinese have still maintained their business power by forming strategic political partnerships with their bumiputra (indigenous) counterparts. Moreover, the redistribution politics had also distorted banks' credit allocation from the most qualified industrial activities.

Thailand's case was somewhat different. After the 1950s, the private sector have had greater access to the policy making process. There had also been a competition among rent-seekers in the industrial sectors, as well as among the patrons in the bureaucracy. This has led to a competitive industry structure, since individual patrons or clients could not prevent their competitors from entering the lucrative market.

However, corruption remains a major problem. The reason why the Thai economy had performed well prior to the crisis was that the corruption and rent-seeking activities had little impact upon the government's macroeconomic decisions.

The Philippines experience is probably the worst among the countries in the region. In the Philippines, the crony business interests have been dominating the state-business relationship. Unlike Thailand who also had a decentralized rent-seeking pattern, the Philippines state has been unable to take decisive policy action. The impact on the economy was the most damaging. There has been less business certainty and predictability. The state has also been incapable of formulating or implementing a coherent economic development policy.

There are two issues here. Firstly, although theoretically rent-seeking is economically harmful, the countries in the region had been able to survive, even performed well for decades. The reason is, with the exception of the Philippines, that the rent- seeking activities had produced a tolerable drain on national economic efficiency.

The relatively autonomous state in Malaysia, Indonesia and Thailand had been able to distribute rent in an "effective" manner. However, such activities also inherently created a fragile economy. The crisis, although not directly caused by rent-seeking activities, has exposed this fragility.

Secondly, the emergence of democracy in the region appeared to have little or even no effect in reducing the rent-seeking activities. Two clear examples are the Philippines and Indonesia. In the Philippines, the post-Marcos governments could not alter the "booty capitalism" practice.

In post-Soeharto Indonesia, the power center shifted from the government to parliament members, and from central to local governments. Patron-client patterns hence became more erratic. It is also more injurious to the economy, since it transferred more resources from productive activities for rent distribution purpose.

The problem with democracy is that politicians have to make promises to their supporters. When they are elected to office, they have to deliver on their promises. But this does not make dictatorships more beneficial either.

At least, democracy opens a greater room for public participation, as well as the check-and-balance mechanism. Rent- seeking activities may still exist. But in the long run, Nobel laureate Gary Becker argued that there would be political competition among pressure groups, which increases the cost for the rent-seekers. As the result, policy that favors the public interests more is the best strategy to gain support.