SE Asia still faces rent seeking problem

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.