Professional Documents
Culture Documents
Introduction
Building
on
the
works
of
Fukuyama
(2004)
and
Williamson
(2003),
this
paper
discusses
state
capacity
and
deregulationone
of
the
three
major
thrusts
of
structural
adjustment
program
(SAP),
the
two
others
being
trade
liberalization
and
privatization.
The
SAP
was
embodied
in
the
Washington
Consensus
implemented
in
Latin
America;
however,
essentially
the
same
program
was
adapted
by
the
member- countries
of
the
Association
of
the
South
East
Asian
Nations
(ASEAN)
in
the
nineties,
which
became
a
period
of
opening
of
their
economies
to
global
trade
and
competition.
Using
the
deregulation
experiences
of
the
Philippines
and
Indonesia,
this
paper
argues
that
1)
state
capacity,
specifically
its
aspect
of
organizational
design
and
management,
is
necessary
for
deregulation
programs
to
achieve
the
desired
development
goals
and
2)
technological
innovations
resulting
from
deregulation
break
down
monopolies
and
promote
market
efficiency,
thereby
contributing
to
the
attainment
of
those
goals.
These
arguments
are
represented
in
the
diagram
below.
Scope
Trade
liberalization,
deregulation,
and
privatization
are
different
yet
interrelated
concepts
and
are
often
implemented
together
under
the
SAP.
This
paper
focuses
only
on
deregulation,
herein
defined
as
the
easing
of
barriers
to
entry
and
exit
[into
the
market,
without]
abolishing
regulations
designed
for
safety
and
environmental
reasons
(Williamson,
The
Washington
Consensus
and
Beyond,
2003)
and
are
intended
to
influence
how
firms
operate,
(having)
no
controls
over
capital
movements
(Williamson,
Beijing
Consensus
Versus
Washington
Consensus,
2010).
Since
deregulation
does
not
involve
transfer
and/of
exchange
of
assets,
its
implementation
is
less
complicated
and
controversial,
and
its
supporting
evidence,
more
transparent
than
that
of
trade
liberalization
and
privatization.
The
discussion
will
not
cover
the
financial
sector,
as
Indonesia
was
way
ahead
of
the
Philippines
in
opening
its
capital
markets,
making
their
cases
incomparable.
It
will
instead
focus
on
select
industries
that
require
heavy
investment
on
infrastructure
thus
justifying
their
original
state
as
monopolistic
markets
(or
the
natural
monopoly
industries).
These
industries
include
air
transportation,
automobile,
telecommunications,
and
electric
power
generation.
Oil
industry
is
not
included
in
the
analysis
because
Indonesia
is
a
net
oil
exporter
while
the
Philippines,
in
contrast,
is
a
net
oil
importer.
challenge
to
industries
that
require
heavy
investment
in
physical
infrastructure
in
order
to
move
goods
and
service,
including
those
cited
earlier
as
part
of
this
study air
transportation,
automobile,
telecommunications,
and
electric
power
generation.
Demographically,
both
countries
have
diverse
cultures,
languages,
and
religions.
The
Philippine
population
is
estimated
at
77
million
(17th
largest
in
the
world
as
of
2002,
which
has
grown
to
94
million
by
2010)
with
110
ethno-linguistic
and
cultural
groups
spread
over
77
provinces
(as
of
2002,
which
has
numbered
80
in
2011).
On
the
other
hand,
Indonesia
has
a
population
of
213
million
(4th
largest
in
the
world
as
of
2002,
which
has
grown
to
over
248
million
by
2012),
speaking
250
languages,
spread
over
32
provinces.
(Buendia,
2002)
This,
combined
with
the
countries
geographic
features,
makes
disparity
in
development
an
inevitable
problem.
Politically
integrating
a
diverse
people
is
also
concern
for
the
government.
Historically,
neither
country
has
been
a
nation
prior
to
colonial
rule
of
the
European
countries,
which
gave
both
countries
common
experience
(or
common
enemy
for
that
matter)
that
compelled
the
people
to
unite.
The
Philippines
was
under
the
Spanish
rule
for
more
than
370
years
(400
years
of
colonialism
to
include
American
occupation)
while
Indonesia
was
under
the
Dutch
power
for
350
years.
(Buendia,
2002)
The
post-colonial
state
capacity
building
for
the
two
countries
should
therefore
not
differ
much.
Consequently,
both
countries
are
characterized
by
clientelism,
patronage,
and
corruption
so
much
so
that
the
interests
of
the
government
and
those
of
large
businesses
cannot
readily
be
separated,
and
that
public
economic
policies
reflect
the
interest
of
the
few
elites.
(Ghosh,
1996)
In
the
Philippines,
the
incredibly
corrupt
Marcos
dictatorship
was
overthrown
by
the
Aquino
administration
that
did
not
have
the
ability
to
eradicate
the
rent-seeking
behavior
of
the
presidents
kin.
(Brilliantes,
1993)
In
Indonesia,
the
first
family
has
a
stake
in
almost
every
important
commodity
or
service
in
the
country.
Thus
some
people
viewed
deregulation
as
a
test
to
the
presidents
willingness
to
sacrifice
his
and
his
familys
Page 3 of 26
interestthe
results
were
mixed.
(Liddle,
1988)
While
in
many
cases
the
monopoly
markets
are
natural
monopolies,
Indonesias
was
known
to
be
plastic
monopolies
because
these
were
monopolies
only
by
the
virtue
of
being
linked
to
the
first
family.
(Soesastro,
1989)
In
the
eighties
and
nineties,
Indonesia
was
widely
known
to
be
more
corrupt
than
the
Philippines
with
its
Vice
President
admitting
that
corruption
reached
epidemic
proportions
in
the
bureaucracy
and
the
business.
(Bello,
2009)
Thus,
corruption
could
not
be
blamed
for
the
Philippines
ineffective
deregulation
and
poor
economic
performance
in
general.
Kung
walang
corrupt,
walang
mahirap
may
not
hold
water
if
various
economies
like
Indonesia
would
be
examined.
However,
Philippines
and
Indonesia
also
differ
in
some
ways.
Under
the
post- colonial
regime,
the
Philippines
adopted
the
unitary
structure
of
governance
and
institutions
of
democracy
from
the
Americans.
However,
this
kind
of
democracy,
opined
Lee
Kuan
Yew
of
Singapore
in
his
analysis
of
why
the
country
has
difficulty
in
economic
take-off,
does
not
work
in
the
Philippines.
(Brilliantes,
1993)
On
the
other
hand,
Indonesia,
under
the
powerful
leadership
of
its
first
president
Sukarno,
used
the
indigenous
village
system
of
governance,
which
espoused
functional
rather
than
party
representation,
and
consensus
deliberation
rather
than
partisan
election.
(Buendia,
2002)
This
kind
of
orientation
could
explain
why
the
policies,
especially
those
under
the
second
president
Suharto
were
pro-indigenous
and
protectionist
in
nature.
As
a
reflection
of
the
countries
political
system
and
culture,
the
Indonesian
government
as
a
whole
determined
who
the
beneficiaries
of
structural
adjustments
would
be
(which
were
the
conglomerates)
while
in
the
Philippines,
in
the
absence
of
a
cohesive
political
system,
patterns
of
recipients
was
less
planned,
less
clear,
and
less
predictablewith
different
groups
(winning
some
and
losing
some).
(Milne,
1992)
This,
however,
does
not
mean
that
Indonesias
institutional
design
(as
discussed
by
Fukuyama)
is
any
stronger
than
the
Philippiness.
The
Page 4 of 26
formers dependence on the power of its leader, Suharto, rendered the state unresponsive unless Suharto personally gave approval; thus the nation was shaken when Suharto fell critically ill in 1997. (Bird, 1997) In terms of the market, Indonesia is different from the Philippines in that the number of local/indigenous firms is smaller and the local Chinese are less well assimilated. In Indonesia, too, it is a basic objective to promote local entrepreneurship to accelerate transfer of the management of foreign-owned enterprises into local, private enterprises. (Milne, 1992)
Theoretical
Background
Fukuyama
(2004)
argued
that
there
was
nothing
wrong
in
the
Washington
Consensus
per
se,
only
that
as
the
states
needed
to
be
cut
back
in
certain
areasfor
example,
through
reduction
of
subsidies
and
tariff
protection,
privatization,
and
deregulationthey
also
needed
to
be
strengthened
in
others.
He
defined
state
strength
or
capacity
as
its
power
or
ability
to
plan
and
execute
policies
and
to
enforce
laws
cleanly
and
transparently.
The
four
main
components
of
state
capacity
are
the
following:
1)
organizational
design
and
management;
2)
institutional
design
or
political
system;
3)
basis
of
legitimization;
and
4)
social
and
cultural
factors.
Of
these
components,
what
is
deemed
most
appropriate
in
the
discussion
of
deregulation
is
organizational
design
and
management,
which
combines
the
discipline
of
management,
public
administration,
and
economics.
Moreover,
Fukuyama
recommended
that
developing
states
focus
on
this
aspect
on
state
building
because
it
can
be
manipulated
and
built.
Hence,
the
analysis
of
the
two
country
casesPhilippines
and
Indonesiashall
center
on
this
particular
component
of
state
capacity.
Milne
(1992),
supportive
of
Fukuyamas
point,
asserted
that
the
nature
of
government
largely
dictates
whether
(structural
adjustment
program)
can
or
cannot
be
implemented
consistently
and
successfully.
Bello
(2009)
also
cited
the
Page 5 of 26
case
of
the
Philippines
neighboring
ASEAN
countries:
these
states
may
have
played
a
less
aggressive
role
but
an
active
state
posture
manifested
in
industrial
policy,
protectionism,
mercantilism,
and
intrusive
regulation
was
central
in
their
industrialization.
In
support
of
these
authors
argument,
this
paper
proposes
that
state
capacity
is
necessary
for
the
scope-reduction
programs
such
as
deregulation
to
be
effective
in
achieving
national
development
goals.
Goals
may
vary
across
nations:
market
efficiency
as
in
the
case
of
the
Philippines;
or
development
of
non- oil
export
capacity
for
macroeconomic
stability
or
strengthening
of
local
enterprises
in
the
case
of
Indonesia;
or
provision
of
quality
and
reliable
supply
of
basic
needs
to
the
public
for
some,
for
exmaple.
Looking
back
at
the
Washington
Consensus,
following
are
the
lessons
that
can
be
culled
from
the
experience:
1)
income
distribution
must
be
considered
(Williamson,
The
Washington
Consensus
and
Beyond,
2003);
2)
the
program
should
be
done
during
the
period
of
rapid
growth,
not
crisis
(Williamson,
The
Washington
Consensus
and
Beyond,
2003);
3)
the
idea
of
deregulation
should
not
be
taken
too
broadly
(Williamson,
Beijing
Consensus
Versus
Washington
Consensus,
2010);
and
4)
having
a
government
that
delivers
is
important
(Williamson,
Beijing
Consensus
Versus
Washington
Consensus,
2010).
These
caveats,
which
could
very
well
fall
under
the
banner
of
organizational
design
and
management,
will
be
included
in
the
country
analyses.
Bowen
and
Leinbach
(1995)
concluded
thus:
where
public
enterprise
is
natural
monopoly,
deregulation
may
not
produce
the
desired
increase
in
competition.
A
natural
monopoly
is
characterized
by
scale
economies
required
for
efficiency
and
profitability
to
recoup
huge
investments
in
capital,
thus
providing
natural
barriers
to
entry
of
other,
most
often
smaller,
players.
Examples
are
petroleum
refining,
tobacco
products,
glass
products,
and
non-ferrous
metals.
Other
industries
may
appear
to
be
natural
monopolies
when
in
fact
the
market
simply
happens
to
be
Page 6 of 26
relatively small for a large firmamong these industries are professional equipment, footwear, ceramics, and metal furniture. (Hill, 2003) Although the above observation on natural monopolies may not be completely inaccurate, this paper further argues that technological innovation that results from deregulated, competitive environment breaks down monopolies, although a deregulated, competitive environment does not always produce technological innovation. Innovation allows the players to compete in aspects other than price; if products and services are undifferentiated and players can compete only through cutthroat pricingwhich shrewd businesspeople will least likely do then the industry may only consolidate into a duopoly, or at best oligopoly and cartels, despite deregulation. Perhaps, the role of technological innovation in determining the success of structural policies is this papers main contribution.
Deregulation
in
Indonesia
The
countrys
dependence
on
oil
revenues
and
the
decline
in
world
oil
prices
in
1986,
coupled
with
the
rise
in
interest
rates
and
the
appreciation
of
yen,
caused
the
rupiah
to
plummet
and
Indonesias
foreign
debt
to
bloat.
At
this
time,
several
major
reforms
were
introduced,
including
modern
tax
system,
promotion
of
non-oil
exports,
reduction
of
trade
barriers
or
select
products,
and
deregulation
of
select
industries
(e.g.
service
industries
remained
closed
to
foreign
investors
and
agricultural
and
handicraft
sectors
to
medium-
and
large-scale
enterprises,
both
domestic
and
foreign).
(Fane,
1996)
Thus,
Indonesian
deregulation
can
be
seen
as
a
pragmatic
response
to
an
economic
situation(and)
Indonesias
policymaking
processes
should
not
be
viewed
as
mechanical
or
unilateral.
(Soesastro,
1989;
Bowen
&
Leinbach,
1995)
Further,
since
Indonesia
had
other
sources
of
credit,
it
was
not
beholden
to
the
development
agencies
for
funds;
and
because
the
adjustment
occurred
without
the
tutelage
of
the
International
Monetary
Fund
and
the
World
Bank,
it
could
afford
to
Page 7 of 26
ignore
(and
it
did)
certain
features
of
the
package
and
deregulation
remained
minimal
(if
not
selective).
(Ghosh,
1996)
The
eighties
were
known
to
be
Indonesias
decade
of
deregulation.
(Soesastro,
1989)
The
country
implemented
deregulation
more
widely
than
privatization
in
promoting
market
efficiency,
for
the
latter
may
actually
mean
strengthening
the
market
at
the
expense
of
the
state.
(Milne,
1992;
Fane,
1996)
In
Fukuyamas
term,
privatization
may
mean
limiting
state
scope
while
also
diminishing
state
capacity.
What
was
also
surprising
was
that
while
other
countries
reacted
to
the
shock
by
imposing
exchange
controls
and
import
licensing,
Indonesia
emphasized
deregulation.
As
to
why
the
country
did
not
implement
such
open
policy
in
the
earlier
decades,
often
the
answer
given
is
bad
times
mean
good
policies.
(Liddle,
1988;
Fane,
1996;
Bird,
1997)
Although
the
state
implemented
market-oriented
policies
in
the
eighties
and
nineties,
up
to
Suhartos
term
in
May
1998,
the
state
had
remained
the
most
important
economic
actor.
These
market-oriented
policies
were
aimed
at
deepening
the
countrys
industrial
structure,
creating
a
heavy-industry
nucleus
around
which
to
center
the
economy.
This
strategy
included
the
development
of
an
automobile
industry,
an
integrated
steel
complex,
a
shipbuilding
complex,
and
an
aircraft
industry.
(Bello,
2009)
Alongside
with
this
program
were
the
implementation
of
local
content
schemes
and
selective
tax
exemptions
intended
to
protect
individual
firms.
(Fane,
1996)
Indonesias
strategic
and
selective
policies
only
show
that
the
country
did
not
adopt
structural
adjustment
lock
stock
and
barrelagain
an
indication
of
state
capacity.
Indeed,
the
countrys
deregulation
policies
were
well
thought
out.
In
general,
the
state
mandates
that
the
benefits
of
deregulation
and
economic
growth
must
be
widely
and
evenly
spread,
and
that
the
development
of
the
rural
areas
should
be
considered
continuously.
(Soesastro,
1989)
In
fact,
the
economic
nationalists
(to
be
Page 8 of 26
described
in
the
next
paragraph)
feared
that
foreign
interest
may
dominate
the
key
sectors
and
that
wealth
discrepancies
between
the
conglomerates
and
the
disadvantaged
group
may
become
worse
under
deregulation.
(Hein,
1990)
Specifically,
certain
caveats
were
highlighted:
1)
if
singularly
pursued
to
promote
non-oil
export,
deregulation
may
lead
to
new
distortions;
2)
if
focused
heavily
on
manufacturing,
it
could
lead
to
bias
against
the
agricultural
sector;
3)
deregulations
initial
impact
was
on
the
psyche
level,
that
is,
business
climate
had
become
more
favorable
with
its
implementation;
and
4)
there
is
a
need
to
assess
deregulations
impact
at
the
industry
or
sectoral
level,
especially
in
the
non-tradable
markets.
(Soesastro,
1989)
Indonesias
organizational
design
and
management
capacity
is
evident
in
the
countrys
political
structure.
The
head
of
the
state
deals
with
two
competing
groups
of
advisers:
1)
the
technocrats,
many
of
whom
are
professional
economists
that
favor
market
forces
or
neoliberalism;
and
2)
the
economic
nationalists,
many
of
whom
are
engineers
who
promote
large-scale,
capital-intensive
projects
using
advance
technology.
The
latter
group
believed
that
such
projects
should
be
state- owned
and
may
need
direct
government
subsidies
and
protection.
(Fane,
1996)
They
argued
that
it
is
worth
paying
the
short-term
costs
of
protectionist
policies
to
promote
the
development
of
state
enterprises
and
indigenous
(non-Chinese
locals)
entrepreneurs
who
cannot
as
yet
compete
in
either
domestic
or
world
markets.
(Soesastro,
1989)
It
appears
then
that
Indonesias
economic
development
framework
is
largely
influenced
by
the
economic
nationalists.
As
of
2000,
the
following
industries
in
the
country
had
been
deregulated:
petroleum
and
natural
gas
refineries,
electric
power
generation,
telecommunications,
automobile,
and
certain
agricultural
commodities.
(Asia
Pacific
Economic
Cooperation,
2000)
Despite
the
favored
groups
flexing
of
political
muscles
to
seize
business
opportunities,
the
economic
policy
reforms
achieved
the
development
of
a
growing
Page 9 of 26
non-oil export market at a minimum. (Liddle, 1988) According to Soesastro (1989), the aim of deregulation is improved economic performance through a more efficient resource allocation and the most immediate measure of its success is the growth of the non-oil exports (hitting USD 1 billlion monthly in 1988 and contributing 60 percent to the countrys total export earnings in 1989). The countrys gross domestic product (GDP) grew by 5.4 percent from 1979 to 1989 and by 7 percent annually on average from 1990 to 1994. Likewise, poverty incidence decreased in the rural area from 40.4 percent in 1976 to 16.4 in 1987 and in the urban area from 38.8 percent to 20.1 percent over the same period. (Ghosh, 1996) With these figures, one can conclude that deregulation worked in Indonesia in propelling the countrys economic growth and without necessarily aggravating poverty (although there could be other factors that have influenced the decline in poverty incidence). In fact, while there is a general perception that the poor bore the costs of structural adjustments, Balisacan (1995) cited Indonesia as one of the countries whose transition has not been anti-poor. These results therefore challenges Williamsons (2003) proposition that structural adjustment should be done during rapid growth, not during crisis. The whole ASEAN region was suffering the consequence of international recessionary trends in the eighties when Indonesia started its deregulation policies. (Bello, 2009) Further, the outcomes serve as proof of the states capacity to formulate and implement appropriate policies, even at least during bad times.
Structural
adjustment
in
the
country
was
designed
to
alter
the
balance
between
the
market
and
the
state
in
the
Philippine
economy
in
order
to
promote
economic
efficiency.
(Bello,
2009)
Its
implementation
was
done
in
three
phases:
1)
from
1980
to
1983
when
the
emphasis
was
trade
liberalization;
2)
from
1983
to
1992,
when
debt
repayment
became
governments
focus;
and
3)
from
1992
until
the
turn
of
the
century,
when
free-market
transformation,
rapid
deregulation,
privatization,
and
trade
and
investment
liberalization
characterized
the
economy.
Structural
adjustment
in
the
second
and
third
phases
was
seen
as
a
precondition
for
economic
growth
and
debt
repayment
as
an
unpleasant
but
temporary
condition.
(Bello,
2009)
Under
the
regime
of
President
Fidel
Ramos
beginning
in
1992,
the
countrys
economic
strategy
centered
on
economic
liberalization,
with
concerted
attacks
on
cartels
and
monopolies.
In
his
inauguration,
the
President
explained
that
the
political
dominance
of
the
oligarchic
groupsthe
countrys
dominant
commercial
familiesis
the
reason
why
the
Philippines
lagged
so
far
behind
the
Asian
tigers.
(de
Dios
&
Hutchcroft,
2003)
Bello
(2009)
argued
that
the
slack
in
the
Philippines
performance
could
not
be
attributed
to
pace
of
economic
liberalization,
as
the
countrys
start-off
point
did
not
differ
from
its
neighbors.
Neither
could
it
be
attributed
to
non-interventionist
states
among
its
neighbors
because
they
are
more
intrusively
interventionists,
including
Indonesia,
than
the
Philippines.
He
cited
two
reasons
for
the
Philippiness
below-par
economic
performance
thus:
1)
the
national
priority
of
debt
repayment
that
signaled
low
purchasing
power
of
the
Philippines
as
a
market
and
thus
failed
to
attract
investors;
and
2)
doctrinal
distortion
that
brought
indiscriminate
liberalization
instead
of
the
state
carefully
calibrating
policiesa
similar
point
raised
by
Williamson
(2003)
regarding
Washington
Consensus
in
that
the
policy
reforms
set
were
needed
by
a
particular
region
at
a
particular
time
and
that
they
were
not
an
ideological
agenda
to
be
imposed
on
all
countries
at
any
and
all
times.
Page 11 of 26
The reforms led to improvements in competition but the gains were not as much as expected, according to Orbeta (n.d.). The author believed that this was so because the nature and extent of deregulation may have been inadequate and that the government continued to control further entry and to regulate prices. These claims may not prove accurate because in 1996 Asia Money Magazine considered the Philippines as one of the most deregulated in Asia (The Philippines Back in the Spotlight, 1996). Besides, the Indonesian government, with its deliberately selective deregulation and high level of regulation even after the reforms, was able to achieve the objectives of its economic reforms. Orbeta also criticized the Philippiness local content requirement as hindrance to firms access to more competitive import productsthe same policy that worked well in strengthening the position of the indigenous entrepreneurs in Indonesia. In the end, however, Orbeta pointed out the countrys two main challenges, which this paper supports: 1) too many implementing agencies results in lack of focus, expertise, and accountability; and 2) there is a danger that regulators become too intimate with the industry players and thus become eventually beholden to them. These points are apparent indicators of the states weak capacity. Sadly, the results of the three decades of structural adjustment were damaged industries such as textile, rubber, and ceramics, among others, while only a modest level of exportation in garments and electronic assembly was established. (Bello, 2009) Aggregate poverty also rose during the period while GDP remained at the 3- percent range from 1988 to 1991. (Balisacan, 1995)
able to do this because of its strong capacity to plan and execute policies, although not necessarily enforcing laws cleanly and transparently, as Fukuyama defined state capacity. However, it cannot be assumed that regulatory agencies in all industries in both countries have uniform capacities. Although Fukuyama (2004) emphasized that state capacity should be viewed at the central government level and not at the level of its various agencies, the implementation issues related to regulation would be better analyzed at the agency level that governs the industries. The following sections show how Indonesia became successful in deregulating the air transport and automobile industries, and the Philippines in telecommunications; and how both did not quite succeed in the electric power generation.
Air
Transportation
Many
of
the
Asian
newly
industrialized
countries
(NICs)
established
their
flag
carriers
during
the
post-war
period.
At
the
time,
the
states
could
not
rely
on
private
capital
to
create
airlines
that
would
support
their
national
objectives;
besides,
it
was
of
ideological
importance
for
the
states,
at
least
at
that
time,
to
keep
direct
control
over
key
sectors
of
the
economy.
Further,
the
states
had
to
ensure
that
private
companies
would
not
exploit
monopolistic
profits
and
that
the
small,
less
profitable
markets,
which
are
usually
present
in
developing
economies,
would
be
served.
Ironically,
the
Philippiness
flag
carrier
Philippine
Airlines
(PAL),
established
in
1941,
was
the
only
privately
owned
in
ASEAN
region
put
up
by
industrialists.
Other
Asian
countries
flag
carriersThailand
(1947),
Korea
(1949),
China
(1950,
closely
linked
to
the
Taiwanese
government),
Indonesia
(1950),
Malaysia
(1972),
and
Singapore
(1972)were
all
state-owned.
(Bowen
&
Leinbach,
1995)
In
1973,
PAL
was
awarded
a
domestic
monopoly
in
exchange
for
its
service
to
unprofitable
routes,
and
was
eventually
nationalized
in
1977.
While
PAL
was
the
regions
premier
international
carrier
in
the
early
post-war
period,
it
was
Page 13 of 26
overshadowed
by
its
neighboring
countries
by
the
eighties.
In
1988,
PALs
monopoly
was
revoked
and
in
1992,
in
line
with
the
Aquino
governments
thrust
to
dismantle
state-owned
enterprises,
the
flag
carrier
was
brought
back
to
private
ownership
through
the
sale
of
shares
to
a
consortium
consisting
of
a
few
major
players
(in
contrast
to
Singapore
Airlines
privatization
via
public-share
offerings
that
prevented
concentration
of
ownership
among
few
individuals).
(Bowen
&
Leinbach,
1995)
No
new
entrant
in
the
market
came
until
the
mid-nineties
with
the
launching
of
Cebu
Pacifica
classic
example
that
deregulation
does
not
necessarily
attract
new
players
or
investors.
One
may
ask
then
if
the
decision
to
nationalize
PAL
and
later
to
privatize
it,
through
sale
of
shares
to
few
individuals
at
that,
was
grounded
on
pragmatic
economic
principles.
In
the
case
of
Indonesia,
the
state
deregulated
the
airline
industry
in
the
eighties,
opening
it
to
private
playerswhich
were
all
related
to
the
Presidents
family while
keeping
Garuda,
the
flag
carrier,
under
state
ownership.
However,
Garuda
remained
protected
despite
the
presence
of
multiple
carriers.
Until
1989,
Garuda
was
the
only
Indonesian
carrier
allowed
to
operate
jet
aircraft.
Moreover,
other
privately-owned
airlines
were
not
allowed
to
undercut
Garuda
by
more
than
15
percent,
were
restricted
to
operate
in
less
profitable
routes,
and
were
allowed
to
fly
only
three
times
for
every
seven
domestic
flights
served
by
Garuda.
(Bowen
&
Leinbach,
1995)
Sempati,
owned
by
a
conglomerate
controlled
by
one
of
President
Suhartos
sons,
entered
the
Indonesian
domestic
market
in
1989
and
the
international
market
in
1991.
Through
its
international
operations,
the
private
company
acquired
foreign
currencies
that
enabled
it
to
acquire
Dutch-made
Fokker
aircrafts.
The
Dutch
manufacturer
in
turn
partnered
with
a
local
manufacturer
IPTN
for
production
of
certain
components
of
the
Fokker
jets.
Thus,
in
the
end,
these
private
company- initiated
arrangements
facilitated
technology
transfer
to
Indonesia.
(Bowen
&
Leinbach,
1995)
Page 14 of 26
As pointed out by Bowen and Leinbach (1995), political leverage in the airline industry may come from two sources: 1) a firms political clout based on its ability to fulfill important government policy objectives and 2) leadership of the airline by politically influential personalities. While Sempati illustrates the first case, PAL is an example of the second. No hard data on these airlines business and developmental performances were provided but the fact that Indonesia has overtaken the Philippines in terms of both access/routes in the international flights and number of players in the industry proves that deregulation has worked better in Indonesia than in the Philippines. The airline industry case thus supports the arguments that 1) who owns the enterprises is not as crucial as the capacity of the state to define development objectives, set sound policy framework, and regulate and 2) that technology plays a key role in breaking monopolistic barriers and achieving efficiency, which could not be achieved solely through deregulation of the market.
Automobile
The
Philippine
automobile
industry
suffered
the
same
fate
as
the
airline.
Despite
its
early
lead
in
the
region
in
the
sixties,
its
operations
proved
inefficient
beginning
in
the
seventies
and
by
mid-nineties
it
was
overtaken
by
Indonesias
production,
which
was
three
times
more
than
the
Philippiness
output.
(Hill,
2003)
Indonesia,
on
the
other
hand,
protected
and
strengthened
its
deregulated
automobile
industry
through
the
national
car
policy.
The
policy
stipulated
that
producer
must
be
100
percent
Indonesian-owned,
must
use
Indonesian
brand
name,
must
develop
local
technology,
and
must
satisfy
local-content
requirements
(that
is,
from
20
percent
by
the
end
of
first
year,
to
40
percent
by
the
end
of
second
year,
to
60
percent
by
the
end
of
third
year).
(Fane,
1996)
Page 15 of 26
Again, the same arguments are supported by the experience of the two countries in automobile industry: 1) ownership of enterprises is not as crucial as the capacity of the state in organizational design and management and, in this case, in promoting efficiency despite protectionist policies; and 2) that technological innovation, more than deregulation policy that does not automatically attract investors, is crucial in development.
Telecommunications
Prior
to
deregulation,
the
privately
owned
Philippine
Long
Distance
Company
(PLDT)
enjoyed
a
monopoly
power
in
the
telecommunications
industry
for
65
years.
With
the
underdeveloped
industry
then,
telephone
density
was
around
1
percent
and
complaints
on
poor
service
quality
was
estimated
at
17
percent
per
month,
higher
than
Indonesias
9
percent.
(Abrenica
&
Llanto,
2003)
Mercado-Aldaba
(2000)
blamed
it
on
the
misguided
policy
and
the
weak
and
corrupt
regulatory
structure
of
the
government.
The
opening
of
the
market
to
new
players
in
1991
and
subsequently
the
mandate
of
interconnection
among
networks
in
1993
eroded
the
dominance
of
PLDT
and
created
nine
new,
privately
owned
telecommunications
companies.
The
country
was
recognized
to
be
among
the
first
11
countries
to
allow
competition
in
the
local
facilities
and
among
the
first
14
to
de- monopolize
the
provision
of
international
telephone
services.
(Abrenica
&
Llanto,
2003)
The
result
was
an
increase
in
telephone
density
of
8.07
percent
in
1997
and
in
absolute
growth
in
mainlines
from
3.2
percent
before
deregulation
to
18.2
percent
after
policy
reforms.
(Mercado-Albada,
2000)
The
emergence
of
mobile
technology
was
also
instrumental
in
breaking
the
barriers
inherent
in
telecommunications,
especially
in
archipelagic
countries
like
the
Philippines
and
Indonesia.
Since
the
digital
technology
does
not
require
land-based
infrastructure
(i.e.
networks
of
copper
wires)
for
connection,
it
is
able
to
reach
the
far-flung
islands
and
highlands,
thus
addressing
the
age-old
issue
of
access
to
Page 16 of 26
services
in
the
country.
Aside
from
the
absence
of
physical
barriers
in
digital
technology,
the
carrying
capacity
of
mobile
transmission
towers
is
several
times
larger
than
that
of
fixed
lines
so
that
the
service
fees
come
out
very
cheap,
thus
addressing
the
problem
of
affordability.
Finally,
the
short
message
service
(SMS
or
texting)
feature
of
the
mobile
technologywhich
has
gone
way
too
low
with
the
unlimited
packages
offered
by
the
mobile
companiescombined
with
the
affordable
mobile
handsetsagain,
a
product
of
technological
innovationhas
redefined
the
way
people
communicate.
Whatever
problems
there
still
are
in
the
fixed
line
segment
in
the
Philippines,
they
seem
to
have
been
addressed
by
the
presence
of
other
means
of
communication,
thanks
to
mobile
technology.
Today,
there
are
many
available
fixed
lines
that
remained
unsubscribed
because
of
the
presence
of
mobile
services.
However,
this
technological
innovation
has
regulatory
implications
as
well.
With
the
process
becoming
more
complex
with
the
fast-developing
technology,
regulators
also
need
to
up
their
technical
skills
to
catch
up
with
it.
Since
mobile
technology
quickly
became
popular
in
the
Philippine
market,
regulators
faced
a
unique
challenge
in
addressing
interconnection
problems
of
mobile
carriersprior
to
this,
no
other
market
in
the
world
had
drafted
and
enforced
rules
on
private
mobile
carriers
(previous
experience
involve
fixed
line
carriers).
(Mirandilla,
2007)
Further,
mobile
technology
is
now
used
in
banking
services
in
the
Philippines,
involving
transfers
of
electronic
moneysomething
that
required
a
new
set
of
competence
from
the
regulators.
The
National
Telecommunication
Commission
(NTC)
is
tasked
to
regulate
the
mobile
companies
while
the
Bangko
Sentral
ng
Pilipinas
(BSP),
the
banking
sector.
The
two
agencies
agreed
that
the
BSP
would
take
the
forefront
in
regulating
mobile
banking,
which
necessitated
the
agency
to
train
its
examiners
in
handling
mobile-based
transactions
and
processes.
In
this
aspect,
the
Philippines
showed
competence
in
its
(banking
sector-wise)
regulatory
functions.
Page 17 of 26
However,
the
same
cannot
be
said
of
the
NTC.
The
success
of
the
mobile
sector
is
not
in
any
way
indication
that
regulation
(or
the
lack
of
it)
that
created
the
problem
in
the
first
place
prior
to
policy
reforms
has
improved.
Today,
the
number
of
mobile
players
has
declined
from
six
firms
in
2003
to
only
two
in
2012
as
a
result
of
merger
and
acquisition.
The
mobile
industry
maybe
a
win
for
the
Philippines
because
of
the
access
and
affordable
services
the
people
now
enjoy
but
unless
regulation
is
strengthened,
the
dominant
player
PLDT
will
always
try
to
prevent
competition
either
by
squeezing
the
smaller
players
out
of
the
market
or
buying
them
out.
As
pointed
out
by
Abrenica
and
Llanto
(2003),
past
experience
shows
that
NTC
leaves
critical
issues
such
as
interconnection
points
and
charges
to
contracting
parties
that
do
not
necessarily
have
equal
bargaining
powers.
Therefore,
unless
level
playing
field
is
ensured,
the
dominant
player
will
always
protect
its
turf.
In
Indonesia,
on
the
other
hand,
although
the
government
started
loosening
its
grip
on
the
telecommunications
industry
as
early
as
1989,
mobile
phone
players
did
not
enter
the
market
until
19991
and
duopoly
in
fixed
line
was
mandated
until
2005.
In
the
early
nineties,
the
country
engaged
in
build-operate-transfer
(BOT)
schemes
with
overseas
telecommunications
companies
that
later
either
exited
the
deal
or
went
to
court.
The
failure
of
BOT
was
attributed
to
different
factors:
bureaucracy
in
the
partly
state-owned
network
Telkom,
political
instability,
Asian
financial
crisis,
and
corruption.
(Zita)
Indonesias
second
attempt
to
liberalize
its
telecommunications
industry
was
through
privatization
in
2002something
inconsistent
with
the
countrys
dominant
strategy
of
deregulation
under
Suhartos
regimewith
the
shares
of
the
two
state- owned
companied
being
bought
by
Singaporean
governments
investment
arm
and
a
Malaysian
firm.
Meanwhile,
the
Indonesian
Telecommunications
Regulatory
Agency
became
operational
only
in
2004.
(Zita)
1
Other source indicated various timelines between 1994 and 1996. Page 18 of 26
The result: fixed line density was estimated at 4 percent while the mobile density was at 8.1 percent in 2003. These figures earned for the country the reputation as the least developed (telecommunications) in Asia. (Zita) These figures pale in comparison with the Philippines, where mobile subscribers grew from 66,000 in 1991 to 22 million in 2003 (Sebastian, 2005) reaching a density of 35 percent; by 2009 mobile density was already 100 percent. (Commission on Information and Communications Technology , 2010) Perhaps Indonesia joined the telecommunications bandwagon a bit too lateeither that or the changing of guards after Suhartos resignation in 1998 was too frequent that the state was unable to create an environment conducive to new investments. The countries experience in telecommunications industry highlighted the role of technological innovations in changing the rules of the games and the need of regulators to build their capacity in terms of technical competence and facilities. It can also be hypothesized that whatever NTC lacked in regulatory capacity, technological innovations in the mobile market have made up for it, so that the industry deregulation resulted in both economic and social benefits, even to the disadvantaged groups. Further, the case proves that the implementation issues related to regulation should be examined at the agency/industry level because of the varying levels of preparedness and competence of the regulators, as exemplified by the BSP and the NTC.
Page 19 of 26
oil),
and
even
foreign
exchange
risk.
The
Philippine
Center
for
Investigative
Journalism
also
pointed
out
that
the
Ramos
administration
pushed
for
the
speedy
approval
of
some
of
the
most
expensive
deals
and
justified
signing
more
contracts.
(Malaluan,
2002)
The
35
IPPs
that
entered
the
market
reported
to
have
built
an
additional
capacity
of
8,000
megawatts,
supplying
more
than
50
percent
of
the
countrys
need.
(Bello,
2009)
However,
because
of
lower
installation
costs,
most
producers
preferred
petroleum-based
facilities
even
if
they
would
entail
high
risks
in
terms
of
price
and
environmental
management.
The
high
costs
of
power
were
then
passed
on
to
the
consumers.
Hence
unsurprisingly,
the
cost
of
electricity
in
Manila
(USD0.181
per
kilowatt
hour)
is
much
higher
than
in
the
industrialized
Japan
(USD0.179
per
kilowatt
hour)
and
the
highest
in
Asia.
(Main
Business,
2011)
On
hindsight,
Llanto
(in
Bello,
2009)
concluded
that
no
government
guarantee
should
be
given
to
shield
private
investors
from
commercial
risks(and
that)
the
government
forgot
to
deal
with
the
need
to
have
an
independent
regulatory
capacity,
leaving
regulatory
institutions
open
to
opportunistic
political
interventions.
(This
is
the
same
reason
for
the
failure
in
the
privatization
of
the
water
sector:
lack
of
regulation.)
Indonesia,
on
the
other
hand,
realized
during
the
1997
Asian
financial
crisis
that
the
IPP
model
entails
high
price
of
electricity
for
the
end-users
and
thus
introduced
policy
reforms.
This
move
caused
the
geothermal
power
sector
to
slow
down
such
that
by
2005,
it
only
had
807-megawatt
(MW)
capacity
from
geothermal
plants
when
its
potential
was
estimated
at
27
gigawatt
electrical
(GWe).
By
2003,
the
country
enacted
the
Geothermal
Law,
which
stated
that
the
government
would
engage
in
exploration
and
production,
taking
on
the
field
development
risk,
to
lower
the
power
rates.
At
the
same
time,
the
government
deregulated
the
downstream
energy
sector,
allowing
multiple
buyers
and
sellers
in
power
generation
and
distribution
and
prioritizing
the
renewable
energy
for
domestic
needs.
Despite
Page 20 of 26
these
deregulation
policies,
the
government
still
maintained
control
over
the
use
of
energy
sources
in
the
country
(Suryantoro,
Dwipa,
Ariati,
&
Darma,
2005),
which
stood
in
stark
contrast
with
the
Philippiness
weak
regulation.
In
terms
of
geothermal
capacity,
the
Philippines
has
outdone
Indonesia
with
its
2,000-MW
power
capacity.
Indonesia
expected
to
install
2,445-MW
geothermal
capacity
by
2012.
(Suryantoro,
Dwipa,
Ariati,
&
Darma,
2005)
Due
to
heavy
government
subsidy,
however,
Indonesia
has
managed
to
keep
its
rates
lower
than
that
of
the
Philippines.
Thus,
price
cannot
be
used
as
basis
for
comparison
of
the
two
countries
performance.
As
of
2002,
the
total
energy
supply
in
Indonesia
that
stood
at
663
million
barrels
of
oil
equivalent
(BOE)
exceeded
the
demand
at
430
million
BOE.
(Suryantoro,
Dwipa,
Ariati,
&
Darma,
2005)
Beginning
2010
though,
Indonesia
had
started
experiencing
power
shortages
and
suffered
from
low
electrification
rate
and
uneven
distribution
of
electricity.
On
the
other
hand,
the
Philippines
was
expected
to
have
experienced
power
shortages
beginning
2008
escalating
until
2014
unless
investments
in
additional
capacity
would
be
made
during
the
said
period.
(Department
of
Energy,
2004)
Page 21 of 26
Hence, one country is not necessarily better than the other as far as electric power generation is concerned. The Philippiness loosely regulated energy market and IPP- based model, and Indonesias heavily regulated and subsidized sector with reformed policies (veering away from the IPPs) both resulted in shortage and high- cost of electric power supply. As to what could the explanatory variables for this phenomenon would be another research question that neither state capacity or technological innovation could account for.
Conclusion
In
general,
Indonesia
has
been
more
successful
than
the
Philippines
in
using
deregulation
as
a
strategy
to
achieve
both
its
economic
goal
(i.e.
development
of
the
non-oil
export)
and
social
goal
(i.e.
wide
and
even
distribution
of
benefits
of
deregulation
and
economic
growth).
The
country
was
able
to
do
so
because
of
its
strong
state
capacity,
i.e.
organizational
design
and
management,
manifested
in
the
following:
Clear
developmental
priorities
such
as
promoting
regional
growth
(in
the
eastern
part
of
the
archipelago)
through
deregulation,
the
air
transport
policies
for
example
Pragmatic
and
selective
adoption
of
the
SAP
Market-oriented
policies
that
aimed
at
deepening
the
countrys
industrial
structure
and
that
did
not
make
open
economy
as
an
end
in
itself
Conscious
promotion
of
wide
and
even
distribution
of
benefits
of
deregulation
and
economic
growth
and
initiatives
to
at
least
not
aggravate
the
wealth
discrepancies
between
the
conglomerates
and
the
disadvantaged
group
Recognition
of
the
need
to
assess
deregulations
impact
at
the
industry
or
sectoral
level,
especially
in
the
non-tradable
markets
Control
over
key
sectors
Promotion
of
the
development
of
state
enterprises
and
indigenous
entrepreneurs
that
justified
the
countrys
protectionist
policies
Page 22 of 26
Strong regulatory functions despite market-oriented policies Indonesia proves that ownershipprivate is efficient and public is inefficientdoes not matter any more. There are successful state-run or state-owned enterprises that are able to employ effective management, high corporate autonomy, and technological innovations. (Bello, 2009) Indonesias performance also challenges Williamsons argument that structural adjustment should not be done during crisis. The country did exactly that and bad times came to mean good policies in its case. The industry examples in this paperair transportation, automobile, telecommunications, and electric power generation, all of which used to be natural monopoliesalso prove that aside from state capacity, technological innovation is indeed key in successful deregulation. In the case of the Philippines, technology must have even compensated the weak regulators in the telecommunications industry. Deregulation in the banking sector, although beyond the scope of this paper, would not have been successful either without advance information and communication technology. It would be interesting to know how the Philippines could strengthen its state capacity, particularly in the area of regulation. Except for the likes of the BSP, regulatory agencies in the country in general are criticized for lack of focus, expertise, and accountability, and for their too close a relationship with the industry players that they tend to become beholden to them. However, if state officials remain advocates of neoliberal ideastaking the concept of deregulation as leaving everything to market forces and reducing the state role to a minimum, among other thingsthen building state capacity would be futile cause.
Page 23 of 26
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