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Striking the Right Balance. Economic Concentration and Local Government Performance in Indonesia and the Philippines

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The relationship between economic concentration and governance remains controversial. While some studies find that high economic concentration strengthens collective action and reform cooperation, others stress dangers of rent-seeking and state capture. In this paper I argue that effects are neither strictly positive nor negative: they are best described as an inverted u-shaped relationship, where better governance performance emerges with moderate economic concentration. Decentralisation reforms in Indonesia and the Philippines—unprecedented in scope and scale—provide a unique opportunity to explore this thesis. Subnational case studies and cross-sectional data analyses indicate that moderately concentrated polities in both countries are accompanied by more effective and less corrupt service provision. The presence of 'contested oligarchies'—a small but diverse pool of economic elites—paves the ground for more balanced policy arenas; they contribute to a scenario where private sector actors are strong enough to influence government decisions and, at the same time, diverse enough to keep themselves and public officials in check.

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