9 - What determines the quality of subnational economic governance? Comparing Indonesia and Vietnam

Summary

INTRODUCTION

There is a large literature on the relationship between the quality of governance – broadly defined – and long-run economic performance (North 1990; Acemoglu, Johnson and Robinson 2002). The general conclusion from this literature is that institutions, and the quality of their governance, matter for economic performance at the country level. There is also evidence to suggest that subnational governance is related to economic performance at the subnational level, although the evidence here is more mixed (Eckardt 2002; McCulloch and Malesky 2011). This chapter asks a different question: what are the drivers of the quality of subnational economic governance? The general assumption in the literature, and by policy makers, is that the quality of governance is a choice, that is, that ‘good’ leaders choose to have good governance and ‘bad’ ones choose otherwise. Leadership is clearly critical (von Luebke 2009; Patunru, von Luebke and McCulloch 2012), but there may also be structural factors, such as the size of the local economy, its location and its natural resource endowments, that influence the quality of governance by shifting the incentives faced by local leaders. We explore the influence of such factors in both Indonesia and Vietnam using quantitative data on the quality of subnational governance and the characteristics of subnational regions.

To preview our results, we find some interesting similarities in the determinants of subnational governance between the two countries, but also some marked differences. In particular, we find support for the idea that the complexity and size of modern cities reduce the quality of local governance. But we also find that being located outside Java appears to have a negative impact on the quality of governance in Indonesia, as does the size of the local economy, whereas neither location nor GDP appears to influence the quality of governance in Vietnam. We suggest that the structure of the political institutions in the two countries has provided a different set of incentives for local leaders, and that it is this that may be responsible for the differences in the determinants of subnational economic performance in Vietnam and Indonesia.

The chapter is structured as follows. Section 9.2 describes the structural drivers of subnational economic governance in Indonesia. Section 9.3 examines the drivers of changes in the quality of governance at the provincial level in Vietnam, exploiting both quantitative and qualitative evidence.