Academic journal article Asian Development Review

The Political Economy of Policy Reform: Insights from Southeast Asia

Academic journal article Asian Development Review

The Political Economy of Policy Reform: Insights from Southeast Asia

Article excerpt

Economists broadly agree on many key economic policy issues, but economics as a discipline has provided much less guidance on why and how economic policy reform occurs and how to develop institutional mechanisms that enable governments to adopt "good" economic policy. Political scientists are adept at identifying coalitions, constituencies, institutions, and interest groups, but they less commonly examine the implications for economic policy. Thus, work at the intersection between economics and politics-of why and how policy reform takes plaoe-remains relatively unexplored territory. This is especially so in developing countries where political processes are more personalistic, institutions often less well established, outcomes more fluid, and the detailed case study literature on economic policy making still in its infancy. This paper provides an analytical survey of economic policy reform in Southeast Asia. It ranges across the major policy U-turns and the incremental reforms, with special reference to macroeconomic management and trade policy. On the basis of several case studies and set against the broader international literature, we advance nine conclusions on the political economy of reform.

Keywords: political economy, reform, Southeast Asia, trade liberalization, macroeconomic management

JEL codes: E61, F13, O57, Z18

I. Introduction

Although it may not seem obvious to non-economists, economists broadly agree on many key economic policy issues. But economics as a discipline has provided much less guidance on why and how economic policy reform occurs and how to develop institutional mechanisms that enable governments to adopt "good" economic policy. Political scientists are adept at identifying coalitions, constituencies, institutions, and interest groups, but they less commonly examine the implications for economic policy. Thus, work at the intersection between economics and politics, of why and how policy reform takes place, remains relatively unexplored territory.

There is no generally accepted template, much less a "rule book" for how to engineer successful policy reform. This is especially so in developing countries where political processes are more personalistic, institutions often less well established, outcomes more fluid, and the detailed case study literature on economic policy making still in its infancy. We therefore need more case study evidence, of both success and failure, to understand why and how successful reform occurs.

Southeast Asia offers a fascinating opportunity for social science researchers interested in these issues. The economic performance of most of the major economies for most of the period since 1970 has been significantly better than the developing world average. But there is much diversity in the record of growth and reform. The reform experience ranges across the major policy U-turns and incremental reforms, successes and failures, and the macroeconomy and the sectors, with both international and domestic factors playing a role. This diversity of the region, reflected also in levels of development and in political and institutional structures, both cautions against generalization but also adds to the richness of the subject matter.

This paper offers an analytical survey of the evidence on economic policy reform in Southeast Asia. To narrow down the topic to manageable, paper-length proportions, we focus primarily on macroeconomic and trade policy reform in three of the lower-middle income economies; - Indonesia, the Philippines, and Viet Nam. Section II introduces the issues and provides some country and institutional context. Section III dissects a series of reform episodes in these countries. Section IV then draws some broader lessons and implications.

II. Issues and Context

A. Some Definitions

I define "reform" for these purposes as a durable and significant policy change that improves aggregate socioeconomic welfare, consistent also with an objective function that recognizes distributional and environmental considerations. …

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