IDS working papers;338

A tale of two cities : the political economy of local investment climate in Solo and Manado, Indonesia

Published on 1 January 2009

There is little doubt that orthodox institutional prescriptions, such as the protection
of property rights, low corruption, and effective public services are desirable longterm
objectives for all countries. But it is not clear whether implementing such
prescriptions is sufficient, or even necessary, to achieve investment and growth.
By taking a deeper look into the political economy of the cities of Solo and
Manado in Indonesia, this paper shows that relationship-based, rather than rulebased,
cooperation between government leaders and local firms can provide an
effective mechanism to boost investment and improve local investment climates.
In the case of Solo, a ‘heterodox symbiosis’ between public and private actors –
involving the mayor and a broad spectrum of multi-sectoral/scale/ethnic firms –
has brought about important regulatory and administrative reforms and contributed
to a rise in private investment. On the other hand, Manado’s government is
characterised by a poorly planned, rent-seeking bureaucracy. At the same time,
exclusive informal relationships between Manado’s leaders and a small number of
influential businessmen have facilitated a high level of investment and growth. Our
study therefore challenges the conventional wisdom that impartial rule-based
economic governance is a precondition for investment, although it suggests that
the creation of such institutions may be necessary to sustain growth in the
medium term.
Keywords: political economy; investment climate; sub-national governance; Indonesia.

Publication details

published by


About this publication


Related content