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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. Decentralization reforms in Indonesia and the Philippines – unprecedented in scope and scale – provide a unique opportunity to test this hypothesis. Subnational case studies and cross-sections, from both countries, indicate that moderately concentrated polities are accompanied by better service and lower corruption. The presence of ‘contested oligarchies’ – small circles of multi-sectoral interest groups – creates a situation where economic elites are strong enough to influence policymakers and, at the same time, diverse enough to keep each other in check. The results of this paper suggest that contested oligarchies compensate for weakly-developed societal and juridical forces and can become a stepping stone to good governance.

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