The Political Economy of Public Administration Reforms in Southeast Asia : A Comparative Analysis of the Tax Administration in Indonesia and the Philippines

Abstract

Within the last decade, scholars and practitioners have increasingly discussed domestic resource mobilization as a development financing tool. Revenues from domestic sources are regarded as more stable than resources derived from world capital markets. Moreover, taxes are ascribed a positive impact on state building and good governance. In most developing and transition countries, so far, the tax ratio has been lower than the internationally advocated twenty percent of their gross domestic product.

Within this context, research on taxation in developing countries has grown, and efforts to improve tax systems have proliferated globally. Strong interest and rhetoric on enhancing domestic resource mobilization however does not necessarily translate into more effective and efficient, equitable and impartial tax systems as previous experience has shown. The reasons accounting for low tax efforts and for the relative success and failure of tax reforms in many countries have remained under-researched. This has been particularly true for countries in Asia, Central Asia and the Middle East.

This study contributes to this research gap by a comparative political economy analysis of the Indonesian and Philippine cases. The study focuses on the tax administration reforms of the years 2002 to 2010. It applies an actor-centred historical institutionalism approach and uses the neopatrimonialism concept as its main analytical lens. Due to the scarcity of related academic research and published material, the study relies to a large degree on the analysis of primary sources. The study’s insights draw on 90 formal expert interviews and four focus group discussions with respondents from inside and outside the tax authorities conducted in 2009. Field mission information collected in 2012 complements these perspectives. A detailed review and analysis of annual national budgets, budget speeches, and state of the nation addresses, relevant legislation, journal articles, and newspaper articles substantiate the study further.

Based on these data, the study describes how the tax administrations are structured and reveals how taxes are administered by law and in practise. It analyses what accounts for the shortcomings and weaknesses in taxation. Further it describes what kind of efforts the governments are pursuing to increase their tax take. It analyses the processes of these modernization and reform efforts and examines the factors why Indonesia in comparison with the Philippines has been widely perceived as the more successful reformer during the period under observation.

The study finds that many of the shortcomings and weaknesses the tax administrations in both countries show are institutionalised. They have existed for decades and often been deliberately created and sustained. Path dependence makes it difficult for reforms to be implemented. Yet, human agents choose directions, therefore can overcome institutional constraints. The study suggests that two agency-related factors are highly decisive in explaining the different outcomes of reforms. These are the degree of power concentration found in a country in combination with the perceived strength of change management applied in the reform process. There is evidence, that the successful implementation of reforms is the more unlikely the more concentrated power, in other words the higher the degree of economic elite capture of politics and bureaucracy. Yet, strong change management holds the potential to overcome resistance against reforms.