Strengthening the state and market in ASEAN

Author: Peter McCawley, ANU

An embarrassing fact about ASEAN governments that is generally avoided in public policy discussions is that the capacity of most ASEAN states is quite limited — much more limited than they, and the international community, generally wish to admit. Until it is recognised that state capacity is limited, it will be hard to understand the implications for public policy.

A construction worker builds iron reinforcement column at a high rise office building construction site in Indonesia's capital Jakarta on April 22, 2013. Asia-Pacific growth will edge up this year on the back of a recovery in the US and emerging nations, a United Nations study said April 18, 2013, but it urged governments to take bolder steps to lift millions out of poverty. (Photo: AFP)

It is not easy to measure the capacity of a state. Essentially, the concept is closely related to the power it can exercise. Power, in turn, can be measured and exercised in various ways — including politically, coercively through the military and police, legally, and administratively.

Levels of taxation and expenditure are two important measures of the capacity of a state. The level of taxation is a good measure because it reflects the power of a state to collect revenues from citizens to provide public goods. From another point of view, expenditures are a better measure because the size of expenditures indicates the ability of a state to respond to the expectations of citizens and to provide the goods and services that citizens expect from their governments.

Surprisingly, statistics on levels of taxation and expenditure in ASEAN are somewhat opaque. The key data are not readily accessible. Having comparable figures on the fiscal capacity of ASEAN states more widely available would be a useful first.

Figures for government spending across ASEAN throw up some startling facts. As a benchmark, the average level of government spending in Australia and New Zealand in 2012 was around US$16,800 per person. By comparison, the average level of government spending across ASEAN in the same year was around US$730.

The figures for government spending across ASEAN naturally vary from country to country. In oil-rich Brunei the government spent over US$15,000 per person in 2012. Government spending in Indonesia, the largest country in ASEAN, was slightly below the average, at about US$600 per person. And in Myanmar, the fiscal capacity of government was very limited indeed, with annual spending at around US$40 per person.

These extraordinary differences in per capita government spending may be interpreted in different ways. One view is that the different levels are not surprising because they reflect, naturally, the different levels of income per capita in the different countries. While this is doubtless true, it is also true that the expectations of ordinary citizens across ASEAN in a globalising world are increasingly influenced by international comparisons. While state capacity is limited, expectations of the state are not.

Another view is that international comparisons of this kind need to be adjusted for purchasing power parity (PPP) differences between countries. But while it is true that notable price differences exist between countries, these differences often reflect large disparities in the quality of goods and services. And PPP measurements often fail to allow for the fact that the prices of many goods on which governments spend their money are set in international markets. The world price of building infrastructure (quality-adjusted) is often quite similar in different countries.

This picture of the limited economic capacity of governments in most ASEAN countries is worrying. It suggests that it would be useful to undertake the painful and controversial task of reassessing strategies of state management and of public service delivery. What are the implications for policy and for the delivery of public programs? More broadly, what should the state’s role be when resources are so sharply constrained?

Three main steps seem to be needed. First, there needs to be discussion of the generally-accepted paradigm of a strong economic state which, among other things, promises to protect the populace from the ravages of uncaring market forces. In fact, market forces are often dominant in poorly-regulated informal economies across ASEAN. Governments frequently try to impose regulation on these markets but generally fail.

A second step, therefore, would be to recognise the problems that arise when there are excessive expectations about the role that the state can play. Clearly ASEAN states cannot provide the range of services that are available in the OECD welfare states. It would be best if the challenges of designing governments to live with very limited budgets were more widely discussed.

It is hard to avoid the impression that, at least in the low-spending ASEAN states, many branches of government are badly over-stretched. Too often political leaders over-promise and under-deliver. Put simply, governments are trying to do far too much with far too little. The result is a vicious circle: citizens become disillusioned with governments and see little reason for paying taxes or even user charges for government services, thus exacerbating the problem of limited resources for the public sector.

A third step towards reconsidering the role of the state is to define the role of government carefully. To be effective, this would need to go well beyond the dozens of programs of public management reform which have been outlined for ASEAN governments in recent years. The measures that are needed to match the functions of governments more closely would be controversial. Governments should identify strict economies in the range of services they provide, improve revenue collection procedures at all main levels of government (including by state-owned enterprises through higher user charges), and systematically simplify administrative services. They should also review the scope of their activities to design an approach where governments ‘steer, not row’ and strengthen their ability to regulate the outsourced provision of services to communities.

Reconsidering the role of the state is needed not as a response to Western pro-market ideology but because, quite simply, states in the region are trying to do too much with too little. And both government failure and market failure are the result. Government failure often exacerbates market failure because overstretched governments cannot perform even basic regulatory functions properly. A pragmatic and determined approach to reform is needed to strengthen the operations of both governments and markets in the region.

Peter McCawley is a Visiting Fellow at the Crawford School of Public Policy at The Australian National University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

SHARE: