A Tale of Two Cities: The Political Economy of Local Investment Climate in Solo and Manado, Indonesia 1

Abstract

There is little doubt that orthodox institutional prescriptions, such as the protection of property rights, low corruption, and effective public services are desirable long‐term 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 rule‐based, 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.