State

Capacity and Deregulation: The Philippines and Indonesia Compared

Asuncion M. Sebastian Comparative Politics DVS540P Dr. Antoinette Raquiza April 13, 2012

State Capacity and Deregulation: The Philippines and Indonesia Compared

Introduction
Building on the works of Fukuyama (2004) and Williamson (2003), this paper discusses state capacity and deregulationone of the three major thrusts of structural adjustment program (SAP), the two others being trade liberalization and privatization. The SAP was embodied in the Washington Consensus implemented in Latin America; however, essentially the same program was adapted by the member- countries of the Association of the South East Asian Nations (ASEAN) in the nineties, which became a period of opening of their economies to global trade and competition. Using the deregulation experiences of the Philippines and Indonesia, this paper argues that 1) state capacity, specifically its aspect of organizational design and management, is necessary for deregulation programs to achieve the desired development goals and 2) technological innovations resulting from deregulation break down monopolies and promote market efficiency, thereby contributing to the attainment of those goals. These arguments are represented in the diagram below.

Scope
Trade liberalization, deregulation, and privatization are different yet interrelated concepts and are often implemented together under the SAP. This paper focuses only on deregulation, herein defined as the easing of barriers to entry and exit [into the market, without] abolishing regulations designed for safety and environmental reasons (Williamson, The Washington Consensus and Beyond, 2003) and are intended to influence how firms operate, (having) no controls over capital movements (Williamson, Beijing Consensus Versus Washington Consensus, 2010). Since deregulation does not involve transfer and/of exchange of assets, its implementation is less complicated and controversial, and its supporting evidence, more transparent than that of trade liberalization and privatization. The discussion will not cover the financial sector, as Indonesia was way ahead of the Philippines in opening its capital markets, making their cases incomparable. It will instead focus on select industries that require heavy investment on infrastructure thus justifying their original state as monopolistic markets (or the natural monopoly industries). These industries include air transportation, automobile, telecommunications, and electric power generation. Oil industry is not included in the analysis because Indonesia is a net oil exporter while the Philippines, in contrast, is a net oil importer.

Rationale for the Cases

This paper presents Philippines and Indonesia as cases of similar characteristics and contexts with differing results of implementation of deregulation, with the latter having economic and social performance than the former. Geographically, both Philippines and Indonesia are archipelagicthe Philippines is composed of 7,107 islands and Indonesia, 13,670. (Buendia, 2002) Both countries are also susceptible to natural calamitiestyphoons and volcanic eruptions in the Philippines, earthquakes and tsunamis in Indonesia. These features pose a major
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challenge to industries that require heavy investment in physical infrastructure in order to move goods and service, including those cited earlier as part of this study air transportation, automobile, telecommunications, and electric power generation. Demographically, both countries have diverse cultures, languages, and religions. The Philippine population is estimated at 77 million (17th largest in the world as of 2002, which has grown to 94 million by 2010) with 110 ethno-linguistic and cultural groups spread over 77 provinces (as of 2002, which has numbered 80 in 2011). On the other hand, Indonesia has a population of 213 million (4th largest in the world as of 2002, which has grown to over 248 million by 2012), speaking 250 languages, spread over 32 provinces. (Buendia, 2002) This, combined with the countries geographic features, makes disparity in development an inevitable problem. Politically integrating a diverse people is also concern for the government. Historically, neither country has been a nation prior to colonial rule of the European countries, which gave both countries common experience (or common enemy for that matter) that compelled the people to unite. The Philippines was under the Spanish rule for more than 370 years (400 years of colonialism to include American occupation) while Indonesia was under the Dutch power for 350 years. (Buendia, 2002) The post-colonial state capacity building for the two countries should therefore not differ much. Consequently, both countries are characterized by clientelism, patronage, and corruption so much so that the interests of the government and those of large businesses cannot readily be separated, and that public economic policies reflect the interest of the few elites. (Ghosh, 1996) In the Philippines, the incredibly corrupt Marcos dictatorship was overthrown by the Aquino administration that did not have the ability to eradicate the rent-seeking behavior of the presidents kin. (Brilliantes, 1993) In Indonesia, the first family has a stake in almost every important commodity or service in the country. Thus some people viewed deregulation as a test to the presidents willingness to sacrifice his and his familys
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interestthe results were mixed. (Liddle, 1988) While in many cases the monopoly markets are natural monopolies, Indonesias was known to be plastic monopolies because these were monopolies only by the virtue of being linked to the first family. (Soesastro, 1989) In the eighties and nineties, Indonesia was widely known to be more corrupt than the Philippines with its Vice President admitting that corruption reached epidemic proportions in the bureaucracy and the business. (Bello, 2009) Thus, corruption could not be blamed for the Philippines ineffective deregulation and poor economic performance in general. Kung walang corrupt, walang mahirap may not hold water if various economies like Indonesia would be examined. However, Philippines and Indonesia also differ in some ways. Under the post- colonial regime, the Philippines adopted the unitary structure of governance and institutions of democracy from the Americans. However, this kind of democracy, opined Lee Kuan Yew of Singapore in his analysis of why the country has difficulty in economic take-off, does not work in the Philippines. (Brilliantes, 1993) On the other hand, Indonesia, under the powerful leadership of its first president Sukarno, used the indigenous village system of governance, which espoused functional rather than party representation, and consensus deliberation rather than partisan election. (Buendia, 2002) This kind of orientation could explain why the policies, especially those under the second president Suharto were pro-indigenous and protectionist in nature. As a reflection of the countries political system and culture, the Indonesian government as a whole determined who the beneficiaries of structural adjustments would be (which were the conglomerates) while in the Philippines, in the absence of a cohesive political system, patterns of recipients was less planned, less clear, and less predictablewith different groups (winning some and losing some). (Milne, 1992) This, however, does not mean that Indonesias institutional design (as discussed by Fukuyama) is any stronger than the Philippiness. The
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formers dependence on the power of its leader, Suharto, rendered the state unresponsive unless Suharto personally gave approval; thus the nation was shaken when Suharto fell critically ill in 1997. (Bird, 1997) In terms of the market, Indonesia is different from the Philippines in that the number of local/indigenous firms is smaller and the local Chinese are less well assimilated. In Indonesia, too, it is a basic objective to promote local entrepreneurship to accelerate transfer of the management of foreign-owned enterprises into local, private enterprises. (Milne, 1992)

Theoretical Background
Fukuyama (2004) argued that there was nothing wrong in the Washington Consensus per se, only that as the states needed to be cut back in certain areasfor example, through reduction of subsidies and tariff protection, privatization, and deregulationthey also needed to be strengthened in others. He defined state strength or capacity as its power or ability to plan and execute policies and to enforce laws cleanly and transparently. The four main components of state capacity are the following: 1) organizational design and management; 2) institutional design or political system; 3) basis of legitimization; and 4) social and cultural factors. Of these components, what is deemed most appropriate in the discussion of deregulation is organizational design and management, which combines the discipline of management, public administration, and economics. Moreover, Fukuyama recommended that developing states focus on this aspect on state building because it can be manipulated and built. Hence, the analysis of the two country casesPhilippines and Indonesiashall center on this particular component of state capacity. Milne (1992), supportive of Fukuyamas point, asserted that the nature of government largely dictates whether (structural adjustment program) can or cannot be implemented consistently and successfully. Bello (2009) also cited the
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case of the Philippines neighboring ASEAN countries: these states may have played a less aggressive role but an active state posture manifested in industrial policy, protectionism, mercantilism, and intrusive regulation was central in their industrialization. In support of these authors argument, this paper proposes that state capacity is necessary for the scope-reduction programs such as deregulation to be effective in achieving national development goals. Goals may vary across nations: market efficiency as in the case of the Philippines; or development of non- oil export capacity for macroeconomic stability or strengthening of local enterprises in the case of Indonesia; or provision of quality and reliable supply of basic needs to the public for some, for exmaple. Looking back at the Washington Consensus, following are the lessons that can be culled from the experience: 1) income distribution must be considered (Williamson, The Washington Consensus and Beyond, 2003); 2) the program should be done during the period of rapid growth, not crisis (Williamson, The Washington Consensus and Beyond, 2003); 3) the idea of deregulation should not be taken too broadly (Williamson, Beijing Consensus Versus Washington Consensus, 2010); and 4) having a government that delivers is important (Williamson, Beijing Consensus Versus Washington Consensus, 2010). These caveats, which could very well fall under the banner of organizational design and management, will be included in the country analyses. Bowen and Leinbach (1995) concluded thus: where public enterprise is natural monopoly, deregulation may not produce the desired increase in competition. A natural monopoly is characterized by scale economies required for efficiency and profitability to recoup huge investments in capital, thus providing natural barriers to entry of other, most often smaller, players. Examples are petroleum refining, tobacco products, glass products, and non-ferrous metals. Other industries may appear to be natural monopolies when in fact the market simply happens to be
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relatively small for a large firmamong these industries are professional equipment, footwear, ceramics, and metal furniture. (Hill, 2003) Although the above observation on natural monopolies may not be completely inaccurate, this paper further argues that technological innovation that results from deregulated, competitive environment breaks down monopolies, although a deregulated, competitive environment does not always produce technological innovation. Innovation allows the players to compete in aspects other than price; if products and services are undifferentiated and players can compete only through cutthroat pricingwhich shrewd businesspeople will least likely do then the industry may only consolidate into a duopoly, or at best oligopoly and cartels, despite deregulation. Perhaps, the role of technological innovation in determining the success of structural policies is this papers main contribution.

Deregulation in Indonesia
The countrys dependence on oil revenues and the decline in world oil prices in 1986, coupled with the rise in interest rates and the appreciation of yen, caused the rupiah to plummet and Indonesias foreign debt to bloat. At this time, several major reforms were introduced, including modern tax system, promotion of non-oil exports, reduction of trade barriers or select products, and deregulation of select industries (e.g. service industries remained closed to foreign investors and agricultural and handicraft sectors to medium- and large-scale enterprises, both domestic and foreign). (Fane, 1996) Thus, Indonesian deregulation can be seen as a pragmatic response to an economic situation(and) Indonesias policymaking processes should not be viewed as mechanical or unilateral. (Soesastro, 1989; Bowen & Leinbach, 1995) Further, since Indonesia had other sources of credit, it was not beholden to the development agencies for funds; and because the adjustment occurred without the tutelage of the International Monetary Fund and the World Bank, it could afford to
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ignore (and it did) certain features of the package and deregulation remained minimal (if not selective). (Ghosh, 1996) The eighties were known to be Indonesias decade of deregulation. (Soesastro, 1989) The country implemented deregulation more widely than privatization in promoting market efficiency, for the latter may actually mean strengthening the market at the expense of the state. (Milne, 1992; Fane, 1996) In Fukuyamas term, privatization may mean limiting state scope while also diminishing state capacity. What was also surprising was that while other countries reacted to the shock by imposing exchange controls and import licensing, Indonesia emphasized deregulation. As to why the country did not implement such open policy in the earlier decades, often the answer given is bad times mean good policies. (Liddle, 1988; Fane, 1996; Bird, 1997) Although the state implemented market-oriented policies in the eighties and nineties, up to Suhartos term in May 1998, the state had remained the most important economic actor. These market-oriented policies were aimed at deepening the countrys industrial structure, creating a heavy-industry nucleus around which to center the economy. This strategy included the development of an automobile industry, an integrated steel complex, a shipbuilding complex, and an aircraft industry. (Bello, 2009) Alongside with this program were the implementation of local content schemes and selective tax exemptions intended to protect individual firms. (Fane, 1996) Indonesias strategic and selective policies only show that the country did not adopt structural adjustment lock stock and barrelagain an indication of state capacity. Indeed, the countrys deregulation policies were well thought out. In general, the state mandates that the benefits of deregulation and economic growth must be widely and evenly spread, and that the development of the rural areas should be considered continuously. (Soesastro, 1989) In fact, the economic nationalists (to be
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described in the next paragraph) feared that foreign interest may dominate the key sectors and that wealth discrepancies between the conglomerates and the disadvantaged group may become worse under deregulation. (Hein, 1990) Specifically, certain caveats were highlighted: 1) if singularly pursued to promote non-oil export, deregulation may lead to new distortions; 2) if focused heavily on manufacturing, it could lead to bias against the agricultural sector; 3) deregulations initial impact was on the psyche level, that is, business climate had become more favorable with its implementation; and 4) there is a need to assess deregulations impact at the industry or sectoral level, especially in the non-tradable markets. (Soesastro, 1989) Indonesias organizational design and management capacity is evident in the countrys political structure. The head of the state deals with two competing groups of advisers: 1) the technocrats, many of whom are professional economists that favor market forces or neoliberalism; and 2) the economic nationalists, many of whom are engineers who promote large-scale, capital-intensive projects using advance technology. The latter group believed that such projects should be state- owned and may need direct government subsidies and protection. (Fane, 1996) They argued that it is worth paying the short-term costs of protectionist policies to promote the development of state enterprises and indigenous (non-Chinese locals) entrepreneurs who cannot as yet compete in either domestic or world markets. (Soesastro, 1989) It appears then that Indonesias economic development framework is largely influenced by the economic nationalists. As of 2000, the following industries in the country had been deregulated: petroleum and natural gas refineries, electric power generation, telecommunications, automobile, and certain agricultural commodities. (Asia Pacific Economic Cooperation, 2000) Despite the favored groups flexing of political muscles to seize business opportunities, the economic policy reforms achieved the development of a growing
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non-oil export market at a minimum. (Liddle, 1988) According to Soesastro (1989), the aim of deregulation is improved economic performance through a more efficient resource allocation and the most immediate measure of its success is the growth of the non-oil exports (hitting USD 1 billlion monthly in 1988 and contributing 60 percent to the countrys total export earnings in 1989). The countrys gross domestic product (GDP) grew by 5.4 percent from 1979 to 1989 and by 7 percent annually on average from 1990 to 1994. Likewise, poverty incidence decreased in the rural area from 40.4 percent in 1976 to 16.4 in 1987 and in the urban area from 38.8 percent to 20.1 percent over the same period. (Ghosh, 1996) With these figures, one can conclude that deregulation worked in Indonesia in propelling the countrys economic growth and without necessarily aggravating poverty (although there could be other factors that have influenced the decline in poverty incidence). In fact, while there is a general perception that the poor bore the costs of structural adjustments, Balisacan (1995) cited Indonesia as one of the countries whose transition has not been anti-poor. These results therefore challenges Williamsons (2003) proposition that structural adjustment should be done during rapid growth, not during crisis. The whole ASEAN region was suffering the consequence of international recessionary trends in the eighties when Indonesia started its deregulation policies. (Bello, 2009) Further, the outcomes serve as proof of the states capacity to formulate and implement appropriate policies, even at least during bad times.

Deregulation in the Philippines

While Indonesias decision to adopt structural changes was deemed pragmatic, the Philippiness was partly due to its international commitments and partly due to its own initiative, expecting that open economy would lead to competition, which in turn would lead to economic efficiency. (Orbeta) With this difference in intention, the Philippines was at a disadvantage in that it did not have as much freehand as Indonesia to select and/or calibrate programs that would suit its context.
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 Structural adjustment in the country was designed to alter the balance between the market and the state in the Philippine economy in order to promote economic efficiency. (Bello, 2009) Its implementation was done in three phases: 1) from 1980 to 1983 when the emphasis was trade liberalization; 2) from 1983 to 1992, when debt repayment became governments focus; and 3) from 1992 until the turn of the century, when free-market transformation, rapid deregulation, privatization, and trade and investment liberalization characterized the economy. Structural adjustment in the second and third phases was seen as a precondition for economic growth and debt repayment as an unpleasant but temporary condition. (Bello, 2009) Under the regime of President Fidel Ramos beginning in 1992, the countrys economic strategy centered on economic liberalization, with concerted attacks on cartels and monopolies. In his inauguration, the President explained that the political dominance of the oligarchic groupsthe countrys dominant commercial familiesis the reason why the Philippines lagged so far behind the Asian tigers. (de Dios & Hutchcroft, 2003) Bello (2009) argued that the slack in the Philippines performance could not be attributed to pace of economic liberalization, as the countrys start-off point did not differ from its neighbors. Neither could it be attributed to non-interventionist states among its neighbors because they are more intrusively interventionists, including Indonesia, than the Philippines. He cited two reasons for the Philippiness below-par economic performance thus: 1) the national priority of debt repayment that signaled low purchasing power of the Philippines as a market and thus failed to attract investors; and 2) doctrinal distortion that brought indiscriminate liberalization instead of the state carefully calibrating policiesa similar point raised by Williamson (2003) regarding Washington Consensus in that the policy reforms set were needed by a particular region at a particular time and that they were not an ideological agenda to be imposed on all countries at any and all times.
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The reforms led to improvements in competition but the gains were not as much as expected, according to Orbeta (n.d.). The author believed that this was so because the nature and extent of deregulation may have been inadequate and that the government continued to control further entry and to regulate prices. These claims may not prove accurate because in 1996 Asia Money Magazine considered the Philippines as one of the most deregulated in Asia (The Philippines Back in the Spotlight, 1996). Besides, the Indonesian government, with its deliberately selective deregulation and high level of regulation even after the reforms, was able to achieve the objectives of its economic reforms. Orbeta also criticized the Philippiness local content requirement as hindrance to firms access to more competitive import productsthe same policy that worked well in strengthening the position of the indigenous entrepreneurs in Indonesia. In the end, however, Orbeta pointed out the countrys two main challenges, which this paper supports: 1) too many implementing agencies results in lack of focus, expertise, and accountability; and 2) there is a danger that regulators become too intimate with the industry players and thus become eventually beholden to them. These points are apparent indicators of the states weak capacity. Sadly, the results of the three decades of structural adjustment were damaged industries such as textile, rubber, and ceramics, among others, while only a modest level of exportation in garments and electronic assembly was established. (Bello, 2009) Aggregate poverty also rose during the period while GDP remained at the 3- percent range from 1988 to 1991. (Balisacan, 1995)

Deregulation of Select Industries

What can be culled from the previous discussion is that Indonesia has been more successful than the Philippines in using deregulation as a strategy to achieve both its economic goal (i.e. development of the non-oil export) and social goal (i.e. wide and even distribution of benefits of deregulation and economic growth). The state was
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able to do this because of its strong capacity to plan and execute policies, although not necessarily enforcing laws cleanly and transparently, as Fukuyama defined state capacity. However, it cannot be assumed that regulatory agencies in all industries in both countries have uniform capacities. Although Fukuyama (2004) emphasized that state capacity should be viewed at the central government level and not at the level of its various agencies, the implementation issues related to regulation would be better analyzed at the agency level that governs the industries. The following sections show how Indonesia became successful in deregulating the air transport and automobile industries, and the Philippines in telecommunications; and how both did not quite succeed in the electric power generation.

Air Transportation
Many of the Asian newly industrialized countries (NICs) established their flag carriers during the post-war period. At the time, the states could not rely on private capital to create airlines that would support their national objectives; besides, it was of ideological importance for the states, at least at that time, to keep direct control over key sectors of the economy. Further, the states had to ensure that private companies would not exploit monopolistic profits and that the small, less profitable markets, which are usually present in developing economies, would be served. Ironically, the Philippiness flag carrier Philippine Airlines (PAL), established in 1941, was the only privately owned in ASEAN region put up by industrialists. Other Asian countries flag carriersThailand (1947), Korea (1949), China (1950, closely linked to the Taiwanese government), Indonesia (1950), Malaysia (1972), and Singapore (1972)were all state-owned. (Bowen & Leinbach, 1995) In 1973, PAL was awarded a domestic monopoly in exchange for its service to unprofitable routes, and was eventually nationalized in 1977. While PAL was the regions premier international carrier in the early post-war period, it was

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overshadowed by its neighboring countries by the eighties. In 1988, PALs monopoly was revoked and in 1992, in line with the Aquino governments thrust to dismantle state-owned enterprises, the flag carrier was brought back to private ownership through the sale of shares to a consortium consisting of a few major players (in contrast to Singapore Airlines privatization via public-share offerings that prevented concentration of ownership among few individuals). (Bowen & Leinbach, 1995) No new entrant in the market came until the mid-nineties with the launching of Cebu Pacifica classic example that deregulation does not necessarily attract new players or investors. One may ask then if the decision to nationalize PAL and later to privatize it, through sale of shares to few individuals at that, was grounded on pragmatic economic principles. In the case of Indonesia, the state deregulated the airline industry in the eighties, opening it to private playerswhich were all related to the Presidents family while keeping Garuda, the flag carrier, under state ownership. However, Garuda remained protected despite the presence of multiple carriers. Until 1989, Garuda was the only Indonesian carrier allowed to operate jet aircraft. Moreover, other privately-owned airlines were not allowed to undercut Garuda by more than 15 percent, were restricted to operate in less profitable routes, and were allowed to fly only three times for every seven domestic flights served by Garuda. (Bowen & Leinbach, 1995) Sempati, owned by a conglomerate controlled by one of President Suhartos sons, entered the Indonesian domestic market in 1989 and the international market in 1991. Through its international operations, the private company acquired foreign currencies that enabled it to acquire Dutch-made Fokker aircrafts. The Dutch manufacturer in turn partnered with a local manufacturer IPTN for production of certain components of the Fokker jets. Thus, in the end, these private company- initiated arrangements facilitated technology transfer to Indonesia. (Bowen & Leinbach, 1995)
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As pointed out by Bowen and Leinbach (1995), political leverage in the airline industry may come from two sources: 1) a firms political clout based on its ability to fulfill important government policy objectives and 2) leadership of the airline by politically influential personalities. While Sempati illustrates the first case, PAL is an example of the second. No hard data on these airlines business and developmental performances were provided but the fact that Indonesia has overtaken the Philippines in terms of both access/routes in the international flights and number of players in the industry proves that deregulation has worked better in Indonesia than in the Philippines. The airline industry case thus supports the arguments that 1) who owns the enterprises is not as crucial as the capacity of the state to define development objectives, set sound policy framework, and regulate and 2) that technology plays a key role in breaking monopolistic barriers and achieving efficiency, which could not be achieved solely through deregulation of the market.

Automobile
The Philippine automobile industry suffered the same fate as the airline. Despite its early lead in the region in the sixties, its operations proved inefficient beginning in the seventies and by mid-nineties it was overtaken by Indonesias production, which was three times more than the Philippiness output. (Hill, 2003) Indonesia, on the other hand, protected and strengthened its deregulated automobile industry through the national car policy. The policy stipulated that producer must be 100 percent Indonesian-owned, must use Indonesian brand name, must develop local technology, and must satisfy local-content requirements (that is, from 20 percent by the end of first year, to 40 percent by the end of second year, to 60 percent by the end of third year). (Fane, 1996)

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Again, the same arguments are supported by the experience of the two countries in automobile industry: 1) ownership of enterprises is not as crucial as the capacity of the state in organizational design and management and, in this case, in promoting efficiency despite protectionist policies; and 2) that technological innovation, more than deregulation policy that does not automatically attract investors, is crucial in development.

Telecommunications
Prior to deregulation, the privately owned Philippine Long Distance Company (PLDT) enjoyed a monopoly power in the telecommunications industry for 65 years. With the underdeveloped industry then, telephone density was around 1 percent and complaints on poor service quality was estimated at 17 percent per month, higher than Indonesias 9 percent. (Abrenica & Llanto, 2003) Mercado-Aldaba (2000) blamed it on the misguided policy and the weak and corrupt regulatory structure of the government. The opening of the market to new players in 1991 and subsequently the mandate of interconnection among networks in 1993 eroded the dominance of PLDT and created nine new, privately owned telecommunications companies. The country was recognized to be among the first 11 countries to allow competition in the local facilities and among the first 14 to de- monopolize the provision of international telephone services. (Abrenica & Llanto, 2003) The result was an increase in telephone density of 8.07 percent in 1997 and in absolute growth in mainlines from 3.2 percent before deregulation to 18.2 percent after policy reforms. (Mercado-Albada, 2000) The emergence of mobile technology was also instrumental in breaking the barriers inherent in telecommunications, especially in archipelagic countries like the Philippines and Indonesia. Since the digital technology does not require land-based infrastructure (i.e. networks of copper wires) for connection, it is able to reach the far-flung islands and highlands, thus addressing the age-old issue of access to

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services in the country. Aside from the absence of physical barriers in digital technology, the carrying capacity of mobile transmission towers is several times larger than that of fixed lines so that the service fees come out very cheap, thus addressing the problem of affordability. Finally, the short message service (SMS or texting) feature of the mobile technologywhich has gone way too low with the unlimited packages offered by the mobile companiescombined with the affordable mobile handsetsagain, a product of technological innovationhas redefined the way people communicate. Whatever problems there still are in the fixed line segment in the Philippines, they seem to have been addressed by the presence of other means of communication, thanks to mobile technology. Today, there are many available fixed lines that remained unsubscribed because of the presence of mobile services. However, this technological innovation has regulatory implications as well. With the process becoming more complex with the fast-developing technology, regulators also need to up their technical skills to catch up with it. Since mobile technology quickly became popular in the Philippine market, regulators faced a unique challenge in addressing interconnection problems of mobile carriersprior to this, no other market in the world had drafted and enforced rules on private mobile carriers (previous experience involve fixed line carriers). (Mirandilla, 2007) Further, mobile technology is now used in banking services in the Philippines, involving transfers of electronic moneysomething that required a new set of competence from the regulators. The National Telecommunication Commission (NTC) is tasked to regulate the mobile companies while the Bangko Sentral ng Pilipinas (BSP), the banking sector. The two agencies agreed that the BSP would take the forefront in regulating mobile banking, which necessitated the agency to train its examiners in handling mobile-based transactions and processes. In this aspect, the Philippines showed competence in its (banking sector-wise) regulatory functions.
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However, the same cannot be said of the NTC. The success of the mobile sector is not in any way indication that regulation (or the lack of it) that created the problem in the first place prior to policy reforms has improved. Today, the number of mobile players has declined from six firms in 2003 to only two in 2012 as a result of merger and acquisition. The mobile industry maybe a win for the Philippines because of the access and affordable services the people now enjoy but unless regulation is strengthened, the dominant player PLDT will always try to prevent competition either by squeezing the smaller players out of the market or buying them out. As pointed out by Abrenica and Llanto (2003), past experience shows that NTC leaves critical issues such as interconnection points and charges to contracting parties that do not necessarily have equal bargaining powers. Therefore, unless level playing field is ensured, the dominant player will always protect its turf. In Indonesia, on the other hand, although the government started loosening its grip on the telecommunications industry as early as 1989, mobile phone players did not enter the market until 19991 and duopoly in fixed line was mandated until 2005. In the early nineties, the country engaged in build-operate-transfer (BOT) schemes with overseas telecommunications companies that later either exited the deal or went to court. The failure of BOT was attributed to different factors: bureaucracy in the partly state-owned network Telkom, political instability, Asian financial crisis, and corruption. (Zita) Indonesias second attempt to liberalize its telecommunications industry was through privatization in 2002something inconsistent with the countrys dominant strategy of deregulation under Suhartos regimewith the shares of the two state- owned companied being bought by Singaporean governments investment arm and a Malaysian firm. Meanwhile, the Indonesian Telecommunications Regulatory Agency became operational only in 2004. (Zita)
1

Other source indicated various timelines between 1994 and 1996. Page 18 of 26

The result: fixed line density was estimated at 4 percent while the mobile density was at 8.1 percent in 2003. These figures earned for the country the reputation as the least developed (telecommunications) in Asia. (Zita) These figures pale in comparison with the Philippines, where mobile subscribers grew from 66,000 in 1991 to 22 million in 2003 (Sebastian, 2005) reaching a density of 35 percent; by 2009 mobile density was already 100 percent. (Commission on Information and Communications Technology , 2010) Perhaps Indonesia joined the telecommunications bandwagon a bit too lateeither that or the changing of guards after Suhartos resignation in 1998 was too frequent that the state was unable to create an environment conducive to new investments. The countries experience in telecommunications industry highlighted the role of technological innovations in changing the rules of the games and the need of regulators to build their capacity in terms of technical competence and facilities. It can also be hypothesized that whatever NTC lacked in regulatory capacity, technological innovations in the mobile market have made up for it, so that the industry deregulation resulted in both economic and social benefits, even to the disadvantaged groups. Further, the case proves that the implementation issues related to regulation should be examined at the agency/industry level because of the varying levels of preparedness and competence of the regulators, as exemplified by the BSP and the NTC.

Electric Power Generation

In the height of power failures in the Philippines, the Ramos administration in the early nineties opened the electric power market to privately owned independent power producers (IPPs). In its intent to attract investors, the Ramos administration entered into contracts where the government-run National Power Corporation absorbed the risks inherent in such investment to protect the private producers market risk (government assured purchases of all energy produced by the power generators), supply risk (government assured purchases all inputs such as coal and

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oil), and even foreign exchange risk. The Philippine Center for Investigative Journalism also pointed out that the Ramos administration pushed for the speedy approval of some of the most expensive deals and justified signing more contracts. (Malaluan, 2002) The 35 IPPs that entered the market reported to have built an additional capacity of 8,000 megawatts, supplying more than 50 percent of the countrys need. (Bello, 2009) However, because of lower installation costs, most producers preferred petroleum-based facilities even if they would entail high risks in terms of price and environmental management. The high costs of power were then passed on to the consumers. Hence unsurprisingly, the cost of electricity in Manila (USD0.181 per kilowatt hour) is much higher than in the industrialized Japan (USD0.179 per kilowatt hour) and the highest in Asia. (Main Business, 2011) On hindsight, Llanto (in Bello, 2009) concluded that no government guarantee should be given to shield private investors from commercial risks(and that) the government forgot to deal with the need to have an independent regulatory capacity, leaving regulatory institutions open to opportunistic political interventions. (This is the same reason for the failure in the privatization of the water sector: lack of regulation.) Indonesia, on the other hand, realized during the 1997 Asian financial crisis that the IPP model entails high price of electricity for the end-users and thus introduced policy reforms. This move caused the geothermal power sector to slow down such that by 2005, it only had 807-megawatt (MW) capacity from geothermal plants when its potential was estimated at 27 gigawatt electrical (GWe). By 2003, the country enacted the Geothermal Law, which stated that the government would engage in exploration and production, taking on the field development risk, to lower the power rates. At the same time, the government deregulated the downstream energy sector, allowing multiple buyers and sellers in power generation and distribution and prioritizing the renewable energy for domestic needs. Despite
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these deregulation policies, the government still maintained control over the use of energy sources in the country (Suryantoro, Dwipa, Ariati, & Darma, 2005), which stood in stark contrast with the Philippiness weak regulation. In terms of geothermal capacity, the Philippines has outdone Indonesia with its 2,000-MW power capacity. Indonesia expected to install 2,445-MW geothermal capacity by 2012. (Suryantoro, Dwipa, Ariati, & Darma, 2005) Due to heavy government subsidy, however, Indonesia has managed to keep its rates lower than that of the Philippines. Thus, price cannot be used as basis for comparison of the two countries performance. As of 2002, the total energy supply in Indonesia that stood at 663 million barrels of oil equivalent (BOE) exceeded the demand at 430 million BOE. (Suryantoro, Dwipa, Ariati, & Darma, 2005) Beginning 2010 though, Indonesia had started experiencing power shortages and suffered from low electrification rate and uneven distribution of electricity. On the other hand, the Philippines was expected to have experienced power shortages beginning 2008 escalating until 2014 unless investments in additional capacity would be made during the said period. (Department of Energy, 2004)
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Hence, one country is not necessarily better than the other as far as electric power generation is concerned. The Philippiness loosely regulated energy market and IPP- based model, and Indonesias heavily regulated and subsidized sector with reformed policies (veering away from the IPPs) both resulted in shortage and high- cost of electric power supply. As to what could the explanatory variables for this phenomenon would be another research question that neither state capacity or technological innovation could account for.

Conclusion
In general, Indonesia has been more successful than the Philippines in using deregulation as a strategy to achieve both its economic goal (i.e. development of the non-oil export) and social goal (i.e. wide and even distribution of benefits of deregulation and economic growth). The country was able to do so because of its strong state capacity, i.e. organizational design and management, manifested in the following: Clear developmental priorities such as promoting regional growth (in the eastern part of the archipelago) through deregulation, the air transport policies for example Pragmatic and selective adoption of the SAP Market-oriented policies that aimed at deepening the countrys industrial structure and that did not make open economy as an end in itself Conscious promotion of wide and even distribution of benefits of deregulation and economic growth and initiatives to at least not aggravate the wealth discrepancies between the conglomerates and the disadvantaged group Recognition of the need to assess deregulations impact at the industry or sectoral level, especially in the non-tradable markets Control over key sectors Promotion of the development of state enterprises and indigenous entrepreneurs that justified the countrys protectionist policies
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 Strong regulatory functions despite market-oriented policies Indonesia proves that ownershipprivate is efficient and public is inefficientdoes not matter any more. There are successful state-run or state-owned enterprises that are able to employ effective management, high corporate autonomy, and technological innovations. (Bello, 2009) Indonesias performance also challenges Williamsons argument that structural adjustment should not be done during crisis. The country did exactly that and bad times came to mean good policies in its case. The industry examples in this paperair transportation, automobile, telecommunications, and electric power generation, all of which used to be natural monopoliesalso prove that aside from state capacity, technological innovation is indeed key in successful deregulation. In the case of the Philippines, technology must have even compensated the weak regulators in the telecommunications industry. Deregulation in the banking sector, although beyond the scope of this paper, would not have been successful either without advance information and communication technology. It would be interesting to know how the Philippines could strengthen its state capacity, particularly in the area of regulation. Except for the likes of the BSP, regulatory agencies in the country in general are criticized for lack of focus, expertise, and accountability, and for their too close a relationship with the industry players that they tend to become beholden to them. However, if state officials remain advocates of neoliberal ideastaking the concept of deregulation as leaving everything to market forces and reducing the state role to a minimum, among other thingsthen building state capacity would be futile cause.

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