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We study how inequality, democracy and economic development affect institutions in a dynamic panel model using data for 78 countries from 1984 to 2006. We suggest a model that assumes the sluggish adjustment of institutional quality and the interplay between the key explanatory variables. We find that democracy has a non-linear effect on government stability and military involvement in politics. This effect depends on inequality and GDP per capita. Inequality matters for law and order and has a non-linear effect as well. However, the results for wealth effect are mixed.

With the passing of Thee Kian Wie (hereafter ‘Kian Wie’) on February 8, 2014, aged 79 years, Indonesia lost one of its most distinguished citizens. Kian Wie, or ‘Pak Thee’ as he was widely known to Indonesians, was a dedicated and productive scholar, a public intellectual, a life-long civil servant, a mentor, a raconteur, and a cosmopolitan able to converse with ease in several languages. He had a remarkable empathy with people across nationalities, ethnicities and socioeconomic classes. His circle of friends and colleagues at home and abroad was extraordinarily wide. In fact, it is difficult to think of any other Indonesian academic social scientist of his generation with a wider international network; he was a bridge between the Indonesian and international scholarly communities. And above all else, he was a warm, charming, generous, principled and modest human being, with a fierce sense of justice and support for the less privileged.

Indonesia's 1999 decentralization law gave local governments in Indonesia an unprecedented opportunity to adopt prodevelopment policies. In this article, we study whether decentralization has in fact generated improved economic performance in Indonesia. Using a synthetic case control methodology, we argue that Indonesian decentralization has had no discernable effect on the country's national-level economic performance. To explain why not, we use subnational data to probe two political economy mechanisms—interjurisdictional competition and democratic accountability—that underlie all theories linking decentralization to better economic outcomes. Our findings suggest that extreme heterogeneity in endowments, factor immobility, and the endogenous deterioration of local governance institutions can each undermine the supposed development-enhancing promises of decentralized government in emerging economies such as Indonesia.

Financial integration has many potential economic benefits. However, it also carries potential risks. In ASEAN, since its financial sector is generally bank-dominated, the banking sector is a key driver in the financial integration process. The ASEAN Banking Integration Framework (ABIF) aims to provide financial stability in the region and achieve multilateral liberalization in the banking sector by 2020 for ASEAN commercial banks. Given the diversity of financial market development, economic structure, and priorities among ASEAN members, the implementation process of ABIF is very challenging, particularly in terms of establishing the necessary preconditions. The biggest technical challenges concern the harmonization of the principles of prudential regulations and the building of financial stability infrastructure. Political challenges, meanwhile, stem from varying political commitments to ABIF between countries, with the ABIF process experiencing numerous domestic political backlashes. ASEAN countries can learn lessons from European Union (EU) banking integration, especially in light of the recent European sovereign and banking crisis, but it must be emphasized that the ABIF will not be the same as that of the EU banking integration. Ultimately, ABIF will continue to progress in the "ASEAN way" marked by small incremental changes, pragmatism and countries retaining much of their sovereignty.

We study how endogeneity between welfare and institutions might make institutional reform more subtle. We use evidence from an in-depth field study conducted in five districts in Indonesia and build a model that illustrates how initial socioeconomic condition as well as past institutions generate institutional complexes, including the degree of local capture, local leadership, and participation level. By endogenizing the degree of local capture, we show how cooperation between local leaders and local elites could positively or negatively affect welfare depending on the initial socioeconomic conditions. These institutional complexes that evolve with welfare create self-reinforcing progresses in the long-run. In the context of Indonesia in the post-decentralization period, exogenous shocks, such as an introduction of central government's enforcements on both strengthening local institutions and increasing welfare are needed.

We provide a positive analysis of the equilibrium bidding and bribing strategies with and without corruption in a first-price, sealed-bid, procurement auction with two-dimensional-type bidders. With corruption, we assume that the quality of the bidders are unobservable and non-contractible ex-post. We show examples of equilibrium bids and bribes of N two-dimensional-type bidders in an incomplete information game where the type space is discrete and strategy space is infinite. The equilibrium bid and bribe decrease in the number of bidders. Moreover, we show that in this auction with corruption, quality is randomly chosen, constraining efficiency. In fact, no mechanism can be efficient in this auction. The empirical study suggests that increasing the number of bidders increases the percentage cost efficiency at a decreasing rate and it starts to decrease the percentage cost efficiency after it reaches a certain number of bidders.

We study how economic institutions intertwine with political institutions. A theoretical study of a simple strategic complementary game with private and public information among partially informed agents such as central banks shows that initial fundamentals might give rise to different levels of transparency. An empirical study shows that both economic fundamentals such as the reserve ratio of broad money to foreign exchange reserves and non-economic fundamentals such as an occurrence of crisis and the level of democracy do affect transparency of central banks. We apply this analysis to study the coordination effect of information on the progress towards regional financial integration among East Asian countries. We find that the progress towards regional financial integration might rely more on polity rather than on economic fundamentals.

Maria Monica Wihardja: The paper discusses how fiscal policy can be used to stimulate growth during a slowdown, with some precautionary notes. The author argues that output expands when public expenditure increases or tax revenue collection decreases, suggesting an expansionary fiscal policy may affectively counteract a growth slowdown. Running a budget deficit is not as dangerous, especially when business confidence is high. However, an expansionary fiscal policy combined with higher growth and rising business confidence will result in inflation. The author cautions that an expansionary fiscal policy should be carried out during the period of oil price decline and exchange rate appreciation to mitigate the inflationary impact of the fiscal stimulus. The author also cautions that public spending should be focused on capital instead of current spending and that populist military spending will result in slow growths in Thailand.

We study how endogeneity between welfare and institutions recommends the efficacy of subtle institutional reforms that must be exogenous. We use evidence from a field study conducted in five Indonesian districts, and build a model that illustrates how initial socioeconomic conditions and quality of institutions generate certain institutional attributes, such as a particular level of local capture (that is, gaining of influence over institutions, and hence over policy, by local elites), local leadership and participation. These institutional attributes, which evolve with changing welfare, create self-reinforcing processes in the long run that could be either vicious, virtuous or neutral. The policy question we investigate is how to break a vicious cycle between low welfare and low institutional quality. Reform must be exogenous and multi-dimensional, requiring welfare and institutions to be mutually reinforcing. In the context of post-decentralization Indonesia, any multi-dimensional institutional reform must include not only policies to strengthen local institutions, but also policies to increase welfare.