In the early 1990s, Singapore, the Malaysian state of Johor, and the Riau Islands in Indonesia sought to leverage their proximity, differing factor endowments, and good logistics connections to market themselves as a unit. Beyond national-level support in all three countries, the initiative had the buy-in of leaders in Johor and Riau.
Now, however, the situation is markedly different. The Malaysian government and its Johorean equivalent have pursued closer integration with Singapore, and the Indonesian central government has been developing special economic zones and fostering production for export. However, the Riau Islands provincial government is promoting traditional economic activities such as fishing and small-scale farming.
This development is counter-intuitive. Traditional fiscal federalism theory argues that decentralization encourages competition between provinces for investment, jobs, and growth. While Indonesia has undergone one of the world’s most far-reaching decentralization reforms, Malaysia has pursued a consistent centralization campaign. Thus, we would expect the Riau Islands’ entrepreneurial drive to be unleashed, and Johor’s to be smothered. However, Johor’s pursuit of investment is undiminished, while the Riau Islands’ drive for capital has dissipated. This monograph will explore the reasons for this paradox.
Francis E. Hutchinson is a Senior Fellow at the Institute of Southeast Asian Studies in Singapore, and a Managing Editor of the Journal of Southeast Asian Economies. His research focuses on state-business relations, federalism, decentralization, innovation, and industrialization in Southeast Asia. He is the Editor of Architects of Growth? Sub-National Governments and Industrialization in Asia (ISEAS, 2014), and has published in Journal of Contemporary Asia, Journal of the Royal Asiatic Society, Economic and Political Weekly, and Southeast Asian Affairs.