Political Science The Political Economy of Public Administration Reforms in Southeast Asia: A Comparative Analysis of the Tax Administration in Indonesia and the Philippines Dissertation for the degree of Doctor of Philosophy granted by the Department of Social Sciences Faculty of Economics and Social Sciences University of Hamburg submitted by Nina Korte Hamburg 2013 First Examiner: PD Dr. Andreas Ufen Second Examiner: Prof. Dr. Joachim Betz Place and Date of Defence: Hamburg, January 28 th , 2014 i Abstract Within the last decade, scholars and practitioners have increasingly discussed domestic resource mobilization as a development financing tool. Revenues from domestic sources are regarded as more stable than resources derived from world capital markets. Moreover, taxes are ascribed a positive impact on state building and good governance. In most developing and transition countries, so far, the tax ratio has been lower than the internationally advocated twenty percent of their gross domestic product. Within this context, research on taxation in developing countries has grown, and efforts to improve tax systems have proliferated globally. Strong interest and rhetoric on enhancing domestic resource mobilization however does not necessarily translate into more effective and efficient, equitable and impartial tax systems as previous experience has shown. The reasons accounting for low tax efforts and for the relative success and failure of tax reforms in many countries have remained under-researched. This has been particularly true for countries in Asia, Central Asia and the Middle East. This study contributes to this research gap by a comparative political economy analysis of the Indonesian and Philippine cases. The study focuses on the tax administration reforms of the years 2002 to 2010. It applies an actor-centred historical institutionalism approach and uses the neopatrimonialism concept as its main analytical lens. Due to the scarcity of related academic research and published material, the study relies to a large degree on the analysis of primary sources. The study’s insights draw on 90 formal expert interviews and four focus group discussions with respondents from inside and outside the tax authorities conducted in 2009. Field mission information collected in 2012 complements these perspectives. A detailed review and analysis of annual national budgets, budget speeches, and state of the nation addresses, relevant legislation, journal articles, and newspaper articles substantiate the study further. Based on these data, the study describes how the tax administrations are structured and reveals how taxes are administered by law and in practise. It analyses what accounts for the shortcomings and weaknesses in taxation. Further it describes what kind of efforts the governments are pursuing to increase their tax take. It analyses the processes of these modernization and reform efforts and examines the factors why Indonesia in comparison with the Philippines has been widely perceived as the more successful reformer during the period under observation. The study finds that many of the shortcomings and weaknesses the tax administrations in both countries show are institutionalised. They have existed for decades and often been deliberately created and sustained. Path dependence makes it difficult for reforms to be implemented. Yet, human agents choose directions, therefore can overcome institutional constraints. The study suggests that two agency-related factors are highly decisive in explaining the different outcomes of reforms. These are the degree of power concentration found in a country in combination with the perceived strength of change management applied in the reform process. There is evidence, that the successful implementation of reforms is the more unlikely the more concentrated power, in other words the higher the degree of economic elite capture of politics and bureaucracy. Yet, strong change management holds the potential to overcome resistance against reforms. ii Acknowledgements This PhD thesis has been a journey of discovery, full of new experiences, challenges, and surprises. Many individuals and institutions inspired and supported me throughout this endeavour. While it is not possible to thank them individually, I wish to express my sincere gratitude to all of them. The GIGA German Institute of Global and Area Studies provided me an academic home. I would like to thank all my colleagues who shared their knowledge, skills, and experience with me and provided recommendations on improving the work done. Thanks go to my thesis supervisor Andreas Ufen for giving me the freedom to work on a rather unique topic and his confidence in this project. I am grateful also to Joachim Betz who accepted to act as the second examiner of this thesis. The thesis originated from a research project on the “Persistence and Change of Neopatrimonialism in various Non-OECD Countries”, where I was responsible for the Southeast Asian case studies. The German Research Foundation (DFG) funded the project from 2008 to 2011, financial support for subsequent research and the writing of this thesis came from the University of Hamburg, both is gratefully acknowledged. The thesis would not have been possible without the hospitality and generosity I encountered in Indonesia and the Philippines. I owe a great debt to the Directorate General of Taxation, the Bureau of Internal Revenue, and in particular the many individuals who have shared with me valuable insights, background materials, comments, and suggestions. It is through them I gained a better understanding of the challenges in taxation and public administration in my host countries. My heartfelt thanks to them. The University of Indonesia’s Eko Prasojo and his team from the Department of Public Administration facilitated my research, provided valuable research assistance and stimulated my thoughts. The University of the Philippines’ Teresa (Tesa) Encarnacion Tadem and her team from the Third World Studies Centre provided similar assistance and introduced me to Philippine particularities. I am grateful for their support. I presented ideas of this study at my host universities, international conferences, and doctoral seminars. I would like to thank all participants for comments and suggestions. During the final stage of the thesis, I worked as a consultant to the International Tax Compact. The insights gained from the field missions to Indonesia and the Philippines, and the related discussions with my team members have been invaluable for final data assessment and the balancing of my interpretations. Finally, I would like to thank my friends and family in Germany, Indonesia, and the Philippines for all their love, encouragement, and support throughout the years. iii Table of Contents iv Table of Contents Abstract i Acknowledgements ii List of Tables vi List of Figures vii List of Appendices viii Abbreviations and Acronyms ix 1 INTRODUCTION 1 1.1 BACKGROUND : WHY STUDY TAX ADMINISTRATION REFORMS ? 1 1.2 RESEARCH QUESTIONS AND EMPIRICAL APPROACH 4 1.3 CONTRIBUTIONS AND LIMITATIONS 5 1.4 STRUCTURE OF THE DISSERTATION 8 2 CONCEPTUAL FRAMEWOR, 9 2.1 POLITICAL ECONOMY OF PUBLIC ADMINISTRATION REFORMS 9 2.2 HISTORICAL INSTITUTIONALISM 14 2.3 NEOPATRIMONIALISM CONCEPT 16 2.4 SUMMARY 20 . ANAL/TICAL FRAMEWOR, 21 3.1 INTRODUCTION 21 3.2 PRINCIPLES OF CASE SELECTION 21 3.3 RESEARCH METHODS AND SOURCES OF THE STUDY 23 3.4 NATIONAL CONTEXT OF REFORM 29 3.5 ADMINISTRATIVE CONDITIONS FOR REFORM 33 3.6 PROCESS OF REFORM 36 3.7 INDICATIVE OUTCOMES OF REFORM 39 3.8 SUMMARY 41 0 CASE STUD/: INDONESIA1S DIRECTORATE 2ENERAL OF TA3ES 02 4.1 INTRODUCTION 42 4.2 NATIONAL CONTEXT OF REFORM 42 4.3 ADMINISTRATIVE CONDITIONS FOR REFORM 61 4.4 PROCESS OF REFORM 87 4.5 INDICATIVE OUTCOMES OF REFORM 113 4.6 CONCLUSION : INDONESIA CASE STUDY 120 Table of Contents v 5 CASE STUD/: T5E P5ILIPPINES1 6UREAU OF INTERNAL RE7ENUE 12. 5.1 INTRODUCTION 123 5.2 NATIONAL CONTEXT OF REFORM 123 5.3 ADMINISTRATIVE CONDITIONS FOR REFORM 144 5.4 PROCESS OF REFORM 174 5.5 INDICATIVE OUTCOMES OF REFORM 207 5.6 CONCLUSION : PHILIPPINES CASE STUDY 210 8 CONCLUSIONS AND IMPLICATIONS 21. 6.1 MAIN DETERMINANTS OF RELATIVE REFORM SUCCESS AND FAILURE 214 6.2 IMPLICATIONS FOR SCHOLARSHIP AND POLICY 220 6.3 FURTHER RESEARCH 222 7 APPENDI3 I 220 8 APPENDI3 II 2.0 9 6I6LIO2RAP5/ 2.8 9.1 PRIMARY SOURCES 236 9.2 SECONDARY SOURCES 256 List of Tables vi List of Tables Table 3.1 Selected Case Studies: Similarities 22 Table 3.2 Respondent Groups and Number of Interviews 24 Conducted Table 3.3 Focus Group Discussions: Number of Participants 28 Table 4.1 Tenure of Presidents and Key Ministers, Indonesia 44 (1967-2009) Table 4.2 Integrity Violations in Taxation and related Indonesian 81 Terms Table 4.3 Disciplinary Sanctions towards DGT Staff (2001-2011) 101 Table 4.4 Number of Tax Administration Offices at Levels II and 109 III (2002-2008) Table 4.5 DGT Staff based on Educational Attainment Level 111 (2002-2011) Table 4.6 Revenue Performance Indicators, Indonesia 115 (FY 1996/97 – FY 2010/11) Table 4.7 Selected High-Profile Tax Corruption Cases, Indonesia 118 (2010-2011) Table 5.1 Tenure of Presidents and Key Secretaries, Philippines 125 (1965-2010) Table 5.2 Integrity Violations in Taxation and related Tagalog 166 Terms Table 5.3 RIPS – Revenue Integrity Protection Service, Cases Filed 200 and Decided (2003-2011) Table 5.4 RATE – Run After Tax Evaders, Cases Filed and 204 Decided (2005-2011) Table 5.5 Revenue Performance Indicators, Philippines 208 (FY