This monograph's analytic narrative sheds light on developmental variations in the cross-border region between Johor, in Malaysia, the Riau Islands, in Indonesia, and Singapore. It provides a convincing explanation of why the Riau Islands attracts less Singaporean investment than Johor and triggers less development, despite both areas having had similar economic circumstances in 1990. This book offers an important contribution to the field of institutional analysis; its topic would have been a relevant inclusion in Acemoglu and Robinson's Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012).
The book is at ease promoting the merits of institutional analysis in explaining developmental factors typically glossed over by mainstream economic theories. Its theoretical basis is fiscal federalism, which, in its first generation, argued that subnational governments have better information on local needs and can therefore provide goods and services that are more suited to constituents’ demands. Second-generation fiscal federalism builds on this argument, adding that subnational governments are not necessarily benevolent; rather, they tend to respond to incentives and aim to maximise utility. Subnational governments thus have to be economically and politically incentivised to perform this role.
Hutchinson explains how fiscal federalism has played out in Malaysia's and Indonesia's ‘internal state architecture’. Malaysia has a politically strong federal government, but state governments remain responsible for generating most of their budgets. This structure, which has been in place since 1990, gives states the incentive to stimulate their local economies. In contrast, Indonesia's subnational governments source most of their budgets from central-government transfers. Despite major political reforms in 1998 that resulted in the large-scale decentralisation of expenditure, provincial governments remain limited in their taxing power and lack the incentive of their Malaysian counterparts.
Hutchinson compares and contrasts the political settings and economic outputs of Johor and the Riau Islands over three periods, spanning 23 years. The first period (1990–97), he argues, saw the beginning of large-scale investment in both areas, prompted by Singapore's offshoring needs, Indonesia's and Malaysia's export-oriented policies, and the three countries’ common interest in the region's Growth Triangle concept. Hutchinson refers to this period as one of mirror images, when Johor and the Riau Islands had similar policies and investment profiles.
In the second period (1998–2003), both host countries were in transition, readjusting to deal with the impacts of the 1997–98 Asian financial crisis. Indonesia had suffered an economic as well as a political crisis and had undergone major reforms to its democracy—including a process of decentralisation that was heavy on expenditure and light on revenue. Malaysia, on the other hand, did not experience a political crisis and emerged from the transition period with most of its pre-1998 political institutions intact.
Hutchinson describes the third period (2004–13) as one of divergence between Johor and the Riau Islands. Johor experienced further development and the structural evolution of its electronics sector. It also established new areas (for example, Iskandar Malaysia) to encourage more development of services and higher-value-added activities. The Riau Islands, in contrast, suffered from political bickering at the national and local levels, labour unrest, and substantial outmigration of electronics firms.
Mirror Images is equipped with time-series data across all three periods, covering variables such as gross regional product per capita and its sectoral composition, firms and employment by sector, and the proportion of central transfers in subnational revenue. Aside from presenting quantitative data, the book also provides useful qualitative information on the politics and policy settings in each period, including the rules that were changed, the statements made, and the political priorities and relationships developed. A small portion of the data are admittedly interpolated, or gathered from non-formal sources, but these instances are clearly identified and do not compromise the credibility of the argument.
The second generation of fiscal federalism, while helpful, does not completely explain the development trajectories of Johor and the Riau Islands. For example, the fast growth and development of Riau Islands (that is, Batam) before 1998 was driven not by an incentive structure but by a strong interest and commitment from the likes of Soeharto, B. J. Habibie, and their affiliates, who treated Batam as their special project. Overall, however, Hutchinson has provided a strong response to one of social science's long-standing questions: why some regions develop faster than others. The book is a welcome addition to the literature on cross-border regions, foreign investment, institutional analysis, and Southeast Asian studies.