Co-Investment and Clientelism as Informal Institutions: Beyond ‘Good Enough’ Property Rights Protection

How do we explain high rates of investment in the production of oil palm in Indonesia under conditions of legal uncertainty and uneven protection of property rights? This article argues that what are commonly seen as deficiencies in the formal institutional environment actually enabled investment, but only when informal institutions were able to provide investor assurances. Although the finding that informal institutions provide investor assurances is not new, this study addresses outstanding questions about how such informal institutions work. An examination of the micro-level details of informal institutions in the oil palm industry shows that informal institutions frequently grouped under umbrella terms such as ‘patronage’ or ‘relational ties’ are not uniform. Rather, two types of informal relational tie operate to provide investor assurances: clientelistic and co-investment. Although they serve similar purposes, clientelistic ties work well only under restrictive conditions and are vulnerable to decay. Co-investment, in contrast, is a more robust informal institution, especially when political power is fragmented. Although co-investment provides investor assurances under conditions of legal uncertainty, it remains a particularistic solution and does not guarantee generalized public interest protections.