Battle for economic policies: Good or bad?<\/p>\n
Ari A. Perdana, Centre for Strategic and International Studies,
\nSchool of Economics University of Indonesia, Jakarta<\/p>\n
The government has finally scrapped the controversial idea to
\ngrant a debt extension to the big debtors under the Indonesian
\nBank Restructuring Agency (IBRA). It has decided to only grant a
\nthree-month grace period for the debtors to repay their debts,
\nnot the initially proposed 10-year extension. It appears that the
\ngovernment has made the right move. The debt extension would only
\ncost the country more uncertainty and a loss of credibility.<\/p>\n
What lies behind the debt-extension idea and the final
\ndecision to scrap it? What are the factors influencing the
\ngovernment's economic policies?<\/p>\n
A standard economic analysis would assume that the government
\nwould always act as a \"benevolent dictator\". Any policies it
\ntakes are based on the objective of maximizing the welfare of all
\nsegments of society. Furthermore, the government is assumed to
\nhave perfect information about what is \"best\" for the economy.<\/p>\n
Such a framework of analysis, however, is not satisfactory.
\nThe benevolent dictator assumption is not always the case. In
\nreality, a government is not a single, rational decisionmaker
\nthat is free of interests. Rather, there are a number of
\ncompeting interests trying to take advantage of certain policies.<\/p>\n
To understand how these interests influence policy-making, we
\nshould evaluate the political-economic structure of the state.
\nThere are two types of state in the political-economic
\nliterature: the autonomous and the factional states.<\/p>\n
An autonomous state is the one that pursues its own policy
\nobjectives. A state is autonomous if within a fairly wide range.
\nIt is relatively immune to any political influences or opposition
\nin delivering policies.<\/p>\n
The Northeast Asian countries during the 1970 and 1980s are
\ngood examples of an autonomous developmental state. The
\ngovernments of these countries were able to set their development
\nagendas with relatively less disturbances from interest groups.
\nAs a result, the countries achieved rapid economic growth,
\ndeepening industrialization and a significant increase of living
\nstandards within two decades.<\/p>\n
To some extent, the New Order government also had similar
\ncharacteristics. The economic policies during the New Order had
\nbeen state-centered, with almost no influence or opposition from
\nnon-state agents. It has also been a general consensus that
\nduring its 30-year reign the New Order had significantly
\ndeveloped the economy and improved the general living standards.<\/p>\n
At the same time, however, the New Order was also a predatory
\nstate, whose behavior sought to maximize the private welfare of
\nthe state apparatus or bureaucracy. Such behavior abused the
\ncountry's economic resources through what is called rent-seeking
\nactivities.<\/p>\n
Therefore, it is unclear whether social welfare was the main
\ngoal of economic policies, or only an instrument to maintain the
\nstate's legitimacy and further maximize the private welfare of
\nthe state apparatus.<\/p>\n
The New Order's predatory behavior was more obvious in the
\n1990s. Economic policies did not seem to reflect the objectives
\nof maximizing social welfare. Some indications were the overabuse
\nof nonbudgetary expenditures, such as reforestry funds or funds
\nunder the State Logistics Agency, as tools for rent
\ndistributions, Soeharto's privileges for his youngest son Hutomo
\n\"Tommy\" Mandala Putra to have a monopoly over the clove industry
\nand the national car project, and several other policies that
\ncost the nation its economic efficiency.<\/p>\n
The second type of state is the factional state, in which
\nthere are interest groups competing to influence policies. In
\ncontrast with the autonomous state, the capacity of a factional
\nstate to pursue its own policy objective is more limited.
\nInstead, it serves the most powerful interest groups.<\/p>\n
The behavior of a factional state may be predatory as well as
\nconstructive. It tends to be predatory if the influences interest
\ngroups have on economic policies are significant to distort the
\nresource allocation in their favor.<\/p>\n
This is the case of \"booty capitalism\" in the Philippines,
\nwhich continues to exist in the post-Marcos era. Meanwhile, the
\nThai experience shows that a competing patron-clientship
\nstructure at the industry level results in a higher industrial
\noutput, which is beneficial for the economy.<\/p>\n
Clearly, the current Indonesian political-economic structure
\nhas the characteristics of the factional state. On the positive
\nside, to some extent the competition among interest groups could
\nstill provide a check-and-balance mechanism.<\/p>\n
The above-mentioned debt extension policy is an example of
\nthis. Clearly, the idea suggested that the government, or IBRA in
\nthis case, was a hostage of the interests of big troubled
\ndebtors. However, as there would be more disadvantaged groups if
\nthe plan went ahead, it was finally dropped.<\/p>\n
On the negative side, the policy-making process becomes the
\narena of competition among various interest groups. There are
\npolitical parties, business interests groups or even factions
\ninside the government.<\/p>\n
In this situation, economic policies become highly tradable
\ncommodities. As a result, the government is still prone to the
\nshort-term interests that often contradict the objective of
\neconomic recovery. One example is the government's inability to
\nmeet the target of privatization and asset sales, due to various
\ninterests constraining the process.<\/p>\n
Meanwhile, the clock is ticking toward the 2004 election. And
\nwhether this will end up with a stronger economic structure for
\nthe country, or economic self-destruction, remains to be seen.<\/p>",
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