History shows that nations that forget their own limitations often\nfail in much more expensive ways. In Indonesia today, almost every\neconomic issue seems to lead to the same conclusion: the state must play\na larger role. The state is entering various economic spheres through\ndownstreaming, strengthening the role of State-Owned Enterprises (SOEs),\nthe formation of Danantara, the Free Nutritious Meal (MBG) programme,\nvillage cooperatives, and the discourse on forming a national export\nagency. Almost all these policies stem from a similar diagnosis: the\nmarket is deemed to have failed to produce the desired economic\noutcomes.<\/p>\n
This logic is not without merit. Various economic literatures prove\nthat market failure does indeed occur. Joseph Stiglitz (1989) stated\nthat markets cannot function effectively and fairly when there is\nasymmetric information, externalities, monopolies, or coordination\nproblems. In present-day Indonesia, various economic issues, such as\ninequality, weak industrialisation, oligopolistic dominance, and low\nadded value of natural resources, are indeed often viewed as\nmanifestations of market failure.<\/p>\n
Therefore, the state indeed has an important role in performing\ncorrections when the market fails to work optimally. However, the\nproblem arises when the existence of market failure is immediately\nassumed to be an automatic justification for the expansion of state\nintervention. It is as if every economic problem requires more state\nintervention. In reality, modern political economy has long warned that\nthe state itself can also fail. When market failures are exaggerated\nwhile state failures are ignored, interventions originally intended as\nsolutions have the potential to create new distortions.<\/p>\n
In Indonesia, warnings regarding the risks of state failure are not\nnew. Soemitro Djojohadikusumo (1977), one of the architects of\nIndonesia\u2019s developmentalist thought, believed that the state must play\na central role in economic development. However, Soemitro never assumed\nthat the state was automatically effective. He emphasised that state\nintervention can only succeed if supported by several heavy\nprerequisites: political leadership with deep social responsibility, the\nability to understand development dilemmas and strategic choices,\nadequate technocratic capacity, and a power framework that allows for\neffective public participation.<\/p>\n
In other words, an active state does not automatically mean an\neffective state. Failing to meet these prerequisites can lead to state\nfailure in the form of bureaucratic inefficiency, policy distortion,\neconomic rent-seeking, and corruption. The problem is that the expansion\nof state intervention today appears to be developing much faster than\nthe development of its own institutional capacity.<\/p>\n
Ironically, state failure is much less discussed than market failure.\nWhen food prices rise, the public immediately sees market failure. When\nthe Rupiah weakens, the market mechanism and global sentiment are\nblamed. When investment slows, the business world is scrutinised. When\ndomestic industry loses competitiveness, the market becomes the primary\ndefendant. Conversely, when state intervention creates regulatory\nuncertainty, inefficient bureaucracy, opportunities for rent-seeking, or\ncorrupt practices, the impact often emerges slowly and widely, making it\nnot always immediately visible.<\/p>\n
The issue is that the state is not a perfect institution. Friedrich\nHayek (1945) once warned that economic information signals are dispersed\nacross various elements of society. Various signals, such as consumer\npreferences, business risks, production conditions, and technological\nchanges, are always shifting and cannot always be fully and accurately\ncaptured by the government. Thus, there is an implicit assumption that\nthe bureaucracy can process economic information better than market\nmechanisms when the state takes on too many roles in the economy.<\/p>\n
In practice, this assumption tends to be overly optimistic. Public\nchoice literature, pioneered by James Buchanan and Gordon Tullock\n(1962), shows that political actors and bureaucrats are not entirely\nneutral institutions. They also possess political incentives,\norganisational interests, and the drive to maintain power and resources.\nTherefore, the larger the space for state intervention, the greater the\nopportunity for rent-seeking, patronage, and corruption. The greatest\nproblem for an overconfident state is that it begins to see almost every\nissue as a reason to expand itself.<\/p>\n
The state should not be a primary player in the market, but rather an\ninstitution that creates a conducive business and investment climate,\nprovides legal certainty, and ensures effective rule enforcement. The\nstate should act as a referee, not as a player. Meanwhile, the function\nas a market participant should be largely left to the business world and\nthe community. The presence of the state as a market player can only be\njustified in sectors where the private sector is truly unable or finds\nit unattractive to provide goods and services adequately.<\/p>\n
However, current policy trends indicate the opposite direction.\nDanantara, for example, has the potential to position the state as a\ndominant player in various strategic sectors that have long been spaces\nfor investment by national or foreign private companies. The MBG\nprogramme on a large scale also has the potential to displace school\ncanteen businesses and local food providers who previously lived from\nthe consumption ecosystem within educational environments. Meanwhile,\nvillage cooperatives formed top-down could create direct competition\nwith small grocery stores and small distribution networks that have\ngrown organically at the village level.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/exaggerating-market-failure-forgetting-state-failure-1780836581", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }