JP\/7\/F00<\/p>\n
INDONESIA AND THE PHILIPPINES: COMPELLING SIMILARITIES<\/p>\n
Neighbors -- and also twins?<\/p>\n
Hal Hill and
\nMohammad Sadli
\nJakarta<\/p>\n
Indonesia and the Philippines share much in common. They have
\nsimilar per capita incomes. They are neighbors, founding members
\nof ASEAN, and the world's two largest archipelagic states. Both
\nhave female heads of states, daughters of former presidents who
\nwere pushed out of power around 1966.<\/p>\n
Both countries have at times been "written off". The late
\nProf. Benjamin Higgins once referred to Indonesia as a "chronic
\neconomic dropout", while the Philippines is often termed the
\n"East Asian exception" because of its lackluster economic
\nperformance.<\/p>\n
Perhaps most important of all, within recent memory both have
\nexperienced long periods of authoritarian rule and economic
\ngrowth, which culminated in a deep economic and political crisis
\nafter which recovery has been difficult and painful.<\/p>\n
The Philippine political crisis occurred in 1985-1986, or 12
\nyears earlier than Indonesia's. There were many similarities in
\nthe pre and post-crisis periods. Can Indonesia learn from its
\nexperience, and in particular avoid any of the pitfalls? This
\nquestion is particularly apposite and interesting given that
\nPhilippine per capita income is just about the same as it was in
\nthe early 1980s. In essence, it has "lost" two decades of
\neconomic development.<\/p>\n
For the Philippine story, we draw on a recently published
\nbook, which one of us has co-edited: The Philippine Economy:
\nDevelopment, Policies and Challenges (Oxford University Press,
\nNew York, 2003), eds. Arsenio M. Balisacan and Hal Hill, and
\nfeaturing a predominantly Philippine authorship.<\/p>\n
Before looking at the crises, it is important to briefly
\nhighlight the obvious differences between the two countries. The
\nPhilippines had a relatively "benign" transition to independence
\nin 1946, and then appeared to be one of the most promising states
\nin East Asia, with an income per capita higher than that of South
\nKorea, Taiwan, Indonesia and Thailand.<\/p>\n
From the 1950s to the 1970s, its economic performance was
\nrespectable though not outstanding. Notwithstanding the
\nsuspension of democratic processes, the first decade of Marcos
\nrule, from 1966, delivered accelerated economic growth.<\/p>\n
However, problems began to surface in the early 1980s. The
\ninternational environment was unfavorable -- the terms of trade
\nof the Philippines, being an oil importer, usually move in the
\nopposite direction to Indonesia's.<\/p>\n
An adventurous borrowing program in the 1970s, initially
\nsanctioned by the international financial institutions as a means
\nof recycling "petro dollars", encountered problems ranging from
\nmounting palace-connected corruption to uneconomic project
\nselection. There was growing popular resistance to Marcos'
\nauthoritarian rule.<\/p>\n
The immediate trigger for the crisis was the assassination of
\nformer Senator Benigno Aquino at Manila International Airport in
\nAugust 1983. This resulted in widespread protests and badly
\ntarnished the regime's image, both at home and abroad.<\/p>\n
In order to evade borrowing restrictions, short-term debt had
\nbeen rising rapidly from the late 1970s. After the assassination,
\ncreditors were unwilling to roll over this debt, and most other
\ncapital inflows dried up. The economy began to contract sharply.
\nTo break out of the impasse, Marcos called an election in early
\n1986. His attempt to rig the result was all too obvious and he
\nand his immediate entourage had to flee to Hawaii aboard a U.S.
\nplane.<\/p>\n
There are clear similarities and differences between the two
\ncountries' crises. The economic contraction was deep, with a
\ncontraction of about 14 percent, albeit spread over two years in
\nthe Philippines (1985 and 1986), but just one (1998) in
\nIndonesia. In both cases, short-term capital flight caused the
\nexchange rate to collapse, in turn exposing financial
\nfragilities.<\/p>\n
There was also the conjunction of economic and political
\ncrises. In both, there was comprehensive and relatively sudden
\nregime collapse, creating a power vacuum. Seemingly impregnable
\nleaders were pushed aside, and there were no institutional
\nmechanisms in place for an orderly transfer of power.<\/p>\n
There were differences between the two crisis episodes, of
\ncourse. Economic growth under Soeharto had been significantly
\nlonger and stronger than under Marcos: 30 years of 4.5 percent
\nper capita growth compared to 18 years of around 3 percent.
\nIndonesia had had the good fortune of two oil booms, and managed
\nthem both reasonably effectively, especially in recycling some of
\nthe proceeds into infrastructure and agriculture. Indonesia's
\nmacroeconomic management had generally been more prudent.<\/p>\n
Moreover, Indonesia's crisis occurred quite suddenly, in the
\nmidst of strong growth, and with the initial trigger coming from
\nabroad. In the Philippines, growth was already slowing down in
\nthe early 1980s, and its crisis was primarily home-grown.<\/p>\n
Thus far, the recovery trajectories have been similar. If
\nIndonesia wishes to avoid 20 years of stagnation, and all the
\nattendant social costs, post-Soeharto politicians, bureaucrats
\nand social activists would profit from looking at the Philippine
\nexperience.<\/p>\n
The Philippine economic recovery was patchy under Corazon
\nAquino's six year term. The initial euphoria was quickly dampened
\nby political squabbles, attempted military coups, some awful
\nnatural disasters, and crippling infrastructure constraints.
\nPresident Aquino was followed by Fidel Ramos, who proved to be an
\nadept economic manager and effective reformer.<\/p>\n
Economic growth resumed, and for a period got back to 6
\npercent before the Asian crisis. Although the Philippines came
\nthrough the crisis relatively unscathed, the forward momentum was
\nlost, and was followed soon after by renewed political
\nuncertainty, under both Presidents Joseph Estrada and Gloria
\nMacapagal-Arroyo.<\/p>\n
The post-crisis similarities in Indonesia and the Philippines
\nhave been striking. In both countries there has occurred:<\/p>\n
* Radical power shifts. A weakened presidency, a newly
\nassertive but unpredictable legislature, a bureaucracy having to
\nredefine its role, and a noisy but generally unsophisticated
\ncivil society.<\/p>\n
* A fiscally incapacitated government. Rapidly rising public
\ndebt absorbs 40 percent or more of public expenditure.<\/p>\n
* An uncertain, and sometimes acrimonious, relationship with
\nforeign debtors, further complicating economic recovery.
\n"Nationalist" politicians find the IMF in particular an
\nirresistible target.<\/p>\n
* A weakened center, in response to pressure to extend
\ndemocracy and fiscal authority to the regions too quickly.<\/p>\n
* Populism in the labor market. Controls over trade unions are
\nrelaxed, and politicians vie for popularity by supporting
\nunsustainable (and widely flouted) increases in regulated wages.
\nThis in turn impairs competitiveness and jeopardizes recovery.<\/p>\n
* Governments struggling with rising public debt and
\ndemocratic demands for expenditure defer major investments. When
\ngrowth resumes, a half-decade or more of under-investment results
\nin chronic power shortages. The situation was perhaps more
\nserious in the Philippines.<\/p>\n
Nevertheless, there is one central lesson for Indonesia: It is
\nextremely difficult to get out of a deep economic and political
\ncrisis. It is possible to get the economy moving again, as in the
\nPhilippines for half of the 1990s. But it requires exceptional
\nand coherent national leadership, with the president, the
\nlegislature and the bureaucracy all working together.<\/p>\n
"Muddle through" may perhaps be the inevitable of economic
\ncrisis and political impasse. But as the years slip by, the cost
\nmounts. To draw on the Philippine analogy, does Indonesia in 2015
\nwant to be where it was back in 1995?<\/p>\n
Dr. Hal Hill is Professor of Economics at the Research School
\nof Asian and Pacific Studies, National University of Australia,
\nCanberra, and Mohammad Sadli is emeritus professor of economics
\nat the University of Indonesia.<\/p>",
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