Managing the Indonesian economy: Some lessons from the past<\/p>\n
Boediono, Jakarta<\/p>\n
President Susilo Bambang Yudhoyono's administration is
\ncurrently facing real challenges in consolidating economic
\nstability and other gains secured by previous governments. Taking
\na long-term perspective, it seems justified to say that in the
\npast few years Indonesia has made slow but significant progress,
\nboth in the economy and in politics.<\/p>\n
But it is clear also that the road ahead is long and perilous.
\nThe lessons of the past may provide some clues as to possible
\nhazards and the way forward.<\/p>\n
The first lesson is: Beware of possible disharmony between
\npolitics and economics<\/p>\n
We have seen that much of Indonesia's modern history is about
\npowerful interactions between politics and economics. One
\nhistorical truth is that the dynamics of politics and those of
\neconomics are not naturally in harmony with each other and, when
\nthey are not, setbacks in both politics and the economy
\neventually result.<\/p>\n
What we need is not only a keen awareness of these facts but a
\nconscious effort to make these two forces mutually reinforcing at
\nevery stage of the transition, rather than mutually destructive.
\nAllow me to elaborate this dilemma.<\/p>\n
On the one hand, we know that to build a viable democracy with
\nall its essential elements -- basic security, rule of law,
\nresponsible political parties, a well-informed citizenry, a
\nprofessional bureaucracy and so on -- will take a long time. On
\nthe other hand, people expect improvements in their living
\nstandards now.<\/p>\n
Our experience in the 1950s, as well as in recent years,
\nsuggests that the practice of democracy may constrain good
\neconomic policy in at least three ways.<\/p>\n
First, the political process in a democracy tends to have an
\ninherent bias toward the short term. Politicians put a premium on
\npolicies that deliver results now and postpone costs until later.<\/p>\n
Only the few visionaries among them are willing to back
\npolicies that promise long-term benefits but inflict short-term
\ncosts, even when it can be established that the gain far
\noutweighs the pain. When politics becomes more a game of five-
\nyearly seat grabbing contests, factors that are absolutely
\ncritical to sustaining development in the long run -- such as
\ninstitutions, human resource quality, natural resources,
\nenvironment and technology -- tend to take a backseat,
\nnotwithstanding lip service that suggests otherwise.<\/p>\n
Appearance is more important than substance, and if substance
\nis involved, \"short-termism\" tends to ensure that the focus is on
\nhow to divide the existing cake, rather than how to make it
\nbigger.<\/p>\n
Second, too much politics can result in distortion of economic
\npolicy through the undue influence of sectional and narrow
\ninterests. Pressure from political parties, business and other
\ntrade lobbies, loud noises in the streets or soft whispers in the
\npresident's or a minister's ear, and other devious forms of
\npressure can and do have distorting effects on economic policy.
\nThere is one important note, though: Our own experience suggests
\nthat serious distortions are more likely to happen in a
\nnondemocratic, nontransparent setting. Transparency prevents some
\ndistortions, but not all.<\/p>\n
The point here is that some areas of economic policy are quite
\ntechnical and their ramifications are so complex that decisions
\nabout them are better left to professionals than to politicians
\nand pressure groups.<\/p>\n
This raises the issue of balance between efficacy and
\naccountability. In monetary policy this is resolved by giving
\npolicy independence to the central bank, but in my view a
\nsignificant portion of fiscal policy and certain areas of trade
\nand development policy qualify equally for some degree of
\ninsulation from day-to-day political pressures.<\/p>\n
Third, democracy as we see it in practice seldom goes together
\nwith decisive, swift action when such action is required. We
\ncould find several examples of this in our history, although in
\nsome cases lack of leadership and bureaucratic inertia may also
\nhave contributed to the problem.<\/p>\n
The main question, then, is this: Can the present political
\nsystem in Indonesia provide an environment that enables:<\/p>\n
o Economic policy to strike a reasonable balance between
\nshort-term and long-term priorities;<\/p>\n
o The economic policy process (or a significant part of it) to
\nbe more professionally managed, with sufficient insulation from
\nundue political pressure; and<\/p>\n
o Government to take decisive and rapid responses when
\nnecessary?<\/p>\n
The answer has to be yes, or else we have to rethink the
\nexperiment. Affirmative answers to all the above questions are
\nessential for effective economic policy.<\/p>\n
A number of possible actions may help to improve the
\naforementioned aspects of policy-making, including the following:<\/p>\n
. Strengthening and empowering the National Planning Agency to
\nenable it to act as an effective guardian of long-term aspects of
\nall major economic policies;<\/p>\n
. Designing arrangements that make formulation of the relevant
\nparts of fiscal, trade and development policies more technocratic
\nthan political;<\/p>\n
. Avoiding ad hoc policy decision-making, and making sure that
\nall important decisions go through clearly identified forums, in
\naccordance with clearly defined decision procedures; and<\/p>\n
. Developing networks for rapid policy response, with strong
\ncoordination mechanisms -- especially in areas potentially
\ndisposed to crisis (for example, the financial safety net being
\ndeveloped to respond to future banking crises, in which
\nmechanisms and procedures involving the finance ministry, the
\ncentral bank and even the parliament are spelled out clearly).<\/p>\n
All such institutional arrangements will help. But in a
\ncountry where many things are still in the formative stage, I can
\nclearly see the critical role of leadership, or statesmanship, or
\nwhatever we may call it.<\/p>\n
The second lesson is that there is a vital need for a solid
\neconomic team.<\/p>\n
A key factor in the success of Soeharto's New Order regime
\nduring the first few years of its rule was the presence of a
\nstrong economic team. The team was effective because its core
\nconsisted of like-minded professionals who had developed mutual
\ntrust out of long personal association and, just as importantly,
\nbecause the team had a clearly recognized intellectual leader in
\nProf. Widjojo Nitisastro.<\/p>\n
With the full trust and backing of the president, the closely
\nknit team drafted and (later, as ministers) implemented the whole
\nsequence of economic policies -- from the stabilization stage to
\nthe rehabilitation stage and then the development stage -- thus
\nguaranteeing their coherence and consistency.<\/p>\n
In the present political setting it is neither possible nor,
\nstrong proponents of pluralism would say, desirable to reenact
\nthis history. But the plain fact remains that incongruence of the
\nviews within a team, too much \"noise\" interrupting the channels
\nof communication with the president, and feeble presidential
\nprotection of the team, lessen the effectiveness of economic
\npolicy-making.<\/p>\n
In the final analysis, it is the task of the CEO of the
\ncountry to come to the best workable balance between the need to
\nsecure maximum policy effectiveness and the imperative of
\naccommodating political realities.<\/p>\n
This article was condensed from a paper presented by former
\nfinance minister Boediono at the Indonesian Academy of Sciences
\nin Jakarta on Saturday. The paper was also discussed in September
\nat a seminar, Indonesia Update 2005: Indonesia, Australia and the
\nRegion, held at the Australian National University in Canberra.<\/p>",
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