Why the West grew rich as the rest grew poor<\/p>\n
By Thee Kian Wie<\/p>\n
This is the second of two articles on David Landes' latest
\nbook The Wealth and Poverty of Nations -- Why Some Are So Rich
\nand Some So Poor. The 650-page book was published in 1998 by W.W.
\nNorton & Company, Inc., New York. N.Y.<\/p>\n
JAKARTA (JP): Does Landes' book offer any insights into
\nIndonesia's modern economic history? Not directly and not
\nextensively, although Landes several times refers to Indonesia
\nduring Dutch colonial rule and Indonesia's impressive performance
\nunder the New Order government. However, it is his more detailed
\ndiscussion of the relatively sluggish performance of the Latin
\nAmerican countries which may have some relevance to Indonesia.<\/p>\n
To be sure, the Latin American countries have had almost two
\ncenturies of independent nationhood, whereas Indonesia only
\nachieved its independence 54 years ago. Despite this age
\ndifference, after almost 200 years of political independence
\nLatin America's sluggish economic growth and relative inability
\nto graduate to economic independence offer some important
\nwarnings which Indonesia should heed, particularly in its current
\neconomic predicament.<\/p>\n
Landes attributes the pattern of arrested development of the
\nLatin American countries to the tenacious resistance of old ways
\nand vested interests, in particular their focus on land and
\npastoralism. This focus, reinforced by social and political
\nprivileges, bred powerful, reactionary elites ill-suited and
\nhostile to an industrial world. Industrialization nevertheless
\ntook place in Latin America, although much later than their North
\nAmerican neighbor, the United States. This lateness is not
\nnecessarily a handicap, as the impressive industrial performance
\nof the East Asian newly industrializing economies (NIEs),
\nparticularly South Korea and Taiwan, has shown. In these two NIEs
\nthe government put a high priority on promoting highly efficient,
\ninternationally competitive domestic firms, and developing
\nindigenous industrial technological capabilities. By pursuing an
\nexport-oriented pattern of development during the early stages of
\nindustrialization, these two countries were able to achieve these
\ntwo goals.<\/p>\n
However, in most Latin American countries inefficient import-
\nsubstituting industrialization was pursued for too long. No
\nwonder that, with some notable exceptions, manufacturing
\nindustries in most Latin America countries are not
\ninternationally competitive. Moreover, these inward-looking
\npolicies led to balance of payment problems, forcing these
\ncountries to borrow large sums from the official international
\nlenders (the International Monetary Fund and the World Bank) and
\nfrom foreign commercial banks. A considerable amount of these
\nfunds however, were \"recycled\" back to secret bank accounts in
\nSwitzerland, the United States and other safe shelters.<\/p>\n
The combination of public sector profligacy, widespread
\ncorruption, mismanagement, and continuous overseas borrowing,
\ncharacteristic of many Latin American countries, fosters
\ndevelopment without efficiency constraints, and is therefore
\nfragile and not sustainable. An economic downturn may suddenly
\ncause overseas lenders and investors to reduce their risk
\nexposure to a certain country. If panic grips these lenders and
\ninvestors, capital will flow out of the country, as happened with
\nthe Mexican peso crisis of 1994\/1995. To deal with this crisis,
\nthe Mexican government had to again borrow large amounts of
\nmoney. By resorting again to overseas borrowing, Mexico repeated
\nthe old pattern, common to many other Latin American countries,
\nof foreign borrowing, often just enough to pay the interest of
\nolder loans.<\/p>\n
Indonesia's financial crisis of 1997\/1998 resembles Mexico's
\ncrisis in various ways. However, unlike the Latin American
\ncountries where public sector profligacy had been the culprit, in
\nthe case of the Southeast Asian countries, including Indonesia,
\nthe major cause was private sector profligacy. But to resolve the
\nserious financial and economic crisis, the Indonesian government
\ntoo had to resort again -- and to a disturbing extent -- to
\nlarge-scale foreign borrowing. While public debt just before the
\ncrisis (June 1997) amounted to only 24 percent of Indonesia's
\nGross Domestic Product (GDP), it had risen to 60 percent of GDP
\nby the end of 1998, and is estimated to exceed 100 percent by the
\nend of 1999.<\/p>\n
As this foreign borrowing intended to finance the large
\ngovernment budget deficit cannot go on forever, the need for
\nfiscal sustainability requires a much higher priority on domestic
\nresource mobilization, that is a greater tax effort. Without a
\nmore serious and efficient tax effort Indonesia will fall deeper
\ninto a debt trap. It will have great difficulty extricating
\nitself from such a trap without a serious loss of economic
\nindependence, or sacrificing of its goal of rapid economic
\ngrowth, which are essential to raising the standard of living of
\nIndonesian people.<\/p>\n
Until Indonesia's economic meltdown occurred in 1997\/1998,
\nsenior government officials tended to dismiss concerns and
\ncriticisms voiced by many Indonesian economists and social
\nscientists. While the government argued that the Indonesian
\neconomy was growing at a brisk pace, many Indonesian analysts
\npointed out the rampant corruption and its corrosive effects on
\nthe investment climate, economic efficiency and public morale.<\/p>\n
Certainly, Indonesia's economic record over the period 1967 to
\n1997 showed that after recovering from the economic decline and
\nhyperinflation in the early 1960s, from the late 1960s the
\nIndonesian economy experienced a period of high growth, which was
\ngenerally sustained during the following three decades. The
\neconomic transformation which Indonesia experienced during this
\nperiod changed the country from its status as the \"chronic
\nunderperformer\" among the Southeast Asian economies in the early
\n1960s into an emerging \"newly industrializing economy\" (NIE) in
\nthe early 1990s. Rapid and sustained industrial growth
\ntransformed Indonesia from an economy still largely dependent on
\nagriculture in the mid-1960s to one in which the manufacturing
\nsector played in the mid-1990s an increasingly important role.<\/p>\n
Consequently, Indonesia, along with the other East Asian
\neconomies -- including Japan, South Korea, Taiwan, Hong Kong,
\nSingapore, Malaysia and Thailand -- in 1993 was classified as one
\nof the \"high-performing Asian economies\" (HPAEs) by the World
\nBank in its famous but controversial report on \"The East Asian
\nMiracle\".<\/p>\n
Despite large differences between Indonesia and the other
\nseven HPAEs -- in terms of levels of economic development,
\nstandards of living, size of economy and population, resource
\nendowments and cultural background -- it shared with these
\ncountries characteristics which, by the World Bank criteria,
\nqualified it as one of the HPAEs.<\/p>\n
To be sure, other developing countries at times have grown
\nequally rapidly, but never at such high and sustained rates.
\nMoreover, the high, sustained growth of the HPAEs was, in
\ncontrast to most other developing countries, accompanied by a
\nsteady reduction in the incidence of absolute poverty and
\nrelative inequality.<\/p>\n
All these HPAEs also experienced rapid demographic
\ntransitions, strong agricultural growth, and very rapid export
\ngrowth, particularly of manufactured exports.<\/p>\n
Nevertheless, in spite of the remarkable economic and social
\nprogress under the New Order government, Indonesia before the
\neconomic crisis of 1997\/1998 was still a relatively poor country,
\nnot only compared with Japan and the East Asian NIEs, but even
\ncompared to its more prosperous neighbors, Malaysia and Thailand.<\/p>\n
In the area of social development, Indonesia lagged behind its
\nmore prosperous Southeast Asian neighbors, Malaysia and Thailand.
\nIn his recent book on Indonesia's economic crisis, Prof. Hal Hill
\nof the Australian National University points out that Indonesia's
\nlife expectancy was lower and its infant mortality rate was
\nhigher than poorer Asian countries, such as China and Vietnam, or
\na country with a comparable per capita income, such as the
\nPhilippines.<\/p>\n
Moreover, because of the \"urban bias\" in its development
\npolicies, there were pronounced urban-rural economic disparities,
\nas well as inter-regional economic disparities, particularly
\nbetween the relatively more developed part of western Indonesia
\nand the less developed eastern part.<\/p>\n
These economic disparities has led to serious discontent,
\nparticularly in the four resource-rich provinces of Aceh, Riau,
\nEast Kalimantan, and Irian Jaya. Many of these peoples feel that
\nthe export proceeds of their natural resources have been mainly
\ntransferred to the central government, just as Indonesia's export
\nproceeds during the Dutch colonial period were largely
\ntransferred to the Netherlands (referred to as the \"colonial
\ndrain\" by the Indonesian nationalists).<\/p>\n
Despite rapid economic growth in the early 1990s, a growing
\nnumber of Indonesian economists began to voice serious concerns
\nabout various economic policies which, in their view, threatened
\nto undermine not only long-term, efficient growth, but also the
\ncherished national goal of establishing a \"just and prosperous
\nsociety\" (masyarakat adil dan makmur). While macro-economic
\npolicies were in general still sound, various micro-economic
\npolicies, such as policy-generated barriers to domestic
\ncompetition and trade (for example barriers to entry into certain
\neconomic activities, the establishment of monopolies and cartel-
\nlike arrangements without economic rationale), had the effect of
\nrewarding unproductive \"rent-seeking\" activities rather than
\ntruly entrepreneurial activities essential to long-term dynamic
\nand efficient growth.<\/p>\n
Many of these policies were obviously intended to benefit
\npolitical powerholders and their cronies, despite the fact that
\nthese policies were often justified on the flimsy grounds of
\n\"national interest\".<\/p>\n
In her interesting study on the role of the state in Indonesia
\nin the 19th and 20th centuries, Prof. Anne Booth of the School of
\nOriental and African Studies, University of London, has described
\nthe New Order state as a \"developmental state\" dedicated to
\nrational economic planning. This \"developmental state\", however,
\nwas showing features of the \"predatory state\" (particularly since
\nthe late 1980s) as powerful vested interests, in cahoots with
\npolitical powerholders at the highest level, were using (with
\nincreasing success) the power of the state to build personal
\nempires based on preferential access to lucrative government
\ncontracts, licenses and bank credit.<\/p>\n
Indonesia's descent into a deep economic crisis in early 1998,
\nmore serious than the plunge by Thailand and South Korea, was
\nlargely caused by the inability and unwillingness of its
\npolitical leadership to dismantle the \"predatory state\" by taking
\nthe necessary structural reform measures as agreed upon in its
\nsuccessive Letters of Intent to the IMF.<\/p>\n
It was pointed out earlier that Landes identifies a few
\ncrucial factors to account for the \"rise of the West\". These
\nfactors were a cultural and social environment which fostered
\nscientific invention and technological innovations, and the
\ndevelopment of institutions, particularly a free market and
\ninstitutionalized property rights, which guaranteed inventors and
\ninnovative businessmen would reap the fruits of their endeavors
\nwithout the intrusive interferences of a \"predatory\" government.<\/p>\n
Hence, Indonesia's new and legitimate government, to be formed
\nin November 1999, should not only focus its attention on economic
\nrecovery, but also lay the foundation of a sustained and more
\nefficient and equitable growth by developing the crucial public
\nand market institutions required to constrain the reemergence of
\nthe \"predatory state\".<\/p>\n
These institutions should include a competent and modern legal
\nand judicial system, an efficient and honest public service, and
\nfree and competitive markets which constrain market players from
\nengaging in anticompetitive business practices harmful to the
\npublic interest.<\/p>\n
The Kian Wie Ph.D is an economics historian at the Center for
\nEconomic and Development Studies, Indonesian Institute of
\nSciences, Jakarta. His most recently published book is
\nExplorations In Indonesian Economic History (Lembaga Penerbit
\nFakultas Ekonomi, Universitas Indonesia, Jakarta 1999).<\/p>",
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