Battle for economic policies: Good or bad?

Battle for economic policies: Good or bad?

Ari A. Perdana, Centre for Strategic and International Studies,
School of Economics University of Indonesia, Jakarta

The government has finally scrapped the controversial idea to
grant a debt extension to the big debtors under the Indonesian
Bank Restructuring Agency (IBRA). It has decided to only grant a
three-month grace period for the debtors to repay their debts,
not the initially proposed 10-year extension. It appears that the
government has made the right move. The debt extension would only
cost the country more uncertainty and a loss of credibility.

What lies behind the debt-extension idea and the final
decision to scrap it? What are the factors influencing the
government's economic policies?

A standard economic analysis would assume that the government
would always act as a "benevolent dictator". Any policies it
takes are based on the objective of maximizing the welfare of all
segments of society. Furthermore, the government is assumed to
have perfect information about what is "best" for the economy.

Such a framework of analysis, however, is not satisfactory.
The benevolent dictator assumption is not always the case. In
reality, a government is not a single, rational decisionmaker
that is free of interests. Rather, there are a number of
competing interests trying to take advantage of certain policies.

To understand how these interests influence policy-making, we
should evaluate the political-economic structure of the state.
There are two types of state in the political-economic
literature: the autonomous and the factional states.

An autonomous state is the one that pursues its own policy
objectives. A state is autonomous if within a fairly wide range.
It is relatively immune to any political influences or opposition
in delivering policies.

The Northeast Asian countries during the 1970 and 1980s are
good examples of an autonomous developmental state. The
governments of these countries were able to set their development
agendas with relatively less disturbances from interest groups.
As a result, the countries achieved rapid economic growth,
deepening industrialization and a significant increase of living
standards within two decades.

To some extent, the New Order government also had similar
characteristics. The economic policies during the New Order had
been state-centered, with almost no influence or opposition from
non-state agents. It has also been a general consensus that
during its 30-year reign the New Order had significantly
developed the economy and improved the general living standards.

At the same time, however, the New Order was also a predatory
state, whose behavior sought to maximize the private welfare of
the state apparatus or bureaucracy. Such behavior abused the
country's economic resources through what is called rent-seeking
activities.

Therefore, it is unclear whether social welfare was the main
goal of economic policies, or only an instrument to maintain the
state's legitimacy and further maximize the private welfare of
the state apparatus.

The New Order's predatory behavior was more obvious in the
1990s. Economic policies did not seem to reflect the objectives
of maximizing social welfare. Some indications were the overabuse
of nonbudgetary expenditures, such as reforestry funds or funds
under the State Logistics Agency, as tools for rent
distributions, Soeharto's privileges for his youngest son Hutomo
"Tommy" Mandala Putra to have a monopoly over the clove industry
and the national car project, and several other policies that
cost the nation its economic efficiency.

The second type of state is the factional state, in which
there are interest groups competing to influence policies. In
contrast with the autonomous state, the capacity of a factional
state to pursue its own policy objective is more limited.
Instead, it serves the most powerful interest groups.

The behavior of a factional state may be predatory as well as
constructive. It tends to be predatory if the influences interest
groups have on economic policies are significant to distort the
resource allocation in their favor.

This is the case of "booty capitalism" in the Philippines,
which continues to exist in the post-Marcos era. Meanwhile, the
Thai experience shows that a competing patron-clientship
structure at the industry level results in a higher industrial
output, which is beneficial for the economy.

Clearly, the current Indonesian political-economic structure
has the characteristics of the factional state. On the positive
side, to some extent the competition among interest groups could
still provide a check-and-balance mechanism.

The above-mentioned debt extension policy is an example of
this. Clearly, the idea suggested that the government, or IBRA in
this case, was a hostage of the interests of big troubled
debtors. However, as there would be more disadvantaged groups if
the plan went ahead, it was finally dropped.

On the negative side, the policy-making process becomes the
arena of competition among various interest groups. There are
political parties, business interests groups or even factions
inside the government.

In this situation, economic policies become highly tradable
commodities. As a result, the government is still prone to the
short-term interests that often contradict the objective of
economic recovery. One example is the government's inability to
meet the target of privatization and asset sales, due to various
interests constraining the process.

Meanwhile, the clock is ticking toward the 2004 election. And
whether this will end up with a stronger economic structure for
the country, or economic self-destruction, remains to be seen.