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.