Canberra's mistakes not good example for RI

Canberra's mistakes not good example for RI

Dealing with the possibility of newly owned government assets
presents a number of dilemmas in balancing equity and benefit to
the overall community. Following on from Kwik Kian Gie's
"Insight" analysis in The Jakarta Post on Tuesday, Sept. 1,
economist Martin O'Shannessy and crosscultural specialist Rob
Goodfellow argue that Indonesia should avoid the mistakes made by
Australia at all costs.

WOLLONGONG, Australia (JP): If Bank Indonesia does confiscate
the assets of liquidity support defaulters and gain significant
assets for the government, several thorny problems will present
themselves in making the greatest use of the assets for the
Indonesian people.

Ultimately, the people are the owners of the assets because it
was public money that propped up New Order liquidity in recent
years. This debt now needs to be repaid if the companies involved
are unable to trade on.

However, as we saw in Kwik Kian Gie's article, deciding on how
to redistribute assets in a noncommunist economy is a major
headache. On the whole, direct asset redistribution has been
shown to fail in Indonesia. Land and asset redistribution under
Indonesia's first president, Sukarno, did not improve the
productivity or overall well-being of the people, and similar
policies are unlikely to do so in the future.

The mechanisms available to effect redistribution present
additional problems. The methods that would provide the highest
overall return, such as selling assets to the highest bidder,
would, of themselves, create inequity for the poor. Direct
redistribution of assets to the poor or selling assets to them in
a protected market carries the risks of asset devaluation and
possible discouragement of the workforce.

From a policy perspective, the search for a mechanism to give
the best outcome for the Indonesian people will present a number
of blind alleys that should be avoided.

The Australian experience shows that income redistribution, as
an alternative to asset redistribution, appears initially
attractive. Arguments in favor of this include the view that on
the one hand asset redistribution will send negative messages to
investors and on the other income redistribution is more flexible
because it can be directed as needed rather than being a once
only chance to establish a fair pattern of distribution.

Both arguments are sound in theory. In practice, they are
irrelevant because of the ultimate truths of welfare
distribution. In Australia, it has become clear that welfare
systems stay in place once they have been introduced because
their removal becomes politically unpalatable and
bureaucratically difficult to accomplish. While there is
flexibility to add new systems or to include new groups, there is
rarely the ability to go back. This leads to high taxing
governments, which are also unattractive to investors.

A more pressing problem for countries like Australia is the
fact that our welfare system has created an underclass of people
who are unable to break out of the welfare system.

According to Australian professors Castle, Chaudhri and
Nyland, social security systems designed after World War II on
the assumption of a fully employed economy have failed to adjust
to modern employment structures where long-term unemployment
remains a feature. This has led to the development of an
underclass excluded from the work force and dependent on social
security, charity or crime.

Social problems associated with this class are great and
extend to every city and country town in Australia. A sharp
example can be seen by examining a particular group, which is
unkindly referred to as "brides of the state". These women eschew
marriage as the welfare system in effect pays them to have a
number of children outside of marriage to different fathers.

This particular system of welfare began as a means of income
redistribution aimed at preventing the children of widows (in
particular war widows) from starving. However, it has now become
a permanent disincentive to work and marry.

A combination of inappropriate policy design and the
motivation sapping effects of easy and permanent welfare have
created a blind alley in Australia, a blind alley that Indonesia
should avoid.

An additional imperative is to avoid asset redistribution,
which is both ideologically irksome and practically cumbersome.

This need is highlighted by the work of Prof. John Glynn of
the Sydney Business School who recently contributed to a seminar
in Australia in which he highlighted the importance of foreign
capital investment in Indonesia over the next 25 years.

Glynn believes Indonesia can enter the top five manufacturing
nations in the world by 2020 because good labor prices, location
and population size all favor manufacturing investment within the
Association of Southeast Asian Nations (ASEAN) generally and
Indonesia in particular.

The change will require a number of conditions including
political stability, preeminence of the rule of law, bureaucratic
transparency and policy predictability. Willingness to
redistribute assets will not be seen as complying with these
conditions by the companies who will need to investment in
establishing manufacturing capacity.

So if asset redistribution has already failed, and income
redistribution carries hidden social and moral costs, how is any
country to deal with the reenrichment of the population in a
situation such as that faced by Indonesia today?

An alternative might be to consider a regeneration loan
program based on the sale of confiscated assets.

The plan could work by selling assets to the highest bidder on
the open market, thus maximizing the cash return to the
government and avoiding asset devaluation. Money raised could be
placed into a fund. This would provide low interest loans to
indigenous businesspeople who have limited assets. This aspect of
the scheme would counter the main sources of economic damage
arising from krismon (monetary crisis), which are capital
shortage and crippling interest rates.

The other problems of asset redistribution and the potential
to create a welfare underclass would also be avoided.

A corollary to this approach is being explored with some
success overseas. In Australia, the proceeds of theft are seized
and liquidated. The money raised is placed in a fund and used to
assist the victims of crime.

So systems can be developed to handle redistribution without
encountering the problems of the past. However, the greatest
benefit of the scheme suggested will not be counted in economic
terms.

According to a number of Australian economists and
commentators, including the two of us, a major contributor to
economic growth in the first quarter of the third millennium
will be the entrepreneurial drive of the population, which arises
from their high economic and social aspirations. If any recovery
scheme is to be put in place, it must not damage this motivation.
It must not pay people to stay away from work or business. It
must reward those who wish to work, invest and enter the middle
class.

In the final assessment, what should be done with liquidity
support defaulters is a decision for the Indonesian government
and people. It is hoped that the mistakes made by Australia in
the construction of its welfare system over the last 50 years can
be avoided for the benefit of the whole people of Indonesia.

Martin O'Shannessy is CEO of IRIS Research, an economic
research institute operating on the campus of the University of
Wollongong. Rob Goodfellow is a crosscultural management expert
who specializes in bilateral Indonesian-Australian relations. He
is a sessional lecturer in business ethics in Dr. M.A. Adnan's
International Program in the Indonesian Islamic University,
Yogyakarta.