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.