Development, mental models and corruption

Development, mental models and corruption

Awan Wibowo Laksono Poesoro
and Indriyanto Seno Adji
Jakarta

Among its neighbors in Southeast Asia, Indonesia was among the
first to espouse a growth-oriented development strategy initially
introduced in Western economies. Almost 40 years since its
inception in this country, this market-led development approach
has not yet brought the optimal results as have been delivered in
such Western developed countries as the U.S. and in sundry Asian
industrialized nations like Japan.

Economic indicators and human development indices show that
even compared to its industrializing neighbors like Malaysia,
Indonesia is being left behind. The severe malnutrition cases
recently descried -- malnourished toddlers have even been spotted
in the greater Jakarta area -- confirm the country's backwardness
in development achievements.

Has Indonesia adopted an unbecoming strategy? Should we
instead embrace a socialist development strategy to achieve
prosperity? Considering the 6.6 percent (of GDP) budget deficit,
a skyrocketing 594 percent inflation rate, a 1.1 percent output
growth and a 70 percent (of population) poverty level it
experienced under the left-leaning Sukarno regime in 1965, I do
not think that a socialist command-led strategy -- where resource
allocation is mostly determined by the government, not by buyers
and sellers as in a market economy -- is the solution.

Socialism already had its share of fame. The Soviet Union is
history and China has incorporated a market-economy approach into
its development design. This leaves us with the market-oriented
strategy. If this strategy is the answer, why have we not
achieved the successes our neighbors have managed to attain?

We have to realize that the market economy works under the
neo-classical assumption that all parties in the market act
perfectly rational in maximizing their utilities, generating
optimal results. The implication is that the market is free from
any transaction costs and institutions. Here, institutions are
not organizations. Instead, institutions are the society's rules,
comprising formal rules such as laws and regulations; informal
rules like social norms, ethics and conventions; and the rule
enforcement features.

The neo-classical market economy emerged about two decades ago
as the mainstream of development theories. Its expounders view
the market-led development strategy as a means of achieving
prosperity. It turns out that the market does not always work
like the neo-classical economists want. It sometimes fails to
function favorably due to several problems.

The first problem is imperfect information. In reality,
information can be randomly incomplete or it can also be
purposely insufficient and manipulated by agents in the market.
Consequently, information is costly and less informed people will
pay more for things than more informed ones, causing welfare
losses.

The second is the free-rider problem. This problem has its
roots in the provision of public goods. Because the consumption
of public goods is non-rivalrous, meaning that any one person's
consumption does not reduce the utility derived from anyone
else's consumption, free-riders -- parties who evade making
contributions to the provision of public goods, benefiting from
the goods for free -- exist.

The third problem is externalities; namely, positive or
negative impacts on agents not directly involved in market
transactions. People are more involved in negative externality-
generating activities instead of being involved in positive
externality-engendering activities -- as negative externalities
are usually costless, while positive externalities mean financial
costs.

Furthermore, people do not hold the same notions -- mental
models, so to speak -- as regards how things around them operate.
Each person has his or her own perception and understanding of
any problems that get in the way. As a result, he/she will come
up with his/her unique solution in solving the problems. Why do
people have different mental models? This could be attributed to
the informal rules, religions, cultures, creeds, environments and
political views to which they are exposed.

It is evident now that imperfect information, the free-rider
problem, externalities and mental models lead to market failures.
As a result, zero information and transaction costs, as well as
free-institution conditions as assumed by the neo-classical
model, are non-existent. In the real world, information and
transaction costs do exist as people search for relevant prices
and negotiate, conclude and enforce agreements, spawning
uncertainty in the economy.

Ergo, the neo-institutional approach pioneered by Ronald
Coase, the 1991 Nobel Prize winner for economics, could be used
to find a solution. According to this approach, institutions are
indispensable to overcome market failures. For example, Douglass
C. North, the 1993 Nobel laureate, proposes property rights (an
example of institutions) as a means to minimize externalities.

Since different countries have different market problems and
mental models, the market-oriented development approach has
procreated different outcomes for them. This explains why
Indonesia has not been able to emulate its neighbors'
achievements. To solve this, simply adopting pristine Western
economic, social and political prescriptions will not bring much
improvement in development. To promote development, Indonesia has
to tune in not just the formal rules but also the informal rules
and enforcement features.

In Indonesia, the most substantial problem stemming from our
rudimentary mental model and flimsy formal and informal rules is
corruption. The most destructive type is institutional
corruption, as opposed to the less harmful individual corruption.
Institutional corruption also infected the U.S. in the 1970s,
undermining state government systems, including the executive,
legislative and judiciary branches. A US$640,000 bribery case
involving congressman Dan Rostenkowski proved that institutional
corruption was severe in the U.S.

Power and bribery have been a steady couple in the bureaucracy
of authority, setting a new trend of crimes by the government
that is extensively related to institutional corruption.
Moreover, institutional corruption has been related to public
policy-making, causing economic and political uncertainty and
instability. Institutional corruption is subtle and very hard to
detect, so it is difficult to catch the perpetrators, as they can
hide behind Indonesia's feeble formal and informal rules.

To get out from this mess, we need political bodies (like
government agencies, political parties and the legislative and
judicial branches) that are willing to enhance institutions in
order to have major and stable political, social and economic
reforms. To begin with, we cannot be ashamed to admit that our
nation has a deficient mental model.

Only by admitting it can we start making significant
alterations to our mental model, thus changing our ways of
solving matters utterly. Thereupon, Susilo Bambang Yudhoyono, as
our leader, has to be steadfast in pioneering and conducting this
great endeavor. He cannot afford to be indecisive. There is no
other way!

Awan Wibowo Laksono Poesoro is a graduate of the University of
Southern California and a researcher at the Indonesian Institute.

Indriyanto Seno Adji is a lecturer at the School of Law at the
University of Indonesia.