Gray area in business, power

By Makmur Keliat

SURABAYA (JP): There are two depressing facts that most Indonesians are acquainted with. The first one relates to the psychological anxiety of people living in urban areas, particularly those in big cities, such as Jakarta and Surabaya, and whose dwellings are not located in the housing landscape determined by the government nor built by real estate companies.

Notwithstanding the longevity of their stay, the government could easily drive them away from their dwellings in the name of public interest. It is also common to see that various schemes for land management cooperation between farmers and private companies, or between the government and farmers in rural areas, end in sad stories. Why have such eyesores come into being? Are they a price Indonesia should pay for its impressive economic growth?

The second one relates to the way some Indonesian tycoons rise to power, and there are only a few of them. In fact, most of them started their business in the early period of the New Order regime. It is also this regime that has played a facilitating role in building up their business empire. In the wake of this paradox, Indonesian economic policy seems to have shifted gradually, but steadily, towards a stronger market economy.

It has been widely accepted that technological progress is one of the determining factors behind the rapid expansion of the modern market economy all around the world. It is this remarkable technological progress that has created a sophisticated and complex specialization in the division of labor and produced a multitude of goods and services. It has also been recognized, however, that technology itself has plunged the present modern market economy into a situation that is very vulnerable to deceptive and unfair acts.

Moreover, interaction between producers and consumers within a modern market economy is very impersonal in nature. In general, both of them do not know each other personally, to the point of "losing face" if one party behaves dishonestly. It is this attribute that mainly differentiates the basic concept of a modern market economy with that of a traditional one. In very elementary terms, a traditional market economy is primarily a market with a very modest division of labor and product specialization. The interaction between sellers and buyers in such a market is personal. In consequence, the likelihood of indulging in unfair and deceptive acts is relatively low. The most palpable and classic case of this situation can be easily found in an isolated village market in which marketers know each other personally, since they all belong to the same village community.

One significant distinction between modern and traditional market economies is the cost of transactions. Since there is little possibility of cheating, the cost of transactions in a traditional market economy are very low. There is no urgent need to work out a budget for the signing of contracts, estimating the selling and buying price of traded goods or launching technological innovations. On the other hand, in a modern market economy, the cost of transactions are very high since various efforts are made at all costs to prohibit and penalize counterfeiting, for instance, by introducing intellectual property rights or producing special products by introducing concerted technological innovations.

Douglas C. North calls the types of economic organizations coming out of the traditional market economy, personal exchange organizations, and those from the modern market economy, impersonal exchange organizations "with a third party enforcement" meaning that it is in a state of being considered a third party enforcement. In other words, a state of being conceptualized as the sole institution, capable of minimizing counterfeiting by translating various regulations into a legal foundation.

However, a transition from a traditional to a modern market economy, in most developing countries, does not take place automatically. What has been apparent, in most cases, is the so- called "impersonal exchange without third party enforcement". This means that not only has it been incapable of providing legal certainty, but it has become an interested party in the creation of weak legal enforcement and it unilaterally imposes a term of exchange in favor of certain marketers as well.

Under these circumstances, the cost of transactions have also become higher, but it does not result from technological innovation. It is mainly due to various economic levies paid to the bureaucracy. Another end product has been that existing big business organizations take the shape of modern ones, but they are, in essence, very similar to traditional ones with a very limited specialized division of labor.

In the case of Indonesia, such a phenomenon is easy to spot. There are big companies running diversified businesses ranging from agriculture to transportation, from real estate to road construction, from banking to five-star hotels. They are very much like traders in Dusun Gedang, an isolated village in the Jambi province in Sumatra. The traders in this village sell various agricultural products and handicrafts in the village market simultaneously. Of great significance is that they are very flexible in their occupation since they could work as farmers, handicraftsmen or carpenters if they deem it necessary. The only difference is that they run a business with little capital and a very limited access to the bureaucracy, while most big companies in Jakarta are the other way round, i.e. running and building up businesses by relying on the protection given to them by the people in power.

The overlapping scope of activities between those who are in business and those who have power, in turn, has obscured the role played by entrepreneurs and the people in power. Those in power could become traders by marketing their powerful position in the bureaucracy. Likewise, it is equally true to say the opposite, that is, big businesses could behave like those in power by misusing its monetary power and its proximity to the bureaucracy. There has been a vast gray area between those who are in business and those who have power. It is against this background that land property rights in Indonesia might have been frequently neglected and violated. If this is the case, then the existing situation is certainly unfit for the principles of a modern market economy since it creates social envy, which could lead to a volatile political instability and, in consequence, discourage foreign investors from bringing business to Indonesia.

How can we solve this discouraging situation? Can we merely rely on the prescription that bureaucracy should behave objectively while, in reality, bureaucracy itself has become interested in creating such a social malady?

Without playing down such a remedy, it also seems necessary to institutionalize community-based organizations among economically disadvantaged groups in rural and urban areas. Though in financial terms they have little capital, such organizations, in the long run, could become appropriate instruments in building trust and strong solidarity.

In this way, the leading economic power and bureaucracy would face difficulty in deceiving them. In short, mutual trust and strong solidarity could be transformed into "large capital", in social terms, if Indonesia seriously intends to help disadvantaged groups in the wake of a modern market economy lacking legal certainty.

The writer is a lecturer at the Faculty of Social and Political Sciences, Airlangga University, Surabaya and holds a PhD degree from the School of International Studies, Jawaharlal Nehru University, New Delhi, India.

Window A: The overlapping scope of activities between those who are in business and those who have power, in turn, has obscured the role played by entrepreneurs and the people in power.

Window B: How can we solve this discouraging situation? Can we merely rely on the prescription that bureaucracy should behave objectively while, in reality, bureaucracy itself has become interested in creating such a social malady?