Wed, 28 Jun 2000

Indonesia really in transition?

This is the first of two articles by Chris Manning, who heads the Indonesia Project at The Australian National University in Melbourne. He is also co-editor, with Peter van Diermen, of Indonesia in Transition: Social Aspects of Reformasi and Crisis.

MELBOURNE (JP): On June 13, the Centre for Strategic and International Studies in Jakarta hosted an Indonesia "Update" conference in cooperation with the Indonesia Project of the Australian National University, to coincide with the launch of a book titled Indonesia in Transition: Social Dimensions of Reformasi and Crisis (ISEAS and ANU, 2000).

Minister of Maritime Exploration Sarwono Kusumaatmadja launched the book and spoke about the special need for attention to climate change, and the ongoing costs of policies which devastated the environment during the Soeharto era.

Much of the discussion at the one day talks inevitably focused on the capacity of the President Abdurrahman Wahid's administration to deal with immediate challenges in the wake of internal troubles faced in the last few months.

These included the continuing failure to resolve the Bank Bali scandal and the standoff between the President and Bank Indonesia governor Sjahril Sabirin, the State Logistics Agency (Bulog) affair, the seeming inexplicable dismissal of former minister Laksamana Sukardi and constant rumors of yet another Cabinet reshuffle.

However, in line with the spirit of minister Sarwono's address, more long-term concerns were not far from the surface. Economist Djisman Simandjuntak perhaps best characterized the current process of policy-making in Jakarta as "muddling through".

Indeed he questioned whether Indonesia was really in a transition, since the word implies both a beginning and an end- point to an ongoing process.

Both at the Update conference held in Canberra in September 1999 and again in Jakarta, "muddling", by putting market oriented economic reforms squarely on the back burner, has been seen by many as an inevitable, even desirable.

It is argued that the new regime still has to tackle big political and social reform issues that have been put on hold for far too long.

What will Indonesia look like in 10 to 15 years time if indeed the government continues to show mixed signals to potential investors, and if inter-elite politics continues to dominate the attention of the President and ministers (who might otherwise be seriously engaged in confronting the issues of debt workouts, bank restructuring and enticing a return of foreign and Chinese business)?

One clear implication is that Indonesia will almost certainly join the Philippines, not only as the poorer, but also the lagging cousin in Southeast Asia, and indeed all of East Asia.

Even with strong oil and mineral prices, and a booming agricultural sector, economic growth is unlikely to top 5 percent in the near future, and may well only average about 2 percent to 3 percent at best.

This means virtually no growth in per capita terms. The economic growth figure achieved under Corazon Aquino was 2 percent to 3 percent, even during the later Ramos reform years in the Philippines in the late 1980s and 1990s.

As my colleague Hal Hill pointed out, this has left per capita income no higher than in the early 1980s and a debt service ratio of 40 percent of the public budget in that country.

In contrast, the Indonesian economy expanded at close to triple this rate from 1970 to 1996, and at the same speed, or indeed a little faster, than Malaysia and Thailand (albeit from a much lower base). Growth under Soeharto was not pretty, especially in the later stages.

But it reduced Indonesia's public debt and raised living standards of most people several fold. In contrast, at the much slower Filipino growth rate Indonesia would begin to fall even further behind its more prosperous neighbors, both of which are well on the path to recovery from the crisis.

Many social scientists will not be particularly perturbed by such a prospect. Indeed they have long argued that economic growth is over-rated as the key indicator of economic and, implicitly, social progress -- especially with the memory still fresh of extreme wealth and power amassed at the hands of the Soeharto family during the rapid growth period in the past.

Commentator Aristides Katoppo argued at the Jakarta meeting that slavish devotion to economic growth has been one factor contributing to now unacceptable costs of environmental degradation and social dislocation.

What then are the likely costs to ordinary Indonesians of the economy "muddling" through, compared with what they have been accustomed to in the past several decades? Three key points stand out, in part informed by the experience of the Philippines (see, for example, this year's World Bank report, The Philippines: Growth with Equity).

First, even with a greatly strengthened civil society, the majority of the Indonesian population will almost certainly not benefit as much materially, and seem more likely to suffer deprivation, compared to the Soeharto years.

Even with a more equitable distribution of the gains from growth, it is hard to imagine that employment expansion will be rapid enough to trigger real wage growth at all, and certainly not to the extent that occurred in the 1990s prior to the crisis (this is a telling lesson from the Philippine experience of slow growth).

For the poorer 40 percent, this will mean less income for education and health, as well as transport and other basic needs necessary to help improve living standards.