Is Indonesia shining?

Is Indonesia shining?

Satish Mishra, Head/Chief Adviser of UNSFIR (UNSFIR is a joint project between the government of Indonesia and the United Nations Development Program)

Wherever you look -- in national daily newspapers, in academic journals, at ministerial seminars, at industrial road maps put forward by leading business associations and at those annual gatherings of the economic cognoscenti -- it seems obvious that old habits really do die hard.

Just look at the average menu of economic concerns; the rate of inflation, the value of the rupiah, the size of the budget deficit, the restructuring of debt, the fiscal burden of the oil subsidies and the assumptions relating to oil price in the current budget, the privatization of state enterprises, the confidence of foreign investors and the growth bottleneck created by badly maintained and depleted infrastructure.

Throw in the banks and government bonds, domestic resource mobilization, the occasional stock market figure and a banking corruption scandal or two and you have it all. For better or worse, this captures much of what passes for the economic policy concerns of professional economists, both domestic and foreign, in Indonesia today.

This is partly the result of the economic education of the 1970s and 1980s, which claimed, like physics, to be relevant for all times and in all places. The dominant economic theory of the day constructed a "greed is good" world in which the state was but an unwelcome nuisance, a necessary umpire of the rules of the game.

The economic conservatism of much of the economics profession in Indonesia is also partly a reflection of a fascination with the data and statistics that make up the day-to-day apparatus of applied economics. This in turn lends a bias toward the study of what is easily measurable, exports and imports, debt and deficits.

This combination of market liberalization and the minimalist state which lies at the heart of traditional neo-classical economic thinking, although already under attack by mainstream economists, still dominates professional thinking on economic affairs in Indonesia today. The result is a strange myopia that sees the economic crisis as a temporary blot on an otherwise fine record of growth and development, engineered by Soeharto's strong political leadership and the technical expertise of alumni of the Berkeley School of Economics since the mid-1960s.

It is interesting that the much admired Darwinian logic of the marketplace, where only the fittest survive, is hardly ever applied, even by its most ardent supporters, to the growth and collapse of political systems. On such logic, the ignominious collapse of the New Order system following the financial shock of 1997/98 was ample proof of its political inefficiency. Further, given the resurgence of institutional economics in even recent neo-classical thinking, by Douglass North among others, it would make sense to suppose that the political inappropriateness of New Order institutions contributed greatly to turning a financial shock into systemic collapse.

This systemic collapse had deep economic consequences far beyond movements in financial variables, and prolonged economic recovery. Witness the speed with which other countries affected by the 1997 crisis recovered, and the slow pace of the Indonesian recovery. Managing economic recovery against the backdrop of stable political institutions is hard enough. It becomes substantially more difficult when economic policy becomes part of the integral design of managing the systemic transition.

In fact, market logic was ignored not just in the realm of politics. It was equally ignored in the field of economics, often by the very economists who had supported it most strongly. The 1997/98 crisis generated the largest bailout of big business and pocket banks in virtually the whole of economic history. No modern country seems to have ever spent as large a share of its GDP in bailing out the richest segment of its population, as Indonesia seems to have done in the closing days of the New Order and its aftermath.

The bailout was deemed to be necessary to contain the risk of a system-wide demise of Indonesia's banks and corporations. It was not enough. The financial system became dysfunctional anyway and triggered a political collapse that brought about not a change in government, but a transition to a new political system altogether.

At the very minimum this should have led to much soul- searching by those responsible for economic policy in the past. Instead, it led to a proliferation of conspiracy theories related to IMF advice and U.S. plans to weaken Islamic states such as Indonesia, and to lamentations on the absence of strong leadership and the genetic dishonesty of the average Indonesian.

Together with the romantic view of the miracle of the Soeharto era, it led to the dangerous sense that the nature of Indonesian politics rather than the tenets of its past economic policies lay at the heart of the Indonesian malaise.

The result of this perspective was predictable. Like all fundamentalist faiths, economics too has its priests. They emphasize a return to the economic orthodoxy of the balanced budget and the minimalist state, of a friendly business environment ruled by the sanctity of contracts, including those relating to foreign trade and debt.

Of course, such a defensive response to a sharply changing political reality by the ruling elite is not new. There is a respectable pedigree. The extension of adult suffrage in late 19th century Europe was followed by a concerted attempt by the ruling groups to manipulate new voting systems and institutions. Such efforts could slow down the move toward greater democracy, but as even Czarist Russia was to find after 1905, they could not altogether stop it.

Early reforms in former socialist countries in the 1960s and onward were another attempt to change the system from within, to make just the right degree of changes that would keep the system afloat. They remained only short-term solutions to deeper systemic problems.

With rule by the majority, most of which were poor, came the concerns of the majority -- employment, education, health and safety, freedom of movement, law and order. It is interesting that despite the ideological Puritanism of the Reagan-Thatcher years, virtually no consolidated democracy has managed to reduce social expenditures significantly in modern times.

Budget deficits and exchange rates matter. But they are merely means to an end. In democratic polities the ends are set by the political process. The economists provide mechanisms for the most cost-effective paths to achieving these ends, or to bring competing ends into sharper focus.

In Indonesia, these lessons are in the process of being learned. It is not the macro and sectoral output numbers that are the most interesting in times of political change. Rather it is the numbers relating to the elasticity of employment with respect to future growth, the elasticity of poverty reduction under varying assumptions about changing income distribution and inequality, the degree of market competition in a market dominated by a dozen families, the coefficients linking employment and health indicators in poor households, the differential impact of food price shifts on the landless and landowning rural households, the criteria governing formulas for central government assistance to regions, to name just a few issues that require study and careful estimation.

In democratizing Indonesia, the fascination with numbers must be channeled into creative areas, not just used to support an outmoded status quo. Economic policy must therefore examine, and take positions on, such complicated issues as income and asset distribution, on the supply and the cost of public goods, on the ownership and management of public enterprises, on the promotion of new technologies and the social costs of declining industries. These are all new and exciting areas of public discourse, which remained hidden for years by the self-censorship of more stringent times.

Economic policy must equally dispel the myth of the New Order miracle. We must not fall into the trap of equating growth with dictatorship and economic collapse with the democratic transition. The growth collapse was a consequence of a political system whose legitimacy had disappeared. It was not the result of the new democracy.

Much of the glamor of the New Order would vanish if we were to recalculate the growth rate taking the crisis periods into account, and reestimate inequality using a wider consumption basket. A recent UNSFIR report did this and found that the political and economic consequences of the New Order took much of the shine off the widely publicized achievements of that period.

It is ironic but true that the greatest damage to the economy is caused not by exogenous oil or financial shocks, but by sudden and frequent changes in a country's political institutions. Countries of the former Soviet Union have still to recover from their systemic transitions. Many others in Latin America and in Asia have been destabilized for years.

The key and the most exciting challenge for Indonesian economists today is both to understand and to take responsibility for economic policy in the context of political transformation. By so doing they will make the greatest contribution of all; they will work to bring about long-term political stability and the end of future systemic collapses. Failure to do so might well make the 1997 crisis look like child's play.

The views expressed in this article are solely those of the author and do not necessarily reflect the views of UNSFIR or the UNDP.