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.