It's not (only) the economy, stupid

Economics is extremely useful as a form of employment for economists.

In economics, the majority is always wrong

-- John Kenneth Galbraith

Few people today will argue that a part, probably a large part if not the entire part, of the problem with the Indonesian economy today lies with noneconomic factors. Even most economists, in their search for explanations for what has gone wrong with our economic policies -- and therefore the theories underpinning the policies they advocate -- would quickly find faults in what they call the noneconomic factors.

How much weight do they attribute to these factors for policy failures is the subject of a debate. This much was clear at a recent panel discussion hosted by The Jakarta Post to look into the prospects of the Indonesian economy in 2002.

At one end of the debate, there are those who feel there is something fundamentally very wrong with the economic system that Indonesia has been building these last three or four decades. Policy makers, they argue, have blindly relied on neoclassical economic theories, which essentially advocate market forces as the best determinant for the most efficient allocation of scarce economic resources. This has been going on since the time of President Soeharto until today.

These proponents argue that instead of correcting Soeharto's mistakes, the current "reformist" regime is continuing the trend, prescribing even more economic liberalization measures as Indonesia's only economic salvation.

To "institutional economists", as these groups of economists are often referred to in the study of the dismal science, the problem with Indonesia lies not with its economic policies, but with the entire system. Their prescription to cure Indonesia's economic ills is therefore a complete overhaul of the system.

In drawing up a new system, the government must incorporate other social science disciplines, including cultural factors. In short, they are saying that the neoclassical economic theories, upon which most of the economic policies of Indonesia today are founded, are flawed because they are imported wholly from the West without adapting them to local conditions.

The speaker in the panel discussion who advocated this, however, fell short of calling for a total revolution, but that is what it essentially boils down to. If he is not advocating a physical revolution, he is certainly advocating a radical change in our approach to economic problems.

But the concept of building a system that relies less on market forces and more on institutional elements, including on the national Pancasila ideology to guide policies and on a greater government role, smacks of socialism, whose economic theories and system have been widely discarded as largely ineffective.

The success of the "people's economy" these last two years is often cited as the chief reason why Indonesia should search for an alternative and more indigenous economic system. It is argued that the traditional sector has been Indonesia's salvation these last two years, fueling economic growth and creating jobs to cushion ordinary people from the impact of the crisis while the modern economic sector has been struggling to free itself from mountains of unpaid debts.

"Since the big ship of Indonesia has been saved by the people's economy, there is no more reason to keep denying the existence and role of the people's economy. As this sector has proven its independence from foreign capital, there is no more reason to think that foreign investment is an absolute necessity," a proponent of the institutional economic approach says.

At the other end of the debate are those economists who advocate less radical, though not necessarily less drastic, changes in approach to our economic problems, believing that at the end of the day, supply and demand market forces are still the best mechanisms to ensure economic efficiency, and even, with the right kind of policies, economic fairness.

These economists argue that Soeharto's economic policies of the last three decades were in fact much closer to the communist system than to one based on free market forces. The granting of monopolistic rights and constant government intervention in the market has rendered the theory of free market forces inoperative all this time, they argue.

They too find many faults in noneconomic factors, but only to the extent of disrupting the market mechanism. Legal uncertainty and security disturbances, for example, have plagued Indonesia particularly in these last three years since Soeharto's downfall, so much so that investors would think twice before committing their money in this country. And then, there is the perennial problem of corruption, which in Indonesia goes hand in hand with the ineffective, if not inept, bureaucracy.

But it would be a fallacy to pin the blame solely on corruption for Indonesia's economic failings, even if Indonesia is regarded as one of the most corrupt nations in the world. How then do you explain Indonesia's rapid economic growth rates of the 1980s and 1990s, when Indonesia was not less corrupt than it is today. And how do you explain the high economic growth rates of China and Vietnam, which, while not as corrupt, are corrupt nevertheless?

But while corruption did not trigger Indonesia's economic crisis in 1997, it certainly made the situation worse, one economist argues. Today, Indonesia's inability to lift itself out of its present predicament could, to a large extent, be explained by the continuing rampant corruption at almost every level in government.

Any attempt to explain Indonesia's economic problems must take into account these various noneconomic factors. Whether these factors render economic theories invalid is another matter.

Some economists try to explain this in terms of the economic theory of imperfect competition, by including various noneconomic factors as variables in their economic models. They were at least able to deduce that part of our economic problems lie not with the economy itself, but with these other variables.

While no economy in the world can ever reach the ideal of a perfect market, this approach also allows economists to identify problems and their solutions. In the case of Indonesia, some of these problems have now been addressed; whether they are effective or not is another question. The government and the House of Representatives, for example, enacted the antimonopoly law this year. With reform continuing to be the mantra of the present regime, perhaps things will improve over time.

One economist at the panel discussion argues that the most important economic reform for Indonesia should be in the real economic sector, particularly in the trade and industrial sectors, rather than in the fiscal and monetary sectors.

"The trade and industrial sectors are the ones that create the jobs, growth and everything else. Fiscal and monetary policies can provide the necessary conducive atmosphere," argues the panelist. On this front, Indonesia still has plenty of homework to do.

In conclusion, while economists seem to agree that noneconomic factors have played a major role in economic performance all these years -- or the lack of it -- they have different prescriptions for the cure. One camp suggests a complete overhaul of the system, while another suggests policy reforms, which are no less drastic.

The jury will probably be forever out on this question, because today, this is still largely an academic debate which boils down to how fast and how drastically should we implement reforms. Right now, those advocating gradual reforms seem to have the upper hand, but let's not rule out the alternative, that of a complete overhaul, even if only as an academic exercise.