It's not (only) the economy, stupid

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.