JP/7/F00
JP/7/F00
INDONESIA AND THE PHILIPPINES: COMPELLING SIMILARITIES
Neighbors -- and also twins?
Hal Hill and
Mohammad Sadli
Jakarta
Indonesia and the Philippines share much in common. They have
similar per capita incomes. They are neighbors, founding members
of ASEAN, and the world's two largest archipelagic states. Both
have female heads of states, daughters of former presidents who
were pushed out of power around 1966.
Both countries have at times been "written off". The late
Prof. Benjamin Higgins once referred to Indonesia as a "chronic
economic dropout", while the Philippines is often termed the
"East Asian exception" because of its lackluster economic
performance.
Perhaps most important of all, within recent memory both have
experienced long periods of authoritarian rule and economic
growth, which culminated in a deep economic and political crisis
after which recovery has been difficult and painful.
The Philippine political crisis occurred in 1985-1986, or 12
years earlier than Indonesia's. There were many similarities in
the pre and post-crisis periods. Can Indonesia learn from its
experience, and in particular avoid any of the pitfalls? This
question is particularly apposite and interesting given that
Philippine per capita income is just about the same as it was in
the early 1980s. In essence, it has "lost" two decades of
economic development.
For the Philippine story, we draw on a recently published
book, which one of us has co-edited: The Philippine Economy:
Development, Policies and Challenges (Oxford University Press,
New York, 2003), eds. Arsenio M. Balisacan and Hal Hill, and
featuring a predominantly Philippine authorship.
Before looking at the crises, it is important to briefly
highlight the obvious differences between the two countries. The
Philippines had a relatively "benign" transition to independence
in 1946, and then appeared to be one of the most promising states
in East Asia, with an income per capita higher than that of South
Korea, Taiwan, Indonesia and Thailand.
From the 1950s to the 1970s, its economic performance was
respectable though not outstanding. Notwithstanding the
suspension of democratic processes, the first decade of Marcos
rule, from 1966, delivered accelerated economic growth.
However, problems began to surface in the early 1980s. The
international environment was unfavorable -- the terms of trade
of the Philippines, being an oil importer, usually move in the
opposite direction to Indonesia's.
An adventurous borrowing program in the 1970s, initially
sanctioned by the international financial institutions as a means
of recycling "petro dollars", encountered problems ranging from
mounting palace-connected corruption to uneconomic project
selection. There was growing popular resistance to Marcos'
authoritarian rule.
The immediate trigger for the crisis was the assassination of
former Senator Benigno Aquino at Manila International Airport in
August 1983. This resulted in widespread protests and badly
tarnished the regime's image, both at home and abroad.
In order to evade borrowing restrictions, short-term debt had
been rising rapidly from the late 1970s. After the assassination,
creditors were unwilling to roll over this debt, and most other
capital inflows dried up. The economy began to contract sharply.
To break out of the impasse, Marcos called an election in early
1986. His attempt to rig the result was all too obvious and he
and his immediate entourage had to flee to Hawaii aboard a U.S.
plane.
There are clear similarities and differences between the two
countries' crises. The economic contraction was deep, with a
contraction of about 14 percent, albeit spread over two years in
the Philippines (1985 and 1986), but just one (1998) in
Indonesia. In both cases, short-term capital flight caused the
exchange rate to collapse, in turn exposing financial
fragilities.
There was also the conjunction of economic and political
crises. In both, there was comprehensive and relatively sudden
regime collapse, creating a power vacuum. Seemingly impregnable
leaders were pushed aside, and there were no institutional
mechanisms in place for an orderly transfer of power.
There were differences between the two crisis episodes, of
course. Economic growth under Soeharto had been significantly
longer and stronger than under Marcos: 30 years of 4.5 percent
per capita growth compared to 18 years of around 3 percent.
Indonesia had had the good fortune of two oil booms, and managed
them both reasonably effectively, especially in recycling some of
the proceeds into infrastructure and agriculture. Indonesia's
macroeconomic management had generally been more prudent.
Moreover, Indonesia's crisis occurred quite suddenly, in the
midst of strong growth, and with the initial trigger coming from
abroad. In the Philippines, growth was already slowing down in
the early 1980s, and its crisis was primarily home-grown.
Thus far, the recovery trajectories have been similar. If
Indonesia wishes to avoid 20 years of stagnation, and all the
attendant social costs, post-Soeharto politicians, bureaucrats
and social activists would profit from looking at the Philippine
experience.
The Philippine economic recovery was patchy under Corazon
Aquino's six year term. The initial euphoria was quickly dampened
by political squabbles, attempted military coups, some awful
natural disasters, and crippling infrastructure constraints.
President Aquino was followed by Fidel Ramos, who proved to be an
adept economic manager and effective reformer.
Economic growth resumed, and for a period got back to 6
percent before the Asian crisis. Although the Philippines came
through the crisis relatively unscathed, the forward momentum was
lost, and was followed soon after by renewed political
uncertainty, under both Presidents Joseph Estrada and Gloria
Macapagal-Arroyo.
The post-crisis similarities in Indonesia and the Philippines
have been striking. In both countries there has occurred:
* Radical power shifts. A weakened presidency, a newly
assertive but unpredictable legislature, a bureaucracy having to
redefine its role, and a noisy but generally unsophisticated
civil society.
* A fiscally incapacitated government. Rapidly rising public
debt absorbs 40 percent or more of public expenditure.
* An uncertain, and sometimes acrimonious, relationship with
foreign debtors, further complicating economic recovery.
"Nationalist" politicians find the IMF in particular an
irresistible target.
* A weakened center, in response to pressure to extend
democracy and fiscal authority to the regions too quickly.
* Populism in the labor market. Controls over trade unions are
relaxed, and politicians vie for popularity by supporting
unsustainable (and widely flouted) increases in regulated wages.
This in turn impairs competitiveness and jeopardizes recovery.
* Governments struggling with rising public debt and
democratic demands for expenditure defer major investments. When
growth resumes, a half-decade or more of under-investment results
in chronic power shortages. The situation was perhaps more
serious in the Philippines.
Nevertheless, there is one central lesson for Indonesia: It is
extremely difficult to get out of a deep economic and political
crisis. It is possible to get the economy moving again, as in the
Philippines for half of the 1990s. But it requires exceptional
and coherent national leadership, with the president, the
legislature and the bureaucracy all working together.
"Muddle through" may perhaps be the inevitable of economic
crisis and political impasse. But as the years slip by, the cost
mounts. To draw on the Philippine analogy, does Indonesia in 2015
want to be where it was back in 1995?
Dr. Hal Hill is Professor of Economics at the Research School
of Asian and Pacific Studies, National University of Australia,
Canberra, and Mohammad Sadli is emeritus professor of economics
at the University of Indonesia.
INDONESIA AND THE PHILIPPINES: COMPELLING SIMILARITIES
Neighbors -- and also twins?
Hal Hill and
Mohammad Sadli
Jakarta
Indonesia and the Philippines share much in common. They have
similar per capita incomes. They are neighbors, founding members
of ASEAN, and the world's two largest archipelagic states. Both
have female heads of states, daughters of former presidents who
were pushed out of power around 1966.
Both countries have at times been "written off". The late
Prof. Benjamin Higgins once referred to Indonesia as a "chronic
economic dropout", while the Philippines is often termed the
"East Asian exception" because of its lackluster economic
performance.
Perhaps most important of all, within recent memory both have
experienced long periods of authoritarian rule and economic
growth, which culminated in a deep economic and political crisis
after which recovery has been difficult and painful.
The Philippine political crisis occurred in 1985-1986, or 12
years earlier than Indonesia's. There were many similarities in
the pre and post-crisis periods. Can Indonesia learn from its
experience, and in particular avoid any of the pitfalls? This
question is particularly apposite and interesting given that
Philippine per capita income is just about the same as it was in
the early 1980s. In essence, it has "lost" two decades of
economic development.
For the Philippine story, we draw on a recently published
book, which one of us has co-edited: The Philippine Economy:
Development, Policies and Challenges (Oxford University Press,
New York, 2003), eds. Arsenio M. Balisacan and Hal Hill, and
featuring a predominantly Philippine authorship.
Before looking at the crises, it is important to briefly
highlight the obvious differences between the two countries. The
Philippines had a relatively "benign" transition to independence
in 1946, and then appeared to be one of the most promising states
in East Asia, with an income per capita higher than that of South
Korea, Taiwan, Indonesia and Thailand.
From the 1950s to the 1970s, its economic performance was
respectable though not outstanding. Notwithstanding the
suspension of democratic processes, the first decade of Marcos
rule, from 1966, delivered accelerated economic growth.
However, problems began to surface in the early 1980s. The
international environment was unfavorable -- the terms of trade
of the Philippines, being an oil importer, usually move in the
opposite direction to Indonesia's.
An adventurous borrowing program in the 1970s, initially
sanctioned by the international financial institutions as a means
of recycling "petro dollars", encountered problems ranging from
mounting palace-connected corruption to uneconomic project
selection. There was growing popular resistance to Marcos'
authoritarian rule.
The immediate trigger for the crisis was the assassination of
former Senator Benigno Aquino at Manila International Airport in
August 1983. This resulted in widespread protests and badly
tarnished the regime's image, both at home and abroad.
In order to evade borrowing restrictions, short-term debt had
been rising rapidly from the late 1970s. After the assassination,
creditors were unwilling to roll over this debt, and most other
capital inflows dried up. The economy began to contract sharply.
To break out of the impasse, Marcos called an election in early
1986. His attempt to rig the result was all too obvious and he
and his immediate entourage had to flee to Hawaii aboard a U.S.
plane.
There are clear similarities and differences between the two
countries' crises. The economic contraction was deep, with a
contraction of about 14 percent, albeit spread over two years in
the Philippines (1985 and 1986), but just one (1998) in
Indonesia. In both cases, short-term capital flight caused the
exchange rate to collapse, in turn exposing financial
fragilities.
There was also the conjunction of economic and political
crises. In both, there was comprehensive and relatively sudden
regime collapse, creating a power vacuum. Seemingly impregnable
leaders were pushed aside, and there were no institutional
mechanisms in place for an orderly transfer of power.
There were differences between the two crisis episodes, of
course. Economic growth under Soeharto had been significantly
longer and stronger than under Marcos: 30 years of 4.5 percent
per capita growth compared to 18 years of around 3 percent.
Indonesia had had the good fortune of two oil booms, and managed
them both reasonably effectively, especially in recycling some of
the proceeds into infrastructure and agriculture. Indonesia's
macroeconomic management had generally been more prudent.
Moreover, Indonesia's crisis occurred quite suddenly, in the
midst of strong growth, and with the initial trigger coming from
abroad. In the Philippines, growth was already slowing down in
the early 1980s, and its crisis was primarily home-grown.
Thus far, the recovery trajectories have been similar. If
Indonesia wishes to avoid 20 years of stagnation, and all the
attendant social costs, post-Soeharto politicians, bureaucrats
and social activists would profit from looking at the Philippine
experience.
The Philippine economic recovery was patchy under Corazon
Aquino's six year term. The initial euphoria was quickly dampened
by political squabbles, attempted military coups, some awful
natural disasters, and crippling infrastructure constraints.
President Aquino was followed by Fidel Ramos, who proved to be an
adept economic manager and effective reformer.
Economic growth resumed, and for a period got back to 6
percent before the Asian crisis. Although the Philippines came
through the crisis relatively unscathed, the forward momentum was
lost, and was followed soon after by renewed political
uncertainty, under both Presidents Joseph Estrada and Gloria
Macapagal-Arroyo.
The post-crisis similarities in Indonesia and the Philippines
have been striking. In both countries there has occurred:
* Radical power shifts. A weakened presidency, a newly
assertive but unpredictable legislature, a bureaucracy having to
redefine its role, and a noisy but generally unsophisticated
civil society.
* A fiscally incapacitated government. Rapidly rising public
debt absorbs 40 percent or more of public expenditure.
* An uncertain, and sometimes acrimonious, relationship with
foreign debtors, further complicating economic recovery.
"Nationalist" politicians find the IMF in particular an
irresistible target.
* A weakened center, in response to pressure to extend
democracy and fiscal authority to the regions too quickly.
* Populism in the labor market. Controls over trade unions are
relaxed, and politicians vie for popularity by supporting
unsustainable (and widely flouted) increases in regulated wages.
This in turn impairs competitiveness and jeopardizes recovery.
* Governments struggling with rising public debt and
democratic demands for expenditure defer major investments. When
growth resumes, a half-decade or more of under-investment results
in chronic power shortages. The situation was perhaps more
serious in the Philippines.
Nevertheless, there is one central lesson for Indonesia: It is
extremely difficult to get out of a deep economic and political
crisis. It is possible to get the economy moving again, as in the
Philippines for half of the 1990s. But it requires exceptional
and coherent national leadership, with the president, the
legislature and the bureaucracy all working together.
"Muddle through" may perhaps be the inevitable of economic
crisis and political impasse. But as the years slip by, the cost
mounts. To draw on the Philippine analogy, does Indonesia in 2015
want to be where it was back in 1995?
Dr. Hal Hill is Professor of Economics at the Research School
of Asian and Pacific Studies, National University of Australia,
Canberra, and Mohammad Sadli is emeritus professor of economics
at the University of Indonesia.