Managing the Indonesian economy: Some lessons from the past

Boediono, Jakarta

President Susilo Bambang Yudhoyono's administration is currently facing real challenges in consolidating economic stability and other gains secured by previous governments. Taking a long-term perspective, it seems justified to say that in the past few years Indonesia has made slow but significant progress, both in the economy and in politics.

But it is clear also that the road ahead is long and perilous. The lessons of the past may provide some clues as to possible hazards and the way forward.

The first lesson is: Beware of possible disharmony between politics and economics

We have seen that much of Indonesia's modern history is about powerful interactions between politics and economics. One historical truth is that the dynamics of politics and those of economics are not naturally in harmony with each other and, when they are not, setbacks in both politics and the economy eventually result.

What we need is not only a keen awareness of these facts but a conscious effort to make these two forces mutually reinforcing at every stage of the transition, rather than mutually destructive. Allow me to elaborate this dilemma.

On the one hand, we know that to build a viable democracy with all its essential elements -- basic security, rule of law, responsible political parties, a well-informed citizenry, a professional bureaucracy and so on -- will take a long time. On the other hand, people expect improvements in their living standards now.

Our experience in the 1950s, as well as in recent years, suggests that the practice of democracy may constrain good economic policy in at least three ways.

First, the political process in a democracy tends to have an inherent bias toward the short term. Politicians put a premium on policies that deliver results now and postpone costs until later.

Only the few visionaries among them are willing to back policies that promise long-term benefits but inflict short-term costs, even when it can be established that the gain far outweighs the pain. When politics becomes more a game of five- yearly seat grabbing contests, factors that are absolutely critical to sustaining development in the long run -- such as institutions, human resource quality, natural resources, environment and technology -- tend to take a backseat, notwithstanding lip service that suggests otherwise.

Appearance is more important than substance, and if substance is involved, "short-termism" tends to ensure that the focus is on how to divide the existing cake, rather than how to make it bigger.

Second, too much politics can result in distortion of economic policy through the undue influence of sectional and narrow interests. Pressure from political parties, business and other trade lobbies, loud noises in the streets or soft whispers in the president's or a minister's ear, and other devious forms of pressure can and do have distorting effects on economic policy. There is one important note, though: Our own experience suggests that serious distortions are more likely to happen in a nondemocratic, nontransparent setting. Transparency prevents some distortions, but not all.

The point here is that some areas of economic policy are quite technical and their ramifications are so complex that decisions about them are better left to professionals than to politicians and pressure groups.

This raises the issue of balance between efficacy and accountability. In monetary policy this is resolved by giving policy independence to the central bank, but in my view a significant portion of fiscal policy and certain areas of trade and development policy qualify equally for some degree of insulation from day-to-day political pressures.

Third, democracy as we see it in practice seldom goes together with decisive, swift action when such action is required. We could find several examples of this in our history, although in some cases lack of leadership and bureaucratic inertia may also have contributed to the problem.

The main question, then, is this: Can the present political system in Indonesia provide an environment that enables:

o Economic policy to strike a reasonable balance between short-term and long-term priorities;

o The economic policy process (or a significant part of it) to be more professionally managed, with sufficient insulation from undue political pressure; and

o Government to take decisive and rapid responses when necessary?

The answer has to be yes, or else we have to rethink the experiment. Affirmative answers to all the above questions are essential for effective economic policy.

A number of possible actions may help to improve the aforementioned aspects of policy-making, including the following:

. Strengthening and empowering the National Planning Agency to enable it to act as an effective guardian of long-term aspects of all major economic policies;

. Designing arrangements that make formulation of the relevant parts of fiscal, trade and development policies more technocratic than political;

. Avoiding ad hoc policy decision-making, and making sure that all important decisions go through clearly identified forums, in accordance with clearly defined decision procedures; and

. Developing networks for rapid policy response, with strong coordination mechanisms -- especially in areas potentially disposed to crisis (for example, the financial safety net being developed to respond to future banking crises, in which mechanisms and procedures involving the finance ministry, the central bank and even the parliament are spelled out clearly).

All such institutional arrangements will help. But in a country where many things are still in the formative stage, I can clearly see the critical role of leadership, or statesmanship, or whatever we may call it.

The second lesson is that there is a vital need for a solid economic team.

A key factor in the success of Soeharto's New Order regime during the first few years of its rule was the presence of a strong economic team. The team was effective because its core consisted of like-minded professionals who had developed mutual trust out of long personal association and, just as importantly, because the team had a clearly recognized intellectual leader in Prof. Widjojo Nitisastro.

With the full trust and backing of the president, the closely knit team drafted and (later, as ministers) implemented the whole sequence of economic policies -- from the stabilization stage to the rehabilitation stage and then the development stage -- thus guaranteeing their coherence and consistency.

In the present political setting it is neither possible nor, strong proponents of pluralism would say, desirable to reenact this history. But the plain fact remains that incongruence of the views within a team, too much "noise" interrupting the channels of communication with the president, and feeble presidential protection of the team, lessen the effectiveness of economic policy-making.

In the final analysis, it is the task of the CEO of the country to come to the best workable balance between the need to secure maximum policy effectiveness and the imperative of accommodating political realities.

This article was condensed from a paper presented by former finance minister Boediono at the Indonesian Academy of Sciences in Jakarta on Saturday. The paper was also discussed in September at a seminar, Indonesia Update 2005: Indonesia, Australia and the Region, held at the Australian National University in Canberra.