Opening access to economic opportunity in Indonesia
The following is the first of two articles by Roderick Brazier, the director of economics programs of The Asia Foundation in Jakarta, identifying nine key areas to open access to economic opportunity. In the next article, to be run on Friday, he will focus his attention on legal infrastructure, information and credit.
JAKARTA (JP): Opening access to economic opportunity is the simplest way of ensuring that as many people as possible can improve themselves materially.
Governments should ensure that there are as few barriers to economic opportunity as possible and have many thousands of choices to make in this direction. They can enact, alter or repeal policies and regulations in a constant effort to create an environment in which access to economic opportunity is as wide open as possible.
Many of the remedies for the reduction of poverty are strikingly similar to those prescribed for opening access to economic opportunity for micro, small and medium-sized businesses (MSMEs).
MSMEs employ well over 90 percent of Indonesian workers. Their growth can have a direct and huge impact on the livelihoods of ordinary Indonesians. We know that the key constraints on their growth can be removed or significantly cut by enlightened policy-makers.
Below are nine key areas to open access to economic opportunity.
1. Growth
The single most critical factor in opening access to economic opportunity is sustainable growth. MSMEs benefit in obvious ways from a growing economy in which inflation is under control. The poor can benefit from a growing economy if real wages rise, employment expands, and low levels of inflation keep prices low.
The bulk of the poor still live in rural Indonesia. A rural- oriented development strategy for Indonesia, at least for the first decade of the 21st century, will be key to linking rapid growth to poverty alleviation.
Both Indonesia's own experience and lessons from the rest of East and Southeast Asia show that growth of the rural economy helps the poor more than growth in the urban industrial sector does and that rural growth contributes to more rapid growth in the overall economy.
Between 1966 and 1997 Indonesia had a very good record of sustaining strong economic growth with low inflation. Much of this growth was fueled by massive investment, both domestic and foreign. But the fruits of that growth were sometimes distributed to unworthy parties.
Indonesia's current growth rate (around 5 percent) is touted by some in government as a sign of recovery. But growth here seems mainly to be consumption-oriented, and without a massive increase in investment, both domestic and foreign, that growth may not be sustainable beyond the near term.
Indonesia desperately needs to attract investment that can fuel economic growth and give opportunities for economic betterment to the population.
2. Health
Health and nutrition are simple but crucial elements in determining access to economic opportunity. Children can be immunized against many diseases cheaply. Healthy children learn more at school, and make better employees and entrepreneurs later in life. Healthy employees and entrepreneurs can work harder and smarter.
Early action in the form of immunization and public health education can also reduce public health costs that might accrue when the sick need treatment. Indonesia has an excellent record of immunization and public health education that has helped increase life expectancies substantially and improved quality of life.
Some dark clouds loom, though. Most men smoke the impossibly noxious kretek cigarettes (smoking one is equivalent to smoking 20 light 'white' cigarettes) and many will die early from smoking-related diseases. These diseases are usually long and drawn out and so become extremely expensive to treat.
3. Education
Access to education is a critical prerequisite to opening access to economic opportunity. Indonesia's record in this regard has been excellent. Drop out rates are generally low (less than 6 percent per year among 13-15 year-olds and around 11 percent for 16-18 year-olds) and the gender balance is even.
Given Indonesia's development, illiteracy is quite low. But gender gaps are significant. In the cities about 8 percent of women and 3 percent of men cannot read and write properly. In rural Indonesia, 19 percent of women and 9 percent of men are illiterate, a much bigger imbalance.
As surprising as this may seem, large parts of the population also have difficulty communicating in Indonesian. In parts of the country, even in cities like Surabaya, Indonesian is a second language for many.
In the cities, 6 percent of women and 3 percent of men cannot speak Indonesian well. In rural areas the picture is worse: 19 percent of women and 12 percent of men cannot use Indonesian effectively.
These and the illiteracy figures suggest that for significant parts of the population, in rural areas in particular, economic participation is limited by illiteracy or inability to speak Indonesian effectively.
But governments must not focus on coverage only. Quality of education is in some ways more important than coverage. Foreigners are often shocked at how incurious Indonesians are. The blame for this may rest with the Indonesian education system, which was fashioned mainly during the intellectually-arid New Order period.
A fundamental review of the national curriculum is therefore needed.
4. Security
When individuals or groups do not feel that engaging in economic activity is safe, they may refrain from participating in the economy, or at the very least will curtail their activities.
The effect of crime and corruption on the business community can be profound and, in Indonesia, the picture is utterly dismal. Since the crisis began in late 1997, security conditions in Indonesia's cities have deteriorated.
In some cases the decline has been extreme, as in Ambon. But even in some of Indonesia's key commercial centers the situation is terrible. SME owners recently surveyed in Medan paint a picture of almost constant harassment by criminals in collusion with corrupt officials and members of the police, that has driven some to send home their employees and close their businesses altogether.
When criminals can extort money from the private sector at will, that reduces opportunities. It is happening routinely now, with 46 percent of business owners recently surveyed nationwide by The Asia Foundation reporting that they paid regular protection money to "youth groups" or oknum.
Recently, self-appointed religious police have ransacked legitimate businesses, such as bars and restaurants. Such a trend merely adds to the uncertainty facing entrepreneurs. Their sense of vulnerability is magnified when the police fail to take action to stem such attacks.
Security is an issue which touches on Indonesia's most stubborn systemic problems, and one where the Indonesian government is failing its entrepreneurs and employees most dramatically.
Stern government action simply to curb corruption and enforce the law would do more to help MSMEs than any grand plan with complicated and expensive subsidized credit schemes and export financing programs.
5. Discrimination
If women or minorities face cultural barriers, not only do they face more curtailed access to the economy, but the size of the economy and the number of opportunities in general are reduced.
Discrimination against Chinese in Indonesia in the form of limits on where they can work (for many years Chinese Indonesians have been barred, formally and informally, from working in the military, the bureaucracy and even some state-owned enterprises) and get an education probably limits opportunities for all Indonesians.
Women entrepreneurs face certain obstacles, too. Some tax refunds are not available to single women entrepreneurs who are heads of households. Such obstacles reduce the incentive for women to go into business and for women entrepreneurs to expand their activities.
6. Physical infrastructure
Roads, bridges, ports, and electricity are critical pre- requisites to economic activity. Economic opportunity is defined by the presence of markets, and those exist only locally without physical connections to populations outside the immediate community.
One school of economics is based on the assumption of "complete markets" -- i.e. there is a buyer somewhere for everything at some price. But without infrastructure, many markets may not exist at all, and with shabby infrastructure, there may be no buyer at plausible prices. So markets require connections.
Thanks mainly to oil and gas revenues, Indonesia has comparatively good infrastructure. SME owners surveyed recently gave relatively high marks to Indonesia's infrastructure, with some niggling problems related to the maintenance and upkeep of telephone connections and electricity supply, caused mainly by corruption in the utility companies.