Part 2 of 2 Discarding mediocrity for the economic fast track

Djisman S. Simandjuntak, Executive Director, Prasetiya Mulya Business School, Jakarta

After stage one, stage two would follow in form of export- driven, factor-based growth. Lasting success in the first two stages of recovery would allow a shift to "imitation-driven" knowledge economy in stage three, and a full-fledged knowledge economy in stage four.

What keeps Indonesia away from a sustaining high growth? Why has it fallen victim to a Syciphean growth? Why is it so difficult to free ourselves from the trap of the "equatorial paradox", in spite of a comparatively generous natural endowment?

A generalized answer to these questions is, abuses of an otherwise good system.

Compliance with good governance would have enabled the existing system to work better and to deliver prosperity at a higher pace with a better distribution. Under much better law enforcement against corrupt and collusive practices in politics, business -- including banking of course -- and civil societies, Indonesia might have catapulted itself ahead of the rest of developing Asia, rather than falling back to the tail-end of the "flying geese", as other countries overtake it one after the other. Alas, the law is dull in the hands of Indonesians.

Corrupt and collusive behavior is deeply embedded in our politics and business. Their history goes as far back as pre- colonial times. So pervasive is the lawlessness here, that some scholars find it appropriate to dub Indonesia a "criminal state". The assumption that, in the hands of Indonesians, power loses its tendency to corrupt is simply unrealistically heroic.

The economic misery which has afflicted Indonesia repeatedly in its relatively short history of independence is more deeply rooted than its failure in implementation. The economic architecture, which is largely a structure of state capitalism, is faulty. Therefore, the misery is not going to disappear permanently by tinkering with the technical issues of implementation. Indonesia is in urgent need of a new economic architecture.

I have floated the idea of a Schumpeterian "creative destruction" in the form of an "open social market economy", in spite of the rising criticism against neoliberalism. Openness is called for, because the winners in different episodes of global competition are usually open economies. Closure may be rewarded temporarily as it was in the case of Stalinist economies, but over time it condemns a state to an "endangered species".

In spite of the harsh criticisms against globalization, the increasing flow of people, information, goods, services and capital -- in short, globalization -- is inherent in the "gene- culture" of co-evolution. Our failure to manage this does not make it evil.

If the vision is to return to a high-growth path in the nearest possible point in time, and if success in doing so requires an anchor of stability in environment of the 2004 election year, maintaining the IMF program for another year or two should be considered seriously.

The market is imperative for success in global competition. Since time immemorial, traders have conquered impossible terrains for the sake of an expanding market. Admittedly, Indonesia has made great strides in the 1980s toward a market economy when it was confronted with a sudden free fall in the price of oil. However, most Indonesian politicians and owners of large businesses are anti-market in their basic attitude, as is reflected in the lack of strong support for privatization, in spite of the disappointingly poor performance of state-owned enterprises (SOEs) in capital accumulation.

Businesspeople understand very well how to exploit such an anti-market attitude for individual enrichment. Positioning SOEs and other government agencies as a force to ensure a level playing field in market competition is illusory.

The language that businesspeople understand best is competition from other businesspeople. Some of the primal instincts in humans are indelible, and require as tough a competition as possible in order to be tempered and prevented from becoming destructive. Instruments such as competition law and principles of good corporate governance can only serve as additional measures to attain this end.

If so, the Indonesian state will have to be reinvented into a "social state", a state which is fearful of the law as the only source of its very existence -- focusing on good regulation rather than ownership of businesses, on social capital rather than economic types of capital, on tax revenue rather than property and investment income.

Stripping the state of a large chunk of its business ownership is perhaps a necessary condition for a successful fight against corruption, the possessiveness of the central government in regards lower levels of government and other symptoms of bad governance.

Finally, the new architecture will have to include an adequate, built-in system of social protection. Symmetry requires negative taxes for the poor, while positive taxes are imposed on wealthy citizens. Social insurance is needed for underprivileged citizens to cultivate a sense of ownership in the development process.

Obviously, outlining the steps necessary for change is one thing, but initiating them is another thing. To climb to a growth rate of 8 percent a year will take much more than a mere discussion of architectural changes -- visionary, realistic and courageous leaders of unquestionable integrity are needed, as well as a critical mass of a coalition of willing followers.

The journey is not going to be easy.

The above article is an excerpt from the writer's paper, presented at The Jakarta Post's seminar on Strategy for Indonesia's Economic Development, on Monday.