Part 2 of 2: The Indonesian economy: Lessons from the past
Part 2 of 2: The Indonesian economy: Lessons from the past
Boediono, Jakarta
The third lesson is that there is a vital need for a coherent
and credible strategy.
Another lesson we can learn from New Order economic management
is the coherence of its strategy. The core of its macroeconomic
and development policies basically derived from mainstream
economics, with some Indonesian emphases added, especially to the
development policies. Its strategy included prudent fiscal and
monetary policies, reliance on markets, open trade and investment
policies, provision of adequate infrastructure and, with an
apparent Indonesian touch, special emphasis on agriculture,
massive expansion in the provision of basic needs (food, health
care, education, housing), population policies and a
transmigration program.
One may agree or disagree with part or all of the strategy,
but it was clearly a coherent one. Its "mainstreamness" helped
assure its coherence, but in my view it was the presence of a
strong intellectual leader within the team that was mainly
responsible for that quality.
Moreover, the strategy was implemented with a high degree of
consistency over a long period. This created a predictable
environment and provided sufficient comfort for domestic and
foreign investors to join in the action in great numbers. The
strategy worked well until the 1997 crisis broke, when the
economy's major shortcomings -- weak institutions and poor
governance -- began to surface. I will return to this below.
The main point here is that a clear picture of how the various
individual policies hang together, showing the broad direction in
which the economy is being steered, is absolutely essential for
both the government itself to coordinate its actions, and for
economic actors to determine their responses. The strategy must
also be perceived as credible, being backed by commitment to
action on the part of the authorities.
In the present political setting it is probably more difficult
to come up with such a coherent strategy, but it is not
impossible. Much will depend on the clarity of the government's
vision, its technocratic capacity to translate this into
operational policies and its skill in maintaining the essential
elements of the strategy and protecting its overall coherence,
while accommodating elements thrust on it by political realities.
Paradoxically, from the viewpoint of economic management, the
need for a coherent strategy as a policy anchor is more acute in
a democratic setting, where the risk of policy swings is often
perceived by economic actors to be greater.
The content of the strategy basically involves political
decisions. But as I implied above, its core must contain solid
technocratic substance, or else it only serves as a wish list.
In my view, the basic thrust of the New Order economic
strategy -- prudent fiscal and monetary policies, market-oriented
microeconomic policies, open trade and investment regimes,
adequate provision of infrastructure, emphasis on basic needs --
is realistic in the present global setting. It is also basically
sound, as it proved capable of delivering results for so long.
However, in light of the experience of its implementation in
the later years of the regime, and our experience since the
crisis, it does appear to require adjustments, which in some
areas may be very significant. Such areas include the
strengthening of institutions and governance ("soft
infrastructure"), financial sector strategy, domestic competition
policy, management of natural resources and environment
protection, a strategy on small-scale enterprises and perhaps
more.
The fourth lesson is never take stability and the budget for
granted.
It is a historical fact that, compared with its neighbors,
such as Singapore, Malaysia and Thailand, Indonesia's performance
in relation to economic stability has not been outstanding, even
when we include the extended period of relative stability of the
precrisis New Order.
It is an interesting question why Indonesia is more prone to
instability than these other countries. I suspect that some of
the explanations lie outside the realm of economics, but here I
wish to highlight one main pillar of stability -- government
finance -- which has served as a crucial link between political
dynamics and economic performance in Indonesia.
When the New Order regime came to power there was a conscious
attempt to begin insulating public finance from the vagaries of
politics. The "balanced budget rule" was adopted to achieve just
that and, as a result, the country was able to enjoy a long
period of relative stability. But then in 1997 the crisis broke
and the budget had to absorb an enormous burden resulting from
that calamity. Large private debts were transformed into public
debts.
Since the crisis, the goal of fiscal policy has evolved from
survival to consolidation, and then to its reestablishment as an
anchor of economic stability.
Looking ahead, formidable tasks await the present and future
governments. Making fiscal policy the anchor of stability
requires more than balancing annual budgets and reducing the debt
ratio.
The first thing the government should do is to reestablish a
firm compact about the basic rules of fiscal prudence (some
variant of the balanced budget objective and the adoption of
market-determined domestic fuel prices may be a good start). This
will insulate fiscal policy from the most damaging political
pressures.
Second, it should undertake a comprehensive reform of all
aspects of the antiquated system of government finance
administration. The reform and modernization of the tax
administration should be given the highest priority, because of
its critical role in securing fiscal sustainability in the long
run. Some efforts have been initiated already along these lines.
Third, the government should transform its currently
rudimentary debt management unit into a best-practice system for
managing government debt, encompassing not only direct debts but
also unfunded liabilities, the most important being the
government's obligations to the civil service pension scheme, as
well as its contingent liabilities, in the form of the implicit
and explicit guarantees currently enjoyed by the enterprises it
owns.
Fourth, the fiscal decentralization process should be
completed, with adequate safeguards against fiscal indiscretion
at the provincial and lower levels of government. Lastly, I would
urge the government to be daring enough to set the goal of
achieving, over the long run, a second political compact that
further insulates fiscal policy from political vagaries by giving
the fiscal policy authority more autonomy -- in similar spirit
to, though not necessarily to the same extent as, that now given
to the monetary policy authority.
The fifth lesson is never (again) neglect institutions and
governance.
The 1997 crisis brought not only an acute awareness of how
treacherous it can be to live in an interconnected world, but
also a growing realization that institutions of society and the
way they are run (governance) matter a great deal in such a
world.
The first strategic step has been taken -- a change from
authoritarianism to a democratic system. Democracy is supposed to
provide a better environment for developing more durable
institutions and improving their governance. The catch is that
the transition to democracy itself is one that requires
purposeful acts of institution building and standard setting.
Of the many exercises in institution building and reform, none
is more fundamental, or promises a greater payoff, than in the
legal sphere, including the judiciary and other aspects of law
enforcement. For here is where society's rules of the game are
actually played out. Alas, despite strong domestic and
international support, these reforms progress very slowly.
Next in terms of urgency is civil service reform, for herein
lies the hope for more effective government and better
implementation of policies. This also provides a natural
framework for the current anticorruption campaign. Like the
judiciary and other legal institutions, the civil service has
long suffered from neglect.
The writer is to be installed today as the new coordinating
minister of the economy. This article was abridged version 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.