Mon, 05 May 2003

RI and RP: Compelling similarities

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.