RI in transition? Or just muddling through?

This is the second of two articles by Chris Manning, who heads the Indonesia Project at The Australian National University in Melbourne. He is also co-editor with Peter van Diermen of Indonesia in Transition: Social Aspects of Reformasi and Crisis.

MELBOURNE (JP): The incidence of poverty is unlikely to fall (and may in fact rise further if the economy falters), staying at around 15 to 20 percent of the population which is the level experienced during the crisis, after falling to around 10 percent in the last years of the Soeharto regime.

Unemployment and under-employment are likely to remain at levels attained during the crisis and continue to be a threat to social harmony, especially in smaller villages and less developed regions where there are few job prospects.

Second, the public budget will be severely tested. Total revenue will grow much less quickly than in the past -- even if rapid progress can be made in tax collection -- partly because of slower growth in corporate profits and taxable incomes, but also because of the huge backlog in public debt arising from the crisis.

It seems unlikely that Indonesia will be able to afford an expansion of essential spending (assuming the government budget remains balanced) on education, health and rural infrastructure, as in the Soeharto years.

This squeeze will probably be felt especially in resource poor regions, which will suffer most from the transfer of resource rents back to the regions under the new decentralization arrangements.

While Jakarta benefited most visibly from the pre-crisis spending spree on infrastructure, it was the expansion of rural and regional roads that was one of the unsung hallmarks of economic growth at a local level during the Soeharto period.

Its relative success can be seen from a comparison of outlying regions in Indonesia with similar locations in the Philippines, let alone less populated countries such as Papua New Guinea where the experiment in decentralization went badly wrong.

Third, despite getting rid of the legendary Soeharto affiliated rent-seekers (or, giant "franchise" holders, according to Ross McLeod) and their cronies, inequalities may well increase.

Greater access to both better paying jobs in the modern sector, and to public goods (health, education and rural infrastructure) on the part of the poor has been at the heart of more equitable outcomes in East Asia over the past 30 to 40 years.

Indonesia was not an exception, even if results could have been much better without the rampant corruption, collusion and nepotism (KKN).

Less access, combined with policies that benefit the middle class supporters of the coalition government rather than the poor (such as fuel subsidies and protection for rice farmers), is likely to contribute to wider gaps between better off families and the poor.

Is there inevitable conflict between the goals of pursuing political reformation and a return to economic growth at levels similar to those experienced in the Soeharto years? Yes, and no.

Environmental controls, such as those called for by Minister of Maritime Exploration Sarwono Kusumaatmadja, may well slow economic growth in the short run. Further, it was to be expected that greater political and individual freedom would discourage some investment, as new rules are established, especially in the wake of the upheavals in May 1998, the Timor struggle and other social clashes in the regions.

While Samuel Huntington recently argued (in interviews given in Jakarta) that democracy and economic growth are not necessarily antagonistic, it is hard to see how they cannot be in conflict during periods of extreme transition, such as that faced by Indonesia.

But, at the same time, much of the delay in economic recovery, and especially investment, would seem to have little to do with the process of reformasi, or with inherent conflicts between economic growth, social reform and the environment.

Mixed signals from the top on a commitment to restoring economic growth (a blanket statement on returning plantation land to the people, suggestions of a 100 percent tariff on rice, delays in fuel price adjustment, and so on) suggest that the President and his team are ambivalent, at the very least, in regards to the importance of market-oriented policies for recovery.

For example, there is much sympathy in Abdurrahman Wahid's (Gus Dur) administration for subsidies or direct protection to support Indonesian farmers and small-scale industry, rather than emphasizing removal of restrictions which discriminate against small producers.

Yet there is little evidence that either group have suffered because they were unable to compete internationally on a "level playing field" (in fact many seemed to have thrived, in coffee, cocoa, vegetables and furniture and they have been further from the reach of government officials).

Gus Dur's coalition government, with less resources at its disposal, shows signs of becoming more populist than any other East Asian government in the wake of the crisis.

As many have witnessed, muddling through economic affairs has not brought about a collapse in living standards.

People have benefited, moreover, as many political and social issues have quite deservedly received priority after a long period of neglect. But without a sense of urgency to sustain an economic reform agenda, living standards for most Indonesians are likely to improve very little, if at all, in contrast to the past three decades.

There is no doubt about a political transition from the Soeharto era and the Habibie interregnum. But it remains to be seen whether there will be a transition in economic performance and incomes in the wake of the crisis.