RI in transition? Or just muddling through?

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.