RI must develop policies to escape crisis

RI must develop policies to escape crisis

Akhmad Rizal Shidiq, School of Oriental and African Studies,
University of London

Hidayat Jati, in The Jakarta Post on July 29, wrote that
despite the recent corporate governance crisis in the U.S., we
could still learn from the U.S. experience in the virtue of
competition, creative destruction and how modern capitalism and
democracy saves the economy.

However, from the series of disclosures and punishment dealt
out to those company crooks, it seems that was what at work was
not the competitive market but the bureaucracy. And as expressed
by Thomas L. Friedman in the New York Times on July 28, it was
President George W. Bush's undue trust in his people -- CEO
cronies -- rather than the bureaucracy, that stimulated the
scandals.

Moreover, the latest crisis shows the relationship
particularly between the financial market and the state under
modern capitalism.

The more developed a country's capitalism -- marked by the
complexity of, for example, financial market transactions and
sophisticated accounting practices -- the more it requires a
state that works. This is counterintuitive to the perception of
minimum state intervention and liberalization as the essence of
market capitalism.

In the U.S., we see the Stock Exchange Commission, the state
bureaucracy, which acts effectively in guarding the economy. Such
a paradox also explains why President Bush -- rather than letting
the market clean up its own problem -- had to speak on Wall
Street to calm the market by claiming that "the American economy
is the most creative and enterprising and productive system ever
devised". Yet he also launched a kind of state intervention, the
tough new enforcement initiatives for reform.

While it is often argued that the market did well in the U.S.
to punish the bad guys as shown by the immediate drop of stock
prices for those scandalous companies; it is that very market
that boosts those bubble stock prices without any reliable base
except the company's ability to create a sophisticated accounting
financial statement. Then how does the financial market work?

The description by economist John Maynard Keynes harks of a
beauty contest. In the 1930s, the British Sunday newspaper used
to publish several pictures of young ladies, which readers would
choose from. Readers who voted for the one who got the most votes
could win a prize. Their basis for selection was only a guess on
the majority's preference regardless of their own judgment.

Replacing the readers and the ladies with most financial
market players and the companies' stocks respectively, we have
the nature of Wall Street and other financial centers.

Because of the similar guessing involved, the state is needed
to secure market expectations to be based on more or less
accurate information -- in the form of reliable accounting and
regulators' agencies. They are important to ensure that the
market works properly; to cope with information problems; and to
minimize conflict among the owners of production factories.

So while the U.S. and Indonesia similarly have all of those
dirty practices among politicians and company crooks, what
Indonesia does not have is clearly a state that works.

When comparing the market-state relationship between the U.S.
and Indonesia, there are two notes for Hidayat Jati's arguments.
First, the concept of competition and creative destruction; and
second, the historical context of comparing the two countries.

Capitalism can be explained by competition or creative
destruction. Yet the former sees the beauty of capitalism as the
efficiency of resource allocation through a price mechanism. In a
perfect market, consumers always have the lowest price as the
competition pushes all producers to set a zero profit.

The latter sees the source of capitalism progress as a series
of temporary monopolies and oligopolies as a reward for
innovators.

Politics is never comparable to the perfect competition. To
some extent politics requires the concentration of power -- an
alliance that never reaches efficiency. Blaming this typical
market imperfection as the source for a lack of political
accountability is then implausible.

And how would temporary monopolies be prevented from being
excessive? The U.S. experience shows us that it is the state
institutions, rather than market mechanism, that must be enacted
-- the anti-trust law and limited patent in economics, for
instance.

In comparing Indonesia with the U.S., surely it is less
meaningful to compare the two countries at present since the two
are at different stages of development.

Cambridge University economist Ha-Joon Chang cited recently in
the Guardian daily that in 1880, when the U.S. income level was
similar to Indonesia's today, the U.S. was among the countries
with the highest protection tariffs. Most of its citizens could
not vote and vote buying as well as electoral frauds were
rampant. There was no open civil servant recruitment, no
bankruptcy law and no acknowledgment of foreigners' copyright.

In short, the U.S. was fraught with the same substandard
features plaguing developing countries. Yet it was also the
fastest growing country in the world, which eventually became the
richest.

Liberalization and all that is associated with American
democracy did not automatically exist in the early days of its
industrialization. The experience of the U.S. and the earlier
pattern of development of "East Asia tigers" shows that
liberalization is not a panacea for economic growth. Even at a
more established economic stage, the role of the government is
very crucial, particularly during the crisis.

This historical perspective and an assessment of Indonesia's
development phase shows a changing relationship between the state
and the capitalists. At an early stage, the state is deeply
involved in creating property rights and the emerging capitalist
class that will lead to capital accumulation and economic
prosperity.

All countries started from a very messy situation, which
involved the massive transfer of rents, corruption and briberies.
Yet it is more interesting to study what features make the state
in some countries able to manage the socially beneficial rent-
seeking process that brings economic growth; rather than simply
importing the typical U.S. institutions of today and hoping they
solve all the problems.

To have the bureaucracy and state work effectively is highly
related to changes in society and the stage of capitalist
development. Therefore, it is up to Indonesia, based on the
interplay between the state and the market, to design the
development policies to escape from economic and political
crises.