Tue, 06 Aug 2002

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.