RI needs constitutional economy

By Akhmad Mukhtar

JAKARTA (JP): The prolonged economic crisis in Indonesia reflects the bad policies and poor economic management of the government, the administration of which is poorly regulated.

In issuing regulations, the government usually has the naive assumption that all its bureaucratic personnel are sincere and honest. However, the unbounded greed and power of its personnel have resulted in unbounded economic problems that tend toward chaos.

During this hard time marked by the worst economic problems, Indonesians have learned in a very expensive way that in a market economy, economic development without proper constitutional limitations on the government undoubtedly produces economic chaos and destruction. Any economy in this world is bound to self- destruct when it has reached unbearable inefficiencies in the system.

It is unwise to blame the international financial community of having caused the rupiah's fall in value. The rupiah's sharp depreciation has been caused simply by the government's unchecked power that has produced many inconsistencies in economic policies and price distortions.

The government has been sending the wrong signals to the market for quite a long time, which eventually resulted in the plunge of the local currency.

Indonesia, for example, for its own sake and for a better future, needs a constitutional economy. To protect its people, the government needs to introduce constitutional constraints that will limit its own authorities.

The unchecked power of the government is generally seen by businesspeople as a supply of exploitable resources for expanding business in the pursuit of profit. Nobody in business can resist this kind of opportunity. The closer the businesspeople are to government officials, the more temptation they have to exploit the unchecked power as a resource. It could be in the form of monopoly power in the market or limitations on new entrants to the market. Consequently, most domestic markets are not contestable and shadow pricing is common -- producing inefficiency in almost every production and distribution activity.

Businesspeople are not competing in the form of producing high quality products and services at competitive prices to consumers. Instead, they are competing for the affection of those in power and lobbying government officials, which takes up a great deal of their daily agendas. The unchecked system has created this kind of behavior, and success in the establishment of a conglomerate does not necessarily indicate hard work and thrift.

For a constitutional economy to work, there are, at least, three important areas that the government should practice constraint. First, the government should balance its budget. Continuous deficit spending will push up inflation because by nature the government has only two options to finance a budget deficit -- by printing money or increasing borrowing. Printing money creates inflation instantly, while heavy borrowing eventually forces the monetary authority to pay debt interest and principals at a higher level than the economy can support sustainable growth.

Second, monetary constraint should be enforced by prohibiting the government from using the power of tax inflation. There should be a constant growth of money supply of, say, 3.5 percent or 5.8 percent per year, because a lack of discipline in monetary policy will result in poor discipline in fiscal policy.

Finally, the central government must provide stronger fiscal power to the provincial and regional administrations, encouraging them to be more responsible with their own plans with their own available resources. Such a policy would reduce tensions in some provinces because local communities thus far feel that they have been robbed of their wealth by the central government and their interest neglected in the process of economic development.

What kind of fundamental economic reform does Indonesia need? The answer is that there should be constraints placed on the government in a number of areas. Democratization, therefore, is needed to facilitate the enforcement of constitutional constraints. Student demonstrations in some provinces, although seemingly without clear conception, are a pure reflection of what the people need -- a real fundamental for the economy in the future, not in terms of macroeconomic indicators but a constitutional economy that is the fundamental of a sound economy.

The writer is an economist and international finance consultant in Jakarta.