RI needs constitutional economy

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.