Three decades of Indonesia's growth (3)

This is the third of four articles on Indonesia's economic development by Yoshihara Kunio, an economics professor at Kyoto University's Center for Southeast Asian Studies.

KYOTO, Japan (JP): Human life is not about economics alone, but decent income is an important component of it. The critics of growth-oriented policy often fail to understand it. Those in industrial countries, enjoying a comfortable living, attach more importance to other components of a good life, such as environmental quality and political freedom. For the developing countries like Indonesia where the living standard is low, economic growth is a terribly important matter. This article deals with the way to build a high performance economy.

If I were designing the source of economic growth, I would do the following. First, I would choose the end of the next three decades, that is, the year 2025, as the target year. Then I would specify the target per capita GNP of US$10,000 in 1995 prices, which is roughly the income level of Taiwan today. Next, I have to determine the rate of annual growth over the next three decades. To make computation simple, consider per capita GNP in 1995 as $1,000 (actually $900). If it grows at 7 percent per year, it doubles every ten years. So, after three decades, with 7 percent annual growth, per capita GNP should be $8,000. Since the currency of a growing country eventually starts appreciating, that growth rate will enable Indonesia to reach at least $10,000. Since population growth will average out to be about one percent per year, GNP has to grow at 8 percent.

The question is how to design an economic system to realize it. The first thing we should keep in mind is that it requires the cooperation of the government and the market economy. Some economists give an impression that economic development is a matter of economics alone, but, as the saying goes, 'it takes two to tango'. In the case of economic development, the two are the market economy and the government.

The government must be effective in providing the so-called public goods. The public goods are the services the market needs but cannot provide efficiently or adequately because it is difficult to make their consumers pay for it. Examples are law and order, defense, public health, and roads. Monetary stability and foreign debt management can also be included. Economists talk about market failures, but there are such things as government failure. It occurs when the government does a poor job in providing the public goods that the market economy requires. This is not an abstract problem. One of the two major reasons for the poor performance of the Philippine economy in the past few decades was government failure (the other reason was too much government intervention).

The market economy must be free from government interference. Free competition must prevail. And the economic rewards and punishments of the market should be left alone (as much as politically possible). These are the only ingredients of an economic system which is needed to realize high growth.

The trouble with it is that many people wouldn't like it. Some do not want to give up government intervention because it benefits them. Some others do not like the distribution of economic rewards by the market because it creates greater inequity (a larger gap between top and bottom incomes, but not necessarily in the rise of the Gini coefficient).

If people do not give up government intervention or allow greater inequity, the target cannot be attained.

As to greater inequity, there is no way to avoid it if a high growth economy is desired. Rewards are incentives, and punishments give rise to fears. The greater the rewards and fears, the greater the efforts of people to work and innovate. This is the human psychology, and a strong market economy depends on this. The gap between top and bottom incomes widens as the market economy advances, since some resources (including human talent) are of limited supply, thus commanding high prices.

In economic development, egalitarianism today is not in the national interest in the long run. A strong market economy benefits the masses over the long run since their wages are bound to rise as high growth continues. If the reader doubts this, consider the cases of Japan, Korea and Taiwan. A large income gap remains in these countries, but this is not much of a problem since the masses enjoy a decent standard of living.

The system based on rewards and punishments will become more acceptable if people are given equal opportunity when they join the market economy. Unfortunately, since complete equal opportunity is not possible with the present institutional arrangements (for example, since the family cannot be done away with, some enjoy more inheritance than others), the most that can be done is to enable all people to receive good basic education free of charge and better students to obtain higher education regardless of financial background. This creates a more level playing field for the participants in a market economy.

If wealth is created with government favoritism, wealth becomes the target of people's criticism, and the market economy I designed above cannot be defended. But if wealth is created by providing something people want on the basis of competition, most people will accept it. So, it is important that the government not interfere in favor of particular persons.

The only condition for government intervention is that it can promote economic restructuring. But, if this is necessary, the rate of protection should be moderate, and the period of protection should be specified in advance. Government intervention for such purposes can raise economic growth, which is the benefit side of it, but since it carries a cost, benefit and cost should be carefully compared. The Korean government, for example, quickly withdrew government assistance from the companies which were not meeting its objectives.

Many Indonesians will continue to clamor for government assistance. Those who have benefited from it want to continue receiving it and say that they have created modern enterprises. But the question is at what cost. Can they compete in the international market? In many cases, they created inward-oriented large enterprises. In economic restructuring, what is needed most is enterprises which create new, more value-added exports.

High growth is needed to uplift the living standard of the masses, who are still poor in Indonesia. The economic system should be designed to sustain high growth. A good economic design requires the support of opinion makers as well as political leadership. The tragedy of poorly performing economies is that there is no consensus on a design for high growth.

One shouldn't become complacent about the present economic system just because it has worked in the past. Economic growth becomes more difficult to sustain as the level of income goes up. Unless efforts are made to keep the economy moving, growth can peter out, as happened in the Latin American countries.