Three decades of Indonesia's growth (3)

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.