What good governance is for

Akhmad Rizal Shidiq, School of Oriental and African Studies, University of London

Legislator Mochtar Buchori argued in this newspaper (March 8) that it is not politically wise to separate the ideas of a good life and good governance. He also argued that the differentiation has been due to ineffective political communication.

The notion of good life and good governance refers to economic prosperity and political process. It was only until the 1990's that the gap in understanding society has been addressed under the concept of institutional economics.

The policy implication is reform for good governance. The Asia Crisis during the late 1990's strengthened this view, as many believed that poor governance was the credible explanation for the persistent crisis.

The logic of the desired reform is that economic reform would not achieve a desirable outcome without sound institutions. "Sound" means accountable, transparent, and prudent. Economic reform implies liberalization, privatization, and cutting subsidies to get the price right.

Such neo liberal ideas have dominated the reform program in many developing countries including Indonesia. Its main belief is in market efficiency and the minimum role of the state. The state is seen as the source of failure, either for its actions or inaction.

But the success of the East Asia Tigers and Southeast Asian economies before the crisis suggests that the state plays a very important role in the economy. Governments were deeply involved in catching up with other countries regarding technology and economic growth.

Indeed, corruption was pervasive in some of those countries. Yet under similar corrupt administrations some countries can grow -- as in Southeast Asia -- and some can't -- like in Sub Saharan Africa.

Rent seeking costs (bribery, kickbacks, lobbies, corruption) should be compared with the economic performance of the groups that win the competition for rent seeking.

In the early days of South Korea -- and to some extent Indonesia -- the government had allocated some subsidy or protection for some new capitalists (chaebol in South Korea or Zaibatsu in Japan) to perform in certain industries.

These new capitalists performed well. This argument contrasts with the idea that all rents are always bad, therefore the state role, as the main producer of rent, should be eliminated.

In Indonesia rent seeking used to be predictable, regardless of the costs. Businessmen still could predict their income after discounting considerable amounts of bribery. Now, the businessmen pay for more parties but without any guarantee. Investors have to deal with many levels of state administration, yet the policy outcome can be canceled out by any of those levels.

Furthermore the state can no more deliver. It cannot, for instance, ensure that the Indonesian Bank Restructuring Agency works effectively. One may suspect that this inability is due to conflicting vested interests involving massive rent seeking cost transfer to various groups within state bodies.

Up to now, there is no sufficient debate on what type of economic recovery and development should be pursued. What is the desired role of the state and the market? This is an issue which is very much related to people's lives. Would they be better off under the market-based scenario of liberalization, privatization, and cutting of subsidies during Indonesia's transition?

Failure of communication of ideas of good governance or a good life can be caused by either politicians' inability to understand the complexity and policy options for pursuing a good life; or their mere interest in seeking the most of private gains.

One needs to define what good governance is for. Under the neo liberal approach, it is to serve liberalization, privatization, and "getting the price right" ideas of market economic reform.

The other approach views that good governance is to recover the capabilities of the state to enhance capital accumulation, acquire technology and generate growth. The choice would determine who gains more during recovery.

Unfortunately under the current political setting it is very unlikely that such a consensus of how to pursue a good life can be achieved.

The mainstream neo liberal approach has not taken into account the country's history regarding the relationship of the state and the market. "Catching up" and "learning" is the main agenda of economic development in developing countries. This process requires different roles of the state. South Korea for example, without government intervention, was most unlikely able to compete in heavy industry.

In Indonesia, protecting the agriculture -- rather than letting the pure market mechanism work -- is very strategic and crucial to develop the agricultural basis for industrialization and poverty reduction.

In our early stage of recovery the state will be important to provide stability and basic necessities, as well as in constructing basic infrastructure. In the next stage, although this is still debatable, the state may act to lead technology acquisition and allocate capital accumulation.

So in the early stage the role of the state in providing a good life will be highly important. If the role of the state was minimal, conflicts may arise again in the competition for necessities.

If the state is so important, then reform for good governance may not specifically support the model promoted by international agencies; but reform may rather need to ensure that the state acts properly -- in its relations with capitalists -- during recovery and after that.

The state must also ensure that the rent seeking cost is not excessive, that it directs and controls rent allocation to the most productive sectors, such as those performing well in exports.

Good governance would further prevent corruption among the state bodies and politicians and their unholy alliances with business circles -- an alliance which created inequity under the old regime.