Will wealth redistribution help the economy?

By Aleksius Jemadu

BANDUNG (JP): The morally unjust and unacceptable distribution of the burden of coping with the pain of recovering from the current economic crisis has led the Indonesian government to realize that economic democratization is absolutely necessary. No one can deny that almost three decades of growth-oriented economic development by the New Order government under former president Soeharto has created an extremely unequal distribution of wealth in this country.

Within the same period there emerged a high concentration of capital ownership among a privileged clique of large business groups and conglomerates.

For instance, in 1990, 200 business groups controlled around one-third of Indonesian GDP. A third of the assets of the top 200 groups were controlled by the country's top five conglomerates (World Bank, 1994). As it has turned out, a large part of Indonesia's unpaid foreign debt -- the debt which has exerted such heavy pressure on the economy -- is held by these same conglomerates.

Thus, in November 1998 the People's Consultative Assembly (MPR) adopted a decree on political economy within economic democracy. This is a new commitment at the highest level of government to redistribute the nation's wealth and resources in a more equitable manner.

The Ministry of Cooperatives and Small Enterprises followed up on this decree by distributing a huge amount of fresh capital among cooperatives and small enterprises.

In a recent interview with Asiaweek (Dec. 18, 1998), the Minister for Cooperatives and Small Enterprises Adi Sasono defended this move by arguing that during the New Order period, the government was overly generous to big business, especially Chinese conglomerates, at the expense of the majority of "indigenous" Indonesians. Sasono suggested the government had to empower cooperatives and small enterprises by giving them more access to cheap government credit. This is the main idea behind what is called the People's Economy.

However, while there is no doubt regarding the moral justification of a policy aimed at redistributing resources in a more equitable manner, many political economists have questioned the rationality behind this policy given that elsewhere there is a strong tendency towards a more market-oriented economy.

In this era of the free market, it has been said that economies cannot be managed by benevolence. By doing so, the government would be repeating the mistake made by its predecessor before the economic crisis.

We cannot move from one extreme to another. What is more important for our national economy as a whole is to work out a functional and productive linkages between cooperatives and small scale business on the one hand and conglomerates on the other.

In fact, the MPR decree setting out the concept of the People's Economy explicitly mentions the importance of such links.

Why are such links necessary? There are several reasons. First, if we study the economic history of industrialized countries like Japan, Germany, and Sweden, it becomes apparent that their progress has been based largely on mutually reinforcing relationships between large, medium, and small enterprises.

Thus, the expansion of big business and conglomerates automatically dragged the other two groups along on its coat tails because of the links between the supply of raw materials and other factors of production, which were provided by small and medium-sized companies.

For instance, links between Toyota, Japan's largest industrial corporation by sales, and hundreds of independent subcontractors and parts suppliers has been the main reason behind the greater efficiency of the Japanese automotive industry when compared to its American counterpart.

Second, as Indonesia enthusiastically integrates itself into the global market, the role of large business groups and conglomerates capable of attracting foreign investment and penetrating complicated networks of global trade will remain critical. They have the capacity, network and resources to make use of opportunities presented by the global market.

Furthermore, they have the ability to lobby successfully to win profitable deals and contracts in the global marketplace.

Third, according to Francis Fukuyama, social capital is as important as physical capital in driving economic progress. By social capital he means "a capability that arises from the prevalence of trust in a society or in certain parts of it".

It is argued that moral bonds of trust are crucial for the facilitation of transactions, empowerment of individual creativity and the justification of collective action.

As the world economy moves rapidly towards the primacy of liberalism, there is a real need to preserve and accumulate social capital in our society. Any radical departure from our communitarian tradition will only increase suspicion and envy among members of society.

Fourth, the promotion of the role of cooperatives and small business enterprises cannot be separated from the national strategy to improve our competitiveness in the global economy. Strengthening the financial structure of cooperatives and small business enterprises is one thing, but improving the efficiency of the national economy as a whole is quite another.

Last but not least, since the allocation of cheap credits to cooperatives and small businesses involves a huge amount of public funds, the Ministry of Cooperatives and Small Enterprises must guarantee that it will not just succeed in giving birth to a new form of rent-seeking economy. If not, it will create more problems than solutions.

The writer is a lecturer at the School of International Relations, Parahyangan University, Bandung, and a visiting scholar at the Department of Politics, University of Leeds, United Kingdom.