Will wealth redistribution help the economy?

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.