Wither populist policies?

By Winarno Zain

JAKARTA (JP): How do we read Hubert Neiss's recent visit to Megawati? The fact that the International Monetary Fund Director for Asia and Pacific felt it necessary to meet the leader of one of the biggest political parties in Indonesia, was an acknowledgment that the economic reforms could be off track when the new cabinet forms after the June 7 election.

It is an indication that Neiss has started worrying about the commitment of the next government toward the economic reforms. Not much was revealed at the meeting between Neiss and Megawati. But one can assume that at the meeting Neiss explained the importance of continuing economic reforms in Indonesia. Or may be Neiss sought assurance from Megawati, that should she be elected as next President, she will not abandon the economic reforms as mandated by the IMF in favor of adopting more populist economic policies.

Populist economic policies have been the dominant theme in the political statements of some major political parties. Populist programs are the most attractive among the people and one that can be easily understood.

It is a logical response after so many years of repression by the Soeharto government. In the aftermath of economic meltdown, the gross injustices committed by the former government and in the midst of the debris of Soeharto and his cronies' economic empire, the case for adopting populist economic policies in the next government are overwhelming indeed. Even though some aspects of the populist policies are questionable, politically and economically, it can not be denied that the appeal of populist policies are strong and powerful.

Populist programs consist of several elements, even though some of them are not explicitly spelled out. The emphasis is on the growth of small and middle entrepreneurs, the advancement of cooperatives and the increase of income for farmers.

The populist proponents claim that these were the groups who suffered most and who were discriminated against during the Soeharto era. They claim the government has wasted enormous resources in collusion with big businesses. They want to correct the allocations of resources by giving more resources to these groups. Proponents of populist policies acknowledge that what they are seeking is a kind of affirmative action policy, where the government has to take sides in favor of a certain group, such as those who are deemed as economically weak.

Although almost every politician says they support populist policies, there is one figure, however, who stands taller than the others. Adi Sasono, the Minister of Cooperatives and the Development of Small and Middle Entrepreneurs is definitely the most visible person behind the push for populist policies. Dubbed as "the most dangerous man" by Asiaweek magazine recently, Adi is getting more popular every day.

Adi has been campaigning for the development of small entrepreneurs and the return of their rights for better treatment from the government, long before he was appointed cabinet minister. As an NGO activist, Adi saw with his own eyes many injustices and destructive policies inflicted by the authorities against the weak and the poor. When Adi spoke at seminars, or when he delivered speeches, you could be sure that the theme of his speech was the plight of the poor.

His speeches were full of harsh criticisms and attacks on the Soeharto government and conglomerates. And Adi did this when Soeharto was in power! Speeches by Adi about the plight of the poor, had an aura of sincerity, since they came from his own personal experiences and observations during his NGO days. His speeches are convincing and powerful. They are not slogans as it might sound if uttered by other politicians.

There are other issues which are part of the populist platform, not explicitly formulated, but rather put forward as general remarks, reflecting their attitudes or opinions on certain issues. The populist proponents, for instance, although not entirely opposed, are not in favor of free market mechanism. They believe free competition only gives an advantage to the big business, while depriving small enterprises their opportunities to survive and develop. They believe government intervention is still required for more equitable resource allocation.

They asked the government to put in more money for agricultural development, whose progress had been lacking compared with the growth of the industry. They accused the government of neglecting agricultural development, causing the standard of living of farmers to remain low.

In this regard, they forget that for many years, most of the government development expenditure went to the agricultural sector. They feel building modern industrial sectors was a waste of money, since these industries could not compete in the international market anyway. It was better the funds were spent for agriculture to improve the lot of farmers that constitutes the majority of the population.

They claim they are not anti-big business and anti-Chinese business per se, as long as the size of their business was acquired in a fair and legal manner. Even though they are not entirely opposed, they are not enthusiastic, and even suspicious of globalization. They view globalization as being forced by the industrialized countries on the less-developed countries as a means by which foreign companies could gobble up domestic companies who lost the battle in globalized economy.

They say you can not let domestic companies compete because they are still weak and need protection. Clearly, they view globalization as being more of a threat than an opportunity for a country. On the issue of privatization of state companies, we still hear some nationalist sentiment. They reject an outright sale of state companies specially those operating in vital industries to private sectors including foreign companies. They view privatizing strategic and important industries unconstitutional.

If policies of the new cabinet are dominated by economic populist programs, there would be some risk for the sustainability of economic reforms. Populist programs, if carried out too far could undermine monetary and fiscal stance, placing obstacles for achieving strong macroeconomic foundations, that are necessary for economic recovery.

Resource allocation would be based on political consideration, not economic, making the economy less efficient. The pressure for loose monetary policies to ease the pains of the business sector -- specially the small business -- would be too great for the government to resist. Similarly, pressure for expansionary fiscal policies would be tremendous, posing a great risk for the government budget. There is a risk that the government would carry out populist programs at the expense of sound monetary and fiscal policies.

The proponents of populist policies do not appreciate the importance of macroeconomic stability as a precondition for a sustainable economic growth. They say that if government subsidies to certain groups result in budget deficit and high inflation, so be it. They'll never understand that high inflation will make everybody's life, including the poor's more difficult. For them, the important thing is equitable distribution of income, and that has to be achieved, if necessary, at the expense of economic growth.

The next government, although politically more legitimate, will work within the multiparty environment, and so politically will be weak. As a coalition cabinet, they will not be strong. They would easily concede to populist demands "to pick winners" at the expense of a strong macroeconomic foundation. It is doubtful that the next cabinet would have a strong economic team like in the previous cabinets. Economic policies and decisions could be disarrayed since they would be less coordinated and would depend on the individual minister, who likely would represent the interests of his political party, rather than the interests of the country.

As the implementation of populist policies could slow down economic reforms, it is necessary for the economists to have more dialogue with the proponents of populist policies. Economists should be more active to convince them that Indonesia needs to continue economic reforms, as failure to do this would be disastrous and would inflict much pain on the population, including the poor, the very group the populist policies want to help.

The proponents of populist policies should be made to accept the fact that the flow of foreign investment is a crucial -- may be the most crucial -- element for economic recovery. The government and domestic private sectors are still struggling to survive and can not be expected to make investments. The national income is shrinking as there has been no investment for some time. Like a household which has no income, what has been consumed by the Indonesian economy has been taken from current assets which are dwindling, and could run out soon if there is no replenishment from investment. What has kept the Indonesian economy afloat is money coming from the IMF and the World Bank.

Whether Indonesia will get out of the economic crisis and have sustainable economic growth in the coming years will depend on the political will of the government to continue economic reforms.

Political leaders should realize that politics are not only about the allocation of benefits to different groups. Politics are also about the allocation of sacrifice and pain to achieve a better future. People would be more willing to endure hardships and give chances to the government to improve the economy as long as they could be convinced to trust the government. That is why having a strong and credible government matters.

The writer economic columnist, former deputy editor of SWA business magazine.