Vincent Lingga - Opinion Column

The descent from developmental state into predatory state

Vincent Lingga, The Jakarta Post, Jakarta | Feature | Sun, August 12 2012, 12:18 PM

Paper Edition | Page: 6

Indonesia’s two longest-serving presidents, Sukarno and Soeharto, were both authoritarian and were both brought down by economic crises.

Bankrupt economies caused severe economic contraction and eventually led to political crisis and the ignominious downfall of Sukarno in 1966 after 21 years in power and Soeharto in 1998 after a reign of almost 32 years.

The difference, however, was that the mid-1960s crisis was caused by internal factors — gross economic mismanagement which led to an utter neglect of sound policies — while the crisis that started in late 1997 was precipitated by external factors — a sudden reversal in foreign investor sentiment wich triggered panic and massive capital flight.

These are some of the points from Indonesia’s Economy Since Independence, the latest book written by Thee Kian Wie, a senior economist at the Economic Research Center of the Indonesian Institute of Sciences (LIPI).

Thee says the crises, though different in their origins and manifestations, show the absolute necessity of good governance and strong institutions to establish and enforce basic rules on the government and the private sector.

An economy which rests only on one unsustainable institution — a strong, authoritarian president — is quite vulnerable to internal and external shocks.

Even though the book does not provide a thematic account of Indonesia’s modern economic history but is rather a short historical overview of Indonesia’s economy since independence, the 14 essays in the book still serve as a highly valuable record of Indonesia’s economic development process from independence to 2008.

This book should serve as a good reference for policy makers, analysts and economics students because the 14 papers form a condensed analytical record of Indonesia’s macro-economic and manufacturing development, pinpointing policy successes and failures over the past six decades.

 Thee shows how the affirmative (Benteng program) policy, launched soon after the nationalization of Dutch enterprises in 1950, to empower indigenous businesses with preferential treatment such as special import licenses and credits and foreign exchange at special rates, failed miserably due to corruption, collusion and nepotism.

He credits the 25 years of rapid and sustained growth during Soeharto’s administration to the ability of the economic technocrats to make use of the strong mandate they received from Soeharto to maintain macroeconomic stability through strict fiscal discipline.

But as the role and influence of the technocrats waned, fiscal discipline weakened under what Thee called the descent from developmental state into predatory state, mired once again in pervasive corruption, collusion and nepotism.

Indonesia, the book says, suffers from the natural-resource curse which also affected many other resource-rich countries such as the Netherlands.

The exploitation of natural-resource wealth encourages rent-seeking activities and reduces the return on human capital, thus diminishing incentives for educational attainment.

Resources, Thee argues, also promote the ascendance of a predatory state over the developmental state either through corruption related to resource rents or decline in the efficiency of policy and administration.

Half of the 307-page book is devoted to analyzing the policies of developing manufacturing industry and case studies on the process of technology transfers and the development of the wood, textile and garment and automobile parts industries.

 Thee traces the changes in the policies of manufacturing development from import substitution industries to meet the rapidly expanding domestic demand fueled by the oil booms of the 1970s into export-oriented industries to broaden the base of non-oil exports as oil exports declined.

 However, the global competitive environment for Indonesia’s manufacturing industries changed in the early 2000s after China’s dramatic rise as a formidable competitor in the world markets for manufactured exports and as an attractive place for foreign direct investment (FDI) and the emergence of global contract manufacturers in Singapore, Malaysia and Thailand.

 Thee sees the crucial role of FDI and visiting foreign buying agents in the transfer of technology to the manufacturing industry. The garment industry in Bali benefitted greatly from visiting foreign buying agents who provided advice and technical assistance in quality control and designs to meet consumer preferences overseas.

 However, Indonesia’s acute lack of absorptive capacity, notably the shortage of adequately trained and skilled manpower able to comprehend and master technologies has hampered the efficient transfer of technology through FDI to the country’s manufacturing industry.

The frequent changes in policy toward foreign investment also show that Indonesian policy makers have not had a clear idea of what they specifically expected from FDI.

The last chapter of the book on the development of the auto parts industry since 1974 should make for interesting reading by policy makers, analysts and economic students who have recently heard so much about the great enthusiasm for developing a national automobile.

This chapter analyzes why the policies for developing the automobile industry through the deletion program for commercial cars failed despite the fiscal incentives given to assembled cars with high local content.

 The low import tariffs and value-added tax imposed on components required for commercial vehicles failed to develop a local manufacturing base because there were too many car makes and models competiting in the limited domestic market while car manufacturing requires large economies of scale.

The government tried in 1981 to rationalize the industry by requiring car assemblers to reduce the number of makes and models locally assembled but this policy was strongly opposed by vested interests in the industry, thereby hindering the development of auto parts and components.

Car assemblers hesitated to develop long-term subcontracting relationships with auto parts suppliers because these suppliers, facing a segmented and relatively small domestic car market, were forced to supply several car assemblers in order to achieve economies of scale.

Indonesia’s economy since independence
Thee Kian Wie
ISEAS Publishing, 2012
307 pages