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

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Editorial: Bridge hangs in the balance

Vincent Lingga, The Jakarta Post | Editorial | Tue, August 07 2012, 7:49 AM

Paper Edition | Page: 6

We know that being indecisive has been one of the main hallmarks of Susilo Bambang Yudhoyono’s presidency.

Yet it is mind-boggling to observe Yudhoyono idly standing by, letting his ministers squabble in public over his decree on such a vital piece of infrastructure as the 28-kilometer Sunda Strait Bridge, which is planned to connect Java and Sumatra, the most developed and populated islands in this, the world’s largest archipelago.

The President has often talked eloquently about how connectivity is crucial to developing a superb logistics system, to ease the movement of people and goods and build up efficient distribution networks.

Yudhoyono should have immediately raised in the Cabinet Finance Minister Agus Martowardojo’s reservations about Presidential Decree No. 86/2011 that serves as the legal foundation for the US$10 billion Sunda Strait Bridge project and the strategic development of the southernmost areas of Sumatra and westernmost areas of Java.

The decree has gone through long, comprehensive and critical deliberations, as can be seen in its 33 articles, and the 30 months Yudhoyono took to make his decision after the government officially received the pre-feasibility study report from the initiator of the project, PT Graha Banten Lampung Sejahtera (GBLS), the consortium of Tommy Winata’s Artha Graha group and the Banten and Lampung provincial governments.

But Agus’ dissenting opinions should also be appreciated because errors can happen, some important legal aspects might have been overlooked, especially with regard to such a huge project that will require government guarantees.

The President should have led the Cabinet in analyzing and cross-checking as to whether his decree on the bridge project fully complied with the three other decrees he made earlier in 2005, 2010 and 2011 regarding public-private partnership (PPP) schemes in infrastructure development.

Of utmost importance is ensuring that the President’s decree does not provide a blank check to the private investors who will develop and operate the bridge and the related strategic industrial zones.

Making necessary improvements to the presidential decree would not be the end of the world. Nor would such changes severely damage the institution of the presidency.

 Only five months ago the President also issued a decree on divestment for foreign investors in mining to improve his earlier decree on the same matter enacted in early 2010.

But for Agus to continue publicly airing his dissenting opinions about the 2011 Presidential decree is also a futile way of improving policies. Such a renegade attitude could amount to little more than hitting his head against a brick wall.

In general, we think, the decree is already quite elaborate as regards the need for good governance in the project because the regulation has been designed to build a powerful internal-control mechanism to oversee the whole project right from its planning to its development and operation.

The decree requires the President to set up a governing council in charge of laying out the direction, policies and strategy for the development of the Sunda Strait Bridge and the industrial zones at its respective ends.

The governing council comprises 21 Cabinet ministers, the Indonesian Military (TNI) commander in chief, the chairman of the Investment Coordinating Board (BKPM), the chiefs of the National Police and the National Land Agency as well as the governors of Lampung and Banten.

 It is the governing council who will appoint the Executive Board that will be charged with implementing all the policies on the project and dealing with private investors under the PPP scheme.

Whatever amendments the government makes to the regulation on the massive project, there are several basic points that have to be factored into consideration.

First, the project is vitally important, second it may take more than 10 years to build and over 35 years for investors to recoup their investment, third, the government simply cannot afford to finance the project and it should therefore be implemented under the PPP scheme, given the economic and political risks and its vital function as a public service and fourth, the bridge and the industrial zones at either end of the bridge should be bundled into a single package to make them more attractive for private investors and lenders.

Of more importance is that regulations on the project should not lead to overkill as very few companies will be technically and financially capable of implementing the infrastructure project, given its size, the huge investment, the high technology and the long-payback period required.

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