75 Years of Indonesia

“When your ship has reached shore, we will tell stories ‘about your love and life in the morning’". What tales will we tell in the morning about Indonesia’s life when it turns 75?

KOMPAS/TATANG MULYANA SINAGA

Fishermen who return to sea pass through Pering Port, Natuna Regency, Riau Islands,  on Monday (4/12/2017).

“When your ship has reached shore, we will tell stories ‘about your love and life in the morning’". –Asrul Sani

What tales will we tell in the morning about Indonesia’s life when it turns 75?

The ship has not yet arrived to shore and the skies have not started turning red in preparation for dusk, like in the verse of Asrul Sani\'s poem. But maybe we can tell stories of a journey that is not yet ended, about hopes that have been mired in reality. Indonesia is indeed an unrealized ideal.

Yesterday on 17 Aug. 2020 we celebrated our 75th independence. Sutan Sjahrir once said that independence was a bridge to goals; to a country that supports its people, humanity, freedom from poverty, avoids oppression and exploitation, upholds justice, frees the nation from the grasp of feudalism, and guides the nation towards maturity.

Also read: Golden Indonesia 2045 No Pipe Dream

Then what should be told about this country’s life in the morning? A friend used to joke that Indonesia was a disappointing country: It disappoints optimists who talk excitedly about soaring economic growth; it also disappoints pessimists who are always talking anxiously about the country’ impending collapse.

As yet unfinished

This year, Indonesia has been included in the group of upper-middle income countries (per capita income of above US$4,046). This is an achievement. However, we have to be honest: our work is not yet finished.

Where does Indonesia stand at 75 compared to other countries? We must compare it with countries that have characteristics similar to ours, for example in terms of population, economic structure, geography, and so on.

My calculations based on data from the Penn World Table (PWT) version 9.1 shows that in terms of per capita income, calculated as relative per capita income in purchasing power parity against the United States, Indonesia is doing much better compared to India, which also has a large population, institutional problems and a dynamic democracy, as well as lags in quality infrastructure.

We are also better off than the Philippines, which shares geographic similarities as an archipelagic nation. When compared to China and Brazil, which also have large populations, however, Indonesia clearly lags behind. The same is true when compared to Malaysia, which is also highly dependent on natural resources.

Indonesia actually entered the middle-income group of nations in 1998. However, the Asian financial crisis made us slip down in the rankings. It then took 10 years for us to return to the 1998 level. And in

2008-2013, the per capita income in Indonesia increased sharply due to the commodities and capital inflow booms. From this perspective, Indonesia has made significant achievements.

Also read: Preserving the Pearls of Independence

Woo and Hong wrote in 2019 that Indonesia was quite successful in terms of economic growth. Unfortunately, Indonesia has not shined in terms of public welfare. This is reflected in a variety of indicators including the infant mortality rate, education, and life expectancy in comparison with the above countries. Moreover, we have poor performance in innovation and exports.

In other words, our exports remain relatively primitive. We must also note that economic growth has slowed relatively since 1998, and that our source of growth has shifted from investment and exports to household consumption. If we want the Indonesian economy to be sustainable, our source of growth must return to investment and exports. This requires investment, infrastructure, and good human resources (HR). This is the recipe of China, Taiwan, South Korea, Japan, and the countries that have helped them reach the top.

Institutional aspects

We are not ignorant of this. Various reform efforts have been made, but economic performance has not been as good as pre-1998 levels. Why? Daron Acemoglu and James Robinson show how institutional aspects are vital in their seminal work Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012).

KOMPAS/RONY ARIYANTO NUGROHO

Residents commemorate the 75th Indonesian Independence Day in the Cilebak River, Sawah Village, Cimahpar, North Bogor District, Bogor City, West Java, on Monday (17/8/2020).

Managing economic reform in Indonesia is not easy because of a variety of complex issues in political economy. The democratic system Indonesia has adopted makes it impossible for us to make a basic comparison with China, Vietnam or Singapore.

Looking at the 1998 crisis, economic reform, political reform, and decentralization were undertaken simultaneously in a “big bang” (drastic manner). This did not happen in other Asian countries that experienced the Asian financial crisis, such as South Korea, Thailand or Malaysia.

How do political economy factors play a role? Several things have an effect: First is the power structure and political map. In the Soeharto era, power was centered in Soeharto and the people around him.

With centralized power like this, the line of command in policymaking is more concise and clear. It provides certainty. Certainty is important for business. Business certainty encourages investment and exports, and Indonesia\'s economic performance was relatively strong at that time.

Although corruption was relatively high during the Soeharto era, it was centralized (McLeod, 2000). Centralized corruption is one-stop bribery through which a person or entity can guarantee smooth resolution of their problem.

This distribution of power has made it more difficult to consolidate the reform process.

The 1998 reform movement changed the political structure in Indonesia from authoritarian to a more democratic one. Political reform has changed the map of power to become dispersed, from being centralized in Soeharto to become distributed among the House of Representatives (DPR), Regional Representatives Council (DPRD), regional heads, political parties, the bureaucracy, and so on. This distribution of power has made it more difficult to consolidate the reform process.

Furthermore, it has also increased the transaction costs of reform. Bardhan (1997) indicated that this fragmentation of power spurred corruption at various levels (decentralized corruption). Bribes may have to be paid to several people, and there is no guarantee that the problem will be resolved. As a result, the cost of corruption is higher than under centralized corruption because it recurs many times, and uncertainty heightens (Kuncoro, 2006).

We know that business certainty is vital for investment. However, prioritizing investments must not neglect institutional issues, corruption or human rights. We have learned this very bitter lesson. Indonesia’s case shows that corruption, collusion and nepotism (KKN) in the financial sector, especially when credit was given without proper risk analysis, turned the banking sector into a house of cards.

Acemoglu and Robinson (2012) pointed out that extractive institutions, in which oligarchs control the decisions, lead to economic collapse. Nobel laureate in economics Amartya Sen once wrote that China\'s authoritarian system of government was partly responsible for the deaths of millions of people because criticizing errors in food policy was impossible in an authoritarian system.

Second is the multiparty presidential system. Having many political parties does not allow the emergence of a clear majority in the House of Representatives. As a result, the President must be willing to compromise to gain political support in the House. To do so, a President must establish a "rainbow coalition" in his Cabinet. This kind of Cabinet cannot be a full meritocracy because it must take political compromises into account.

In fact, the reforms must often neglect the interests of various parties.

Under this condition, it is difficult to expect solid, technocratic reform because too many political compromises are made to accommodate various interests. In fact, the reforms must often neglect the interests of various parties.

Third is the political cycle. Major reform often takes a long time until they show results. However, the political cycle of five years has left politicians uninterested in pushing for reforms with results that will only become visible in 10 years or during the next generation. Their rationale is, why sacrifice political capital by becoming unpopular, since the beneficiaries are to become the successors? As a result, politicians have no incentive to undertake long-term reform.

Also read: Fundamental Transformation

Fourth is central-regional coordination. Decentralization increases the risk of a lack of synchronization between central and regional policies. Basri and Hill (2010) pointed out that this is a principal-agent problem in which the agents (local administrations) are unable to align with the principal (central government) because the local administrations are now directly elected by their constituents. As a result, it is difficult for the central government to apply incentives and penalties to regional administrations.

Kompas/Hendra A Setyawan

The mural is critical of the government\'s performance in the Lengkong Gudang Timur area, South Tangerang, Banten, on Tuesday (19/5/2020).

On the other hand, of course we must also be fair in noting that decentralization has given rise to potential leaders and reformers in several regions. Unfortunately, their numbers are still very low.

Starting from "quick wins"

As long as the political economy problem persists, we will continue to struggle with the problem of policy implementation. Progress wil stilll occur, but at a slower pace. Democracy requires patience and the ability to manage different viewpoints. Then how do we push for reform in conditions of political

and institutional constraints like this? The success of a reform program depends on political capital and space available for reform.

We need to remember that both political resources and time are limited. That is why prioritizing is important. “Big bang” reform can only occur if we have very strong political capital. The problem is that our political capital is limited. Time is also short because of the political cycle. Reforms must therefore be carried out within the existing constraints.

How? My study, Reform in an Imperfect World: The Case of Indonesia (2017), shows that if political capital is limited and political and institutional constraints exist, then economic reform should start with something easy, for example by creating quick wins that have an immediate impact on the people. If the public starts to feel the positive impacts of these policies, the policymakers’ credibility will increase, as will political capital, so that they gain public support for more complex reforms.

Reforms can thus start from the simplest programs with simple targets, and then progress to more complex and difficult targets.

On the other hand, public support can be an incentive for political leaders to support policymakers in continuing their reform programs. Reforms can thus start from the simplest programs with simple targets, and then progress to more complex and difficult targets.

Our work is not yet finished; not at all, wrote Chairil Anwar. We have made many achievements, but we are not yet a country that is just and free from poverty, as Sutan Sjahrir imagined. We are facing various problems right now, including the Covid-19 health crisis. We are aware that some of our hopes have been cut off from the reality. The bottom line, however, is that we mustn’t give up. Even though it may be difficult, we must try to remain steadfast and sincere in continuing our journey.

KOMPAS/HERU SRI KUMORO

Muhamad Chatib Basri

Then, in a voice choked with emotion, we can whisper the verses of H. Mutahar: ”Dari yakinku teguh/Hati ikhlasku penuh/Akan karunia-Mu/Tanah air pusaka/Indonesia merdeka” (With my firm faith/my sincere heart is full/of your many bounties/my inherited homeland/independent Indonesia).

Muhamad Chatib Basri, Lecturer, the University of Indonesia Economics and Business School