Institutional Development, an Essential Legacy

Indonesia is not a perfect country, but we never stop trying. Heroism does not only appear when the hero wins. Heroism actually arises from the steadfastness to keep trying, even in the most abstruse situations.

Indonesia may not be a perfect country, facing many problems and complaints, and is not able to provide for everyone.

Even so, on the morning of Aug. 17, people gave their time for the country. People exercised in red and white clothes, some gathered by the roadside for a simple flag ceremony, and a tired worker sat on the street porch wearing a red and white scarf around his neck. Although there may be disappointments here and there, we stood tall, giving our time for the red and white flag of Indonesia.

Indonesia may not be a perfect country. In the midst of problems, we were able to get out of the pandemic –which cippled the world– relatively well. We stumbled as household incomes were hit hard by the pandemic, but two years later the economy is recovering. It grew 5.4 percent in the second quarter of this year, the top five among the Group of Twenty (G20) countries.

It's something that deserves appreciation. We have been –and probably still are– worried about fragile social capital, but the pandemic helped us to understand what the writer Albert Camus meant: “In the midst of a disaster, in humans there are more traits to be admired than hated.” We saw people working together to help each other, actively involved in forming groups to speed up the vaccination program. The community took initiative, without the need of presidential or governmental regulations.

Also read:

> Fiscal Aspects of Social Protection Programs

> Commodity and Energy Boom: Double-Edged Sword

Indonesia may not be a perfect country. Our hopes were dashed in 1998 due to the economic, social and political crisis. On that day, people worried about the possible disintegration of the country –or the risk of chaos due to political conflict– if a president were directly elected.

The elections went peacefully and 10 years later, in 2008, Indonesia participated and played a role in the meeting of world leaders at the G20 to overcome the global financial crisis (GFC).

In the midst of the GFC, which was the biggest financial crisis after the Great Depression in 1930, the Indonesian economy did not experience a recession albeit grew 4.7 percent, the third highest among the G20 countries. As the crisis hit the financial sector in developing countries, within seven months Indonesia –together with India– was able to stabilize and leave the category of the five most vulnerable countries.

Institutional development

Why was Indonesia, while far from perfect, able to face these various economic problems? The answer could be good policy responses or perhaps good fortune. However, there is one important point we do not fully appreciate: the institutional development of 1998 and the choice to maintain democracy have an important role. There are, however, a few things we need to note.

First of all, in the case of the COVID-19 crisis, the provisions of vaccines and the implementation of effective community activity restrictions (PPKM) were the main reasons we were able to escape this terrible crisis. A well-managed pandemic brought back economic activity.

The impact of the global economic crisis and COVID-19 on the Indonesian economy was limited. Why? The Basri and Hill (2011) papers reveal that in the case of the GFC, Indonesian banks and private sectors do not have large exposure to subprime mortgages. In addition, the share of Indonesia's total export of gross domestic product (GDP) is much smaller than that of other countries, such as Singapore and South Korea.

Why was Indonesia, while far from perfect, able to face these various economic problems? The answer could be good policy responses or perhaps good fortune.

We benefit from something we don’t really want, which is lack of integration into the global economy. Of course we have to be fair; the limited integration of the global economy led to a slow recovery while the global economy recovered quickly.

Secondly, why was the financial sector relatively stable when the crisis hit? Banking conditions in 1998 were different from that in 2008, 2013 and 2020. The financial sector was much healthier than in 1998. The percentage of bad loans to total loans in 1997 was around 27 percent, much higher than in 2008, 2013 and 2020, which were below 4 percent. Of course, at this time the banking sector has to be vigilant as the loan-at-risk ratio is relatively high, even though it has started to decline.

Compared to 1998, capital adequacy was also maintained at around 17 percent due to various reforms carried out in financial institutions, especially the banking sector after the Asian financial crisis in 1998, the regulation of banking capital and improvements in supervision and institutions. In addition, risk management for individual banks and deposit insurance systems were being institutionalized (Sato, 2005). The banking reform saved us.

Thirdly, since the 1998 crisis, the government has implemented prudent fiscal rules for a sustainable budget. This is stated in the State Finance Law, which limits Indonesia's budget deficit to 3 percent of GDP and a government debt/GDP ratio of less than 60 percent. As a result, the debt/GDP ratio fell from 77 percent in 2001 to 25 percent in 2014.

That is why, when facing COVID-19, Indonesia had room to carry out a stimulus in order to provide vaccines and social protection. This fiscal stimulus is one of the important factors mitigating the impact of the pandemic and preventing the contraction from going too deep. Fiscal space is available due to the prudent fiscal policies of the past periods.

Fourth, corruption is a very serious problem in Indonesia. Corruption, collusion and nepotism (KKN) resulted in the collapse of the banking sector, which then dragged Indonesia into a deep financial crisis in 1998. Credit was given to the owners group without taking into account the feasibility of the project because of KKN. Like a house of cards, when the crisis hit, Indonesian banks collapsed.

Also read:

> Russia's Invasion of Ukraine on Global Economy

> Longing for a KPK with a Positive Image

Then hope emerged in 2002 when the government formed the Corruption Eradication Commission (KPK). We know that eradicating corruption is far from successful, but we have also seen how major corruption cases were uncovered by the KPK several years ago. That is why the efforts to strengthen the KPK, reform in the police and the prosecutor's office are non-negotiable. Weakening commitment to corruption will bring the country back into crisis.

Fifth, the decentralization in 2001 created opportunities for local administrations to develop their regions. However, it also creates a problem.

Simply put, local administrations can be inconsistent with the central government because regional heads are directly elected by their constituents. As a result, coordination between the central government and local administrations becomes difficult. Although the funds transferred by the central government to the regions are quite large, it does not mean that development in the regions is improving.

Without a clear reward or a penalty scheme, central government policies such as infrastructure, poverty alleviation and improvement of the business climate –which are implemented by the regional administrations– can be ineffective.

We know that the key to our success in overcoming the pandemic accelerated the delivery of vaccines to various places in Indonesia. This is not an easy job.

It depends on whether the regional head is a reformist or not. However, we must be fair; decentralization has produced figures who make changes in their regions. The matter of coordination between the central government and local administrations is crucial in the issue of the vaccination program.

We know that the key to our success in overcoming the pandemic accelerated the delivery of vaccines to various places in Indonesia. This is not an easy job. Initially this process did not go smoothly.

Local administrations have limited health personnel. In addition, there was a matter of central-regional coordination, as mentioned above. As a result, the program did not move quickly. The government does not have a hand in the regions. That is why the vaccination program became effective when the Indonesian Military (TNI) and National Police (Polri) –which have a line of command to the lowest level in the region– were actively involved. The role of the TNI, Polri and community leaders helped accelerate the vaccination program.

The role of democracy

Sixth, the democratic system. The Nobel Prize laureate in economics Amartya Sen points out that prosperity is created not because of the goods we have, but because of the activities that allow us to own those goods. People must have the freedom or the right to carry out their activities. The element of freedom becomes important. If people are limited in their political rights, silenced or have limited access to education and health, then they cannot develop themselves.

Sen expands the dimension of development in which economic, social and political aspects are balanced. We know, for the sake of economic interests, socio-political aspects are often marginalized, repression is justified, criticism is silenced in the name of development. In fact, criticism of the government is very important.

A survey conducted by Saiful Mujani Research Consulting and Political Indicators shows that the level of satisfaction with President Joko “Jokowi” Widodo has decreased between July and September of 2021 due to dissatisfaction with the handling of COVID-19. The government then responded to this dissatisfaction with various measures, including accelerating vaccine delivery, implementing effective PPKM and expanding social protection.

As a result, in October 2021 Indonesia was recorded as the country with the best recovery from COVID-19 in the ASEAN union.

Also read:

> Getting Out of the Recession

> The Hyperpolitics of Our Digital Democracy

I remember my discussion with Sen (on Dec. 2, 2021). Although there is no definite relation between economic growth and democracy, history shows that severe famine has never occurred in a country that is independent, democratic or has free press.

Criticism allows the problem to be addressed immediately. Criticism and social control also encourage the opening of various legal cases or service improvements. We learn about the importance of freedom and democracy in development. Both can prevent further political and economic catastrophes from occurring.

That is why institutional development is key. Good institutions enable effective government policies. Our institution is far from perfect, but to a great extent is able to help this country overcome various formidable obstacles. I know that political rights and the building of an institution are not interesting during good economic times.

Democracy may be noisy or a nuisance to the power holder, but it saves us from social and economic hardship. It encourages us to continuously improve ourselves. History teaches that economic improvement requires institutional development, such as bureaucratic reform, improving public services, governance, legal certainty, fighting corruption and protecting the environment.

Institutional legacy

An orientation to economic growth that is not supported by a good institution will not lead to a sustainable development. The greatest legacy of a government may not be high growth, but how to bequeath good institutions that can make this country better, stronger and more inclusive.

Indonesia is not a perfect country, but we never stop trying. Heroism does not only appear when the hero –as in the movies– wins. Heroism actually arises from the steadfastness to keep trying, even in the most abstruse situations. Perhaps that was why Bung Hatta, who quoted Rene de Clercq, read with emotion: "There is only one country that has become my country, it grows with actions and those actions are my efforts".

Muhamad Chatib Basri, Lecturer at the faculty of economics and business, University of Indonesia

KOMPAS/RADITYA HELABUMI

Muhamad Chatib Basri

This article was translated by Kurniawan Siswo.