Indonesia's Mediocre Harvard Grade
Despite remarkable strides in the last 11 years after the economic, social and political chaos of the Asian financial crisis, Indonesia remains to some extent caught in the coils of Suharto's New Order -- overly dependent on resource extraction and with its political and social institutions still inadequately developed, according to an exhaustive 105 page report by a Harvard University program.
"Improving the quality of Indonesian government institutions will not be easy," according to the report, under the unwieldy title, From Reformasi to Institutional Transformation: A Strategic Assessment of Indonesia's Prospects for Growth, Equity and Democratic Governance, "Democracy has not eliminated corruption or strengthened the rule of law. The economic oligarchy has survived the crisis intact, and its relationship to the state is largely unchanged."
The report, by the Indonesia program at the Harvard Kennedy School, is bound to stir up controversy in Jakarta, which has been flavor of the month with investment bankers for its accomplishments through the global financial crisis of 2008-2009 and with a government and society in a self-congratulatory mood.
Performance through the crisis was remarkably smooth, built on domestic consumption rather than export performance. Although the economy slowed, Indonesia, along with China and India, became the only G20 members to record gross domestic product growth during the crisis. Government planners used fiscal stimulus and monetary policy judiciously to counter the effects of the crisis. It was announced July 30 that for the first time, car sales in Indonesia had surpassed Thailand's, rising 76 percent in the first half of 2010 to make the country the biggest auto market in the region.
Nonetheless, the report says, reformasi, which got underway with Suharto's fall in 1998 to create what hopefully would be a more open and liberal political and social environment, must move to the hard work of "substantive institutional transformation."
While Indonesia deals with the political and institutional legacy of the Suharto era, "the rest of the world is rewriting the rules of production and trade" and if Indonesia doesn't transform its institutions in a hurry to take advantage of globalization, it will remain mired in heavy dependency on natural resources and low-wage manufacturing. Unfortunately, according to the report, "oligarchy and collusive democracy have left Indonesia ill equipped to respond to the challenge of globalization."
Most analysts point to widespread institutional corruption, particularly the judicial system and the police force, which have received considerable attention in the last few weeks. In recent weeks the national police managed to ignore evidence that top officers had bank accounts holding far money than would have been possible given their salaries, instead attempting to buy up all the copies of a magazine that detailed the amounts in the officials' accounts, as reported in Asia Sentinel on June 29.
Also, charges were dropped against two high-ranking officers, Brig. Gen. Edmond Ilyas and Brig. Gen. Raja Erizman, who had been indirectly implicated by the National Police's former chief of detectives, Comr. Gen. Susno Duadji, for receiving bribes in relation to a case against rogue tax official Gayus Tambunan. The current chief of detectives, Comr. Gen. Ito Sumardi, told journalists last week that there was no indication of wrongdoing by the officers.
Economic oligarchy and political collusion are maintained through high barriers to entry, a dysfunctional legal system, patrimonial politics, disempowered citizens and political gangsterism, the report said. "Oligarchy and collusive democracy have left Indonesia ill-equipped to respond to the challenge of globalization. Like a marathoner carrying a 20-kg pack, Indonesia can see the competition pulling away but is powerless to pick up the pace."
While domestic demand carried the country through the financial crisis, that will not be enough for Indonesia to compete on an international stage. Indonesian companies, the report says, "must be more nimble, tied more closely to the international economy and less dependent on government protection. Barriers to entry to the formation of new firms must be eliminated, since it is likely that many of the world beaters of the future are not the legacy firms carried over from the New Order."
Barriers to job growth and formation of small businesses must also be relaxed to give hard working Indonesians a chance to reduce the risk of falling into poverty and to secure their hard-won middle class status.
Disheartingly, Indonesia's social indicators are also lagging other middle income countries, with the country falling behind on technological readiness, infrastructure, health and primary education, higher education and training and labor market efficiency. Growth in manufactured exports has been slow in comparison with its neighbors.
Unlike Thailand, Malaysia and the Philippines, the country appears to be falling into the resources trap, depending on resources for exports but failing in manufactures and unable to link up with Chinese supply chains. Its most dynamic export is palm oil, in which it leads the world, making it over-reliant on natural resources and susceptible to unpredictable price swings on global markets.
Foreign investors are put off by the poor quality of the country's infrastructure, notably roads, ports and power. Per capita availability of power in Indonesia is less than Vietnam's, a problem that won't be solved unless subsidies are reduced, which places a massive cost burden on government.
Social indicators are bleak. Although measured poverty has fallen sharply, job creation has been hampered by lack of competitiveness and overly restrictive labor regulations. Health care is a problem, with child mortality three times that of Vietnam's. Progress in providing access to clean water and sanitation has been slow. Nearly one third of children suffer from moderate to severe stunting, and nearly one fifth are underweight. Mothers in Indonesia are more than three times more likely to die in childbirth than Vietnamese mothers.
The government, the report says, "does too many unproductive things and fails to act when it should. The country has squandered its natural heritage by allowing destruction of its forests to continue unchecked. At the same time, Indonesia has underinvested in health and education. Indonesia is one of the few countries in the world that exports more raw ores than metals.
The government, it continues, "over-regulates the economy, operating a 'license Kerajaan' analogous to the License Raj of pre-reform India. Over-regulation protects incumbent large firms and penalizes start-ups and small companies. It also forces millions of small and medium scale companies into the informal sector.
The resulting industrial structure is dominated by a few huge companies resting on top of a sea of micro-enterprises. The "missing middle" phenomenon is a symptom of weak legal and regulatory institutions. Inadequate protection of property rights and corrupt courts also leaves small businesses vulnerable to predators with money and connections to politically powerful people.
Instead of contributing to the economy, many state-owned enterprises actually drag it down, the report says. The Financial Services Authority has not yet developed the technical capacity and political autonomy needed to conduct independent bank regulation and supervision.
Suharto's New Order brought military versus civilian rule, integration versus decentralization, the "floating mass" vs democratic participation, rule by law versus rule of law; and patrimonialism vs institutional development, the report continues.
"Indonesia must arrive at a fuller understanding of these legacies before the country can begin to reform its public institutions. Another essential element of reform is the reconstruction of Indonesian citizenship, by which we mean a renegotiation of the relationship between citizens and the state. The state must be transformed from a vehicle that provides favors and facilities to the rich and powerful, and into a "rule of law" state that works to realize the rights of all citizens regardless of income, region, gender, ethnicity or religion."
The paper concludes with a discussion of several modest measures to help propel the process forward. These include electoral reform, using international standards for some economic institutions, improving the implementation of the decentralization policy and giving more Indonesians a stake in stability and democracy.
Still, the report quotes President Susilo Bambang Yudhoyono as saying there were five scenarios for Indonesia in 1999: that it would break apart, that it would become a hard-line Islamic country or a semi-authoritarian one, or even fall back into authoritarianism. The fifth, that it would become not just a democratic country but a stable and united democratic one, was a scenario that few envisioned. Indonesia has pulled that off.