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Democracy and Indonesia economy


Stephen Grenville

16 July 2012 09:40

Indonesia is getting good press, with fulsome praise for both the post-Soeharto democracy and the performance of the economy. There are some links between the two.

Democratic performance is usually judged in terms of whether the elections went smoothly, whether the diversity of the population is effectively represented and whether parliamentary debates are carried out in good order. But we might also ask the question: what has democracy done for the economy?

You might not know it from current commentary, but the much-lauded current rate of growth, benefiting as it does from the boom in commodity prices, is still a little below the average annual growth achieved during the three Soeharto decades. The most notable change since then is the sheer difficulty of governmental decision-making. Legislation is debated interminably, unworkable conditions are added to draft legislation, parliament seeks to involve itself in the detailed on-going administration of everything, and passage of legislation generally requires substantial 'facilitation' payments to political parties.

Indonesia went into the 2008 global crisis with inadequate financial sector regulation because parliament had not passed the necessary laws. More recently, the President proposed a modest increase in petrol prices, which are among the lowest in the world. The case for an increase is straightforward: the energy subsidy is largely enjoyed by the middle-class and rich. Winding it back over time would make room for vital expenditures on education, health and infrastructure. This compelling logic should have triumphed. But parliament chose to effectively veto the increase. As a result, almost 30% of budget expenditure this year will be used for energy subsidies.

The current elections for the governorship of Jakarta illustrate the populist pressures democracy has brought, with candidates out-bidding each other to offer free public services not just to the poor, but to everyone. The trade-off seems painfully clear. If candidates compete to buy votes at the expense of revenue-raising, Jakarta's nightmare traffic congestion will worsen, the city's regular floods will deepen and public services will remain seriously sub-standard.

Populism and the influence of vested interests show their influence in broader economic policy-making. The rise in import protectionism and a more nationalistic attitude to resources investments are not enough to dampen the current rise in foreign investment, but bode ill for the presidential election in 2014, when these issues will play well with the voters. It is true universally that the public has never been convinced by the economists' belief in the benefits of free international trade. But while most countries (including Indonesia, until recently) have been moving in the right direction, Indonesia is now back-sliding. The prospective candidates for 2014 are all more nationalistic and less economically-rational than the incumbents.

Corruption, a 'one-stop-shop' in the Soeharto days, seems undiminished but more widely spread, creating uncertainty about who should be paid and how much. Just as seriously, the (many) non-corrupt officials are reluctant to make decisions (particularly on government procurement and tendering) for fear of being caught up in a corruption investigation, where the Corruption Eradication Commission has an almost-perfect record of convicting all those brought to trial.

Sitting in Australia and observing the incapacity of our own mature democracy to make sensible decisions on mining taxes, climate change, refugees and a myriad of other issues, and noting the incapacity of governments in Europe and the US to come to grips with their heavy economic challenges, we should of course  not be too harsh in our criticism of Indonesia's nascent democracy.

But to simply praise the trappings of democracy without also examining its performance in the areas that matter most — making good decisions — leaves a gaping hole in the analysis. And good economic policy matters more for Indonesia because there is more at stake. India is at present demonstrating that good economic performance can quickly be undone by democratic dithering.

It may well be that there is a price to pay for democracy in terms of slower growth (and perhaps less-well-distributed growth) and that Indonesians are ready to pay this price in return for the many benefits democracy has brought. Also relevant is Churchill's aphorism that democracy is the worst system, except for all the others.

Democracies evolve over time. There will be politicians who can use the parliamentary process to resolve vexed economic issues in ways which reflect public consensus, informed by rational debate. The balance between what is decided by parliament and what is in the mandate of the government can change, reflecting the skill of the participants. Such evolution holds out the prospect that the dead-weight costs of democracy on economic policy making can be lightened.

Photo courtesy of Wikimedia Commons.