The Reform Narrative
Within the periodization of Indonesian politics, 2018 marks the end of the fourth lustrum of the Reform Era that marked the end of the New Order and Soeharto’s 32-year presidency.
Within the periodization of Indonesian politics, 2018 marks the end of the fourth lustrum of the Reform Era that marked the end of the New Order and Soeharto’s 32-year presidency. Various reflections on the Reform dreams and their realization have been made, with many of them taking a critical and even skeptical tone.
A sense of dissatisfaction remains that democracy is yet to be implemented properly and that it has been mainly limited to formal procedures without any substance to ensure freedom and justice for all. The economy has yet to achieve equality in wealth, and the number of poor people remains high. Law enforcement has yet to impose the law equally on all people, without differentiating the rich and the poor, those of the lower strata and those of higher ones, and ordinary and well-connected people.
Education is increasingly lagging behind our neighboring countries, despite the increasing number of people taking graduate and post-graduate education. Meanwhile, appreciation for science is not progressing properly and no attention is given to advancing our sciences and technology, as is evident in the increasingly limited funds for research.
Generally, there has been little to no positive research and thought on how to measure successful reform and what criteria must be used.
Clearly, reform is not just about changing regimes or a power succession. It is about a shift in social institutions that either support or impede a society’s progress, whoever might be ruling the country. The conditions of these social institutions will determine whether a nation will achieve progress, suffer setbacks or fail in realizing the country’s goals. Social scientists have proposed many theories on what causes states to progress or fail.
Do a nation’s geography, climate and culture determine its progress? This theory has been rejected on the basis of a variety of evidence. South Korea and North Korea have similar geography, climate and culture, and yet the welfare of their respective peoples cannot be more different. The life expectancy in North Korea is 10 years less than in South Korea, and North Koreans’ average living standards is one-tenth that of South Koreans’.
A similar situation was also found in Germany after World War II. The country was split into West and East Germany, which have no differences in geography, climate or culture. People read Goethe and Schiller in West Germany, as did the people in East Germany. People listened to Mozart’s operas and Beethoven’s symphonies in the West, and those in the East enjoyed the same quality of operas and symphonies. However, the welfare level in the two countries was in stark contrast to each other.
On the US-Mexico border is the city of Nogales, which is divided in two by a fence. The northern part is named Nogales Arizona, while the southern part is Nogales Sonora. The division does not affect the cities’ geography, climate or culture, which is heavily influenced by Aztec traditions. However, the annual average income of families in Nogales Sonora is US$10,000; in Nogales Arizona, it is US$30,000. It is common for youth in Nogales Arizona to have a university education, while Nogales Sonora youth have inadequate access to education.
In order to improve on the theories linking welfare to geography, climate and culture, another theory called the “ignorance hypothesis” was introduced. Put simply, the theory proposes that a state cannot achieve progress and prosper because its political leaders have no idea how to do so. With proper information and knowledge, these political leaders would be able to bring prosperity to their nation.
In reality, better and more proper knowledge does not make a country prosper. A recent example is the global economic crisis in the late 1990s. In facing the late ‘90s economic crisis, the International Monetary Fund (IMF), an international body tasked with stabilizing the global economy, advised many countries on how to overcome the crisis. However, the countries that followed the IMF’s advice were still hit by the crisis. On the other hand, China, which rejected the IMF’s advice, overcame the crisis well.
Economic and political institutions
Two economics professors, MIT’s Daron Acemoglu and Harvard’s James A Robison, wrote Why Nations Fail: the Origins of Power, Prosperity and Poverty (2012) based on their sprawling, 15-year research on global political and economic history in five continents in the last 400-500 years of the previous millennium.
In their research, they found that a nation’s progress was determined by its ability to establish economic and political institutions. These two institutional branches can be extractive, leading to stagnation and the absence of prosperity, or inclusive, which enables a nation to advance on its own resources, skills and intelligence instead of depending on external forces.
It needs to be said that the factor of natural wealth is not included in the theory, as world history has shown that natural wealth does not automatically lead to national wealth and prosperity. Instead, it has mostly led to colonialism by foreign powers that rule over the natural resources for their own profit, leading the colonized nation into poverty. The lessons provided by economic history show that natural wealth is an input that nations must appreciate but not brag about, as a nation’s progress is determined by how it produces certain outputs by utilizing the available inputs. Natural wealth is a gift from nature; however, a nation’s welfare is determined by what it does and achieve by using all available alternatives toward progress and prosperity.
The slogan of Acemoglu and Robison’s approach is not that culture matters, but instead that institutions matter. It is postulated that people’s talents will respond to the education system and that education will respond to society’s needs. In this framework, an inclusive economic institution is one that provides the necessary economic incentives for members of society. Such economic incentives will encourage people to discover their best talents, develop those talents into skills at school, and then apply those skills into either finding or creating jobs.
Independent projects necessitate the individuals to obtain funding through loans from local banks and to use the job market that supplies manpower with relevant qualifications.
Another incentive is the courage to develop businesses based on trust that one’s belongings will not be taken away by another, as the law guarantees the right to private property. If someone writes a best-selling book and then other publishers can illegally reproduce the book for sale without paying royalties to the writer, then the economic institution is an extractive one that will only create disincentives for productive businesses. Inclusive economic institutions will encourage technology innovation. Even if these innovations might trigger resistance from old economic institutions, they are needed to induce sustainable economic growth.
In short, inclusive economic institutions can ensure private property rights, enable a level playing field, motivate people to invest in new technologies and are conducive to economic growth. In contrast, extractive economic institutions enable a few to profit from the resources of the many and will fail to protect private property rights or provide incentives for productive economic and other activities.
On the other hand, economic institutions depend on political institutions that can also be extractive or inclusive. Extractive political institutions will concentrate power in the hands of a few, which believe that they have the incentive to maintain extractive economic institutions for personal gain and to use existing resources to reinforce their political power. Extractive political institutions will be unable to create a strong power center that enforces law and order. In contrast, inclusive political institutions will be able to establish a strong center of power that serves as the authoritative source of law and order. In inclusive political institutions, power will be divided among several parties that believe that they have the incentive to push for and maintain inclusive economic institutions, ensured by the existence of private property rights.
The two institutions are closely linked to each other. Inclusive economic institutions will establish economic incentives that will encourage people to develop their talents and skills, save money, invest and commit to technology innovation. On the other hand, political institutions determine whether people live under an extractive or inclusive economic institution. Political institutions determine the ability of citizens to monitor their elected officials and how these politicians work and behave. Can the politicians be agents of public interest, or will they just push for personal gain?
An interesting question is whether extractive political institutions can enable economic growth. The answer is yes, it can, and there is a certain logic to this. Those in power require the economy to grow so that the results of this growth can be extracted for their own gain. Nevertheless, under extractive economic institutions, economic growth cannot be sustainable, as there is no technology innovation. Technology innovation is not always supported, as innovations pave the way for new possibilities that may endanger the existing political power structure and the privilege of those controlling the status quo.
According to sociologist Joseph Schumpether, technology innovation will lead to creative destruction as new creativity in technology emerges as a destructive force against old institutions. Such creative destruction is possible, as new technologies may render old power irrelevant over the people they control, since most jobs will be taken over by new technologies at cheaper costs. The second possibility is that creative destruction will be caused by an increasingly open political system, for instance due to advances in foreign trade.
There are many cases of countries with extractive political institutions and advanced economies, but then their progress stagnates and they can never recover. The Soviet Union is a prominent example. After Stalin consolidated power in 1927 and pushed for massive industrialization, the Soviet Union enjoyed the highest economic growth rate in history from 1928 to 1960 at 6 percent a year. However, this high economic growth rate was not a result of technology innovation, but rather due to reallocation of resources and manpower from agriculture to industry. Private ownership was abolished and collectivization was implemented in its agricultural sector to erase economic incentives for agribusiness.
Capital and manpower productivity was concentrated in state-run heavy industries, and a top-down approach in the extractive political institution led to economic growth despite the absence of technology innovation in agriculture. However, after the reallocated agriculture resources were spent, economic growth stagnated, followed soon by famine soon that caused 6 million deaths.
The Communist Party leadership should have gradually established an inclusive economic institution in the Soviet Union, thereby salvaging the country’s economic growth and providing incentives for farmers. This was implemented too late, and by the time Mikhail Gorbachev reformed the economic institution in 1987, the Communist Party had collapsed.
Argentina previously suffered from a similar fate. Prior to 1914, the country enjoyed five decades of economic growth and became a classical example of economic growth within an extractive political institution. Argentina’s economy was then ruled by a small group of elites with huge investments in agriculture. Economic growth was driven by exports of beef, leather and wheat as the prices of these commodities boomed. However, there was no technology innovation.
In the years during World War I, political instability rose and armed rebellions forced the elite to broaden the political system. However, this systemic shift led to the mobilization of powers the government could not control, until the first coup occurred in 1930. Between then and 1980, the country was led by a series of democratically elected leaders and dictators backed by the military, until it peaked in the 1970s. There was no longer a concentration of power that was strong enough to maintain law and order. We know that today, this country has one of the biggest foreign debts in the world.
Obstacles from political oligarchies
President Joko “Jokowi” Widodo once complained that Indonesia’s economy had yet to grow. He used the human body as an analogy: “The cholesterol level is good, the heart is good, the lungs are good, there is no high blood pressure, but why can’t we run faster? We need to find the problem.” (Kompas, 6/1/2018). In the context of economic growth, running faster means economic growth of more than 5.05 percent. Better yet would be to exceed the 5.2 percent target set for 2017.
Some things must be noted from the President’s statement. In terms of running fast, a healthy body is not the only important factor. Regular and discipline in exercise is also necessary. Furthermore, based on examples in economic history, it is important not only to run fast, but also to run at a consistent speed like in the Kompas ultramarathon on Sumbawa Island in April, which required runners to cover 320 kilometers in 72 hours.
Regular and disciplined exercise is analogous with mutual support between inclusive political and economic institutions. It is known that an economy can still grow under an extractive political institution. However, this will not be sustainable, as economic players are not provided with economic incentives and space is not given for technology innovation.
If the President wants to uncover the problem, then we need to see whether Indonesia’s increasingly inclusive economic institution is being supported or obstructed by its extractive political institution, which is maintained by those who hold special economic and political rights. Those in this group do not wish their rights to be reduced, and will therefore fight to defend the concentration of power in a few members of the oligarchy.
It is this oligarchy that obstructs the emergence of economic incentives on a wider scale that would encourage the economy to continue to run until it achieves its goals – goals that seem so close and yet so far.
In short, true reform is necessary to establish inclusive political and economic institutions, as economic growth depends on the character of the political institution.
Ignas Kleden, Chairman, the Indonesian Community for Democracy