In their Survey of Recent Developments, Ari Kuncoro and Budy Resosudarmo paint a picture that contains something for both pessimists and optimists. For the pessimists, there is a story of declining economic performance and government failure to meet its own targets. The global economy has been booming, and with it the demand for the natural resource commodities that Indonesia has in abundance. Yet output growth is trending down, and that of investment—on which future employment opportunities and incomes depend—is now near to negligible. The high-profile anti-corruption campaign continues, but the number of convictions relative to the number of suspected corrupt officials at senior levels remains minuscule. Nor has there been much progress with revising important legislation in areas such as taxation, customs, investment and mining.
More optimistic readers will focus on the future, taking heart from the president’s recent fine-tuning of his economics team in cabinet. The markets have provided initial positive feedback in the form of significant appreciation of the rupiah since early December. Moreover, Indonesia’s new democracy has passed a demanding test of its resilience, with the government having had sufficient confidence to cut back heavily on wasteful and inequitable fuel subsidies in the face of widespread opposition. Finally, there is promise that progress with the rehabilitation of tsunami and earthquake stricken Aceh and Nias will accelerate significantly in 2006.
While the latest economic data are always of interest, there is also much to be gained from looking at the development process over far longer periods. It is useful, also, to compare the performance of countries that were once at similar levels of development. Economic historian Pierre van der Eng’s paper compares rice agriculture in colonial Java with that in Japan over the seven decades preceding World War II. It comes as a salutary reminder to see how similar Java and Japan were in 1870, for Indonesia has fallen far behind since then. Van der Eng argues that differences in taxation, public expenditure and agriculture policies, land ownership arrangements and private savings behaviour go a long way toward explaining the very different experiences of the two economies in relation not only to agriculture, but also to their structural transformation away from agriculture towards manufacturing and services.
My own paper in this issue is the third in a planned series of articles focusing on new economics legislation in Indonesia. It deals with a law introduced in 2004 to establish a new Deposit Guarantee Agency. In contrast with the slow-moving legislation mentioned above, this was enacted with little fuss, since no coherent political interest group felt threatened by it. I argue, however, that it does indeed pose a great threat to the public, because it codifies a set of procedures to be followed in the event of bank failures that bears a striking resemblance to the government’s actions when the banking system collapsed in 1998–99. That episode cost the Indonesian people some $50 billion, creating a mountain of public sector domestic debt. The unsuspecting populace is reassured by the notion that bank deposits are guaranteed, but fails to appreciate that if there is another collapse in the future, the government will be forced, again, to raise taxes and/or cut back its expenditures to cover claims against this guarantee.
The third article in this issue also has a historical fLavour. Written by Gustav Papanek, a long-time adviser to the Indonesian government, it focuses on the popularly held view that small, indigenous businesses need ‘infant industry’ assistance if they are to prosper. This view informed various policies in the 1970s and 80s, and still carries considerable weight today. Although Papanek maintains some sympathy for it, here he presents two case studies from the 1980s that call it into question. One shows government assistance to have been counter-productive, in that it caused the atrophy of the very entrepreneurial skills it intended to promote. The other shows the firms in question prospering in the absence of any assistance.
Tim Stapleton’s paper on the political economy of the sugar industry continues the theme that governments’ economic policies often fail to achieve their nominal objectives. He shows how policies claiming to assist deserving groups—in this case smallholder sugarcane farmers—may have quite different true objectives. The major beneficiaries of the government’s sugar industry interventions seem to be its own bureaucrats and sugar importers. Restricting total sugar imports generates rents for firms licensed as importers, and these are presumed to be shared between them and their bureaucrat patrons. Stapleton draws attention to the lack of effective mechanisms for inter-ministerial coordination of policy making in Indonesia. He notes the domination of the Sugar Council by beneficiaries of the present regulatory regime, and goes on to urge its opening up to genuine representation of all of those affected by its recommendations—especially downstream industries for which sugar is an important input, household consumers, and cane farmers (as distinct from the association that purports to speak in their name).
Finally, we come to a review article by another long-term Indonesia observer, Stephen Grenville, on Soedradjad Djiwandono’s book about Bank Indonesia’s role in the financial crisis that began in 1997. Djiwandono has told parts of his story in the pages of this journal and elsewhere, but this book-length treatment allows him to cover many more issues, and in greater depth. His insider status, as governor of the central bank at the time of the economic shock that brought an end to the three decades long Soeharto era, ensures that this book will provide an invaluable contribution to our understanding of that momentous episode.
This issue of the Bulletin also contains a large and eclectic group of book reviews, on topics extending from studies of the military, Islam, the ethnic Chinese community, and reproductive health issues in post-Soeharto Indonesia to New Order policies toward population and economic liberalisation. Other books reviewed here take a Southeast Asian perspective, on issues as diverse as corporate governance and declining fisheries. Finally there are two reviews that focus on the developing world, or large parts of it: one a strong attack on the Jeffrey Sachs recipe for ending poverty, and the other recalling the famous Asia–Africa Conference held in Bandung just over 50 years ago. Indeed, something for almost everyone.
Selamat membaca!