Dept. of Political Science, the Ohio State University
Autumn, November 29, 2006
Introduction
At a seminar hosted by the Australian National University, September last year, the now Indonesian coordinating minister of economic affairs, Boediono, represented the wariness of many Indonesians today. He raised an issue that demands a thorough consideration from any advocate of today’s Indonesian democracy.
Boediono writes as follow (2005, 315-316),
“One historical truth is that the dynamics of politics and those of economics are not naturally in harmony with each other and, when they are not, setbacks in both politics and economics eventually result… [E]conomic performance ...depends on whether a supportive political environment exists… Indonesia currently has to deal with economic problems very similar to those of the second half of the 1960s, but within a political environment more akin to that of the 1950s… [I]n contrast with the situation in the 1960s, all this has to be done within the rather chaotic atmosphere of a democracy in the making.”
He argues further that three political environments must exist to secure the country’s economic growth. First is the circumstance that is able to avoid the short term bias of politics. The second factor is the insulation of professional economic policy making process from overweighed political pressure. And thirdly, the presence of a certain political environment in which government could act decisively and responsively in the economic field. More importantly, he also underlines to never again ignoring the importance of institution and good governance development (Boediono 2005).
In this paper, I will try to show that it is the governance the key factor for Indonesian economic development and that its role is more significant than the importance of insulating economic policy making process from the politics as Boediono argues. In securing Indonesian economic development, democracy and good governance must be pursued simultaneously. I hypothesize that in the absence of good governance, or by not undertaking those three tasks simultaneously, government would fail to secure a sustainable economic development.
Here, I separate governance out from democracy in order to enable us examining its individual impact on economic development. I view governance as a bridge linking democracy and economic development. Without a robust governance-bridge, a burgeoning democracy would not transform in a wealthy economy. Another reason, we have also sees how democracy and good governance have their own paths. Nations can have flourished democracy and yet at the same time lag behind in good governance. Today’s Indonesia is the very example of such phenomenon. The country is highly praised for having free elections and promoting press freedom and yet it is still at a very low level in corruption and rule of law.
Most African and several Asian countries’ experiences have well shown the importance to distinguish the role of those two variables. Some African countries have enjoyed a high level of democracy and yet they still fail to achieve a satisfactory economic growth. In contrast, several Asian countries such as Singapore and Malaysia are always positioned at the bottom of democracy index, but they are able to maintain the impressive economic developments. The answer for that empirical puzzle, I would argue, is the level of good governance. Here I define good governance as an effective political framework that is conducive to economic development and that is marked by the rule of law and transparent, accountable, and efficient state administration (Hirst 2000).
In trying to show the merit of that argument, I structure this paper as follow. I will assess the impact of democracy and good governance level on the Indonesian economic development at four distinct periods by borrowing William Liddle’s periodization (2002), i.e. the Parliamentary Democracy (1949-57), Guided Democracy (1957-65), New Order (1965-1999), and Presidential Democracy (1999-present).[1]
The Parliamentary Democracy (1949-57).
Indonesia started its history as a democratic country. Adopting the continental European-style constitution, the new born state chose parliamentary democracy as its political system and as William Liddle put it, this was a period when the country was led by “a genuinely democratic regime” (2002, 11). However, divided along the deep social-cleavages, the prevailing multi-party system (28 parties gained the parliamentary seats through the 1955 election) resulted in a divisive, unstable, and high turnover of government (Liddle 2002, Feith 1962). The ideological battle was intense and the 1955 election campaign only deepened the socio-religious and ethnic tensions. Over nine years, since Hatta’s administration started in December 1947 until March 1957 when the second cabinet of Ali Sastroamidjojo ended, seven cabinets had taken and left offices interchangeably, posing the threat of government immobilism.
Most interestingly, in line with the flowering democracy, the country enjoyed a fairly high level of good governance. The check and balance mechanism was in place. The central bank was structured as an independent body to the cabinet (Thee 2006). The judiciary system was relatively clean and maintained its integrity. The level of corruption was low. And the press enjoyed their freedom (Feith 1994).
The result was a positive economic development. Notwithstanding it grew modestly, there were major achievements in education, health, exports, control of inflation, and other macro-economic policies (Feith 2004). A sound economic plan was also established since 1956 which was called the Five Year Plan. It was oversight by the National Planning Council, a professional and technical body dominated by Western trained economists (Mackie 1971, Thee 2006). These are a group of what Feith terms “the administrators,” namely “men with administrative, legal, technical, and foreign language skills, such as are required for the running of a modern state” (Feith 1962, 24). In addition to that characterization, Thee Kian Wie views them as “pragmatic men who, while attracted to socialist ideals, did not adhere to any rigid ideological doctrine” (2005, 6). The achievement in this period was attributable to their key role of steering the country.
Despite some variations of the economic advancement within this period, the aforementioned positive valuation holds. Despite the cabinets of 1953-57 were indeed less successful in achieving the administrative and economic tasks than their predecessors did, the overall economic performance in this period was brighter than that of the Guided Democracy, as I will show later (Feith 1962).
However, such modest growth did not sufficient to satisfy the domestic aggregate demand that grew rapidly at the level approximately 10 percent per annum during 1952-1957 (Feith 1962). This became the major cause of the death of the Parliamentary Democracy. According Jamie Mackie’s assessment, the administrators of the parliamentary democracy were “trying to tackle basic administrative, military and economic problems with some degree of success, but not enough to create ‘a new rule-based politics’ and to stabilize the post-revolutionary situation of ferment and high expectations” (1994, 28).
The Guided Democracy (1957-1965)
In this period every thing runs in the reverse direction. The parliamentary crisis of early 1957, the regionalists’ armed rebellions, and the dispute over West Papua provided great momentum for Sukarno and the military leaders to overthrow the new born democracy. Playing the revolution-not-over-yet spirit over the mass public, Sukarno established what he dubbed the Guided Democracy; a euphemism of his personal-authoritarian rule backed by the General Nasution led army. The democracy died young.
In line with the consolidation of Sukarno’s authoritarian regime, good governance collapsed. In February 1960 Sukarno positioned Chairman of the Supreme Court as a member of his cabinet. Six months later he denounced the principle of separation of powers. Press freedom was immediately repressed (Feith 1963). The central bank’s independence came to the end. Bank Indonesia was transformed as a subordinate and a mere financial instrument to support Sukarno’s ambitious mega-projects (Thee 2006). The level of corruption increased significantly and, more adversely, became institutionalized since 1958 (Feith 1963).
The so called “solidarity makers” took over the administrator’s role in steering the country. Herbert Feith (1962) defines these persons as leaders who exercised their roles primarily by combining traditional and charismatic authorities. Belong to this group are political propagandists and military, political parties, regional, or religious leaders. Meanwhile, Benjamin Higgins, the then United Nations economic envoy to Indonesia, categorized them as “communists, nationalist, conservative, and isolationists” (Mackie 1971).
Not surprisingly, the resultant of these forces is an economic calamity. The solidarity makers subordinated almost every economic policy under Sukarno’s political agenda. The Five Year Plan and National Planning Bureau were replaced by the highly political Eight Year Plan and National Planning Council (Mackie 1971).
The economic indicators were suddenly in a free fall. The annual growth of net national product during the period of 1958-65 shrank to only 1.7 percent. In 1965 the inflation reached over 600 percent. While the gross government increased roughly seven times during the period of 1961-1964, the gross revenues rose only less than five times. The blame of this breakdown could be fairly correlated to the ouster of the administrator. As noted by Thee Kian Wie, “was the logical outcome of poor economic policies which had become a major feature of government policy since the late 1950s” (2006, 7).
Comparing the economic development between two periods, 1953-59 and 1960-65, results in a striking contrast. Almost all economic indicators in the latter period were plummeting. Except a slight increase on the manufacturing, the average annual rates per sector entirely crashed.
[Table 1: Average Annual Sectoral Rates of Growth at Constant Prices (1953-65)]
The New Order (1965-1999)
At first, the New Order represented the anomaly of Asian democracy-economy relationship. The level of democracy seemed independent to the Asian Tigers’ booming economies. Suharto’s Indonesia was a continuation, or more aptly the reinforcement, of Sukarno’s authoritarian rule. Labeled his dictatorship with another euphemism, Pancasila Democracy, Suharto transformed the multi-party system into a practically monolithic party system under his political machine, Golkar (the Functional Group). Two other parties, PPP (the Unity and Development Party) and PDI (the Indonesian Democratic Party), were no more than insignificant figurants at the political stage and were tightly co-opted and controlled by the regime.
Despite the low level of democracy, no one can deny the New Order achievement in the economic field. Supported by a team of Western educated economists led by Professor Widjojo Nitisastro the New Order restored the ruined economy. Only within four years, the hyper-inflation of 636 percent in 1966 was stabilized to nine percent. During the same period the average annual growth rate of GDP reached 6.7 percent. This impressive achievement remained in place until the end of the New Order. Between 1992 and 1996, the annual economic growth was recorded at 7.6 percent on average. The percentage of population below the poverty depleted from over 40 percent in 1978 to 11.3 percent in 1996, before it rose again to 24.2 percent in 1998 after the country was hit by a disastrous economic crisis (Kuncoro and Resosudarmo n.d.).
[Figure 1: Population Below the Poverty Line, 1976-98]
The prominent role of Western educated economist and technocrat. The so called Berkeley Mafia was not without competitor. The nationalistic and pro-state protection “technicians” persistently challenged their influence over the economic policy making. However, under a strong Suharto’s political umbrella provided, the technocrats won the overall fight in designing and implementing sound economic policies (Boediono 2005, Kuncoro and Resosudarmo n.d., Liddle 2002). In summary, the greatest contribution of the New Order, as William Liddle concludes, “...was to improve the capacity and autonomy of the state in the area of economic policy formulation and implementation” (2006, 54).
Whereas analysts on Indonesia typically do not pay much attention to the problem of lack of governance, I would contend that that is indeed the key variable of the collapse Indonesian economy. The failure of the New Order in safeguarding good governance provides a proof for my argument.
Besides coercion and persuasion, another major mean the New Order employed to maintain its reign was by patronizing its bureaucracy. This, in turn, induced a rampant corruption. The absence of independent judiciary system, central bank, and other check and balance mechanisms (press censorship was also vigorously applied) aggravated the stadium of the cancer (Kuncoro and Resosudarmo n.d., Liddle 2002)..
And the economic crisis of 1997 was no more than a confirmation of this long neglected symptom. The economic contraction reached to 13.6 percent, much worse than that of 1963 when the economy shrank to three percent (Thee 2006). It became obvious that the major cause of the sudden collapse was the weak institutions, poor governance, and rampant corruption; the fields that had long been ignored by the academia (Boediono 2005). This economic disaster has shown a very expensive lesson that merely insulating economic policy making policy from political disturbances is not enough and more importantly, that good governance does matter.
The Presidential Democracy (1999-present)
The post-Suharto democracy seems to be a half-reincarnation of the 1950s parliamentary democracy. Now taking form the presidential system, the multiparty system reemerges. In 1999 and 2004 general elections 48 and 24 political parties participated, respectively.
Most indices praise the achievement of today’s democracy. The Freedom House Index, for example, since it was firstly launched in 1973 until 2005 only positioned Indonesia as best as partly-free. This year, for the first time, the index inaugurates the country as a completely free state. Three main reasons are behind the judgment: The improvement of political rights and civil liberties, the success of unprecedented 2004 direct presidential election, and the signing of the Aceh peace accord. On similar tone, Asia Democracy Index of 2005 rank Indonesia as one of the developed democracy in the region (ARDA website). The World Bank’s Governance Indicator shows a similar valuation. According to this index, the current level of voice and accountability has risen significantly compared to that in Suharto’s era. However, it still marks the red signs on political stability and violence.
It is widely argued that the current political liberalization has been inducing disturbances to economic development. Economists blame political reform for hampering economic development by diffusing the decision making process and reducing the cabinet cohesiveness. Another milestone of reform, the decentralization policy that was implemented since 2001 exacerbates those problems (Boediono 2005, Kuncoro n.d.).
More empirical studies are needed to examine the causal relationship among level of democracy, good governance and economic growth in this reform era. I would hypothesize that the overall outlook is in fact not entirely gloomy. Despite some negative sides, we can see positive indications emerging from numerous sectors. Here we are facing a confusing ambiguity and the net impact is not entirely clear.
Surveying 1800 corporations across the country, Ari Kuncoro (2002) found a decline of the level of bribery (as a percentage to total production cost) reported by the local business leaders after the decentralization law enacted. However, he notes that the finding should be reserved and it needs to be further examined due to a suspicion that the decline of bribery might related to a drop in corporation’s profit due to the crawling economy following the 1997 severe economic crisis. Also noteworthy that another Kuncoro’s finding indicates that the decentralization also results in the increase of business uncertainty.
The World Bank’s governance indicator displays a positive trend, in a quite consistent manner, on the government effectiveness, requlatory quality, rule of law, and control of corruption, in which the last two are the weakest. Nonetheless, all parameters are still below those in the New Order era. In regard corruption, the well known Transparency International – Corruption Perception Index shows a similar pattern. Despite a steady increase during the recent years, the latest index scores Indonesia 2.4 (1 for the lowest), still a bit worse than 2.72 in 1997 (TI website).
[Figure 2: Governance Indicator on Indonesia (1996-2005)]
It is tempting to draw a line between the increase of political competition and the climbing corruption trials against politicians at the local stage. According to the Ministry of Home Affairs record, between 2004 and 2006 67 heads of local government or their deputies and 1,062 local parliament members has been indicted on corruption charges. More interestingly, in reaction to such developments, a group of legislators at the national level have petitioned government to stop the wave of trials against their local colleagues. They charges that the prosecutions are merely the product of political fight and are skewed by narrow interests (Komisi II-III DPR-RI 2006).
On the other hand, however, there is also an indication that the frequency of local budget misuses have increased in this period. The national coalition of anti-corruption NGOs reports that during 1999-2004 the corruption upon local government budgets in 18 provinces has reached Rp.454 billions or equivalent to $45.4 millions.[2]
In general, the economy has been stabilized and starts growing again in a modest rate. From minus 13.13 percent in 1998, after hit by the severe crisis, the economic growth is expected to reach the level six percent this year. Inflation displays a resemblance; from 77.63 percent in 1998 it dropped to only five percent in 2003. Last year, due to the fuel subsidy reduction policy that resulted in a dramatic price increase, the inflation rose again to a two digit level, 15.6 percent. Yet analysts predict that it will be decreasing to eight percent this year.
[Figure 3: Investment 1996-2003 (% GDP)]
Despite those positive outlooks, as Herbert Feith assessed the inadequacy of the Parliamentary Democracy elaborated previously, William Liddle reminds us that today’s economic advancement also might not be high enough to satisfy people’s need (Usindo 2006).
The clearest indication for Liddle’s warning comes from the investment statistics. Dropped steeply after the economic calamity in 1997, the investment spending in 2003 remained at the lowest bound, at the same level of that in 1999. Overall, the actual investments grew only by a small 2.2% and the investment-to-GDP ratio has fallen to its lowest level since the early 1970s. It declined from 18.2% in 2002 to 17.8% in 2003, and further to 17.4% in the first quarter of 2004 (Kuncoro and Resosudarmo n.d.). As well, the poverty rate is still high, above 15 percent during 2000-02 and is expected to rise again in 2006 following the high inflation post the fuel price hike.
[Figure 3: Investment 1996-2003 (%)]
[Figure 4: Population Below the Poverty Line, 1996-2002 (%)]
Lessons from the History
We have seen the wisdom of history. During the Parliamentary Democracy era, the economy grew when democracy and good-governance were in place. However the failure to achieve a sufficient level of economic development and to establish a stable polity had created a momentum that brought Indonesian democracy to its end. From the New Order period we learn that a stable tightly restrained democracy could not guarantee a sustainable economic growth. The 1997 economic disaster was an expensive lesson that has taught us the substantial role of governance and institution development. Without nurturing democracy and good governance, the success of New Order’s economy only ended in a fatal crash and dragged the country’s economy back almost to the level of thirty years ago. Must also be underlined, these two periods reveal the importance of Boediono’s demand of a sufficient room for administrator to play its professional role. However, merely insulating and providing a strong political umbrella for economic policy making is not sufficient.
[Table 2: Democracy, Governance, and Economic Development per Period]
Indonesia therefore can not follow the anomalous Singaporean and Malaysian model. The two countries enjoy a strong economic growth and good governance without having a high quality of democracy. Indonesians should have learned that the country lost its good governance along when it surrendered democracy. And, without these two foundations, the economy was always at high stake. Democracy, good governance, and economic development should be pursued simultaneously.
In line with that argument, Yudhoyono’s administration seems to have been on the right track. His two predecessors failed in fulfilling those three joint tasks. In the era of President Abdurrahman Wahid, politics detracted economic policies and there was not adequate space for administrators. Instead, he promoted the nationalistic-anti Western economists to several key portfolios in the cabinet. The libertarian professional economists gained their place again when President Megawati Soekarnoputri took over the office. During this era, politics was much more stable. However, her lack of commitment on good governance and anti-corruption resulted in a failure in maximizing economic growth.
President Yudhoyono, at least until today, pursues those three aspects simultaneously. His administration launches a rigorous anti-corruption campaign that has shown its deterrent effect, nonetheless has also revealed numerous side effects. The technocrats are still in place and the overall economic picture is promising. Politics, for the time being, is relatively stable, thanks to the success of Vice President Jusuf Kalla’s maneuver in taking over Golkar Party. However, in the long run Yudhoyono is always in a vulnerable position in securing parliamentary support. The recent retraction of the labor bill shows the picture very clearly. Despite the fact that the bill is badly needed in attracting investment and capital inflow to the country, Yudhoyono’s administration chose to bow out before the strong pressure from the parliament and interest groups.
End Words
Searching political and governance format that would promote economic development is indeed a critical task in securing Indonesia’s new democracy. Adam Przeworski (2004) has shown its significance. Examining 141 countries from 1950-1990, he concludes that democracy is more vulnerable to economic crisis than dictatorship. When economy grows, the average of life expectancy of democracy is 68 year and that of dictatorship is 53 years. However, the life span of democracy is only 18 years, compared to 40 years for dictatorship, when economy is gloomy.
Does it apply to Indonesia? Public opinion studies indicate most Indonesians do not satisfy with today’s economic development. Numerous nation-wide surveys conducted between 1999 and 2006 reveal that the vast majority of respondents, over 60 percent, believes that economy has been getting worse from year to year (Mujani 2006). Recently, between November 2004 and September 2005, public dissatisfaction on the economic condition jumped from 21 percent to 47 percent (Liddle and Mujani 2006).
Nonetheless, the support on democracy is persistently high. The same surveys display that 68-74 percent of respondents has been overwhelmingly stating their belief that democracy is the best system for the country. Another survey focusing on Indonesian Muslims shows a consistent pattern (LSI 2006). The 82 percent of respondents stands on the similar belief.
However, I would argue, upon those positive scene a more careful interpretation should be taken. The figure could be highly inflated due to the pro-democracy bias among Indonesians. Despite living more than 40 years in the authoritarian rules, most Indonesians have always been taught that democracy a la Indonesia is the best political system in oppose to the evil of dictatorship or liberal democracy. We can not also forget that Sukarno and Suharto labeled their authoritarian rule in the name of democracy; the Guided Democracy and the Pancasila Democracy. Thus, most Indonesians hardly perceive democracy negatively. This might mean that the true correlation between economic efficacy and democracy support is still not conclusive.
Taking that into account, we should finally consider William Liddle’s warning. Liddle argues that the country’s democracy will depend on economic success (Usindo 2006). The stake is high. The economic failure, he concludes, would provide the military a legitimacy to reverse the today’s democracy.
* * *
References
Alliance for Reform and Democracy in Asia. 2005. Asia Democracy Index Report 2005. <http://www.asiademocracy.org/content_view.php?section_id=1&content_id=566> 2006, Nov. 10.
Boediono. 2005. “Managing the Indonesian economy: Some lessons from the past.” Bulletin of Indonesian Economic Studies 41: 309-24.
Feith, Herbert. 1962. The Decline of Constitutional Democracy in Indonesia. Ithaca and London: Cornell University Press.
Feith, Herbert. 1963. “Dynamics of Guided Democracy.” In Indonesia, ed. Ruth T. McVey. New Haven: Southeast Asia Studies, Yale University. 309-409.
Feith, Herbert. 1994. “Constitutional Democracy: How Well Did It Function?” In Democracy in Indonesia: 1950s/1990s, eds. David Bourchier and John Legge. CSEAS, Monash University. 16-25.
Glassburner, Bruce. 1971. The Economy of Indonesia. Ithaca and London: Cornell University Press, 70-98.
Hirst, Paul. 2000. “Democracy and Governance.” In John Pierre, ed. Defining Governance. London: Oxford University Press, 13-35.
Kuncoro, Ari. 2002. “The New Laws of Decentralization and Corruption in Indonesia: Examination of Provincial and District Data.” Presented at the IMF Research Department, Washington, D.C.
Kuncoro, Ari, and Resosudarmo, Budi P. n.d. “Understanding Indonesian economic reforms: 1983-2000.”
LSI (Indonesian Survey Institute). 2006, October. “Prospek Islam Politik (The Prospect of Political Islam).” Jakarta: LSI.
Liddle, R.William. 2002. “Indonesia.” In Comparative Governance, ed. Phillips Shively. Primis/McGraw-Hill. 3-70.
Liddle, R. William, and Saiful Mujani. 2006. “Indonesia in 2005: A New Multiparty Presidential Demoracy.” Asian Survey, 46(1), 132-139.
MacIntyre, Andrew and Resosudarmo, Budi P. 2003. “Survey of Recent Developments.” Bulletin of Indonesian Economic Studies 39 (2): 133–56.
Mackie, Jamie. 1971. “The Indonesian Economy, 1950-1963.” In The Economy of Indonesia, ed. Bruce Glassburner. Ithaca and London: Cornell University Press. 16-69.
Mackie, Jamie. 1994. “Inevitable of Avoidable? Interpretations of the Collapse of Parliamentary Democracy.” In Democracy in Indonesia: 1950s/1990s, eds. David Bourchier and John Legge. CSEAS, Monash University. 26-42.
Manning, Chris and Roesad, Kurnya. 2006. “Survey of Recent Developments.” Bulletin of Indonesian Economic Studies 42 (2): 143-70.
Mujani, Saiful. 2006. “Menkonsolidasikan Demokrasi Indonesia: Refleksi Satu Windu Reformasi (Consolidating the Indonesian Democracy: The Reflection on Eighth Year of Reform).” Jakarta: LSI (Indonesian Survey Institute).
Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub, and Fernando Limongi. 2004. Democracy and Development: Political Institutions and Well-Being in the World, 1950-1990. New York: Cambridge University Press.
Usindo. 2006. “How Much is Enough? Assessment of the SBY Administration Two Years Later.” Conference Summary. Washington, D.C.
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Transparency International. TI Corruption Perception Index.
End Notes:
[1] Liddle categorizes the two year period between 1957 and 1959 as a transition period from the parliamentary democracy and the guided democracy. In this paper, to simplify the periodization, I include the two year into the guided democracy due to the consideration that Sukarno and the military had played a dominant role in the then Indonesian politics.
[2] Korupsi Dana APBD Rp. 454 Miliar (Corruption of Local Budget Reaches 454 Rupiahs). Sept 18, 2004. Jawa Pos.
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