The Politics of Economic Liberalization in Indonesia

State, Market and Power

Andrew Rosser

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780700714766
• eBook ISBN:
  9781136855863
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

This book examines the dynamics shaping the economic process of economic liberalisation in Indonesia since the mid-1980's. Much writing on the process of economic liberalisation in developing countries views economic liberalisation as the victory of economic rationality over political and social interests. In contrast, this book argues that economic liberalisation should not be understood in these terms, but rather in the way that political social interests shape processes of economic reform in both a positive and negative sense. Specifically, Rosser argues that economic liberalisation needs to be understood in terms of the extent to which economic crises shift the balance of power and influence within society away from coalitions opposed to reform and towards those in favour of reform. In the Indonesian context, the main coalitions that need to be examined in this respect are the politico-bureaucrats and the conglomerates who have generally opposed reform and mobile capitalists who have generally supported reform.

Based on extensive original research, and providing much new material, the book considers the politics of economic policy-making in Indonesia in a range of sectors including the capital market, intellectual property law, the banking industry, and the trade and investment sectors. Analysing why the nature of economic policy in Indonesia has varied over time, this study argues that there is nothing inevitable about a transition to a fully-fledged liberal market order in Indonesia, and outlines possible future scenarios for the country's political economy.

Part 1

Theoretical and Historical Introduction

Chapter 1

Introduction

Since the mid-1980s, Indonesia has undergone a dramatic process of economic liberalisation. Prior to the mid-1980s, the government intervened heavily and directly in the economy through strategic trade and investment policies, the provision of cheap credit and subsidies to priority sectors and borrowers, and the cultivation of a range of state-owned enterprises. Following the collapse of international oil prices in the early to mid-1980s, however, it introduced a range of reforms that dramatically reduced the extent of its intervention in the economy. Interest rates were liberalised, credit ceilings eliminated, a range of non-tariff barriers abolished, restrictions on foreign investment relaxed, tariffs reduced, the stock market deregulated, state enterprises privatised and the tax system overhauled. At the same time, there were also attempts to introduce regulatory reforms such as new prudential banking and capital market regulations, intellectual property laws, and other commercial law reforms.

With the onset of the Asian economic crisis in 1997–1998, the process of liberalisation was to greatly accelerate. Under the International Monetary Fund’s (IMF) advice and pressure, the government revived the process of deregulation and increased moves towards regulatory reform and the rule of law in economic life. A range of trade monopolies and restrictions on foreign investment were eliminated, several insolvent banks were closed, a new commercial court and bankruptcy law was introduced, and several state-owned enterprises were prepared for privatisation. Following Suharto’s resignation in May 1998, moves were also made to dismantle the Suharto family’s business empire as well as those of leading cronies such as Liem Sioe Liong, Prajogo Pangestu and Bob Hasan.

How can these developments be understood? Were they, as some have suggested, the product of rational choices by insulated policy elites made aware of past policy failures by severe economic shocks? Or did these shocks produce a realignment in the balance of power between competing interests within Indonesian society and thus make economic policy reform politically possible? In addition, what do these developments suggest about the future development of capitalism in Indonesia? Are they part of a process of rationalisation, the end point of which is the emergence of liberal markets and liberal democracy? Or is Indonesia heading in a different direction – towards chaos, money politics, or a revival of economic nationalism?

In explaining economic liberalisation in developing countries, scholars of political economy have emphasised the political nature of the process of reform (Williamson 1994a; Nelson and contributors 1989; Nelson 1990; Haggard and Kaufman 1992; Haggard, Lee and Maxfield 1993). Economic policy-making, they have argued, is not simply a technical matter involving rational deliberations over the merits of alternative policy positions but a political process in which there are winners and losers. At the same time, however, many political economists – and in particular those operating within the rational choice tradition – have tended to emphasise the economic rationality of policy elites who advocate economic liberalisation and construe the role of politics in negative terms (Williamson 1994b:13–15; Grindle 1991; Grindle and Thomas 1991; Schamis 1999). As such, they have tended to view struggles over economic reform as essentially ones between economic rationality, as represented by technocrats, on the one hand, and vested political and social interests, on the other. In doing so, whilst they have demonstrated the way in which political and social interests may impair the process of economic liberalisation, they have obscured the way in which coalitions of interest may also underpin the process of liberalisation.

This understanding of the dynamics of economic liberalisation is most clearly expressed in the public choice literature. As Merilee Grindle and John Thomas (1991:24–25) have pointed out, the defining feature of the public choice approach is a belief that society is composed of rational individuals who pursue their own self-interest. In pursuing this self-interest, it is argued, these individuals will form groups in order to lobby the government for economic policies that maximise their share of society’s resources. At the same time, rational public officials will concede to these groups’ demands if they believe it will get them re-elected or earn them substantial bribes. The consequence of this situation, it is argued, is invariably a reduction in the general welfare of society. Governments will introduce interventionist policies that serve the interests of lobby groups, rather than market-oriented ones that maximise efficiency. And scarce economic resources will be wasted in rent-seeking and corruption as different groups compete for state largesse (Krueger 1974; Bates 1981; Bhagwati 1982; Olson 1982; Buchanan 1980a:9).

In explaining economic liberalisation, then, public choice theorists have been forced to introduce into their analysis ‘enlightened technocrats or statespeople who are somehow liberated from the pursuit of self-interest and thus able to see beyond short-term goals to long-term public interests’ (Grindle 1991:59–60). John Williamson (1994b:13–15), for instance, has emphasised the role of ‘technopols’ or ‘policy-maker[s] who [are] motivated to pursue the objectives postulated by traditional normative economic analysis’. To be sure, Williamson notes that technocrats/technopols may not ‘have purely altruistic motives’ and may be propelled by ‘a desire for a place in history or heaven, or an ambition to win prizes and public accolades’ (1994b:15). Importantly, however, he does not define them in terms of the broader political and social interests that their policies serve in the contexts in which they are introduced.

Other examples of this approach abound. James Buchanan (1980b:360, 367), for instance, has argued that reform is ‘particularly difficult to accomplish in a rent-seeking environment’ and thus depends to a large degree ‘on the ability of political and intellectual leaders to think in terms of, and be persuasive about, general constitutional changes in the whole structure of social and economic institutions’. Similarly, T.N. Srinivasan (1985:58) has explained a number of developing countries’ decisions to introduce liberal economic reforms in terms of a growing ‘awareness’ on the part of their political leaders about the negative effects of rent-seeking interventions in the economy. And Arnold Harberger (1993:343) has suggested that a crucial factor in the introduction of orthodox reforms in many Latin American countries was the existence of ‘a handful of heroes’ who exhibited the ‘conviction, courage, and determination’ to carry out reforms in spite of adverse political circumstances and high personal costs. In all cases, these scholars suggest that the crucial determinant of reform was the voluntary and rational decisions of technocratic policy elites rather than political and social interests.

The idea that economic reform is essentially a contest between economic rationality and political and social interest is also inherent in the work of new institutional economists and, in particular, that of Douglass North. The central feature of this work is the idea that markets are institutional arrangements – that is, particular configurations of rules, regulations and enforcement mechanisms (Acheson 1994:8–9; North 1994:360). In contrast to many public choice theorists, new institutional economists argue that markets are deliberate constructs in the same way as communist, socialist or other non-market economic systems (Chaudhry 1993:247). Rather than existing naturally, they say, markets are created by the state. North (1981; 1989; 1994), for instance, has described how states help to create markets by specifying property rights and enforcing voluntarily negotiated contracts. In recent years the World Bank has also taken up this idea. In the early 1980s, it had viewed the state as an obstacle to the creation of markets, arguing that state intervention was only legitimate where it was intended to overcome market failure (World Bank 1983:47–56). By 1997, however, the Bank’s position had shifted dramatically. According to its 1997 World Development Report, The State in a Changing World: ‘An effective state is vital for the provision of the goods and services – and the rules and institutions that allow markets to flourish and people to lead healthier, happier lives’ (1997a:1).

But whilst new institutional economists (and now the World Bank) have a more sophisticated understanding of the relationship between states and markets than some public choice theorists, their analysis of the dynamics of economic liberalisation is very similar to the public choice approach. This can clearly be seen for instance in North’s work on institutional change. North recognises that institutions embody political and social interests. ‘Even when rulers wish to promulgate rules on the basis of their efficiency consequences’, he argues, ‘survival will dictate a different course of action, because efficient rules can offend powerful interest groups in the polity’ (North 1989:1321). Similarly, North and Thomas (1970:7) have noted that efficiency-impairing institutional change may occur if it benefits the interests of certain powerful groups within society. In explaining the emergence of market-based institutional arrangements, however, North has generally ignored explanations based on power and interest in favour of ones that emphasise the operation of instrumental economic rationality.

For instance, in a number of publications (North 1981; 1989; North and Thomas 1970), North explains the emergence of market-based institutions in terms of functional responses to changes in relative factor and product prices. Historically, the most important sources of relative price changes are seen as being population change, technological change, changes in the cost of information, and the expansion of markets through political and military conquest. These changes, he argues, generate a need for institutional reform because they make existing institutions less efficient and growth-promoting than they were previously. But he is vague on precisely how these relative price changes have shaped government decisions concerning institutions. Given the general emphasis in North’s writings on the efficiency-enhancing and growth promoting character of institutional reform, one is left with the distinct impression that governments adopt market-based reforms simply because policy-makers choose to put efficiency and growth above their own political interests (Rosser 1998:96–98).¹

In more recent work, North has explained the emergence of market-based institutions in terms of cultural development or ‘learning’ (North 1994). Market-based institutions, he says, have only appeared in societies that have learned to solve ‘the fundamental economic problems of scarcity’. Where these problems have remained unsolved, he argues, societies have been ‘stuck’ with institutional arrangements that have failed to evolve into properly-functioning markets (North 1994:364). In essence, this approach is little different to the relative price changes approach. Like that approach, it explains the emergence of market-based institutions in terms of the operation of an instrumental economic rationality and ignores the political determinants of reform. Once again, politics enters the analysis only in a negative sense, that is, as an obstacle to the process of reform (Rosser 1998:97).²

The World Bank’s understanding of the dynamics of economic reform is also similar to the public choice approach. According to the Bank’s 1997 World Development Report, vested political and social interests are one of the chief barriers to reform. ‘In short’, it argues, ‘the redistributive effects of a reform and the political strength of groups affected by it may simply render some policy changes politically undesirable’ (World Bank 1997:144–145). In this context, it says, the key to reform is for reformist politicians to take advantage of periods of crisis and other times when vested political interests are weak and to tactically design and sequence reforms so as to minimise likely opposition to them (1997:144). To be sure, the Bank acknowledges that reform requires the creation of a constituency that supports it. But it understands this, not in terms of reformist politicians forging alliances with particular groups in society, but in terms of them building a consensus within the society as a whole (1997:151, 154). In other words, it maintains the public choice view that reform is about serving the interests of society as a whole even if it means that particular groups within society lose.

At the same time, the World Bank has denied the political nature of its own reformist agenda, at least in its published work. Whilst many Bank officials openly acknowledge in private conversations that the Bank’s agenda is informed by political interests, the Bank has been unwilling to do this publicly because its Articles of Association require it to focus on economic matters and not get involved in politics.³ Hence, the authors of Managing Development: The Governance Dimension, argue that the Bank’s work on ‘governance’ is ‘guided solely by concern for economic development and not by any political agenda’ (World Bank 1991a:iv). It is an approach, they say, that revolves solely around the ‘technical issues of development management’, an argument that, as Adrian Leftwich (1994) has pointed out, suggests that there is always an ‘administrative or managerial ‘fix” rather than political solution for development problems. In this way, and because the Bank also emphasises the role of wise technocrats or statesmen in promoting reform (World Bank 1997:154–155), it reinforces the idea that economic liberalisation essentially represents the victory of economic rationality over vested political and social interests

Neo-Weberian scholars working under the heading ‘The Politics of Economic Adjustment’ have also explained the dynamics of economic liberalisation in these terms, or at least very similar terms. At the heart of their approach is the idea that economic liberalisation concentrates costs on the beneficiaries of the existing system and disperses benefits to a broad range of actors. For this reason, it is argued, economic liberalisation presents a serious collective action problem: whilst losers will have an incentive to engage in collective action to block reform, potential winners will have little incentive to actively promote reform because of uncertainty about the expected payoff (Haggard and Kaufman 1992:18–20; Nelson 1993:434–435; Schamis 1999:237). As a result, it is argued, an important prerequisite for reform is the neutralisation of groups within society that favour the existing system. Only when technocratic policy elites are insulated from political and social pressures, it is argued, will policy shift in a more reformist direction. As Thomas Callaghy (1989:120) has put it: ‘The success or failure of adjustment efforts to a large degree depends on a government’s ability to insulate itself from – and buffer against and adjust to – threatening political, societal, and international pressures that might prevent the inherent economic logic of the adjustment process from coming into play to the extent necessary’.

Hence, a number of neo-Weberian scholars such as Stephan Haggard, John Waterbury and Harold Crouch have explained economic liberalisation in developing countries in terms of state autonomy or insulation from political and social forces. According to Haggard (1988; 1989), for instance, market-oriented economic policy reforms in the East Asian NICs during the past few decades – and, in particular, the adoption of export-oriented trade and industrial policies – were facilitated by institutional changes that increased the autonomy of technocratic policy elites. At the same time, he says, the relative weakness of ‘rent-seeking groups’ and ‘distributional coalitions’ in these countries ‘enhanced the ability of policy-makers to launch and sustain policy reforms which, while having beneficial long-term effects, demanded political control, or even elimination of previously privileged groups’ (1988:262; italics in original). Similarly, Waterbury (1992) has emphasised the role of technocratic ‘change teams’ who are ‘to varying degrees shielded from the groups whose interests will be gored in the reform process’ in promoting state enterprise reform in several developing countries including Mexico, Turkey and India. Crouch (1984) has also emphasised the importance of state autonomy, suggesting that the adoption of market-oriented reforms within the ASEAN region has depended on the degree to which regional governments have been able to act independently of ‘pressures from above’ (e.g. politically-connected business groups and powerful state officials) and ‘pressures from below’ (e.g. peasants, students and workers).

As Hector Schamis (1999) has pointed out, this analysis – like the public choice explanation of the dynamics of economic liberalisation – rests on a negative conception of politics and, partly for this reason, a flawed understanding of the state. ‘Theoretically, these claims are based on a profoundly negative view of politics characteristic of neoclassical economics (that is why whenever societal groups engage in political organisation, protectionism is invariably expected to follow) and on what appears to be an increasingly prevalent tendency in the field of political economy: to view political institutions – particularly the state – as autonomous structures with their own distinctive configurations, ideas, and interests, and take them as the independent variable that explains various socio-economic outcomes, government policy among them’ (1999:266). At the same time, it also rests on a belief in the economic rationality of the technocrats. This is most transparent in Callaghy’s work where the technocrats are seen as pursuing an ‘economic logic’ rather than the ‘political logic’ which, he says, guides the actions of the vested political and social interests which oppose reform (Callaghy 1989 and 1990).

To be sure, neo-Weberian scholars are aware that the technocrats may be assisted in their endeavours by exogenous developments such as economic crises and external threats. But these are important in the neo-Weberian view, not because they strengthen the position of coalitions that support reform, but rather because they ‘have the effect of shocking countries out of traditional policy patterns, disorganizing the interest groups that typically veto policy reform, and generating pressure for politicians to change policies that can be seen to have failed’ (Williamson and Haggard 1994:562–564). In other words, they are important because they reduce political opposition to reform and make apparent the inherent economic rationality of market-oriented policies. This is a view that continues to obscure the way in which political and social interests are embedded in market-oriented policies and hence the way in which these interests underpin the process of reform.

In more recent work, some neo-Weberian scholars have suggested that the support of political and social interests may be necessary to promote certain stages of reform. Stephan Haggard and Robert Kaufman (1992:18–27), for instance, have suggested that reforms are more likely to be implemented properly if the state is well ‘embedded’ in socie...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Dedication
• Contents
• Preface
• Acknowledgements
• Glossary and Abbreviations
• Part 1 Theoretical and Historical Introduction
• Part 2 The Politics of Economic Liberalisation in Indonesia from the mid-1980s to mid-1997
• Part 3 The Asian Crisis and the Politics of Economic Liberalisation in Indonesia
• Notes
• Appendices
• Bibliography
• Index