An underlying theme of a recent Lowy Analysis paper (Trade Protectionism in Indonesia: Bad Times and Bad Policy) is that current Indonesian economic policy-making is refuting 'Sadli's Law': good times give rise to lazy populist economic policies while crisis times produce good policies.
Mohamad Sadli, a key member of the 'Berkeley Mafia' of economic technocrats who guided economic policy through much of the Soeharto era, certainly had enough economic ups-and-downs on which to base this insight. But in this Lowy Analysis, Arianto Patunru and Sjamsu Rahardja argue that politics has undermined Sadli's Law: bad times are producing bad policies. Will last week's cabinet reshuffle change this melancholy assessment?
On the surface, Susilo Bambang Yudhoyono's decade as president (2004-2014) seem to have provided some confirmation of the 'easy' phase of the Law: good times encouraged lackadaisical policy-making, with serious reform stuck in the 'too hard' tray. Indonesia's export commodity prices were strong and China's spectacular growth provided a ready market. The good times saw little progress and even some slippage, through creeping interventionism and industry protection. More fundamental reforms (eg. in finance, the legal system, the bureaucracy and state-owned enterprises) were sidelined by immediate distractions. Indonesia's infrastructure shortfall went from poor to parlous.
But the policy environment has changed post-Soeharto, with democracy encouraging populist policies and self-interested parliamentarians limiting what a president can achieve. Was SBY's rather disappointing economic performance an example of Sadli's Law, or instead a reflection of this more difficult policy environment?
The real test of the Law comes when times are tough. Now, with the benign international environment of high commodity prices gone, where is the reforming policy response, emboldened by the urgency of the moment? Can the current economic ministers reprise the crisis-resolving reforms of the 1970s and 1980s? [fold]
The differences with today's economic policy-making are profound. Then, the technocrats were a close-knit team with a clear leader who imposed a consistency of approach. For most of the Soeharto era, Widjojo Nitisastro was an influential advocate in cabinet for sensible economics. The technocrats operated in an environment (both in public opinion and among rival policy camps) deeply suspicious of so-called 'free-market liberalism' (a legacy of the colonial period), and yet by a combination of Javanese guile and force of argument, they were able to keep the economy open to foreign competition and foreign direct investment.
The technocrats demonstrated that if the big-picture macro-economics could be kept in reasonable order – with balanced budgets, small external deficits, restrained monetary policy and a competitive exchange rate – then the economy would operate quite well, even if many of the micro issues were far from ideal and much potential was left untapped. Crony capitalism, for all its unattractive and harmful effects, was still consistent with three decades of 7% annual growth.
Perhaps the greatest difference was that Soeharto trusted the technocrats and turned to them whenever the going was tough. Jokowi, the former businessman, seems to have confidence that running an economy is just like running a scaled-up business. There are many examples in the wider world where successful businesspeople believe that their skills are readily transferable to the economy as a whole. But skills in running a business are not readily transferrable to the overall economy. A key macro-economic insight distinguishes the business mindset from that of the economist : 'in the macro-economy, everything is connected to everything else'.
Rather than being guided by this macro view, current policies are essentially reacting in isolation to the latest problem as it emerges. The first response is to attempt to influence demand and supply in individual industries through subsidies and protection. Import quotas are tightened to protect domestic producers, then expanded again when supply shortages push up prices for consumers. Protection for one industry makes life harder for other industries and stifles dynamism.
The Jokowi presidency is less than a year old. Former finance minister Chatib Basri has suggested that all governments come to power with new ideas, and in time end up with the same old tried-and-true views. This is a version of 'mugged by reality', but there are many paths to bad policy, and new players can waste too much time exploring them. Some of Jokowi's Big Ideas, such as infrastructure and maritime development, make good sense if they can be well implemented. But Indonesia currently lacks the supporting bureaucracy and trustworthy legal system to deliver on this strategy.
What of the new economic ministers? It's true that the new economic coordinating minister, Darmin Nasution, has a wider policy-making background than his predecessor, having held senior roles in financial supervision, tax administration, and as governor of the central bank. But in the latter role, his interventionist policies in the foreign exchange market give him a much-criticised reputation for micro-management. The appointment of a former economic coordinating minister Rizal Ramli to coordinate maritime affairs should enliven cabinet meetings with verbal fireworks. His well-established reputation as a scatter-gun critic has already offended other cabinet members, who resent his interference in their territory (even if he may well be right).
Meanwhile, the economy is slowing but is still growing close to 5% (twice as fast as Australia). Maybe Indonesia will just muddle though, falling well short of its potential (and Jokowi's target of 7% growth). As usual, both the optimists and the pessimists will be disappointed that their predictions have not come to pass. One thing is clear: Sadli's Law is no longer operating.
Photo by Flickr user Ignatius Win Tanuwidjaja.