Indonesia's planned market economy

Emil Salim ,  Jakarta   |  Wed, 06/17/2009 1:20 PM  |  Headlines

The study of economics deals basically with the problem of choice. The producer has to choose the proper combination of limited resources to produce a profitable product. The consumer has to choose the goods and services they need with a given income. There is always a choice to be made among the limited resources to meet unlimited human needs.

This process of choosing is conducted in the market where the producer's supply meets the consumer's demand at an equilibrium level revealed through the price mechanism. This price mechanism simplifies the whole process of decision-making on what, where, when and how much to produce.

The first wave of liberalism started with the notion of Adam Smith in his An Inquiry into the Nature and Causes of the Wealth of Nations, that the free market is the most efficient way to enable the economy to grow. Smith initiated Classical Economics that strongly supported the policy of laissez-faire, dictating a minimum of government interference in economic affairs of individuals and society. It argues the society as a whole is best served by permitting individuals to pursue their interests and limiting the state to maintaining order and property rights.

When the Great Depression erupted in the thirties, John Maynard Keynes in his monumental book, The General Theory of Employment, Interest and Money, rejected laissez-faire economic theories, arguing the treatment for depression was to enlarge investment by creating public substitutes for private investments. Keynes' notion of active government intervention in economic development was widely embraced by the school of development in developing countries.

But then a serious economic crisis broke out in Latin America, including in Argentina, Brazil and Mexico, due to too much interference by governments in economic development. High rates of inflation erupted to fuel an overheated economy. Foreign debts piled up, affecting the financial centers of developed countries, especially the United States.

A second wave of liberalism emerged based on the consensus among Washington-based influential global economic institutions such as the World Bank, the International Monetary Fund and the US Treasury Department. It calls basically for a retreat of too deep involvement by governments in the national economy through liberalization of state enterprises, foreign trade and foreign investment flows, and a more disciplined budget policy aimed at a budget surplus or budget deficits up to 2 percent of GDP.

This second wave of liberalism coincided with the collapse of the Soviet economy, which had championed a command economic system. In this system, a central authority dominates in the decision-making process of what, how, how much, when and where to produce and consume. It is a tight centrally planned economic system. The allocation of resources is dominated by the preference scale of the central state authority.

When Mikhail Gorbachev introduced perestroika, the restructuring of the Soviet Union's political and economic policy, and glasnost, the democratization of the Soviet Union in the 1980s, the command economic system lost its influence and the global economy became dominated by the market economic system.

As a developing country, Indonesia adheres to an economic system that is neither a command economy nor a free liberal economy. By virtue of its independence struggle, the Indonesian government has had to interfere in the market to guide economic decisions into the direction of national interests. The prevailing underdeveloped and unbalanced economy, with a heavy reliance on natural raw resources, leaves Indonesia vulnerable to global economic fluctuation. But Indonesia lacks adequate infrastructural facilities and low savings rates among the large population, which makes high growth difficult.

To by pass the slow but needed process of savings and capital formation to speed up the growth rate, foreign loans are a useful vehicle. Indonesia has since the 1970s sided with the Group of 77 and China to demand that developed countries provide 0.7 percent of their GDP for assistance to other developing countries, the rationale being that it was inhuman if 20 percent of the world's population, living in developed countries, controlled 80 percent of the world's natural resources.

The transfer of resources, in terms of finance and technology, is urgently needed to reduce the inequality between developed and developing countries. To ensure that foreign credit is used responsibly, it must be directly connected with budget programming and financing, which are discussed intensively with the budget committee in parliament. This makes it possible to use foreign loans to speed up development growth.

It is also important to recognize the ability of a nation to repay foreign debts along a debt profile projected for the future. In this context, it is important that Indonesia engage in foreign loans with concessionary terms and use them productively. Because foreign loans are part of the budget, with the aim of raising the GDP, the ratio of debt to GDP will decline, in spite of the increase in the absolute value of the loans. Since the loans are mixed together with taxes, duties and others in the revenue box, it is difficult to trace that a particular expenditure item in the budget, such as financial resources for poverty programs, is linked to a particular item of revenue, such as foreign loans.

The basic notion in foreign debt management is "prudence and transparency". Indonesia has proved to enable foreign loans to grow, with its debt to GDP ratio declining from 57 percent in 2004, to 32 percent in 2009.

Foreign loans will assist the budget meet the unlimited needs of the country. It is clear Indonesia requires huge funding to finance infra-structure, health facilities, poverty alleviation programs, reforestation, clean drinking water facilities, military planes and defense hardware - all this requires investment funds. In economics, the rule of "opportunity costs" applies: Any spending for a particular item effectively wipes out the opportunity to spend on other items. The nation has to live within its priority scale, and not all needs and wants can be met.

It is to this context that Indonesia adheres: Not to a free liberal or neoliberal economy, but rather a planned-market economic system. The needs are huge and the resources limited, including foreign loans. The nation cannot afford a liberal or neoliberal economy. It must engage planning and tight budget programming, and focus on urgent targets that are pro-poor, pro-employment and pro-growth. This can only be achieved through a planned-market economy free from notions of command or neoliberalism.

The writer had been a Cabinet member in the New Order government and was a member of the President's Economic Advisory Team (1966) and the Presidential Advisory Council (2007-present).

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.