The crisis of neoliberalism: Rhetoric and reality

John A. Prasetio ,  Jakarta   |  Thu, 06/18/2009 11:44 AM  |  Headlines

In the past few weeks, neoliberal economic theory has come under serious attack by a good number of the country's political elite. They claim the Yudhoyono administration has reduced its role in providing social welfare and allowed the market to freely dominate people's lives. Some say they long for the old days of state-dominated development to come back. Some go even further and call for national self-reliance by way of restricting foreign investment and canceling overseas debts.

During the 1980s, Ronald Reagan and Margaret Thatcher took policy steps that dismantled Keynesian welfare capitalism. They also established an international political climate that allowed the spread of economic neoliberalism. Keynesian thinking on the role of the state in the economic process to influence aggregate domestic demand was buried and traded in for a more dominant role by the market and the supply side of the economy. Reagan was well known for his speech that government was not the solution; big government was part of the problem. The demise of the Soviet Union and the opening up of China gave further impetus to the view that top-down state action in economic affairs was not a viable model of economic development.

In the wake of the 1998 Asian financial crisis, the IMF advocated neoliberal prescriptions that pushed Indonesia to slash public spending, raise interest rates, cancel infrastructure projects and increase taxes. Critics suggest the IMF failed to recognize the 1998 crisis as primarily a liquidity crisis. Instead of supplying additional liquidity to restore investor confidence, the IMF insisted on monetary tightening and fiscal austerity policies. Further, the IMF loan conditions were far more sensitive to the risk of moral hazards, as opposed to social implications such as job losses.

Japan had actually proposed the founding of an Asian Monetary Fund. It had also come to suggest the Washington consensus of rapid deregulation and privatization might not be the best policy response for Asian countries. Their own experience of state-sponsored capitalism through so-called "Japan Incorporated" suggests the relevance of a close relationship between the private sector and the state to achieve rapid industrialization. Japan's logic of "an Asian response to an Asian crisis", however, received strong opposition from the IMF and the US Treasury Department, most notably from Larry Summers.

In defense of the IMF, market fundamentalists argued the 1998 Indonesian crisis was the result of years of crony capitalism, nontransparent regulations, corruption and inefficiencies in the public sector, including in government enterprises. Accordingly, the IMF insistence on structural reform and fiscal austerity was viewed as necessary shock therapy for the establishment of an efficient market economy.

While Indonesia was compelled to accept an orthodox recipe for capitalism, the response in the US and a number of countries in the West to the global financial apocalypse in the last quarter of 2008 was to throw many of the basic precepts of neoliberalism out the window.

Three decades since Reagan declared that big government was the enemy, George W. Bush brought to a close the age of Reaganomics by moving US$700 billion to bail out the financial sector. Government intrusion is again accepted as a necessary step to stimulate the economy.

Instead of pushing for the closure of Wall Street institutions that had been run by reckless executives, the US government committed to spending trillions of dollars for relief programs at least until stock markets returned to more rational pricing. This action actually reflects the return of the Keynesian doctrine on the need for government to step in, as "markets can stay irrational longer than firms can stay solvent".

There is always a deep-seated suspicion of market forces and private capital in many influential quarters in Indonesia. Despite the economic chaos, and near bankruptcy in the mid 1960s as a result of economic authoritarianism, the embrace of a liberal economic order has always been halfhearted and ambivalent. In fact, old-style economic nationalism, which professed collectivist economic orthodoxy represented in Article 33 of the Constitution, has always been an influential school of thought. Closely related to this group of fundamental nationalists are those who favor active government intervention in market behavior.

Following the completion of the IMF program, the policy pendulum in Indonesia swung to accommodate economic nationalism. In the early days of his administration, Yudhoyono made a decision to dissolve the CGI (Consultative Group on Indonesia), a move that signaled his conviction Indonesia was ready to define its own future without having to accept external economic models imposed by its creditors.

For Yudhoyono, the issue of state intervention is not on "how much" but on "what kind", insofar as he believes economic transformation is part of the state's central responsibility. In a meeting with the Indonesia Chamber of Commerce (Kadin), Yudhoyono stated he would strive to achieve a middle way between market forces and state planning, and that we could all look at the success of "Japan Incorporated" as an inspiration for the private sector, state and NGOs to work closely together to construct comparative advantage for Indonesia, and to achieve the long-term goal of industrial nation status.

Among pundits in Indonesia, there seems to be a growing consensus that there should be no single template for economic development. One size does not fit all. Neoliberal models of privatization and liberalization of capital and trade may suit one country at a certain point. At another point, strong state intervention could be necessary to steer the economy away from a slump, and also to block market forces from hurting the weaker segment of society.

While the rhetoric against neoliberalism may continue for some time, Indonesia's strong exports and FDI performance in 2007 and 2008 have delivered enormous benefits in terms of creating employment and strengthening growth. To achieve stronger growth and development, three requirements are of fundamental importance.

The first is political stability and a strong economic environment - low inflation, predictable policy environment, adequate infrastructure and public services, as well as clean governance.

The second is a human capital development strategy to ensure our workforce is productive, competitive and flexible. The third requirement is revitalizing domestic economies by way of improving domestic supply chains, and realigning production to cater to domestic demand. Kadin, in collaboration with foreign chambers in Jakarta, is currently in the process of preparing private-sector recommendations for the 2009-2014 government on strengthening the business climate to create jobs and achieve stronger growth with equity.

The writer is chairman of CBA Asia and also Kadin deputy president for international economic cooperation.

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