Feeding the Indonesian Private Sector

By webadmin on 05:58 pm Mar 11, 2011
Category Archive

Yohannes Sulaiman

Napoleon is said to have once remarked that an army marches on its stomach, meaning its success depends on the support of logistics and ample provisions.

In today’s world, geopolitical theorists link the remark to the economy: The stronger the state’s economy, the stronger the state. A famous example is Paul Kennedy’s book “The Rise and Fall of Great Powers,” which examined the correlation between a great power’s productive capability and its ability to stay on top.

The theory is supported by a wealth of evidence. For instance, an oft-forgotten fact is that the Allies’ victory in World War II depended not merely on atomic bombs, but on its “arsenal of freedom” — its massive ability to produce enough food, equipment and armaments to supply its armies in Europe, North Africa and the Pacific.

It is not surprising that Stalin was said to have remarked that he was not afraid of the atomic bomb, but that he was afraid of the United States’ seemingly unlimited ability to flood the world with its goods.

This was repeated at the end of the cold war, when the United States massively increased its defense budget, spending up to 5 percent of its GDP.

At the same time, the Soviet Union’s centralized state-based economy was unable to cope, having spent 30 percent of its GDP in an arms race that it ended up losing.

The United States’ ability to rapidly increase its production at short notice was thanks to its robust private sector. Even though it just emerged from times of economic crisis (the Great Depression of the 1930s and the oil shock and recession of the 1970s that ended the gold standard), the private sector’s ability to adapt and ratchet up production was amazing.

The reason for this is simple: The private sector is profit-driven and thus will always try to improve its efficiencies and lower costs to maximize profit. This in turn spurs innovation and technological advances.

State-based enterprises, on the other hand, are mostly interested in filling the quota or “performing public duty,” regardless of how antiquated or irrelevant the standard is or how bad their performance.

They are also influenced by politics, by the government’s interests. Moreover, as they are less concerned with profit, there is little incentive to innovate.

In a state with a strong work ethic, supervision, professionalism and clear goals — such as exists in Singapore — state-owned enterprises such as sovereign funds may work.

Singapore itself, however, is aware of its very fatal weakness, which is the geopolitical reality of being straddled by the two giants of Malaysia and Indonesia.

In order to survive, Singapore must adapt and innovate or be swallowed. Thus, it also has the most liberal economic policy of the Asean nations and has worked to manage its state-owned enterprises professionally.

This kind of behavior, however, is very difficult to emulate. In the Soviet Union, for instance, the steel industry was committed to manufacturing expensive, heavy steel even though other countries had moved to light, cheap steel that was just as durable. The reason was that the Soviet Union had to keep meeting its quota of steel production, measured by tonnages. Thus there was simply no incentive to innovate.

Indonesia has the ability to create a strong private sector. It has a huge population and is rich in resources. It is strategically placed, making it a very attractive place to invest.

Yet, compared with Singapore, China or even India, Indonesia still has huge problems in stimulating the growth of its private sector.

With byzantine regulations that sometimes contradict each other at state and local levels, unreliable infrastructure and endemic corruption at every level, the barrier to private-sector growth has been huge.

Worse, the economy is also hobbled by inefficient state enterprises. Even though under the Constitution the state should control vital sectors such as electricity, it is clear that the state’s performance is lacking. While there are some bright spots in state-owned enterprises, a significant amount of them unfortunately remain awash with inefficiencies and graft.

China learned from its disastrous experiments in state-controlled development in the 1950 to 1970s, which resulted in millions of deaths from starvation. It began to encourage the growth of the private sector by creating Special Economic Zones, inviting foreign direct investment, cutting down on regulations and closing many inefficient and unprofitable state-owned enterprises. In the past year it passed Japan as the world’s second-largest economy.

India was almost bankrupt in the early 1990s and the government decided to cut the “permit raj,” open the market, allow foreign investment and encourage growth in private enterprises. Today, Bangalore is well-known as India’s Silicon Valley.

Indonesia needs to rethink its economic policy, to further encourage the growth of the private sector.

Indonesia should realize that if it is properly managed, FDI would benefit the state greatly and encourage further growth. With a robust private sector and further improvements to or even restructuring of state-owned enterprises, Indonesia may find itself marching beyond 7 percent growth.

Yohanes Sulaiman is a lecturer at the Indonesian National Defense University and a researcher at the Global Nexus Institute.