State and Market

Indonesia is a highly market-oriented society with many markets operating in loosely regulated ways. Yet widespread market and government failure in many market sectors raises interesting questions about the best and most effective regulatory role for the Indonesian state.

In the mid 1980s, economic liberalization became a key part of Indonesia’s national economic agenda. At the time, the international community pressed the Indonesian government to loosen economic controls and promote entrepreneurship, private sector and market forces, and competition as a means of spurring economic development. Similar policies continued to be urged upon Indonesia in the early 1990s. And then came the great financial crisis of 1997- 98 that brought huge damage to the Indonesian economy and was arguably caused by a combination of both market failure and government failure (Hayami 2003). Looking back over Indonesian experience with controls and liberalization in recent decades, there are three broad observations that may be made (World Bank 2002, McMillan 2002, and Sato 2005). First, market liberalization has social and political implications as well as economic ones, so the pros and cons of policy changes require public discussion. To use jargon from the “Star Wars” film series, fair and legal markets can be said to have a positive “force” in that they foster higher levels of productivity and expand economic freedoms for citizens. But there is a “dark-side” in markets too, where corruption, rent seeking, and black market activities by “non-state actors” pose significant risks for regulatory agencies in developing countries.

Secondly, Indonesia’s weak legal system and chronic budget constraints limit the regulatory capacity of the state, as do the high direct and indirect costs associated with government price suppression schemes.

Thirdly, in spite of weak regulatory capacity the widespread market failures in Indonesia support strong arguments in favor of government regulation. However with such limited resources the government needs to be pragmatic and realistic in order to focus its regulatory priorities and resources on selected key sectors, case by case.

Comment(s)

There are [2] comment(s) for this entry. Post a comment.

1. Peter McCawley, author of this paper
   (posted 30 March 2007 / 11:47:39 AM)
   
   Peter McCawley, author of this policy brief responds to the comment below:
   
   
   
   There seem to be at least two important points which arise from these observations. The first is that while it is certainly true that the three constitutional arms of government are the legislature, the judiciary, and the executive, it is also true that relationship between these three arms of government in Indonesia is as yet rather uncertain. In many areas, the true relationship (that is, the true balance of power) between these three arms in Indonesia is still vague. The relationship between the three arms has varied dramatically in the six decades since Independence in 1945. At times, the executive (in the shape of the President) has been very strong while the other two arms have been weak. More recently, since President Soeharto resigned in 1998, the legislature and the judiciary appear to have expanded their real powers. In short, the definition of the relative powers of real influence and authority in Indonesia between these three arms of government is still, more than is that case in many other countries, a 'work in progress'. The relationships are evolving, and are likely to continue to evolve in the coming decades.
   
   
   
   Second, in practice, other parts of society are important players in the process of governance in Indonesia as well. These other parts of society are generally not specifically mentioned in the Indonesian Constitution but in practice they exercise (to a greater or lesser extent) influence in the broad governance of Indonesian. These groups include the military, the media, and broader parts of civil society (religious organisations, professional groups, trade unions, producer organisations, universities, non-government organisations, think tanks, and so on). Any discussion of governance in Indonesia needs to allow for the role that these other organisations, some of which may be called "non-state actors", play in Indonesian society.
   
   
   
2. golding imoh
   (posted 23 March 2007 / 12:08:30 AM)
   
   The government legislature, judiciary and the executive are the three arms of government we have. The executive that we refer as the president in a country, while the legislature they are the people who enforce the law. Take for instance, if the executive enforces law on the people without passing it to the legislature to confirm it, will it be law? If the legislature makes law and passes it to the executive to sign it, if the executive refuses to sign after 30 days in his office it becomes a law. If the legislature enforces law on the people they want the people to benefit from it and also for the satisfaction of the country.