Transition Economies

A second way of drawing lessons from international experience is to draw on the substantial debate about change in transitional economies (Mishra 2000). Many countries have passed, or are currently passing, through significant transition phases -- just a few of the countries which come to mind are the Philippines after the fall of Marcos, Russia during the past decade, Cambodia since the early 1990s, the People's Republic of China at various stages in its own reform process, and so on. In many cases, sharp transitions in these and other countries were triggered by a severe economic crisis following the downfall of a centralist regime. Often a period of political disruption followed accompanied by a breakdown in established social consensus.

It is important, in drawing on the debate about transitional economies, to distinguish between the different types of economic transition. The term "transition economy" has often been used to describe the process of change in economies (such as in Eastern Europe) which are passing from a socialist economic system to a free market system based system on private property. However a second definition of "transition" which is more useful in the current context refers to the change from one type of market economy where patrimonial or patronclient relationships are widespread to a rules-based system of market relationships. Transition towards political pluralism and a rules-based market system has been a key feature of the transition in countries such as Indonesia, the Philippines, Cambodia, and Russia.

Within Southeast Asia, Hill and Sadli (2003) have recently compared experience in the Philippines and in Indonesia. They have drawn attention to the following similarities in these two countries as they passed through during the transition phase:

• Radical power shifts. A weakened presidency, a newly assertive but unpredictable legislature, a bureaucracy having to redefine its role, and a noisy but generally unsophisticated civil society.
• A fiscally incapacitated government. A rapidly rising public debt which absorbed 40% or more of public expenditure.
• An uncertain, and sometimes acrimonious, relationship with foreign debtors, further complicating economic recovery. "Nationalist" politicians found the IMF, in particular, an irresistible target.
• A weakened center, in response to pressure to extend democracy and fiscal authority to the regions too quickly.
• Populism in the labor market. Controls over trade unions were relaxed, and politicians vied for popularity by supporting unsustainable and widely flouted increases in regulated wages. This in turn impaired competitiveness and jeopardized recovery.
• Governments struggling with rising public debt and democratic demands for expenditure deferred major investments. When growth resumed, a half-decade or more of underinvestment resulted in power shortages (chronic in the Philippines in the early 1990s).

More generally, some of the main lessons for Indonesia from surveying the wider literature on transition economics would seem to be the following (Mishra, 2000).

It is would seem important to find ways of ameliorating the conflicts likely to emerge between social groups, and to attempt to build transparent and equitable social consensus. If this cannot be done, increasing social instability and a decline in internal security may well retard both domestic economic activity as well as programs of foreign assistance and investment.

Second, the transition from one form of market economy (patrimonial or discretionary) to another (rules based) can be slow and time-consuming. Political change often goes hand in hand with social and governance changes across a nation. New institutions need to be established; weak institutions need to be strengthened; and often the resources available to support the process are thinly spread over many competing demands.

In addition, potential losers can be expected to resist change. For example, in a number of transition economies it has proved very difficult to implement programs to reform or privatize state owned enterprises. Similarly, owners and managers of insolvent private sector conglomerates often adopt stratagems to avoid letting control pass to the state or to administrators appointed to take over the firm. Neither is it always easy for policy-makers to decide on the best approach in settling the affairs of insolvent firms. Sometimes there are strong public interest arguments in favor of allowing firms to try to trade their way out of difficulty even when debt levels seem very high.