Introduction

Development of a nation has many different facets. These include developing social relationships amongst people, political systems, law and order, government administration, economic production and consumption of goods and services, infrastructure (such as transport and communication) and public services such as health and education.

These notes will focus on the development of a nation's economy. The goal is to describe a framework which may be helpful in thinking about development, and use this to suggest an understanding of Australia's experiences and to raise questions about Indonesia's perspectives on the history and challenges of development.

A Systems' View of Development

An economy and many other facets involved in developing a nation consists of numerous systems - within which individual people and businesses live and work. An economic system, for example, may include sub-systems for: production; distribution and marketing; savings and investment; education and training; business management; employee relationships; innovation; transport; accounting; law and so on. Elements of each of these systems exist within different types of individual firms, in specialised institutions, in the community, in the way people live and work and in government regulations.

The importance of economic systems is illustrated by Michael Porter's Competitive Advantage of Nations, which discussed requirements for success in terms of: high quality suppliers; demanding customers; tough competitors and good regulations. Economists' theories about the benefits of strong industry clusters lead to similar conclusions.

The importance of economic systems is also illustrated by the general failure of the widely promoted 'missing strategic factor' theories of development (ie that if only some key inputs such as finance or trained people are provided - all will be well).  Such methods have traditionally resulted in the wastage of whatever 'strategic' factor is provided, because of the absence of other elements of the economic system without which the 'strategic' factor could not be effective.

'Development' can usefully be defined as evolutionary changes within such systems, or the emergence of new systems, whose effect is to provide better support to individuals and businesses. The basic argument presented in these notes is that:

• 'economic' development creates competitive advantages for individual firms by providing more appropriate support in meeting current market needs. This allows higher incomes and a good return on investment, which encourages growth. However those advantages (like those firms gain from innovation) are transitory, and need to be constantly re-created because market requirements change and others will copy any advance;
• a leading economy has to have attitudes, institutions and arrangements in its community generally which allow rapid development. Sound macro-economic (eg monetary and fiscal) policies are also necessary - but insufficient on their own.

A region does not become developed by the creation of any particular infrastructure or institution (eg roads or banks). Rather it it sets out towards economic prosperity when it has effective means to manage economic transactions and to change overall economic systems quickly.

Different cultural traditions equip different peoples to do this in different ways.

Australia's traditions emerged from those of Western (especially Anglo American) societies. The latter attach importance in managing economic transactions to the initiative of individuals under a rule of law. Changes in economic systems are the integrated outcome of many micro-initiatives, moderated by the effect of a democratic political system and facilitated by the absence of immutable social structures or rules of behaviour. This approach mobilises the power of rationality at the level of individuals where it can be used relatively effectively.

Rationality is an approach to problem solving by manipulating abstract concepts which, like science, originated in classical Greece. Also like science it increases efficiency and speeds up change by making the effects of decisions more predictable with less trial and error. However it does not work well for centralised economic decision making by government or authorities - because they deal with systems that are too complex and rapidly changing. The latter constraint, though not formally recognised, is the basis of: Western economists' emphasis on economic liberalism; management theories about the limits to rationality; and public administration theories about counter-intuitive responses to policy initiatives.

Various nations in East Asia with a Chinese cultural heritage have adopted forms of the Japanese economic model which involves quite different techniques for managing economic transactions, and also has formal social mechanisms for changing economic systems (eg through the role of: community leaders; bureaucrats in industry policy; financial institutions at the centre of business groups; and trading companies). These more community-based and 'a-rational' techniques have been very powerful in accelerating development of the real economy in some societies - though they appear not to treat return on investor's capital as a high priority, and are embedded in ethical systems which are not universalist (ie they tend to involve a concern for the welfare of their own, rather than all, people).

Economists' theories of economic growth typically involve a production function, in which capital and labour have been seen as the key inputs. In the 1950s Robert Solow made a major contribution to growth theory by showing that the majority of growth in the USA was not due to increased inputs of labour and capital, but to a 'third factor' - which was often put down to advances in technology or knowledge. In the 1990s, Paul Romer and others grew tired of a situation where economists' best explanation of growth was that it was due to 'something' that was not included in their production function. So they proposed modifications to the production function to incorporate knowledge as an economic input.

However it may be that the theory of economic growth and the practice of economic development can be revolutionised by considering whether the massive effect that advances in technology and knowledge can have on growth may arise because such advances allow the production function to be changed, rather than merely providing a different input.

Economics has grown out of the Western tradition of natural sciences such as physics. The latter seeks to understand the causal relationships in a natural system so that their behaviour, or the effect of new inputs such as investment projects, may be predicted. But what may be essential to accelerate economic development is to see knowledge as a way of changing an economic production function rather than as an input to a fixed function.

In other words, rather than seeing knowledge's contribution to economic advancement in terms of (say) educating students so as provide better inputs to the economy, it might be even more important that new knowledge stimulate leaders in the real economy to change the way things are done (ie to change an aspect of the economic system as a whole).

It is understood that the intellectual traditions in East Asia that have been the associated with several past 'economic miracles' involve various forms of the Daoist precept that 'the Dao which can be known is not the true Dao'. This seems to be a statement of the limits to rationality which is quite contrary to the intent of the Western scientific tradition and 'positive' economics. This view exactly parallels that of Hayek's classic 'Use of Knowledge in Society' article, which is the major plank of Western economists rejection of economic planning by authorities. However in East Asia this view has led to a-rational practices whose effect is to change the economic system, rather than to understand in the abstract how it currently works.

A View of Australia's History and Challenges

Modern Australia is the bye-product of the worldwide expansion of European influence over recent centuries - especially of British influence in the 18th century.

Australia inherited British traditions and institutions which were the foundation on which the world's first industrial revolution had been built. Those traditions were a bye-product of Judeo / Christian traditions under which societies incorporated an amalgam of:

• an ideal of self-denial and putting-God-and-others-first; together with
• universalist values (ie valuing all people and seeking truth).

Internally this amalgam allowed:

• relative freedom from the superstitions that can emerge from human imaginings;
• individual liberty to be socially and politically acceptable because of expectations that individuals would give attention to others' interests and help others less fortunate than themself. This in turn (especially in Britain initially) then allowed:
  • the strengthening of institutions that enabled individuals to operate independently (eg a rule of law, money as a measure and store of value, and market institutions);
  • the classical Greek idea about rationality to be applied to economic situations that, as noted above, were simple enough for abstract analysis to be effective;
  • a flexibility that enabled societies' institutions to be re-formed relatively freely - even though the process could be stressful; and ultimately
  • a large diversity of specialized activities to be undertaken in an integrated way
• various cultural revolutions over the past 500 years - which resulted in:
  • a search for an empirical understanding of nature, which was expected to be lawful because of its creation by an orderly God. This search followed the Renaissance's rediscovery of classical Greek ideas about science which had been preserved in some Islamic societies, and paid off handsomely in providing a foundation for industrial technology;
  • social innovations that have further increased the scope for enabling and coordinating enterprising initiative by many members of society (eg in financing and managing large enterprises, democratic government, commercial law and institutions / mechanisms to promote welfare and equity); and ultimately
• a series of economic / industrial revolutions.

This culturally-derived strength was implemented in different ways and rates in various countries and allowed an expansion by Western societies throughout the world over several centuries - involving trade, colonization, political and military influence and some spread of the methods which provided that strength. In this process strengths were often abused, while the potential universality of the basic methods and 'put-others-first' ideals tended to be overlooked. However by the start of the 20^th century the overwhelming advantages that Western societies had enjoyed, were declining as some others absorbed their methods or created alternatives, and as European societies squandered their energies in a Great War. Overt political and military control through colonies faded in the first half of the 20^th century - though the United States has retained a dominant status in world affairs since that time.

In the latter half of the 20th century 'put-others-first' ideals have tended to decline in favour of ideals focused on of SELF-fulfilment at the same time that social dysfunctions (eg family breakdown, poor ethics) have increased, and this (unless reversed) may eventually erode the economic strengths that Western societies have been able to enjoy because individual liberty has been socially and politically tolerable.

Australia's economy prospered initially by the discovery of valuable minerals (eg gold) and in the 19^th century Australia enjoyed the world's then highest income levels mainly as a supplier of agricultural commodities to European markets, combined with efficient government administration and service industries transplanted from Britain.

In the 20^th century, diversification into manufacturing industry was long promoted by governments by tariff protection and import replacement. These policies achieved practical results that unfortunately were quite unproductive economically. From the 1960s, external investment in mineral and energy resources was encouraged and boosted the growth of activities in which Australians continued to be unable to gain the competitive advantages required to achieve high economic productivity. During most of the 20^th century, Australians' relative affluence declined, though their economy remained significant in its region.

From the 1980's Australia began reducing government economic controls (eg by financial deregulation, reduced tariffs, micro-reform of government economic interventions to promote competition). The results included: initial instabilities in some deregulated markets; a more dynamic and flexible economy; and social / political stresses especially in economically marginalised regions. A dramatic improvement in Australia's performance has been widely proclaimed by advocates of economic liberalism - but that improvement has been associated with increased inequality and significant currency devaluation.

Australia has further to go in improving its approach to economic development, eg by:

• establishment of machinery to enable real development of industry clusters to be systematically and productively stimulated - particularly at regional levels;
• improving economic equality;
• inventing government machinery that is more appropriate for a post-industrial economy;
• strengthening regional relationships, and Asia 'literacy';
• environmental and ecological sustainability.

Australia's experience may provide a number of object lessons, such as:

• an open economy is more productive, but more demanding, than a closed economy;
• the (so called) 'resource curse' hypothesis can describe a real problem. Rich resources can encourage political and business elites to seek gains from their ability to facilitate foreign investors' access to those resources, while suppressing the leadership required to be effective in improving community economic welfare. Well-informed independent institutions can be needed to ensure that elites act in the real community interest;
• it can be difficult to think about or take effective actions to develop economic systems;
• attempts to use political power to improve economic systems can be counterproductive, eg by selecting idealistic rather than realistic goals, attracting the wrong type of people, and creating dependency. In particular government 'assistance' to business, which can have political appeal, can be the opposite of economic 'development' (ie of enabling other firms and the community to provide higher quality and more flexible support);
• copying economic / business models from elsewhere can be ineffective, if there is no allowance for the social, cultural and economic differences between those contexts.

Indonesia's Situation

The author has no expertise in the history or philosophy of Indonesia's approach to development. However all reports suggest that the present situation is difficult.

From documents available on the Internet it appears that the economy is officially analysed quantitatively, but does not seem to be analysed qualitatively in terms of how it works. And official programs seem focussed on building and providing inputs to a 'machine' whose ideal form corresponds to theorists' models. They do not seem to treat the economy as a human endeavour which needs to reflect the Indonesian context and to mobilise Indonesia's people.

Could it be that a different emphasis would produce faster and stronger results?

Might Indonesians better mobilise themselves economically by evaluating and strengthening those capabilities already implicit in their cultures, traditions and institutions to:

• acquire the information needed to create competitive advantages (eg by being near the leading edge in understanding the natural world, or having strong market linkages);
• manage economic transactions; and
• facilitate rapid changes to economic systems?

Moreover reform of the financial system to conform to IMF principles is a current necessity. This will tend to increase the role of money in determining and coordinating economic transactions and decrease the role of social relationships. This has some advantages, but can it be effective without attention to how it 'fits' into the overall Indonesian context?

Strategic Outlook

In considering approaches to future development both Australia and Indonesia face not only their respective internal challenges but also a difficult global reality. For example:

• rapid market and technological change, and increasing competition, require different and ever higher standards of economic performance;
• instabilities exist in the global financial system - resulting in periodic crises;
• global inequality is extreme - with 30% of humanity in grinding poverty and 20% in sometimes-unhealthy affluence;
• progress on resolving global and regional environmental constraints appears to be too slow. In particular recent accounts of serious Asia-wide atmospheric pollution suggests that the region's environmental policies and economic strategies need to be upgraded;
• UN machinery doesn't work effectively. The Bretton Woods triplets (IMF, World Bank and WTO) are promoting 'free market' solutions that do not in themselves create the capabilities required for economic success - and many are left behind;
• growing awareness about inequalities and differences in the preferred cultural foundations for a global order increase friction - and the potential for conflicts that can only make it more difficult to solve the above problems. A process to create a global order in which all may realistically hope to succeed seems to be needed.

29 August 2002
Notes Contributed to a Forum arranged by UKRIM in Yogjakarta (Revised version)