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Introduction + Introduction

The purpose of this document make suggestions for Indonesia on the basis of generalized requirements for economic development, and of available information about the Indonesian context.

Reference is also included to related documents and to comments on progress in establishing sharia courts in Indonesia

Related Documents Related Documents

Forum on Development Policy: Comparative Study on Australia and Indonesia (UKRIM, Yogyakarta, 29/8/02)

Indonesia and the IMF

Can Asia Compete? (World Bank)

Some Strategic Issues - as seen from Australia

Ideas For Consideration


Assessing Advice

Indonesia will receive advice from many sources - including what follows here. In assessing all such advice it is suggested that:

  • care be taken to look for unstated (and perhaps unrecognized) assumptions that may be involved - because the experiences of other countries may have been successful or disastrous because of critical factors in the cultural, social, political, economic or administrative context which may be somewhat different in Indonesia.

    A specialist team to help in 'translating' any advice or suggestions into the Indonesia context could well be considered, and made accessible to authorities at all levels from the national government down to village headmen. A second step which could be useful would be to ensure that Indonesian people themselves determine how advice from other sources should be implemented in practice (with those providing the suggestions then encouraged to provide feedback on the outcome).

  • advice from Western economists should be considered by recognizing that it is not only likely to assume the existence of a Western style context, but will probably be concerned with creating a market environment in which firms may compete - but not with what is required for them to do so successfully. 

    For example, economists will seek to ensure that firms DO NOT gain market power (a permanently strong position in the market which would enable them to gain monopoly profits), whereas the goal of firms is that they DO gain market power (because this is the key to raising productivity). This apparent inconsistency can be reconciled by recognizing that SHORT TERM market power (through strategies to gain competitive advantages) is consistent with the goals of both firms' and economists' ideas about a market economy. 

    Furthermore some of the capabilities needed to compete successfully will involve economic 'systems' (eg see Towards A Comparative Study on Development Policies: An Australian's Notes on Indonesia's and Australia's Challenges). These may not be able to be created by the initiative of individual enterprises (because there can be a 'chicken and egg' problem whereby no element of such a system might be viable until all the others already exist).

    Thus issues of business strategy and the development of economic sub-systems on which the performance of individual firms depends are as important as issues of general economic policy. Australia's experience of the One Nation phenomenon (whereby those in marginal regions who had been left behind by economic change found leaders who promoted radical and disruptive policies) illustrates the problems that can arise from purely 'free market' economic solutions.

    On the other hand, practices that may be suggested by East Asian connections may be intended to enable firms to gain LONG TERM market power as instruments of national policy - a tradition which has weaknesses as well as advantages

  • advice from businesses will always be be tinged by concerns for the firm's own profit needs. It will also tend to be technically and financially sophisticated. Strong domestic sources of information which are equally technically and financially sophisticated (and which are neither biased for or against what may be proposed by international firms) are needed to allow Indonesia's leaders to make informed choices (eg in the civil service and civil institutions).
  • advice from NGOs will often reflect a political agenda which the NGO is pursuing irrespective of whether this corresponds with the real needs of nations such as Indonesia.

In particular organizations concerned with 'sustainable development' may have little knowledge of requirements for economic success and may promote solutions that they may believe would improve environmental outcomes, but which would be economically naive.

There is a plausible case that not all of humanity can ever 'modernize' (ie achieve living standards like those in the most developed nations) because of environmental and resource constraints. However there is also a plausible view that such pessimism ignores the lessons of history about effect of human ingenuity. The adverse environmental impacts of primitive peoples (through efficient hunting and agriculture) and of inefficient poor modern peoples also needs to be considered.  Indonesia needs its OWN informed understanding of what is actually sustainable and achievable. 

Making it Happen

Random (and not comprehensive) suggestions about how Indonesia might accelerate economic progress include:

  • systematically enhance the ability of leaders in Indonesia to have confidence in their ability to make things happen by emphasis on developing (say) effective legal systems, property rights, public services and machinery for providing infrastructure, as well as arrangements that ensure that economic initiatives tend to be market oriented;
  • focus on boosting the productivity of all sectors of the existing economy (agriculture, craftsman and services), rather than on:
    • the development of natural resources because: (a) production based on natural resources tends to involve undifferentiated commodities where it is impossible to gain much market power - so prices tend to be bid down to costs and economic productivity is low and (b) the Resource Curse hypothesis can be a real phenomenon (because, despite the potential benefits of the cash flow associated with commodities, emphasis on natural resource wealth can give high status to government and business elites who give poor leadership in developing higher productivity activities);
    • the development of a 'modern' economy as a separate entity as the latter can give rise to problems of inequality and of a purely artificial 'modern' sector;
    • a few special economic activities that government gets involved in or encourages - as the latter (a) raises many political risks and (b) can at best never have as much impact as steadily raising the productivity of the broad mass of the community. The community will always expect governments to 'do something' so there is always a need for economic 'projects'. However if the 'projects' mainly have the effect of informing, networking and stimulating existing firms and industries (rather than doing something separate) they will tend to be much less costly, and be of more economic benefit.
  • pursue increased productivity (ie increase economic value added - to fund higher wages; profits and net payments to government) by:
    • encouraging existing sectors to find ways to compete with high wage producers in other countries - rather than seeking competitiveness on the basis of low costs. Becoming competitive requires accelerated learning - not only by individuals and firms, but also in terms of economic systems;
    • emphasizing change (ie to gain temporary competitive advantages) – rather than simply seeking efficiency. In particular the risks associated with change must be socially possible - eg via some sort of 'safety net' for those whose risks turn to failures. A means for ensuring that changes are socially and environmentally responsible is also needed through checks and balances which promote good results most of the time, rather than by case-by-case decisions of authorities;
    • seeking knowledge (about markets / technologies) as being no less important than capital. Strong business services can be one way to improve the flow of information. World trade centers might be useful in additional cities to concentrate a critical mass of organizations able to improve access to  market intelligence and trade services;
    • using information technologies to allow constructive changes in the way production and marketing is organized; and
    • avoiding the use of subsidies to increase demand for local products - as this undermines productivity

  • encourage leadership by both individuals (eg entrepreneurs) and by community leaders to stimulate a supportive economic system which is not depend on centralized political support.  Leadership can be most effective in enabling systemic change if leaders pose important questions, and make it possible for others to find the answer - and for existing organizations to undertake new roles that may be required. A method whereby this might be achieved is suggested in Developing a Regional Industry Cluster - a method which would require adaptation to suit the Indonesian context. To promote equity, it is presumably desirable that such processes involve participation by a diversity of people with potential, rather than those who are already the most successful and powerful;
  • similar methods can be used to increase the economic benefits of significant investment projects - through allowing possible synergy with other's plans and interests to be discovered;
  • ways of financing of the development of economic systems might be found by recognizing that such development will increase business and community incomes, and that this in turn will lift land values (as land values are related to the incomes of individuals and business in their vicinity). Thus the gains which holders of strategic land assets might achieve could motivate them to support accelerated development;
  • take the environmental challenge seriously, as it is very obvious that low environmental standards are not a sustainable option in Asia (see Asian Brown Cloud). There will be significant market opportunities for practical solutions to environmental challenges.  If Indonesia were to accept low standards in any respects (in terms of growing global environmental / energy challenges) then it would perpetually remain in a 'catch-up' mode;
  • encourage demand for slightly more advanced goods and services that can be provided internally. For example, could contests be arranged to identify and publicize the best 10 innovations in various typical neighbourhoods that would that create better living conditions for people? The goal would be to create the demand (and awareness by potential domestic producers of that potential demand) for incrementally more advanced goods and services that could be provided domestically - and perhaps then have export potential.

Considerable further elaboration and explanation would be necessary to justify any of the above suggestions - quite apart from assessing their relevance in the Indonesia context.

Indonesia and the IMF

Available documents suggest that:

  • the policy agenda which has been adopted to comply with requirements for obtaining IMF financing amounts to a systematic process of 'bankruptcy' for many Indonesian institutions to dispose of their unsustainable financial obligations, and create a new financial system on Western principles;
  • the IMF has a plausible set of concepts of what is required for monetary and financial stability which are being promoted globally (even in China which currently remains the most remote from practical application of those concepts);
  • decentralization of political and economic power has been seen as an important corollary of reforming Indonesia's financial system - about which further comments are offered below.

The process of clearing out unsustainable financial obligations is also resulting in the loss of Indonesian ownership and control over many assets. However it is difficult to find an alternative, because (as seems to be shown by Japan's experience) long term economic distortions can arise if, in order to protect a particular political elite, unsustainable financial obligations that are not written off quickly.

The IMF's concept of requirements for monetary and financial stability are based on Western cultural traditions which may not easily fit in an East Asian context (see Understanding the Cultural Revolution). These difficulties are unlikely to be recognized by IMF economists because of the epistemological gap which exists between their world-views and those in East Asia.

As far as Indonesia (which has been the recipient of cultural traditions from almost everywhere because of its geographic location) is concerned, it is unclear how such a system will 'fit' - or in fact what viable alternatives may exist.

An Indonesian Model?

Some of the issues that could be considered in evolving an 'Indonesian' economic model include:

  • the practical requirements to effectively manage economic transactions and to change economic systems, and the limited numbers of cultural traditions through which methods to achieve this have yet been found (see Towards A Comparative Study on Development Policies: An Australian's Notes on Indonesia's and Australia's Challenges)
  • the ideals upon which the Indonesian nation was founded;
  • the diversity of Indonesia's cultural traditions;
  • the apparent failure of the current global order to resolve problems of inequality and environmental degradation - which means that no one can claim that any perfect model can yet be identified;
  • whether an Indonesia economic model would be designed to benefit all (the ideal of Islamic and Christian religions) or of particular ethnic groups; and
  • the role of both traditional community leaders and of elected representatives.

In evolving an 'Indonesian' economic model there might be value in:

  • identifying and evaluating the effects of the ways in which economic influence is exerted (eg via friendships, networks, formal authority, media, politics) because constructive economic change requires effective means for influence;
  • making the conclusions of such research widely available on the understanding that nothing is expected to be different overnight.

Decentralization of Power

Decentralization of economic and political power (to provincial and district governments) is a major priority for Indonesia's national government as embodied in 1999 legislation, and there are indications of provincial uncertainty about whether this is advantageous. Decentralization is creating a complex process of administrative change which absorbs a great deal of government effort. Moreover the national government is losing its ability to influence social development.

In Australia's case decentralization of political and economic power (through the states) has:

  • contributed to political stability - because political problems that arise in one region do not affect all, and when a political crisis affects the national government there is no sense of crisis for Australia's system of government generally; and
  • been associated with complex and unbalanced federal - state financial relationships (ie with most tax revenues centralized and most spending responsibilities decentralized). This has resulted in positive features (ie fair regional equity). However it has also: made it very difficult for states to take all the infrastructure initiatives that might have been needed especially in the 1980s and 1990s; and encouraged in some cases the pursuit of economic outcomes which maximize state revenues but may not be optimal overall;

In Indonesia's case advantages of decentralization have been said to include (a) meeting regional demands for more say and (b) more efficient delivery of services and efficient taxation. Undoubtedly such advantages will exist to some degree, however:

  • if regional autonomy is to be balanced by greater national cohesion, it might be useful to consider also a new 'national' movement to explore ways that the ideals which are the basis of Indonesia as a nation can be given appropriate practical expression;
  • there is no guarantee that the complex reform process designed to balance responsibilities and financial capacity will produce practical outcomes. In Australia's case, complex politically motivated and financially driven reforms of public administration in the 1990s have often been associated with a serious loss of administrative skills and consequently with as much pretense as performance because political and financial criteria allow overly simplistic thinking about what is required to dominate. 

Other factors to consider in relation to decentralization in Indonesia might include:

  • the apparent concentration of decentralized functions and finance in districts while provinces have a coordination role with respect to districts but no hierarchical authority over them. This may ultimately mean that the provinces hoped-for coordinating role will be ineffectual;
  • decentralization may be of some advantage in term of economic management, because:
    • just as Indonesia may find value in its own 'model' for managing economic transactions and changing economic systems so different regions with unique cultural traditions (eg Bali) may need to find somewhat different solutions;
    • resource based economic strategies - which can have considerable political and personal advantages to political and business leaders whilst not being effective in achieving a modern economic structure - can not be relied up in ALL of Indonesia's regions;
  • the effectiveness of decentralized administration ultimately depends on the quality of the inputs and support that administration receives from the civil service and civil institutions - so there is always scope to improve the effectiveness of such administrations. Arrangements such as those suggested in the ‘South Land Connections’ project proposal might be considered as a means for enhancing civil institutions

However the major gains from decentralization that Indonesia might achieve may not come from differentiation in government administration but from differentiation of product and services, as the capabilities of Indonesian artisans appears to significantly exceed the current rates of remuneration they receive. The problem seems to be that (a) many produce similar products and thus all lack market power and (b) those products and services tend to be determined by tradition rather than by information about market demands.

Vision for a ‘New’ National Movement (Draft)

The following might be considered as a provisional vision.......

"Indonesia has a history that its people’s can be proud of. Even centuries ago, many of its peoples had reputations for commercial skill and for a culture which recognized that there is a lot more to life than success in business. Given the reality of humanities' challenges (with the environment and social inequalities) these traditions are likely to be highly advantageous in the years ahead.

Indonesia is strategically positioned for trade at the junction of the Pacific and Indian Oceans – and has become the home of people and ideas from all over the world. From this history Indonesian’s have learned both the difficulties and advantages of differences and some of the art of tolerance – and have ideals which stress the importance of the welfare of all peoples. And Indonesians perhaps more than any other people have access to an insights into the ideas of virtually all of humanity – and so the ability to experiment with what works best.

Indonesia is currently a land of unfulfilled potential

Indonesia is not at peace in its spirit. Many of its people do not live well. They have become the servants, rather than the master of money. Indonesia has been losing its reputation for tolerance – and the respect of some neighbours and the world. Some peoples have become disaffected to the point where they do not even wish not to be part of Indonesia.

And the world is also not at peace because of many of the same economic, social, cultural and environmental stresses which have affected Indonesia. Thus in finding practical solutions to their own problems, Indonesians will almost inevitably provide useful leadership for the 2/3 of the world that has the most to gain. 

In order to become the master rather than the servants of money, Indonesians must learn the art of changing their organizations while respecting the importance of increasing their spiritual, social and environmental values.

The motto of the 'New' National Movement is that ‘Indonesia can do it’ (ie the solutions will come from inside not outside) "

Notes on New National Movement proposal

The above is a preliminary proposal which would need to be developed properly by those with real knowledge of Indonesia – which the author lacks. The skills required for developing vision are broad knowledge of the world, and some knowledge of the people for whom vision is to be appropriate

National leadership could then:

  • Consider the proposed new national movement vision and amend it as appropriate;
  • Commission detailed studies of what would be required to achieved the vision by technical experts – both domestic and international;
  • Invite communities, businesses and other organizations (a) to arrange for the results of those studies to be analyzed with a view to identifying the most desirable ways to implement them, and (b) to report back to provincial governments and to a national committee who task is to fairly present a report on the people's conclusions
  • Encourage initiatives to be taken which are allowable under existing laws
  • Evaluate desirable changes to national laws which would allow the movement to be even more effective – and recommend this for consideration by national and provincial Parliaments.

A Lead Role in Setting Global Directions

In some respects Indonesia, which incorporates people and ideas from almost everywhere, is the whole world in miniature - and especially that 2/3 of the world which suffers the greatest difficulties. If Indonesia can rise above the problems that beset it, then there is hope for all. Can Indonesia empathize with, and rise to provide leadership to others who face similar challenges?

Who is going to provide leadership to the world?  The USA, the world's most powerful nation, can’t as it is introspective, and doesn’t yet really understand. It must be respected and educated by translating issues into a form that its people can relate to - but it doesn't seem able to lead.

Indonesia would probably be respected (and gain support from many different areas) if it not only demonstrates its people's determination to meet their challenges but its leaders raise serious questions about the nature of a future global order in international forums. Proposals for a New Manhattan project suggest one way in which that question could be explored in practice. Other and better ways could undoubtedly be devised.

Indonesia has already taken the initiative in proposing a SW Pacific Dialogue with a view to promoting joint discussion of challenges facing countries in its immediate region (Callick R. 'Regional stability focus of new forum', FR,  4/10/02).

Discouraging Pointless Extremism

A separate document, Discouraging Pointless Extremism, considers the motivations of radical Islamists and suggests that the best way to deal with all extremists may be to seriously seek out the ideas that their 'spiritual leaders' have about solutions – and have those solutions subjected to detailed assessment by a ‘jury of their peers’ after inputs to those peers by reputable experts reflecting many different shades of opinion.

How Others can Help - Suggestions that could be included here will be appreciated

  • money that can be provided to small loans funds;
  • Australia could help Indonesia by offering free trade access to all goods imports (Mitchell A 'Our trade can aid Jakarta', FR, 6/11/02);

  • Australia could help by providing guidance in the establishment of effective economic, legal and governance systems [1]

Unifying Religion and State in Indonesia

Unifying Religion and State in Indonesia - email sent 8/12/10

Tim Lindsey
University of Melbourne and

Cate Sumner
Indonesia Australia Partnership for Justice Transition
c/- Family Court Australia

Re: ‘Real Islam’ in action in Indonesia, The Australian, 8/12/10

Your article drew attention to the constructive role that newly emerging religious courts are playing by making access to justice affordable in Indonesia.

I should like to caution that, no matter how useful such progress may seem to be, such courts reflect the official state control of religion in Indonesia. While lodging ultimate religious authority in the state (eg via the establishment of sharia law) is one of the ideals of Islam, it is also arguably a major factor in the political and economic failures that have plagued Muslim dominated societies for centuries, and thus a likely obstacle to Indonesia’s effective modernisation.

The separation of church and state has been uniquely possible in Western societies because of the Christian expectation that moral interpersonal behaviour would be promoted effectively by individual consciences responsible to God. And that separation has been critical to the individual liberty that has had many political and economic advantages (eg by reducing social and political constraints on the ongoing initiatives required for the changes that are vital to economic prosperity) - see Cultural Foundations of Western Strengths (2001).

However under Islamic traditions it seems that the morality of individual behaviour is expected to be enforced by communal pressures (ultimately and ideally by the state) and this has created serious obstacles (through a form of communal oppression of individuals) to the initiative and constant change that economic prosperity requires (see Islamic Societies in Competing Civilizations).

There is a great deal to be gained through working in collaboration with Indonesia in the development of its institutions. However there is a need also to be aware of the adverse consequences when states take the role of religious authorities. Some speculations in 2002 about the challenges of Indonesia’s development (and the importance of enabling change to achieve this) are on the present writer’s website, and may be of interest.

John Craig