Can market capitalism, democracy, decentralization ensure civilization?

MARIA MONICA WIHARDIA – THE JAKARTA POST – 03 may 2011

Indonesia has thrived as a capitalist market economy since Soeharto's authoritarian regime collapsed amid the economic crisis of 1998, when it also moved to become the world's third-largest democracy and devolved its authorities to the regency/municipal level in a “big-bang” manner.

Despite the market capitalism, democracy and decentralization — all adopted with aspirations to improve social welfare (including non-economic welfare) — Indonesia has failed or at least has been struggling to become a civilized society. Is this surprising? Probably not.

But, there seems to be some misconceptions about the very meanings and aspirations of market-capitalism, democracy and decentralization, as well as about what they can and cannot do for us.

The first misconception is that capitalism does not need government intervention. Market-capitalism still needs governments to play roles in areas it does not cover, including public services in health, poverty-relief programs, natural disaster relief efforts and job creation.

These are called functional or neutral interventions when market failures exist. This type of intervention is to be distinguished from selective interventions to promote or prioritize certain economic activities such as high technology industries.

The second misconception is that self-interested behaviors will lead to optimality. Market capitalism and the “Invisible Hand” are generally understood to mean letting the market work without government intervention to reach optimality, and this is reached by the self-interested or profit-maximizing behaviors of market players following Adam Smith's “Invisible Hand” model.

However, a rational market player is not completely selfish.

This definition of “rationality”, which is often misconstrued as an all-selfish behavior, should be adjusted to include altruism and other factors.

Indonesia's efforts to fight bureaucratic corruption are often conducted by increasing economic incentives, although personal integrity plays a bigger role.

In other words, economic incentives are necessary, but not sufficient, and integrity should start from the very top leaders.

The third misconception is that market capitalism can excel without good governance, such as property rights and the rule of law.

Without good governance and rule of law, costs of market transactions and contracts become to too high, and investments cannot flourish (as argued by Basu in 2010).

This must also be supported by the value of trust between creditors and debtors, otherwise the lending market will not be optimal.

The absence of clear rule of law and property rights has increased the cost of transactions and hindered investment in Indonesia.

The country may be trapped as a middle-income country if it is unable move from relations-based institutions to rule-based institutions.

Similarly, democracy has been misunderstood by many laymen. The first misconception is the definition of democracy, and hence the aspiration of democracy.

The thinnest definition of democracy is people participating in regular, free and fair elections. This means that elected leaders are made accountable to voters.

However, as Larry Diamond argues (The Spirit of Democracy, 2008), any democracy should aspire to adopt the thick definition of democracy, called a liberal democracy.

At the moment, Indonesian democracy is simply an electoral democracy.

“Democracy means civilization,” said J. Kristiadi, a senior political analyst at the Centre for Strategic and International Studies. “But, so far Indonesian democracy is procedural, and not yet civilized,” he said.

The second misconception is that a strong leadership and democracy cannot coexist. An unstable coalition party system and the proliferation of new political parties, among other structural political issues, have made development messy.

The infighting within the ruling coalition, including over the Bank Century scandal in 2010 and the House right to investigate tax graft in 2011, are just a few examples.

A strong leadership is needed to manage these voices to get things done. Indonesia needs to think where it wants to go — and whether this presidential and multiparty parliamentary system can continue.

One of the aspirations of decentralization is to bring policies and public goods closer to people. But, there are growing indications that this aspiration may have completely failed, including the blossoming of new districts from 292 in 26 provinces in 1999, to around 524 in 33 provinces in March 2011.

The theory of decentralization often relies on intergovernmental competition (or “voting with one’s feet”) and democratic accountability.

However, because of striking heterogeneity among regions and immobility factors such as natural resources and labor, as well as intense local capture, this theory is inapplicable.

Under a regional autonomy regime where the central government does not have the power to discipline local governments any more, decentralization will only work if local participation and local accountability can discipline political leaders and local business elites so that local policies are not controlled by vote-buying and corruption.

One of the preconditions for this should be well-educated and politically informed citizens, which we still fail to see in many regions.

A strong civil society may be key to the success of decentralization. But, unfortunately, in regions with poor socioeconomic conditions to begin with, a vicious cycle may already exist.

Indonesia should aspire to become a free market economy in this globalized world economy, with democratic values to ensure people’s representation, and with decentralized administration because of the current bureaucratic hodgepodge.

Unless these misconceptions are corrected and constraints are internalized, it is throwing the very values of market capitalism, democracy and decentralization away.

**The writer is a researcher at the Centre for Strategic and International Studies (CSIS) and a lecturer at the University of Indonesia.