On Indonesia and its development
Prescript: This is originally an answer to a Quora questions. Link.
Recently I’ve been reading about Indonesia‘s underwhelming development and I found that there is a disproportionate attribution of causes to those that are cultural in nature. While I do believe that they could absolutely be the reasons that underpin the underdevelopment of Indonesia, a derivation of corresponding technical issues from it will provide us with more concrete steps from which we can build upon. A country cannot pick itself up purely by recognizing cultural/behavioral issues (although it is inevitably the first step), it’s too massive of a system to expect nor demand for a collective change in mindset. Macro policies are a hard-set requirement in effecting meaningful change.
I will emphasize to the reader though that a system with this much variable will inevitably lead us into a narrative fallacy (which is basically a qualitative representation of implementing simple linear regression on a multi-variable system), but unfortunately the real world is not ludic in nature. There will always be aspects unaccounted and consequences unintended.
Misattributions
Before we get to answering, I will segue a bit to factors that are often wrongly attributed to the failure of a country (and is a pet peeve of mine);
1. Apathy as a consequence of climate/land fertility/location
Stark difference in adjacent towns (one in Mexico, the other in the US)
A study was done comparing two adjacent towns in North America. These towns were historically from the same origin, same culture, same location, same people. At some point in time, they were separated. One ended up in Arizona, the other in Mexico. The Mexicans made 3 times less money and have lower parameter in general (life expectancy, etc). This study concludes that geographic factors does not account for the divergent path both these towns took meaningfully. To go into greater detail on this particular study, I highly suggest reading through “Why Nations Fail”, Acemoglu et al.
The narrative of Indonesians being apathetic due to its fertile lands/pleasant weather is a cliched exposition and it reduces Indonesia’s hundreds of years of history to what I’d opine is a very lazy explanation.
2. Too much social decorum
Our northeast asian neighbors, guess which one.
In the same vein, I’ve often heard Indonesian’s indirectness or respect for hierarchy being associated with Indonesia not progressing significantly. A simple glance at our more fortunate friends in north-east Asia will easily refute this explanation.
Core issues
Going back to the core issues, from a more technical approach these are what I believe the main reasons why Indonesia is underdeveloped, along with a rough explanation and -what in my opinion- is its corresponding curative policies;
1. No land reform (or essentially no solid agriculture foundation)
A somewhat amazing revelation was made in correlating certain policies with a country’s future success and it is that of land reform. Northeast Asian countries did it, Britain did it, and we all know how they ended up. Land reform basically reassigns excessive land holdings of particularly big landlords to the people in order to maximize agricultural yield and stabilize conflicts. It’s quite unfortunate that we did not get to do this in the early days of independence (unlike the countries mentioned). If we did have a go at it today, I‘d be hard pressed to imagine any of this happening in a peaceful and practical manner. A solid agriculture foundation is essential for a country to transition to a more robust manufacturing economy and drive initial consumption. Indonesia has never established it staunchly, and it has haunted us until now.
2. Submission to contemporary western dogma (unreined free trade)
It is a generally accepted principle in the contemporary world that free trade is how a country is supposed to drive the economy. While this is certainly true, a trade imbalance will be unavoidable, as developed countries posses a very large edge to countries like Indonesia. Germany, Japan, and the US in its early days for example, recognized the importance of nurturing infant industries*, and now free trade is of course the preferred method for these mature economies to grow.
While I do not believe that the free trade guidance given by developed countries or the World Bank are malevolent in nature, I do think it is misguided. Basically, Indonesia should groom firms with export potential, culling those that do not perform and growing those that does. How? Devise protectionist policies that assists in growing domestic firms with strategic manufacturing potential in hopes of conceiving our own Mitsubishis and Hyundais.
*trivia: the term infant industries is coined by the now pop-culture famous Alexander Hamilton
3. No export discipline (rent-seeking)
As an extension to the previous point, these protectionist policies should be applied sparingly and geared towards exports, that is, it should only benefit firms that can compete in the international stage in order to avoid rent-seeking. Protectionist policies will inevitably bring about a competitive edge and motivate firms to compete only domestically so as to maximize its returns while avoiding perceived unnecessary risks. Appropriate policies such as prorated benefits in accordance to export revenues, etc. will avoid these loopholes and maximize a country’s developments.
4. Extractive institution
An extractive institution are those designed to extract certain resources for the establishment’s benefits. An exemplary institution in this regard is the Indonesian government left behind by the VOC. A parallel can be drawn to the exploitation of the Mexican people, where the system created by the Spanish (which is basically a dressed up version of the slavery system Mexicans already had in place) have taken root to this very day. Conversely, the US for example, do not have a history of extractive institutions. The indigenous population did not have any system of slavery in place and the settlers were incentivized to go there by being provided land in return.
Now this issue is a bit finicky, in that I have not seen anything resembling a reliable solution. Change in this regard is commonly a result of war and political turmoil (civil, world, you name it).
A closing note
Do I think this is the optimal answer?
No, and probably no answer is. To echo what I’ve striven to emphasize, a large system is not ludic in nature, no model can ever hope to provide us with a foolproof solution (at least before the AI’s rise in power :). An empirical approach driven by constant and agile experimentation is the way to go.
However, a sensible and timely game plan founded on facts has never hindered any endeavor.