Indonesia | Economics

Thursday, July 06, 2006

An open letter to Mari Pangestu, trade minister

Dear Bu Mari:

It has been a while. The last time we spoke to each other, I think, was when I volunteered an advice on places to avoid for electronic purchases in Jakarta. That was such a long time ago.

Today, however, I’ll volunteer an advice of a different kind. In part, this is my way of keeping my promise to be critical towards government policies, despite the fact that you – my senior and a good friend – are a minister. This has been a difficult promise to keep – in part because I empathise with the political struggles you faced as a minister but, more importantly, because I’ve been too busy with my own stuff.

However, when I heard and read that you will develop action plans for “10 priority commodities”, I felt that I had to write, despite the hesitation.

Surely, you understand why I hesitate: The idea of me giving you - Indonesia’s trade economist par excellence – an advice on policy seems like hubris on my side. My decision to write in the end suggests how concerned I am with these plans of yours.

The most obvious question with these priority commodities is: Why ten? Why not five? Or even 25? Were you intent on convincing others that the number chosen was not arbitrary, you would probably have more luck by picking a less-conventional number – say, 8, 11, 14, or 17. The number ten is too neat – leaving no doubt that it was chosen arbitrarily.

This might lead people to think that you also chose the commodities arbitrarily. From what I’ve heard, this was not so – in fact, you consulted some rather credible economists. The bad news, of course, is that having them chosen by economists do not ameliorate the potential problems associated with “picking winners” the economy (and you) will face in the future – in fact, it might make them worse.

Why is this so? It’s the political economy: By isolating ten commodities as “special products”, you will create a focal point on which players in these industries will latch on to. Since the economists choose “commodities with high growth”, in the years to come, it is quite likely that producers of these commodities will experience a high income growth. As their incomes grow, so will their collective bargaining power.

The real problem comes when these commodities are no longer worth supporting (if they ever are in the first place). Now that these producers have become strong, dismantling the special facilities granted to them will become extremely difficult. Indonesia’s more mature democracy in the years ahead will exacerbate this problem, as interest groups learn their trade. Isn’t this the expensive lesson of the common agricultural policy (CAP) in Europe?

I said that a random choice would have been better. If the choice was poorly made, you might find that those receiving special treatments might fail to achieve high income growth in the years to come – and hence, could not garner the collective bargaining power to protect their vested interests in the future. The future might be better off had the present choices been wrong.

Reading between the lines, I know that you did not envision a policy that provided special incentives to these industries. However, while it was you who sent the initial signal about “priority commodities”, you might not be able to shape how that signal be interpreted by the power that be. You say “comprehensive support”; business interests (along with other ministries etc.) say “tax incentives”. At the end of the day, political muscle will matter more than clear thinking.

At any rate, that is all for today. I hope all is well with your family. I will try to write some more about policies and keep the promise I once made.

Sincerely,
Arya B. Gaduh

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