Saturday, March 23, 2013

The urgency of economic democratization


The urgency of economic democratization

Ratih Hardjono, Jakarta | Opinion | Mon, February 25 2013, 10:21 AM

Paper Edition | Page: 6
One only hopes that Indonesian economic policy makers were listening carefully to the speech of Christine Lagarde, the managing director of the International monetary Fund (IMF), at the World Economic Forum held in Davos in January 2013. Lagarde did not mince her words in the excellent speech she delivered on why policymakers must start addressing economic inequality.

“I believe that the economics profession and the policy community have downplayed inequality for too long,” she said, adding that “surely we have all learned by now that it is no longer enough to focus on growth alone. We need all people to share in rising prosperity.”

Lagarde went on to say that “a more equal distribution of income allows for greater economic stability, more sustained growth and healthier societies with stronger bonds of cohesion and trust.” At the same time, she pointed out that youth and women play a crucial role in economic growth.

Lagarde’s approach is certainly different from that of Michel Camdessus, who was IMF director in the days of former president Soeharto, when the latter was accused of being recalcitrant. Things have changed at the IMF.

One way to measure economic inequality is to use the gini ratio. In 2011, Indonesia’s gini ratio was 0.41, which means that 1 percent of the population held 41 percent of Indonesia’s total wealth.

The number looks even worse if the household gini ratio is considered; the ratio of 0.65 means that 1 percent of Indonesia’s households control 65 percent of the wealth of Indonesia’s households (Kompas, Oct. 30, 2012).

In 2011, an Indonesian NGO calculated that, based on a gini ratio of 0.41, the wealth of the 40 richest Indonesians is equal to that of 77 million Indonesians.

The thinking that economic growth without equality leads to instability is not new. As early as 1910, president Roosevelt was already concerned about economic inequality when he declared that the US federal government had a responsibility to promote equality of opportunity and to attack special privileges and vested interests.

Perhaps the book written last year by Nobel Prize winner Joseph Stiglitz, entitled The Price of Inequality, spurred on discussion of this crucial issue, which so many had been avoiding.

In Davos this year, Stiglitz told an elite audience that the richest 1 percent of Americans now hold 25 percent of the country’s wealth and that this was causing all sorts of social problems, especially among young people, in the US.

An in-depth and well-researched report by the weekly The Economist last year focused on economic inequality. Its 25-page coverage on the issue investigated the widening gap between rich and poor and found that inequality was one of the most serious social, economic and political problems that the world was facing.

The Economist quoted the Asian Development Bank, which has argued that if income distribution in emerging Asia had not worsened over the past 20 years, the region’s rapid growth would have lifted an extra 240 million people out of extreme poverty.

This is something for all of us Asians to think about!

The Economist stated that the close links between politicians and plutocrats or government by the wealthy meant that cronyism was established and that this was the most obvious way in which Asian governments have made inequality worse.

This was because businessmen who are politicians have insider access to land and natural resources and to government contracts. The Economist pointed out that cronyism must be curbed, particularly in emerging markets, as a freer financial sector with market-driven interest rates will remove a potent source of income concentration and economic distortion.

Education is a crucial factor in reducing income inequality, as can be seen in Latin American countries. Government spending on secondary education has led to an increase in the literate and schooled workforce, which is then able to work in a modern economy that is very much driven by technological innovation.

The Indonesian government is still fixated on economic growth. This kind of thinking is reflected in a 2012 publication by the McKinsey Global Institute called The Archipelago Economy: Unleashing Indonesia’s Potential.

The McKinsey Institute has been a consultant to the Indonesian government and claims that it helped the government “to better fulfill [its] mission to the public” (McKinsey website). The focus of the report has been economic growth and the ways in which to ensure further growth to attract investment.

The McKinsey publication states that Indonesia today is the 16th largest economy in the world. There is a smattering of discussion on inequality in the publication but not much; instead, the focus is on economic opportunity and on the fact that Indonesia has a young population, which will be powering future growth in incomes.

This is true. Indonesia today is also the fourth-most populous country in the world and 44 percent of its 240 million people are under 24 years of age.

A tsunami consisting of a large youth bulge is about to arrive in our employment sector. As Lagarde pointed out in her speech, “Inclusive growth must also be job-rich growth,” in which a strong dimension is youth employment.

Indonesia is in the grip of large-scale corruption that is eating into our economy and can be likened to a cancerous growth.

As for the 20 percent compulsory government spending on education, which directly affects our youth, how much of this spending really goes into powering knowledge and skills among our young people and how much of it
becomes operational costs for our bureaucrats?

The Indonesian government can get the McKinseys of this world to give advice and help plan greater efficiency and effectiveness, but the crucial test lies in implementation. Let’s stop all the image building, spinning of statistics and political pitching.

Just get on with it and implement plans properly and effectively, because this in itself would be a major achievement.
The writer, a former journalist, is secretary-general of the Indonesian Community for Democracy (KID).
http://www.thejakartapost.com/news/2013/02/25/the-urgency-economic-democratization.html

1 comment:

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