Nominal and actual objectives of economic policy making in Indonesia

Abstract

Indonesia's Constitution makes it clear that the government should act to improve the welfare of the people, but there is little indication as to how it should go about doing so. Economic science gives plenty of guidance on this, and there are two basic lines of argument used to justify a role for government in economic affairs: efficiency and equity. Casual observation suggests that the policies of successive Indonesian governments have done little to improve efficiency, falling well short of dealing adequately with clear cases of market failure. At the same time, the government frequently intervenes in the economy when it appears it should not-driven mainly by political motives rather than economic logic. Poor policy choices hold back national development, and harm the interests of Indonesia's most disadvantaged citizens. This study examines the hypothesis that economic policy making in Indonesia generally has been strongly inclined toward redistribution of income at the expense of the poor, and has shown little concern for overcoming instances of market failure for the benefit of the general public. It bases its contributions on case studies in three important areas of government intervention in the economy: provision of electricity and road infrastructure, and redistribution income by various means. The author attempts to look beyond the immediate, visible effects of a number of key economic policies so as to highlight their ultimate consequences: in other words, to distinguish between those consequences that are seen, and those that are not. The basic finding is that these policies have done little to increase general prosperity, since their main-albeit hidden-objective typically has been to redistribute income and wealth in favour of those already better off, rather than to improve economic efficiency. It is argued that there are two main reasons why the task of correcting market failures is largely neglected: first, a lack of understanding of economic science on the part of many policy makers and the general public; and second, the fact that political considerations dictate that the objective of policy making is to favour particular interest groups rather than to maximise the material well-being of the population as a whole. The thesis is motivated by the belief that it is important to engage with the general public in order to demonstrate that the actual objectives of economic policy are often quite different from its nominal objectives. The important task of those with expertise in the field of economic science, in particular, is to strive continuously to explain and justify sound economic policies and the economic principles underlying them. This dissertation is an attempt to do just that. Show more