On Economic Development
Bryan K. Ritchie
James Madison College (Michigan State University)
My analysis of the upcoming election explores the relationship between political institutions in Indonesia and economic recovery. In particular, how will a continuation of Indonesian democracy influence economic development?
The literature on the direct relationship between democracy and economic growth is ambiguous at best. Empirically, however, five years of democracy seems to have done little to extract Indonesia’s economy from the wreckage of the Asian Financial Crisis. This enduring stagnation has led to growing pessimism in the run-up to the next general election.
New and compelling research, however, suggests that democracy might impact economic growth indirectly through the provision of public goods, especially health care and education. Drawing on market models, this view argues that democracy's competitive pressures limits states' ability to garner and distribute monopoly rents to themselves and a narrow band of supporters.[1]
Yet clearly Indonesia has not benefited even from these indirect salutary effects of democracy. Thus, while democracy is a valuable end in itself, it does not always yield more capable states. Democratic competition might inspire improved institutional performance and increased public provision when it helps induce elite vulnerability, as seen in contemporary Thailand. But where ruling elites develop such a stronghold on power resources that they can preserve power without building better institutions, as we see in the Philippines, the “invisible hand of democracy” fails to deliver the goods.
We should therefore not assume that democracies are the most effective way to constrain ruling elites, even indirectly. My position is that the interaction of coalitional structure and political institutions can create constraints and incentives that simultaneously promote policy flexibility and credibility/stability while limiting opportunities for rent-seeking better than democracy alone. That is, the way one implements democracy matters.
My argument is that democracies in developing countries are most effective when centralized parties and legislative institutions are coupled with broad (cross-class) and deep (highly participatory) coalitions (those upon whom the ruling elite depend to stay in power). Institutional centralization encourages decisive and flexible policy processes. High levels of participation in the policy process by members of the supporting coalition create incentives that discipline and constrain centralized ruling elites. By bearing a portion of the costs of the policy process, coalition members are monetarily, emotionally, and ideologically committed to a particular policy. In effect, by soliciting the active participation of coalitional actors the government binds its hands. Although it can unilaterally change policy, it cannot do so without the risk and costs of alienating its support coalition. The broader the coalition, the more likely policies will be public regarding.
Consider Indonesia’s neighbors: Thailand, the Philippines, and Singapore. In Thailand a highly fragmented party and parliamentary system coupled with a narrow but participatory coalition of primarily business interests ensured that policy processes would be indecisive and tailored to special interests. The exceptions prove the rule: policies insulated from the rough and tumble of fragmented parliamentary politics and that also had the support and participation of a broad coalition, such as macroeconomic policies, have been notably successful. Similarly, the combination of Thaksin’s growing political centralization coupled with the same narrow participative business coalition has resulted in growing policy decisiveness and credibility, although the benefits accrue to an equally narrow and favored group.
In contrast, creating either political centralization or participative coalitions in the Philippines has been difficult at best. The results have ranged from “booty capitalism” and near meltdown to extended stagnation. In spite of recent improvements in government coherence, patterns of exclusion and fragmentation continue with predictable results.
Singapore, despite its non-liberal and pseudo democracy, is perhaps the best example of centralized party and legislative institutions coupled with a broad and deep supporting coalition. Interestingly, it is Singapore alone among these three cases that passed flexible, decisive, and credible policies to avoid the worst of the Asian financial downturn. Unlike Thailand and the Philippines, a broad, relatively participative coalition (anchored by labor) helped direct and implement key policies.
My conclusion, then, is that Indonesia needs more than democracy, per se, to kickstart its economy. While democracy in Indonesia might reflect broadening and deepening coalitions (although this is not clear), the corresponding structure of the political institutions also matters. Upcoming elections might not change anything in terms of economics if steps aren’t also taken to restructure political institutions, such as the ability of parliament to form strong policy majorities. Yet only creating centralized power structures—such as Lee Kuan Yew has done in Singapore, Mahathir in Malaysia, or increasingly Thaksin in Thailand—is vulnerable to a lack of credibility without the simultaneous development of broad and deep support coalitions.