Are vested interests always lurking behind Indonesian policymaking?

Photo by Flickr user Sanchaka Andiona Ryanto.
Photo by Flickr user Sanchaka Andiona Ryanto.

 

Indonesia’s economic policies are byzantine and unstable. Too often, however, poor outcomes are explained away with facile reference to “vested interests” – elites who advance their private commercial interests through privileged access to political parties and government officials. In fact, the idea of “mafia” – code for vested interests – is a common feature of public discourse in Indonesia. One need only open a newspaper to find reports about mafias in everything from garlic to natural gas trading. Unfortunately, hard and systematic data about these interests is much more elusive.

 

Vested interests can be anywhere and are a handy explanation for poor policies or deviations from the neoliberal, good governance path. Writing about post-commodities boom adjustments, Ross Garnaut, for example, notes: “the flow of easy money from mineral and coal resources into private hands during the formative years of democracy meant private wealth had excessive influence over economic policy.” This sounds highly plausible, especially considering the broad (and growing) array of politicians with coal interests, but is it the whole story?

 

It is certainly true that some Indonesian groups acquired coal assets following the Asian Financial Crisis, a time of low prices, flagging regional demand, and domestic political risk. The acquisitions came up aces in the 2000s when Chinese and Indian demand drove prices to the stratosphere, but has this wealth definitively changed Indonesian politics, and, if so, how?

 

Evidence suggests coal interests escape tax obligations but they are also subject to an onslaught of ill conceived, interventionist policy initiatives, including domestic market obligations, royalties, dedicated ports, and efforts to informally introduce production quotas. Instead, rather than explaining policy – often confused and counterintuitive – through the lens of vested interests, Eve Warburton highlights the importance of ideology. On the flipside, I argue that broad political economy factors are critical for understanding economic policies and reform.

 

Vested interests undoubtedly exist in Indonesia, as in any late capitalist society. They enjoy privileged access to bureaucrats, the legislature, the courts, and regulatory organizations. Corruption elicits permits, favourable regulation, and regional budget allocations. It is not clear, however, to what extent these vested interests actually drive policymaking. Perhaps instead it is just that they are better at responding to (or even hijacking) nationalist initiatives in an environment of legal uncertainty and policy flip-flops?

 

Consider recent minerals policy, which sought, including with an export ban, to prod miners to invest in domestic metals processing facilities. Supposedly the work of vested interests both home and abroad, the policy has resulted in little actual investment, while stopping commercial activity for two minerals, nickel and bauxite, that are in fact dominated by domestic miners. If this policy is indeed the work of vested interests it seems to have brought them little return on their presumed investment.

 

A more useful consideration for Indonesia’s continuing policy chaos is the state. The most effective states are impersonal, professionalised mechanisms for administration. Doing this well helps states to tax, provide public goods, and interact effectively with non-state actors. Effective states are connected to society and possess an internal coherence that prevents them from becoming a mere site for intra-elite competition.

 

Vested interests are not the underlying cause of state ineffectiveness. Weaker states perform poorly when rents are created, because formal rules cannot prevent elites from going to great, often destructive, lengths to secure them. Weak states suffer because marginal spaces allow informal processes and roles to thrive. These marginal spaces can be territorial – consider the circulation of rupiah banknotes in areas adjacent to the Malaysian border – or institutional, in the form of ad hoc policymaking and flexible legal norms. Weaker states rely on personalised pathways to deliver security, law, and public goods.

 

There are many examples of the state’s incoherence and preference for informality. The Supreme Court often simply ignores Constitutional Court rulings, such as one on final appeals (PK). Pertamina, the state oil and gas company, is forced to sell low-octane, previously subsidized petrol below market price – an arrangement the company’s own official describes as a “tool for maintaining people’s purchasing power”. President Joko Widodo’s premature groundbreaking ceremony for the US$4 billion Batang power plant was a result of project delays because the government declined to use its compulsory land acquisition procedures. It shows a state unwilling – or, more likely, unable – to wield administrative powers theoretically at its disposal.

 

These cases (and there are many more) demonstrate the tendency towards informal solutions for things states are expected to do – rule of law, anti-poverty spending, infrastructure. Illegality, a way of overcoming formal rules or procedures incompatible with the prevailing political economy, becomes (as Aspinall and Klinken argue) as inherent to the state as its formal, bureaucratic institutions. This is not just the result of greed or simply because of a complete absence or disregard for rules, of which there are plenty. Rather, rules are useful only to a certain point before a web of informal relationships and special exemptions take over.

 

It is not that rent seeking and corruption play no role in Indonesia, or that vested interests do not influence policy. As the Corruption Eradication Commission (KPK) has documented, the use of bribery to win projects or obtain favourable regulatory treatment is common. We also cannot deny “mafias” do sometimes obtain quotas or permits – and often benefit handsomely from distortions in the market. Instead, I question whether vested interests analysis is the most fruitful line of inquiry for explaining the full range of policy muddles attributed to them. That gathering data on vested interests is virtually impossible makes this question even more salient.

 

President Jokowi’s recent cabinet reshuffle and “massive deregulation” pledge has renewed hope that retooled policies and rhetoric may at last help governance triumph over the political oligarchies often identified as the root cause of policy dysfunction in Indonesia. But these explanations risk “hand waving” to support pre-formed conclusions that institutions are captured, politics corrupt, and vested interests rule. This is all plausible but we must also explain the times that we can only find losers all around and ambiguous returns from rent seeking. An overmatched, incoherent state is too often the real culprit for suboptimal economic policymaking.