Tuesday, May 15, 2007

A Brief Institutional Analysis of The Cabinet Reshuffle

„....creation of new rules does not in itself immediately produce new stable forms of behaviour… while rules can change overnight; individual responses will be much more complex and slow to adapt.”

These quotations from Douglas C. North, a profound institutional economist, were the first thing that came out of my mind when I heard that the President finally announced his cabinet reshuffle. So what’s exactly this quotation mean? And what are the relations with the Cabinet reshuffle? Well, we shall proceed then, and I hope I can briefly explain my intentions.

So here it comes. I believe that
institutions in Indonesia are still weak. And so what is institution anyway? In this sense, let me once more, quoted from North. He clearly point out that institution is the rules of the game. Institutions are humanly devised constraints that structure human interaction, or moves of the game. It’s the circumstances that make self-interested-homo-oeconomicus constrained with bounded rationality chooses their optimum pay-offs. In this part, let me generalize and simplified institutions as regulations, so that I meant that regulations in Indonesia are still very weak. In developed countries, each regulation is a prime and clear signal to the market or individuals, more than the person who is (politically) in charge, endorsed or made the regulations. But in Indonesia, it’s vice versa, as people seem more interested in who’s in charge. And I’m not going to blame them, because that’s how it works. New minister, new regulations, and that’s all what they believe for the truth. And if it’s true, so what’s the fuss about reshuffling? New regulations will bring new complex frameworks of social interactions associated with more uncertainties. And in the sense of institutional economics, this will eventually lead to higher transaction costs in the expense of economic performance and growth. And this is what the quotation is all about (and for the sake of the readers I shall not write it again).

In Indonesia, new ministers could (eventually) mean new regulations, and if they are not in the footsteps of the old ones, they are a step back. We can obviously saw the disputes about regulations among the ministers not so long ago. And replacing the ministers is not the answer. I’m sure that we will see more to come. And this is what will happen if reshuffling is only a case of political adjustments. Reshuffling is OK, but regulations, if they were agreed for common sake, let’s say of those which normatively maximize social welfare, should be kept intact.

And so let’s go back to the general analysis of institutions. In the case of newly-democratized Indonesia, it is important to recognize that economic development alone will never adequate and should always be paired with institutional development and awareness. In general, modernization is defined as process of improving the capability of a nation’s institutions to meet increasing and different demands. And thus a modern nation is one in which the institutions are able to meet or adequately handle the increasing and different demands made on them. Growth in economic development is change, and change is inherently “destabilizing”, especially in the era of globalization where domestic issues and international challenges can no more be separated. Altogether, there is one important future challenge for Indonesia; on how can it adopt changes due to socio-political pressures needed for a successful economic development, and thus learn that institutions do matter.


berly said...

In Asean (particularly Malaysia, Singapore and Brunei), we saw that the rule of the game is almost completely lay down by previous strong ruler (Mahathir, Lee Kuan Yew, sultans).

It is facts that our early Presidents did not emphasize rule of the game and constitutionality. People are continously looking for short cuts and internal people (orang dalem) instead.

So what is your suggestion to strenghten institution and rule of the game in Indonesia?

Anonymous said...

I think the most important institution is the property right. :)

Yudo said...

British say "we rule the waves". Indonesians say "we wave the rules" :-)

Neruda Sophia said...

Yudo's point is quite true for Indonesian I think :)

Well, I also have another one about politicians though:

In Singapore, they will always say that they have the rules and also have the discussions about them.
In Thailand, they will always say that they have the rules, but they don't ever discuss them.
In Indonesia, they will always say that they have discussions, but they don't the have rules.

Cheers :)