Wednesday, May 16, 2007

Just an Added Thought on Institutions

Firstly, I owed Berly for this brief essay, because while trying to answer his question, I end up with this too-long-comment-reply, of which was a good-productive thing though. And so here we are.

A complete institutional structure consists of three parts: Formal rules, Informal rules and Characteristics of rule enforcement. In my humble opinion, the main problem now is within the first one (Although I also believe there are several significant problems with the two other parts, but let me just emphasize in the first in this case) .

The general function of the formal rules is to enhance transactions on political and economic markets. In democracy (such as Indonesia right now), the exchange on political markets determine the economic rules. So then inefficiency in political markets will bring inefficiency in property rights, and inefficiency in the latter will eventually lead to socially inefficient organizations, increasing costs in transactions and then reducing the probability of mutually beneficial exchange through specialization within the economic markets. I think this is the updated problem in a newly-democratized Indonesia.

There is a very high transaction costs on political markets, because of little transparency of the political processes, little competitions among them, and the last important thing, is that we do not have the constitutions that brings the self-interested politicians in line with the creation of this efficient formal-economic institutions. A quite similar conditions also hold for Thailand and the Philippines, where military-feudal-based political interventions are still used up till now.

Let's then have an example for the latter point:
Right now the Assembly is busy drafting a bill on political parties, which includes one of the controversial articles regarding the possibility of Party Owned Enterprises. (What is this crap???!!)* Personally (again) I think this is an outrage.

Politicians are also always being self-interested and utility-maximizing agents. If constitutions do not align with the people sovereignty, politicians will not promote their economic interest in the course of pursuing their private goals. So it’s a necessity to restrict politicians constitutionally (Hayek). And that's what we’re lacking off. And as a now-democratic-state, it's remarkable that up till this point there are no efforts to propose such draft of constitutions. Well, this emphasized one of my points before of why institutions in Indonesia are still very weak, and hopefully this also can answer the question from Berly’s comment. Or maybe I shall make some essays discussing more about these institutional-constitutional frameworks later on. Happy Christi Himmelfahrt** holiday, and let me finish this essay with a quotation from Boediono, of which I quoted from one of Prof. Hal Hill paper: “‘Beware of possible disharmony between politics and economics.. Never take economic stability for granted... Institutions and governance should receive the highest priority in the overall strategy” (Boediono, 2005, p. 323, on lessons learnt)

* Please kindly ignore this author’s self-comment
** The ascension day of Jesus Christ in German words


Jennie said...

Hello, who wrote this posting? Could you kindly e-mail me? I'd like to ask a few questions on this interesting topic. :)


Jennie S. Bev
info [at]

anymatters said...

Interesting topic. Is that POE similar to Army OE in the New Order era?

Neruda Sophia said...

I still don't have a full picture about the POE. But if the bill passed, I think it'll be worst than the AOE (Army Owned Enterprises or Age Of Empires? I'll let you decide :P )

Berly said...

Great back-to-back post Joko.

But my question is still not adequately responded. Yes, Indonesia now has weak institution but how to improve it (in your term: reduce transaction cost in political market).

People respond to incentive, so what incentive structure need to altered in order to do it.

Hope this comment trigger another post :-D

ade said...

"Politicians are also always being self-interested and utility-maximizing agents.....
So it's a necessity to restrict politicians constitutionally (Hayek). And that's what we're lacking off."

I think our government actually is a group of politicians in acting. So, how can we expect that they will propose the bill to restrict their own lovely sovereignty?
Not to mention that the draft is subject to approval of another group of politicians in the House.

I'm sorry for being pessimistic. But hey, do we have a hope for good laws enacted by two selfish groups of politicians?