Economic and political transition in China and Indonesia

Author: Sherry Tao Kong, ANU

China and Indonesia are two of the world’s largest countries. Combined, they account for nearly 30 per cent of the developing world population. Surprisingly few studies have put them side by side, even though these two Asian giants share comparable political and economic growth experiences over the past 60 years.

The initial conditions of China and Indonesia can be described as those of underdeveloped agrarian economies.

At the founding of both republics, each had political institutions dominated by their respective charismatic leaders, Sukarno in Indonesia and Mao in China. The rule of each of these leaders ended in economic disasters where development was severely set back. In the aftermath, both countries embarked on a journey striving for economic prosperity. As a result, both economies subsequently experienced decades-long rapid economic growth combined with deepening integration into the global economy.

Up to this point, the two countries shared remarkable similarities in their economic and political development. The Asian financial crisis in 1997-1998 changed Indonesia’s economic and political landscape virtually overnight. Indonesia was one of the worst casualties of the krismon (monetary crisis), and the resultant economic disaster severely damaged the legitimacy of the New Order regime, eventually triggering President Suharto’s political demise. This in turn catalysed a swift transition in Indonesia characterised by deep political and economic decentralisation. During the 10 years since this ‘big-bang’ reform occurred, Indonesia has displayed modest yet positive economic growth, dealt with major separatist movements, and established arguably the most democratic state in the region.

China, by contrast, was much less affected by the Asian financial crisis. It kept its economic development in the fast lane with an average annual growth of 10 per cent and maintained a seemingly unchanged political landscape. Yet China too has unmistakeably become less authoritarian over the past two decades. To an increasing extent, the government delegated responsibilities previously exclusive to central or provincial governments to other economic and social actors. In the absence of fundamental change to its political structure, China’s political institutions have evolved into what is often referred to as ‘fragmented authoritarianism’.

Against this backdrop of hard-earned optimism, both countries are pursuing their long-term development goals.

The Indonesian economy is driven significantly by domestic consumption, which arguably sheltered Indonesia from unfavourable external shocks during the recent global financial crisis. In the long run, Indonesia aims to be better integrated into regional production networks and the global economy. However, some of its long-identified impediments to development, such as infrastructure deficiency and pervasive corruption, remain to be addressed. To assess these economic challenges, one needs to view them in the context of politics and institutions.

As democracy deepened, political strife in Indonesia shifted up a gear, bringing political contests into the open. Two major events occupied the Indonesian domestic political stage over the past 12 months, the KPK (Corruption Eradication Commission) saga, and the case of Bank Century. The KPK affair eventually ended with the final clearing of two troubled KPK senior officials. The Bank Century case cost Indonesia a very capable finance minister and resulted in the regrettable departure of a number of key macroeconomists.

What does this suggest about Indonesia’s reform path? The Bank Century case may be seen as the somewhat understandable outcome of the fact that the government is still a so-called ‘rainbow coalition’ and that President Yudhoyono’s Democrat Party remains as a minority in the lower house of parliament. This case alone does not suggest that the anti-reform block is winning an upper hand over the liberal technocrats. Nevertheless, the loss of a champion of reform in the Indonesian Finance Minister, as well as disappointment in the extent of President’s compromise, must necessarily cast some doubt over Indonesia’s reform agenda.

A further consequence of democratisation and decentralisation, Pemakaran daerah, the proliferation of jurisdiction, has emerged as an additional concern for Indonesia. Between 1999 and 2009, more than 200 new autonomous jurisdictions were established. The staggering number of new jurisdictions has yet to deliver the intended purpose of responding to heterogeneous needs and aspirations across different localities. Instead, electoral financing, local capture and inadequate capability may have undermined local political and economic authorities and even raised doubts over the motivations behind the formation of new jurisdiction.

Democratisation and decentralisation can be messy, since the process necessarily involves bringing in together diverse and often conflicting interests and agendas.

Indonesia will likely go through a long and complex process before the current political institutional setting grows into a fully-fledged democracy. But Indonesia’s decentralised democracy as a political system must deliver economic prosperity in order to ensure its legitimacy. The question remains as to how to unleash the power of checks and balances of a democratic system and ensure the accountability of those in positions of authority.

China faces similar development issues. Rapid urbanisation, limited social protection and widening internal social-economic disparities are but a few of the most pressing concerns that need to be addressed. China must juggle the often conflicting organisational and political interests of various vertical agencies and spatial regions. On the one hand, the party-state system exhibits much liveliness and continues to attract well-educated members of younger generations into its apparatus, resembling a powerful meritocracy. In addition, the public sectors have been engaged in wide-ranging reforms, from improvements in social welfare policies and fiscal rules to the introduction of performance-based measures to govern the promotion of civil servants.

On the other hand, China faces growing unresolved grievances caused by issues such as misappropriation of private property, rampant corruption and widening inequality. Even official statistics indicate a ten-fold increase in the occurrence of social unrest between 1993 and 2005 (reaching 87, 000 per year by 2005). The government appears to be struggling to respond to the public’s increasing demands for governance quality and accountability. The recent case of the outspoken chief editor of Caijing Magazine, who resigned with a large number of her fellow journalists, serves as a testimony of the self-censorship enforced by the authority. But the public’s discontent is more expressed in the hope that it can be addressed within the current system rather than a plea for anything other than the status quo.

Keenly aware of the potentially prohibitively high costs and uncertainty of the success of a democratisation process, the Chinese government seems to advocate a measured approach towards political reform. The mixed signals suggest that the government envisions a future that shares elements of contemporary Western-style democracies but remains distinctively Chinese. But the question remains whether, in the absence of democratic checks and balances, the government will be able to maintain legitimacy in the eyes of its people by achieving economic prosperity and improving social justice.

How will these two countries evolve economically and politically? The questions that both face highlight the similarity of the fundamental challenges confronting the Chinese and Indonesian governments, and contrast their respective choices and associated risks. Economic progress is the objective China and Indonesia share. In each case, however, the political and institutional evolution ahead involves a degree of danger. Pushing forward a political and institutional reform agenda might awaken popular demand for a more accountable and effective government, yet too fast a political reform may be deemed to be politically unviable. To achieve an improvement in living standards for the majority of people, each country needs to devise its own strategy that is compatible with the prevailing political and institutional context. Given time, economic performance feeds back to politics and institutions, and thus completes the circle of co-evolution of economic development and political institutions.

Sherry Tao Kong is a Research Fellow with The Rural-Urban Migration in China and Indonesia Project (RUMiCI) in the Economics Program of the Research School of Social Sciences, ANU.

This is an article from the most recent edition of the East Asia Forum Quarterly: ‘Next generation on Asia’.