Neoliberalism vs Democratic Economy

VIVAnews - Susilo Bambang Yudhoyono's decision to appoint Boediono as his running mate has produced intense polemic on Indonesian economic outlook.

The supporters of Megawati-Prabowo and Jusuf Kalla-Wiranto believe that SBY-Boediono are honoring “neo-liberalism” while claiming their economic approach as the “democratic economy”.

In the purpose of understanding the definition of democratic economy and neo-liberalism, Freedom Institute, Liberal Society, Café Salemba, and Friedrich Naumann Stiftung held a discussion on the particular issue together with M. Ikhsan Modjo (INDEF) and Arinto A. Patunru (LPEM UI) on Tuesday, May 26, 2009 at the office of Freedom Institute on Jalan Irian no. 8 Menteng, Jakarta. The discussion was hosted by Luthfi Assyakaunie. The results of the discussion are as follows.

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For the first time, unlike in the previous presidential elections, the economy has become an important issue.

During the past times, the issues arisen were on Islam and nationalism.

Neo-liberalism is a nomenclature derived from abroad. The more commonly known term is liberalism. It is rooted in philosophy during the European enlightenment era in forms of individual freedom and autonomous market.

The term neo-liberalism appeared for the first time in 1960s together with the theology liberation movement in Latin America. The term was coming from those who did not like the term liberalism.

Meanwhile, the term democratic economy has been known since before the independence era. It was Muhammad Hatta who firstly introduced it. In 1930s, Hatta called it the “democratic economy”.

What was defined as democratic economy was the indigenous economy. Hatta’s goal is to defend the importance of indigenous economy.

Hatta was not the only one who wrote about democratic economy. HOS Tjokroaminoto also did the same thing. According to his perspective, there are two kinds of capitalism, which are the good capitalism and the bad capitalism.

The good one is the indigenous economy while the bad one is the power of colonialist economy.

Therefore, the definition of democratic economy prior to the independence era was the indigenous economy versus the colonialist economy.

Meanwhile, in the beginning of the independence era, democratic economy was interpreted as the economy of the poor against the economy of giant entrepreneurs.

During the 1960s, there was also a democratic economy program. The program was trying to involve the people in the economy. With the presence of particular kind of economy, the capital was expected to be ruled by the people and was used entirely to fulfill their needs.

In the 1980s, democratic economy was changed into the economy of Pancasila. However, the spirit was still the same.

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The debate on neo-liberalism and democratic economy during the presidential elections shows how politics and democracy in Indonesia have been developed.

Politics are no longer being associated with narrow ideological and sectarian issues. Now it is associated with pragmatic and economic issues. This is a good sign.

Meanwhile, the emergence of neo-liberalism in the 1960s was triggered by various failures in technocratic and interventionism economic policy.

Neo-liberalism implied two things. The first one is minimizing country intervention and the second one is recognizing individual freedom.

Neo-liberalism was a term derived from various contemporary anti-intervention theories which were developed in historical, political, and particular institution context.

It was also a combination of neo-classic economic ideology, which believed in market freedom, and Libertarian-Austrian political sect that honored individual freedom and independence.

There are a few models known in neo-liberalism. The models are monetary model, rejection of centered planning, the rigidity of the institutions, principal agent model of bureaucracy, interest hunting, and rejection of public institutions and privatization.

For the last model, the neo-liberalists assume that public corporations are one of the main sources of economic inefficiency and stagnation experienced by developing countries.

In the context of developing countries like Indonesia, where inefficiency of public corporations often happen, privatization policy gains a lot of support.

Later, with the success of policy implementation in developed countries, World Bank, IMF, and the US Financial Department agreed to generalize the theory with what is now known as the Washington Consensus. There are at least 10 core policies in the Consensus.

The 10 polices are: fiscal policy discipline; the diversion of subsidies, except for the direct subsidy of education, health, infrastructure, and tax reform; enhancing tax basis and lowering tax level; interest rates which are determined by the market and positively real; competitive exchange rates, trade liberalization, especially license revocation and the application of single tariff; liberalization of direct foreign investment; state corporations privatization; deregulation; property rights protection.

However, the Washington Consensus also spurred criticism. The left wing group accused the subsidy removal was aimed to accelerate payment of debt to the developed countries.

George Stiglitz also criticized liberalism without sufficient stages and preparation. He assumed that the failure of Washington Consensus was proven by the countries which implemented it and failed, such as Argentina and Indonesia.

Stiglitz suggested liberalism to be started from the real sectors, trade, and then finance. While in Indonesia, it was the other way around. The financial sector was the first one deliberated through Pakto 88, the trade sector, and finally the real sector.

The weakness of neo-liberalism was also emerged as the result of the combination of importance between the neo-classic ideology, which legitimates academic-intellectuals, and the Libertarian-Austrian tradition as the source of political rhetoric.

Based on the discussions above, it is fair to say that neo-liberalism is not more than a compilation of various anti-government intervention thoughts concerning the economy which could be different than the neo-classic root of thoughts.

However, despite the weaknesses and intellectual bias, it also showed us some of the fundamental weaknesses from the technocratic views in economic systems.

Democratic economy itself is a collection of views on a policy orientation which sides with the people from the consumption side in term of basic needs fulfillment, to the production side by favoring small-medium level industry.

The inventor of the term democratic economy is Emil Salim. He wrote the term on a newspaper article on 30 June 1966. While the one who popularized the term by introducing the economy of Pancasila term in 1980s was Mubyarto.

But, the definition of democratic economy is merely semantic because it has not seriously answered the roles of the countries, market, and individuals, just like typical economic theories.

The striking difference between democratic economy and neo-liberalism lies on the roles of the government. In democratic economy, the government is expected to interfere and side with the people while in liberal economy, the government is expected to be neutral and not interfering.

Eventually, how about SBY’s current administration? It could be said that SBY’s administration is based on democratic neo-liberalist economy.

It is democratic because the government interferes. One of the forms of intervention is establishing an empowerment program for the small-medium level industry (UMKM). The government also created the national people empowerment program (PNPM).

But, it is also neo-liberalist because on the other side, the government liberates foreign investors.

Despite the issue on foreign capital liberalization and privatization, the agenda of democratic economy is not much different than neo-liberalism views.

The government is even combining the two ideologies. The democratic economy jargon seems indeed prioritizes agricultural sector and UMKM. Thus, democratic economy is not the right jargon to compete against liberalization and privatization.

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Translated by: Nataya Ermanti

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