TCS Daily


Indonesia's Wrong Path

By Christopher Lingle - September 29, 2004 12:00 AM

During her failed election campaign, President Megawati Soekarnoputri promised, if re-elected, to "create" more jobs. While this promise may have been based upon what was thought to be good electioneering, it reflects a poor understanding of economic realities. As history indicates, government policies to redistribute wealth and income are inimical to economic growth.

While economic growth is a necessary condition for new jobs, it also helps to alleviate rigid disparities in income that involve keeping those at the bottom of the income ladder in impoverished conditions.

It turns out that attempts to rely upon policies to redistribute income and wealth may deter economic growth. Meanwhile, economic growth in a market economy eventually reduces disparities in material well being.

A well-established theory developed by Simon Kuznets shows that markets in developed economies have built-in mechanisms that smooth out income differentials over time. Kuznets observed the long-term development of income differences between social groups in a market economy.

During the "establishment period" of less-developed countries or feudal economies or reformed socialist economies, there is a rapidly-increasing degree of inequality. Such large and growing differences were described by Karl Marx and other early socialists.

Then the relationship peaks when the economic basis for political struggle over redistribution is most intense. Political parties and interest organizations form in response to the uneven distribution of income.

Eventually, a third phase emerges whereby "automatic forces" in a mature market economy even out income differences by generating rising income among broad segments of the community. In this sense, mature capitalism is a society of opportunity for the many.

Integrating technological development in the production system ended the disastrous "Malthusian cycle" of periodic mass starvation. Now, mature capitalism allows large groups to survive and prosper without access to land and only to other means of production. The capitalist labor market opens the possibility to individuals to offer their labor power in exchange for jobs that suit their target income or long-term career plans.

For all the good intentions behind the President's campaign promises, it is misguided to think that governments can create jobs. Whenever public sector actions "create" a job, they also impose an offsetting tax burden that will destroy another job, now or in the future.

Attempts to reduce poverty and unemployment by legislating jobs into existence through government spending or putting additional public employees on the payroll are delusional. And so is the promotion of "investments" in public works projects or fiscal pump priming to raise consumption to stimulate the weak economy.

Part of the seductive logic behind the belief that governments can "create" jobs reflects the misguided notion that the consumption of newly-employed people will drive economic growth. This thinking flies in the face of my grandmother's admonitions that "you cannot create something out of nothing". Believe me. She was a wise woman, and she was right.

What she might have added, were she lecturing me on economics, is that consumption does not lead economic growth. Sustainable economic growth can only come from an adequate pool of savings that are used by private entrepreneurs to create new businesses that generate jobs and wealth for the community.

Despite being discredited during the 1970s because of its role in the onset of stagflation, the case for governments to promote employment growth through deficit spending has been resurrected. But more recent reminders indicate the failing of this approach.

Consider the disastrous and futile attempts to throw money at Japan's economy in the vain hope of re-igniting it. While there is a glimmer of hope for a belated recovery, Japanese taxpayers now face an unimaginable amount of debt that will be translated into higher taxes that will hinder further economic growth.

The motivation behind these flawed policy choices is apparent whenever economic decisions are guided by political rather than economic considerations. Politicians and bureaucrats tend to implement policies that generate short-run benefits whereas the associated costs are shifted to the future. Conversely, they almost always avoid policies that generate short-run costs even if they yield large benefits in the distant future. Offering quick results and creating the impression of being actively engaged in problem solving increases the likelihood that they will be re-elected or re-appointed even if the eventual result is bad for the community.

It would be bad enough that deficit spending on job creation was simply ineffective. What is worse is that government spending schemes that expand public-sector debt imposes burdens on future generations. Most obvious is the additional tax burden in having to pay for debts incurred for spending in the present.

More diabolically, government attempts to orchestrate jobs by spending beyond their means undermine or eliminate employment that would have been created in the private sector in the future. An increase in the share of GDP going to government tends to lead to slower long-term economic growth. This means that some jobs today will mean many fewer jobs in the future.

From an operational standpoint, a better method for addressing employment growth is to undertake reforms that change the fundamental nature of economic decision making. New government spending cannot and does change the incentive structures associated with tax codes or regulation, both of which impose limits on entrepreneurial choices.

As always, the choice facing politicians is between electoral expediency and economic rationality. In confronting this dilemma, Indonesia's leaders have often chosen the wrong path.

Politicians should not be allowed to promote and protect their own well being. Instead, they should undertake reforms that benefit most of their constituents. It is high time that the good of the people is put ahead of the interests of the political class and their self-interested supporters.

The author is Global Strategist for eConoLytics.com.


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