Indonesia in a post-neoliberal order

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James Van Zorge
James Van Zorge, is a Business consultant in Indonesia that has worked for the Harvard Institute for International Development, Food and Agriculture Organization, McKinsey & Co., and A.T.Kearney’s Global Business Policy Institute. He completed his BA in International Relations, summacum laude, at the State University of New York at Albany, and he holds a Masters of Public Policy, International Economics, from the Kennedy School of Government, Harvard University.

Jakarta, IO – Ever since the 1980s the conventional wisdom about economic policymaking has been, until recently, that neoliberalism is the best path towards achieving growth and prosperity. For many countries, especially in the West and also large emerging markets such as Indonesia, it was taken for granted that by deregulating capital markets, lowering trade barriers and privatizing state-owned enterprises the economic benefits would far outweigh the costs. 

The benefits of neoliberal policies and the ensuing globalization it wrought were evident for everybody to see: households in developed economies enjoyed cheaper imported consumer goods produced in countries with lower labor costs, multinational corporations brought much-needed technologies and capital to developing countries, billions of people were lifted out of poverty and, as proof of the merits of globalization, a new and ever fast-growing global middle-class was born. 

In Indonesia, the neoliberal policies of the so-called Berkeley Mafia during the late 1980s and afterwards led to a boom in non-oil and gas exports. Import restrictions on intermediate goods were removed and as a consequence the manufacturing sector was able to compete in foreign markets and became a key driver for employment and growth. Financial deregulation resulted in the creation of numerous private banks, a viable stock market and led to a large influx of foreign capital. There was a large increase in foreign direct investment, and with the unleashing of its economic potential the Indonesian economy quickly became a success story for others to emulate, leading eventually to its joining the ranks of the G-20. 

The notion that people, goods and capital would go where they would be the most productive and provide the greatest benefits as long as markets were free was deemed sacrosanct by mainstream economists, and for ostensibly good reasons–neoliberal policies could take credit, in large part, for a prolonged and unprecedented period of low inflation combined with growth. The World Trade Organization, World Bank and International Monetary Fund, institutions created in the aftermath of the second world war and which embodied the principles of neoliberalism, could also take credit for financial stability, poverty reduction and a creation of wealth that significantly narrowed the income divide between the developed and developing worlds. 

Yet the downside of neoliberalism became painfully evident as the world became increasingly globalized. Income inequalities deepened within countries that adhered to open trade policies– a primary example was the United States where free trade with China resulted in significant job losses in the manufacturing sector. 

Economic theories that predicted losers in an open trade economy, such as blue-collar workers in America, would move to where there were good employment opportunities or even manage to learn new skills to become more employable, proved to be demonstrably wrong. For a variety of reasons, most Americans with well-paying jobs and who enjoyed the protection of unions and then suddenly found themselves unemployed did not move. Neither did many of them find the wherewithal to obtain technical training. Instead, most of them stayed in their hometowns either underemployed or ended up working in menial jobs paying minimum wages.