Policy reform in Indonesia

By Professor Jeff Borland

Reform in a "second best world": the case of Indonesia

The practice of policy reform was the subject of the 20th David Finch lecture, delivered on September 14 by Chatib Basri, Professor of Economics at the University of Indonesia and ex-Minister of Finance in Indonesia.  

In a fascinating and insightful talk on how policy is made, Professor Basri suggested that there are two paths a policy maker must choose between.  One path requires a willingness to do policy reform only when government institutions allow perfect policies to be chosen and implemented.  Having perfect policies might sound attractive, but they would likely be a long time coming.  That is because establishing government institutions that facilitate perfect policies is a major undertaking.  So Professor Basri argued that following this path would mean no policy reform during the 25 years it would take to create the new institutional environment.  The alternative path, preferred by Professor Basri, is therefore to seek to commence policy reform today, accepting that this will have to be done in a world where institutions are not perfect, in what can be described as a ‘second-best’ world.

Finch group
Professor Ross Garnaut, Ms Dewi Savitri Wahab - Consul-General to Indonesia,
Dr Chatib Basri, Professor Jeff Borland and Professor Paul Kofman - Dean of the
Faculty of Business and Economics

Having sought to implement major policy reform during his period as Minister for Finance in Indonesia, Professor Basri was able to draw on a wealth of experience to reflect on doing policy reform in a second-best world.  Amongst the episodes of reform and policy making he described were changes to processes for attracting foreign investment to Indonesia, dealing with the sharp drop in the value of the Indonesian currency in mid-2013, reforms to Indonesian customs in order to reduce costs of shipping, and introducing a major scholarship scheme for Indonesian students to study at leading international universities.

Based on his experience, Professor Basri proposed many lessons for policy makers doing reform.  Perhaps his main advice was that policy makers, having limited time, should focus their efforts. The best way to do this is to concentrate on reforms where the likelihood of successful reform is high and the gain to society from the reform is highest.  All this needs to be done while recognising the constraints of the existing political and institutional environment – although Professor Basri suggested that these constraints could be relaxed somewhat by skilful communication with the media and major stakeholders.

Watch the full lecture

The 2016 David Finch Public Lecture was delivered by Dr. Chatib Basri on Wednesday 14 September 2016 in the Copland Theatre at the University of Melbourne.

David Finch was an alumnus of the University of Melbourne, graduating with joint honours degrees in commerce and arts in 1944 and received a PhD from the London School of Economics. He was appointed to the newly established International Monetary Fund (IMF), where he held the position of Councillor and Director of the Exchange and Trade section of the IMF. He was awarded an Honorary Doctor of Commerce by the University of Melbourne, two years before his death, in 2000.