One interesting observation about Indonesia is that it is a “rich” yet “poor” country at the same time. Somehow, Indonesia has never realized its full potential in the past and even now.

Anne Booth has characterized the economic history of Indonesia with a melancholy phrase “a history of missed opportunities” (Booth 1998). The missed opportunities refer to the fact that despite its rich natural resources and great variety of cultural traditions, the Indonesian economy has been underperforming for large periods of its history. As a foreign friend put it to me once: “As a country you are richly sitting on a pot of gold … and yet, you as a people, are still poor.”

One interesting way to look into this issue is through the lens of institutional economics, a sub-discipline of economics. Institutional economics focuses on understanding the role of institutions in shaping economic behavior. According to Noble winner Douglas North, institutions are the “rules of the game”, consisting of both the formal legal rules and the informal social norms that govern our behavior. If the “rules of the game” are properly designed, they help to reduce the cost of transacting and therefore improve economic performance.

According to North, “The cost of transacting … is the key to economic performance. When I go to third world countries and look at why they perform badly and examine how factor and product markets are really working, in every case, be it capital, labor or product market, one observes that the cost of transacting is high. The cost of transacting results in the economy performing badly because it is so costly for human beings to interact and engage in various kinds of economic activity that the result is poor performance and poverty and so on. Where this takes us is to try to understand why the cost of transaction is so high.”

In Western societies, over time complex institutional (legal and corporate) structures have been devised to encoourage the participants, to reduce the uncertainty of social interaction, in general to prevent the transactions from being too costly and thus to allow the productivity gains of larger scale and improved technology to be realized. These institutions include elaborately defined and effectively enforced property rights, formal contracts and guarantees, trademarks, limited liability, and bankruptcy laws.

The cost of transacting is something that stops us to close a business deal. It can be because of tangible and intangible factors, such as a lack of trust, an immature equity market, a “brokers’ economy”, no property rights or protection, a lack of protection for business players, governmental issues, legal structures, an uneven playing field, etc.

Is there anything wrong with the “rules of the game” in Indonesia that prohibit us from performing to our full potential? If the rules of the game were not clear, it would be difficult for people to do business, and in Indonesia, there are too many grey areas and ambiguity … there are no clear and clean-cut rules to protect people in doing their business here.

Indonesia owes much of its success to nothing smarter or more high-tech than a commodities boom. Coal and gas go to China and India, palm oil to the world. Money is pouring into the country, yet little goes into fixing long-term problems that impede growth. Indonesia has a once-in-a-generation opportunity to move beyond its commodities-based economy. It is not clear however whether or not it will seize that opportunity.

Let’s ask ourselves the following questions:

• Do you agree with Anne Booth’s phrase “Indonesia: a history of missed opportunities” when she characterized our country’s economic history?
• Is it true that the cost of transacting in Indonesia is high?
• What are the rules of the game in this society?
• What needs to be done to increase the confidence of people wanting to do business here?
• What role has leadership to play in this process?

Related to the above, the following article “Missing BRIC in the wall’ which can be found through the following link is well worth a read  http://www.economist.com/node/18989153

Putera Sampoerna