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Jakarta globe

by Jennie S. Bev

Politics and economics make an incredibly sexy partnership. Their erotic affair is based on influencing people, getting them to respond to desires. According to Thomas Sowell, a Stanford-based economist, political decisions tend to be categorical or unconditional, while economic decisions tend to be incremental or progressive. Citing Otto Von Bismarck, politics is the art of the possible. Thus, how well politicians and economists work together to create public prosperity is the measure of a successful government.

In the case of the United States, a successful government translates to one that spreads its influence in the most effective way possible. In Indonesia’s case, success means surviving the challenges posed by the wave of globalization.

Barack Obama is currently playing his hand very carefully and steadfastly. His administration has invested a fortune, some $75 billion, under the Homeowner Affordability and Stability Plan, in an attempt to help out nine million homeowners. The plan came into effect on March 4, with the release of guidelines detailing who was eligible. This “stability plan” is the follow-up to the Bush administration’s Hope for Homeowners Act, which saw $300 billion in funding approved on Oct. 1, 2008. Under the Bush plan, however, the money never trickled down properly due to inadequate underwriting guidelines and insufficient incentives for lenders.

Obama will certainly not want to repeat the mistakes made by his predecessor in the first rescue plan. He has said that his plan aimed to assist honest and hardworking citizens. Sure, it is a noble cause worth fighting for and his reputation is at stake. But these are early days and only time will tell whether this latest plan will be of long-term benefit; whether its creators have thought beyond stage one.

The problem is that policy makers are often guilty of failing to envision the full impact of their decisions beyond the initial phases. Take an example. The Gramm-Leach-Bliley Act of 1999 repealed the Glass-Steagall Act of 1933 and set the stage for today’s global crisis by allowing commercial and investment banks to consolidate. The reverberations from a bad policy decision might not be experienced immediately and everything may work well initially.

But we are now learning the hard way. We are now sowing the seeds of bad public policies that were implemented a decade ago. This current crisis resulted in part from a lack of understanding of the broad effects of politics on economics. From a failure to think beyond stage one. Awareness of long-term political consequences and implications is crucial.

One a smaller scale, we can see how rent control in San Francisco and the development of housing projects for low-income families in U.S. inner cities failed to serve their real purpose. Instead of lowering the cost of rental accommodation, the maximum rental prices imposed by these laws and ordinances caused rents to skyrocket as landlords were unwilling to lose rental earnings. Also, it is common knowledge that renting and owning residences in San Francisco costs a lot more than in its neighboring areas. The introduction of housing projects for low-income families only aggravated the problem of poverty by creating ghettoes.

Regarding Obama’s financial rescue plans, if we use the stock exchange as an indicator, the markets are not confident that it will provide a solution. On Feb. 27, the Dow Jones index ended at its lowest level since May 1997, with the market disheartened by government’s large investment in Citigroup Inc.

Indonesia, also suffering from the global economic downturn, is experiencing a similar predicament to the 1997-1998 Asian financial crisis. While at that time the International Monetary Fund might have greatly influenced Indonesia’s limited choice of policies, today’s outlook seems brighter as there are several options available, other than the use of interest rates. For instance, in addition to rescue plans, efforts to motivate entrepreneurial activities should be encouraged. Also, the Ministry of Education’s program to provide free vocational training for low-income individuals is an admirable move.

It remains to be seen how well Obama’s $1.4 trillion economic recovery package will work in its attempt to salvage the $14 trillion US economy. The debate among economists goes on, but it is much too early too tell. How well Indonesia handles its economic policy will also determine how quickly and how soundly it recovers.

Yet it requires the whole world to think beyond stage one. Remember to see far beyond the somewhat “innocent” attainable economic goals, as politics often comes into play. After all, this erotic love affair between politics and economy is a continuous one.[]

The Jakarta Globe, March 15, 2009

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