The Impact of Democracy to Indonesian Economic Growth

By Yuni Suryati.

Indonesia is considered the world’s 4th largest nation (after China, India, and the US) and 3rd largest democracy (after India and the US). Indonesia could use all these superlatives for its benefit to further its own interests in the face of its rising global prominence, in particular the relationship between democracy and economic growth. Whether democracy can foster economic growth? If so, how does the pattern of the relationship between democracy and economic growth?

Most experts believe, democracy can encourage and has a significant effect on economic growth. Some states are both no causality, even disconnection between one another. However, there is also the opinion that democracy-albeit weakly-correlated with economic growth. Other scientists say that democracy or indirect effect is indirect impact on the dynamics of economic growth. Therefore, there are a number of other determinant variables: social capital, human capital, and the quality of governance that contributed to the growth. Robert Barro (1996) concludes:

“The established links between democracy and growth are a result of the connections between democracy and other determinants of growth such as human capital and social capital, as the relationship is mediated by the quality of government. Importantly, all three determinant variables can only be a direct effect when sustained by a democratic political system. Obviously, a democratic political system into a kind of prerequisite for structuring the governance structure in order to operate properly so that the open space that is conducive to economic activity”.

The experience of Western countries shows that modern democratic system becomes a social basis for efforts to achieve economic progress, which brings direct implications on improving social welfare.

With due regard to other determine variables such as social capital, human capital, and the quality of governance that have contributed to the growth, then democratic political system proved able to stimulate the acceleration of economic progress to achieve the welfare of society.  Economists and political scientists believe, a democratic political system is a prerequisite for the structuring of government in order to operate properly so that it will open a space that is conducive to economic activity.

Established democracies can ensure transition of power more orderly, smoothly and safely so that political stability can be maintained. Political stability is a basic prerequisite in the implementation of the development agenda. Economic progress runs parallel with the reliability of the democratic system of the state.

Democracy in Indonesia

The initial stage of Indonesia’s reformation era began in 1998 after the financial and economic crises that led to a political crisis. The crisis eventually brought down the Suharto regime. After the fall of Suharto, Indonesia established Democratic Reform or modern democracy. Until now, the Indonesian political system as a form of democratic reform has indeed been referring to the modern democratic system. All political institutions become the main pillar of democracy has been available and developed well, even the president and members of parliament directly elected by the people.

However, democratic governments need to be supported by clean public institutions (the bureaucracy, the police, and the judicial institution). Referring to some of the cases revealed by the Corruption Eradication Commission, proves that parliament and the public institutions have been populated by corrupt politicians. Parliament institution which is vital in the process of formulating public policy, in reality became one epicenter of acute systemic corruption and thus contributed to the difficulty of building good governance.

Gigantic scaled of corruptions that rampant in political institutions and government tend to be a factor in slowing down the acceleration of economic growth. With such a situation, the democratic system in Indonesia has not been able to contribute to economic growth, because it was blocked by corrupt practices, therefore incapable of creating a conducive climate for business activity, investment, and exchange of domestic and foreign capital.

Policy Options

  • Democratic system should be improved and accompanied by a clean and honest government.
  • Indonesia should ensure a stable democracy that in turn would lead to a favorable environment for equitable economic growth and development for its people.

To conclude, democracy can encourage and has a significant effect on economic growth, however, need to be supported by a good governance.

Jakarta, 14 October 2016






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