Honoring Indonesia’s Generational Compact While We Still Have Time

By webadmin on 10:24 am Jul 12, 2012
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John Riady

During a recent lecture, historian Niall Ferguson was asked where he would advise a young person to begin his career. Perhaps Singapore? Australia? Ferguson said it was a good question, one that he often found himself discussing with his son.

“I think the answer is to take a look at where the institutions are improving,” he said. “If you analyze the quality of the rule of law using World Bank or World Economic Forum data, one of the most striking things, apart from its deterioration in the United States, is its improvement in Hong Kong. If I were you, I would move to Hong Kong.”

The answer was unusual for two reasons: first, because Hong Kong, despite its British heritage, is not a Western country — whereas historically, institutions in the West have long been held as most worthy of emulation. Second, because Hong Kong, despite much debate, still does not have a particularly representative government. Popular votes account for only 50 percent of the Legislative Council and the chief executive is elected by a body that privileges professional associations at the expense of ordinary voters.

Can this strange, unrepresentative system really be the future? By bringing up Hong Kong, Ferguson is suggesting that the traditional Western model is just one possible option for representative government.

Ferguson focuses on institutions because he believes the West became so much richer than the rest of the world from the 1500s to the 1970s because of the quality of its institutions, namely those that fostered economic competition, the scientific revolution, modern medicine, the consumer society, the work ethic and the rule of law. Since other countries have “downloaded” these “killer apps,” they have become richer themselves. In fact, as the quality of non-Western institutions has improved, Western institutions have begun to crumble. Why?

Most commentators “tend to focus on excessive debt, mismanaged banks, widening inequality — that sort of thing.” But Ferguson says he believes these are just symptoms of a more profound malaise.

The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.

This is the central argument of “The Human Hive,” the first of his four BBC Reith lectures. The present-day social democracies are not only fiscally unsustainable (which we all know) but also, as a consequence, intergenerationally unjust, because they steal from the unborn to pay for present generations.

When the United States borrows money to pay for present-day outlays of health care and social security, it is implicitly committing future generations to pay creditors back. When it promises “defined benefit” pensions to workers, it is accumulating so-called unfunded liabilities, that is to say, future promises for which no provision has been made.

Ferguson points out that the most recent estimate for the difference between the net present value of federal US liabilities and the net present value of federal revenues is $200 trillion — nearly thirteen times the debt as stated by the US Treasury. By pointing this out, he is suggesting that current US estimates of indebtedness vastly understate the problem.

For this reason he advises us to ignore stated sovereign balance sheet figures, claiming that significant off-balance sheet liabilities mean they are as “misleading as Enron’s.”

What “these mind-boggling numbers” represent, he says, is “nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future.”

The only reason we haven’t seen a spike in US bond yields, Ferguson says, is because of persistent deflationary fears, central bank bond purchases (the famous quantitative easing) and a “flight to safety” from the rest of the world.

But the longer the uncertainty prevails, the more likely it is that Western governments, one after another, “follow Greece and the other Mediterranean economies into the fiscal death spiral that begins with a loss of credibility, continues with a rise in borrowing costs and ends as governments are forced to impose spending cuts and higher taxes at the worst possible moment. In this scenario, the endgame involves some combination of default and inflation. We all end up as Argentina.”

I have enormous sympathy with the thrust of Ferguson’s argument, in part because unsustainable fiscal policies, be they high-cost labor laws, higher spending in welfare or health care, or future liabilities, are traditionally justified in terms of fairness (i.e. universal access to various goods and services). The (always well-organized) public-sector employees and those receiving government benefits say it is unfair to cut their benefits, and proponents of fiscal sustainability are often muzzled by their ability to only speak in dollars and cents. But since the current system is intergenerationally unfair, conservatives have the stronger ethical argument.

Ferguson’s solution is to call for better public sector accounting. Liabilities and assets should be listed in full, governments should adopt the Generally Accepted Accounting Principles, and generational accounts, which factor in future liabilities, should be prepared on a regular basis to make clear the intergenerational implications of current policy. It all seems appropriate.

But Indonesia is a young nation. The passing of the Social Security Bill (BPJS) earlier this year, the standoff between labor and businesses over the minimum wage and the promise of de facto universal health care brought about through decentralization, may be driven by good intentions, but if done wrongly, will haunt our future generations. The temptation to create policies that are intergenerationally unsustainable is too large, but we must resist while we still can.

John Riady, editor at large at BeritaSatu Media Holdings, is a lecturer at Universitas Pelita Harapan’s School of Law.