The Legacy of Colonialism and Future Economic Development of Indonesia

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  • By: Bertha Fania Maula, a Master of Economics Candidate at the University of Melbourne under the Australia Awards Scholarship program and Ex-Junior Analyst at the Indonesian Ministry of National Development Planning (Bappenas).

    People who got a chance to walk around the Botanical Gardens in Bogor (Indonesia), Singapore, and Melbourne (Australia) might get similar vibes among the three as if those were made with a certain template to display the beauty of nature. A mere déjà vu feeling would then be validated by the fact that those are the legacy of British colonialism. This leads to a thinking that colonialism might shape how the world looks nowadays, for instance, an economic development.

    A brief sentence to summarize the legacy of colonialism would be: “the same Botanical Gardens, but different institutions which shape current socioeconomic conditions.”

    The impact of colonialism on economic development itself is rather indirect. Economists found that one of the most important mechanisms is via institutional development. This is because colonialism is pretty much an economic strategy: how to maximize the benefit from making the best use of what each colony had during that period.

    In order to maximize the benefit, the colonizers (e.g., British) would then develop an institution depend on what they could gain from each of the colonies (e.g., Indonesia, Singapore, Australia, etc.). The type of institution developed centuries ago tend to exist until today and, in many ways, affecting the current economic development of countries.

    To easier understand this, suppose there are three major types of colonies based on the benefit-maximizing behavior of the colonizers: settler, entrepôt, and resource colonies.

    Firstly, settler colonies are those exploited as a potential destination for migration where colonizers would live and settle. The well-known countries in this type is the “Neo-Europe” countries such as the United States, Canada, Australia, and New Zealand. It is called Neo-Europe because the colonizers had established an inclusive institution as a replication of the institution in their homeland Europe in the settler colonies. This type of institution has a better legal system, protection of private property, and constraint on political power. Nowadays, the settler colonies are among the top ranks in GDP per capita and many other socioeconomic indicators.

    Secondly, entrepôt colonies are those with a strategic maritime position to be exploited as a trading hub during the colonialism era. The colonies include Singapore, Hong Kong, Penang, Malacca, and Gold Coast. To maximize the benefit from colonializing these regions, the colonizer (British) would invest in aspects that support the port system, such as in physical and human capital. Today, the entrepôt colonies have a relatively better economic development than the average global countries.

    Lastly, resource colonies are those exploited for the abundant natural resources. Indonesia most closely belongs to this type along with countries in Central and Latin America, Africa, South Asia, and some fellow Southeast Asian countries. Currently, resource colonies are relatively left behind in terms of welfare and socio-economic achievements. In resource colonies, typically corruptions are massive, the economy still depends on natural resources, some basic rights are not protected by the legal system, and poverty and socioeconomic inequality are relatively high.

    In the past, colonizers established an extractive institution in resource colonies that had less protection to private property and no “check and balance” to the government system. The establishment of an extractive institution is the most efficient way to exploit as many resources as possible while developing an inclusive institution in this type of colonies would be substantially costly. For instance, educating labor in resource colonies would enlighten the people to fight back and hence limiting the ability of colonizers to further exploit the natural resources.

    Indonesians would commonly joke that “maybe if it were not Dutch, but British that colonized us, we would have been able to reap a better socioeconomic condition today.” Nevertheless, this statement does not seem to be valid. Indonesia was meant to be colonized for its natural resources that regardless of who colonized, the outcomes would be most likely the same.

    Of course, it is easier to refer to our neighboring countries such as Singapore and Malaysia (which closely belongs to the entrepôt colonies) or Neo-Europe countries as the parts of British colonies. However, we are forgetting the fact that some South Asian and African countries are also the other parts of British colonies. Likewise, even when the British built the similar-looking Botanical Gardens in Bogor, Singapore, and Melbourne, they did not establish the same type of institutions in those three regions.

    Thus, why should we care about what happened during colonialism?

    Researchers found that the institution established in the past is closely related to the institution of a country today. The inclusive institution still prevails in Neo-Europe countries because the society is benefitted from the equal opportunity guaranteed by the system. Meanwhile, an extractive institution still exists in resource colonies because a small group of elites prefers to maintain the institution to have more power over domestic land and resources.

    We might now grasp the idea that institution is a major determinant of economic development. Less corruption would mean more tax resources to be distributed for health and education. Better bureaucracy would mean a more efficient process to open and expand a business. A more certain legal protection would prevent the emergence of informal practices. Meritocracy instead of nepotism would encourage more people to unleash their potentials in society.

    If we need to learn something for improvement, it is safe to look at how the fellow resource colonies perform currently. However, the story might not be the good news we expect. For example, as the resource colonies that relatively got independence earlier, some Latin American countries have already been in the middle-income trap (e.g., Brazil, Argentina, Colombia, etc.) and deemed as becoming failed states today.

    Certainly, we might perform better at some aspects than countries in Latin America, but some alarming symptoms on our current institution are still there: widespread corruption, bad bureaucracy, unjust laws and policies, unequal access to basic services, and more to mention.

    Standing from 2021, thanks to Covid-19 (not the pandemic per se), omnibus law things, or even regional elections that happened in 2020, we could evaluate how our government performs nowadays and more Indonesians have now been aware that our institution is not in a good shape.

    When 75 years post-colonialism have not transformed this country to have a fully inclusive institution that supports economic development, we should not feel comfortable either with how our current institution would drive the economic development of Indonesia in the future. And from this moment, it would only take a couple of decades with the peak of the demographic dividend to see where Indonesia would be: escaping or falling from the brink of being trapped as a middle-income country.

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