"The ongoing banter between the Punakawan, Petruk and Gareng, continued. Their heated discussions cover everything from fuel restrictions to relocating the new capital city of Sonyawibawa, the ever-increasing national debt, the Trump shooting incident, and yes, even democracy.'In my humble opinion,' declared Gareng, 'the elites in your kingdom have a rather simplistic approach. They’re like one-trick ponies, chanting ‘democracy’ as if it were a magical incantation. At the very least, they’ve got the name down—never mind the content. And hey, let’s start with just holding the reins of power for now. Fairness and usefulness for the people? We’ll deal with that later. Oh, and the election? Well, let’s just get that out of the way too—honesty and fairness can wait. As for their authority to plunder and their corruption? Well, that’s a problem for another day.”Petruk, not one to back down, reached for his mystical book, the primbon, to counter Gareng’s argument. Alas, he found nothing of substance. Not because the primbon lacked meaning, but because Petruk didn’t know how to use it, he was well aware that he relied heavily on his whisperers and consultants.'No need to consult the primbon,' quiped Nala Gareng. 'Besides, even if you tried to argue about democracy, could you tell me what currency the Pewayangan world uses? Exactly—you’re stumped!'And with that, Petruk’s ego swelled a little more. So, the satire continues ...."“Robust institutions are like the solid foundation of a skyscraper. Without a strong foundation, the building would crumble; similarly, a nation without strong institutions cannot achieve lasting stability and growth. Robust institutions are the DNA of a healthy democracy, encoding the rules, norms, and practices that enable the state to operate effectively, adapt to changes, and sustain its vitality. Just as the backbone supports and stabilizes the human body, robust institutions provide the necessary support and stability for a state, allowing it to stand tall and function effectively. Robust institutions are the engine that drives a nation forward. They ensure that the mechanisms of governance, economy, and society run smoothly, propelling the country towards development and prosperity," said Seruni as she looked at the Tugu Pahlawan (Heroes Monument) in Surabaya, East Java. Tugu Pahlawan commemorates the Battle of Surabaya (1945), where Indonesian fighters bravely resisted British and Dutch forces during the struggle for independence. The monument was inaugurated on November 10, 1952, to honour the fallen heroes of Surabaya. You can visit Tugu Pahlawan during daylight hours to pay your respects and learn more about Indonesia’s history."Before we delve into the topic of ‘Robust Institutions,’ let’s revisit our previous discussion on ‘Military Power.’ Here’s an overview of key nations and their military strengths: The United States, boasting the largest defence budget globally, the US maintains an extensive global military presence and possesses advanced technological capabilities; China is rapidly modernizing its military, bolstered by a large number of personnel and growing global influence; Russia, with a significant nuclear arsenal, advanced military technology, and a strategic geographical position, Russia remains a formidable force; India wields a large military force, holds significant regional influence, and continues its ongoing modernization efforts; United Kingdom and France, both nations exhibit strong military capabilities, maintain nuclear arsenals, and play influential roles in NATO and other international organizations.Maintaining a strong military is expensive and can strain national budgets. Balancing defence spending with other public needs is a constant challenge. Military actions can effect a nation's global reputation, either positively (through peacekeeping and defence of human rights) or negatively (through perceived aggression or interventionism). The rapid pace of technological advancement in military capabilities can lead to an arms race, potentially destabilizing global security. The use of military force must be governed by ethical principles and international law to avoid unnecessary suffering and collateral damage.Now, let's talk about the Robust Institutions. Daron Acemoglu and James A. Robinson delve into the fundamental question: Why do some nations thrive while others remain impoverished? Drawing on extensive research and historical examples, they argue that the key lies in institutions. According to Acemoglu and Robinson, several historical examples illustrate the impact of failed institutions. The Roman Empire’s extractive institutions contributed to its eventual decline. These institutions concentrated power in the hands of a few elites, stifling innovation and economic growth. Extractive political and economic institutions in the Mayan city-states led to their downfall. These institutions hindered inclusive development and perpetuated poverty. Venice’s prosperity was linked to inclusive institutions that encouraged trade, but over time, extractive practices eroded its economic vitality. The Soviet Union’s centralized, extractive institutions stifled individual initiative and innovation, ultimately leading to its collapse. Many Latin American countries struggled due to extractive institutions that favored elites and hindered broad-based development. England’s transition from extractive to inclusive institutions played a pivotal role in its rise to economic power. Extractive institutions have caused poverty and conflict in various African nations, including Angola, Mozambique, and Sudan. These examples highlight the critical role institutions play in shaping a nation’s fate, either fostering prosperity or perpetuating failure.Extractive institutions refer to systems, norms, and practices within a society that concentrate power, resources, and benefits in the hands of a select few, often at the expense of the broader population. These institutions hinder economic growth, limit individual freedoms, and perpetuate inequality. Examples of extractive institutions include Dictatorships, authoritarian regimes that suppress dissent, control resources, and deny citizens political rights; Monopolies, entities that dominate markets, restrict competition, and prevent fair access for others; Corruption, practices where public officials misuse their power for personal gain, diverting resources away from public welfare; Inherited Privilege, systems that perpetuate advantages based on birth, such as aristocracies or caste-based societies; Unequal Property Rights, when property rights are not equally protected, leading to land grabs, exploitation, and insecurity.In contrast, inclusive institutions promote broad participation, protect property rights, and encourage innovation, fostering economic development and societal well-being. Inclusive institutions are structures, norms, and frameworks that promote equity, participation, and representation. They play a vital role in achieving sustainable development and leaving no one behind. For example, National Parliaments. Inclusive parliaments ensure diverse representation, pass laws that protect human rights, and hold governments accountable. Or Cultural Competency Training, programs that help employees appreciate cultural differences, including religious practices, traditions, and holidays.Nepotism and dynastic politics are indeed considered extractive institutions. Nepotism refers to favouritism shown to family members or close friends, especially in matters of employment, promotions, or political appointments. When nepotism prevails, positions of power or influence are often inherited or granted based on personal connections rather than merit. This undermines fair competition and perpetuates inequality. Nepotism can hinder social mobility, discourage talent from participating in public life, and weaken institutions by prioritizing loyalty over competence.Dynastic politics occurs when political power is concentrated within specific families across generations. Dynasties perpetuate their influence through inheritance, often sidelining other qualified individuals. This limits democratic processes and prevents fresh ideas and perspectives. Dynastic politics can lead to a lack of accountability, reduced competition, and a focus on maintaining family interests rather than serving the public.Addressing nepotism and dynastic politics effectively requires some efforts, among others are implementing transparent recruitment and promotion processes based on qualifications, skills, and experience rather than personal connections (Merit-Based Systems); Enforcing regulations that prohibit family members from occupying key positions within the same organization or government (Anti-Nepotism Laws); Educate citizens to raise awareness about the impact of nepotism and dynastic politics on governance, accountability, and development. Empower them to engage in politics, hold leaders accountable, and demand transparency (Active Participation).Other efforts can be Political Reforms such as introducing—or maintaining if there is already one—term limits for political offices to prevent long-lasting dynasties; Regulate campaign financing to level the playing field and reduce the influence of wealthy families. For Civil Society and Media, including support independent journalism that investigates and exposes nepotism and dynastic practices; Encourage NGOs and advocacy groups to monitor and challenge such practices. For Youth and New Leadership, can be as to promote youth participation in politics and leadership roles to break the cycle of dynasties. Invest in training programs to nurture new leaders with fresh perspectives.These issues require collective commitment and sustained efforts to build more inclusive and accountable societies.Acemoglu and Robinson argue that the key lies in institutions—inclusive or extractive. Inclusive institutions encourage economic growth, protect property rights, and allow citizens to participate, while extractive institutions hinder development and perpetuate inequality. By examining historical examples, they shed light on the critical role institutions play in shaping a nation’s destiny.Acemoglu and Robinson suggest that robust institutions—those that protect property rights, encourage innovation and ensure fair competition—drive economic growth. Inclusive institutions allow citizens to participate in the economy, leading to prosperity. Strong institutions provide stability, enabling a nation to weather challenges and adapt to changing circumstances. They create a predictable environment for businesses and individuals. Failed institutions often lead to extractive practices, where elites exploit resources for their benefit. Robust institutions prevent such exploitation, fostering equitable development. Inclusive institutions promote social cohesion by ensuring that everyone has a stake in the nation’s success. This reduces conflict and fosters cooperation. Robust institutions are the backbone of a thriving society—they determine whether a nation flourishes or falters.Acemoglu and Robinson suggests that the failure of nations can be attributed to their institutions. When institutions concentrate power in the hands of a few elites, hinder innovation, and perpetuate inequality, nations tend to fail. These extractive institutions prevent broad-based development and economic growth. In contrast, inclusive institutions encourage individual initiative, protect property rights, and allow people to benefit from their hard work. Nations that foster inclusive institutions tend to thrive and prosper. The fate of a nation hinges on the nature of its institutions—whether they empower or constrain its citizens.Acemoglu and Robinson's thesis is not without criticism, for instance, they places excessive emphasis on institutions as the sole determinant of a nation’s success or failure. Other factors, such as geography, culture, and historical context, also play significant roles; Establishing a causal link between institutions and outcomes can be challenging. While strong institutions correlate with prosperity, proving causality is complex; They focus on historical examples but provide limited guidance on how nations can transition from extractive to inclusive institutions. Implementing institutional change is often difficult and faces resistance; some critics contend that they oversimplify complex dynamics. Economic development involves multifaceted interactions beyond institutions alone; other critics argue that they selectively highlight cases that fit their thesis, potentially overlooking counterexamples.Despite all the criticism, according to the Inclusive Development Index by the World Economic Forum, several nations stand out for their inclusive institutions and economic success. For example, Lithuania, ranked as the most inclusive economy, Lithuania has benefited from EU membership and performs well in growth and development. Hungary, follows closely in second place, emphasizing inclusive processes that sustainably share wealth and avoid burdening future generations. Switzerland’s robust growth, employment opportunities, high median living standards, strong environmental stewardship, and low public debt contribute to its position in the third rank.In fourth place, Latvia also demonstrates strong inclusive practices, contributing to its economic resilience. Poland secures the fifth spot, with a focus on balanced growth and development. Luxembourg, its strong economic performance, social inclusion, and environmental sustainability contribute to the sixth rank. Croatia ranks seventh, emphasizing inclusivity and sustainable economic processes. The eighth country is Uruguay, and the ninth country is Chile. Romania rounds off the top ten, showcasing positive growth and development outcomes.These nations prioritize equitable wealth distribution and long-term sustainability, making their institutions inclusive and successful.Robust institutions refer to stable, effective, and well-functioning systems, rules, and norms within a society. These institutions include legal frameworks, governance structures, property rights, and regulatory bodies. They provide a conducive environment for social innovations to thrive. When institutions are transparent, fair, and predictable, they encourage creativity, risk-taking, and collaboration. Independent judiciaries, property rights protection, and efficient bureaucracies are examples of robust institutions.Robust institutions foster an environment where social innovations can emerge. Conversely, successful social innovations can lead to institutional reforms. Social innovations are novel solutions to societal challenges. They can be new technologies, organizational models, policies, or cultural practices that address pressing issues.Timo J. Hämäläinen and Risto Heiskala emphasizes that social innovations play a crucial role in shaping economic and social outcomes. These innovations can lead to positive changes in institutions, policies, and practices. social innovations are processes that determine the economic and social performance of nations, regions, industrial sectors, and organizations. These innovations play a crucial role in shaping the long-term success of industrial economies, especially during the current transformation of the world economy. Social innovations can vary significantly across different sectors and regions. In sectors like information technology, biotechnology, and renewable energy, social innovations often involve disruptive technologies or novel applications. Examples include open-source software, gene editing, and community solar projects. Urban areas often see innovations related to smart cities, public transportation, and digital services. In rural regions, innovations may address agricultural productivity, water management, and healthcare access.Social innovations drive positive change by addressing gaps or inefficiencies in existing systems. They challenge the status quo and often emerge in response to institutional shortcomings. Microfinance, open-source software like Linux, and community-based healthcare initiatives are social innovations.Let’s consider the relationship between robust institutions and social innovations in the context of microfinance. Robust financial institutions, including banks, regulatory bodies, and legal frameworks, play a critical role in economic development. In the case of microfinance, well-regulated financial institutions provide stability and trust. They ensure that borrowers have access to credit and savings facilities.Microfinance is a social innovation that emerged to address the lack of financial services for low-income individuals. Microfinance institutions (MFIs) offer small loans, savings accounts, and insurance to marginalized communities. These innovations empower people to start businesses, invest in education, and improve their livelihoods. By providing financial inclusion, microfinance contributes to poverty reduction and economic growth. Initially, microfinance faced regulatory challenges. However, as its impact became evident, institutions adapted. Legal frameworks were adjusted to accommodate MFIs. The success of microfinance demonstrated the need for flexible lending practices. This influenced broader financial institutions to adopt similar approaches.Did robust institutions enable microfinance, or did microfinance drive institutional reforms? It’s a bit of both. As MFIs thrived, they pushed for better regulations. Simultaneously, supportive regulations allowed microfinance to flourish. Microfinance exemplifies how robust institutions and social innovations co-evolve, reinforcing each other for societal progress.Indonesia has several active microfinance institutions (MFIs) that support the growth of micro, small, and medium enterprises (MSMEs) while increasing financial inclusion. BPR KSU (Rural Credit Agency—Cooperative Savings and Loan Unit) is a common type of MFI in Indonesia. It operates as a cooperative, providing microloans, savings, and even microinsurance products. BPR KSU focuses on helping cooperative members and the local community develop their businesses. BMT (Baitul Maal wat Tamwil) are Islamic MFIs based on Sharia principles. They offer Islamic financing, savings, and other financial services, especially in rural areas. Besides BPR KSU, Rural Banks (BPRs), there are many other BPRs operating in Indonesia. These rural banks play a crucial role in supporting local economic development by serving small businesses and individuals with limited access to formal financial institutions. Islamic Microfinance Institutions (LKMS) adhere to Islamic finance principles and provide financial services to marginalized communities. LKMS contributes to financial inclusion while respecting religious guidelines. So, these MFIs play a vital role in empowering local economies and ensuring that financial services reach those who need them most.Online loans in Indonesia, known as 'Pinjol', share some similarities with microfinance, but they are not identical. Online loans refer to financial services provided through digital platforms. Borrowers can apply, receive funds, and manage repayments online. Online loans cover various types, including personal loans, payday loans, and peer-to-peer lending. They offer convenience and accessibility, especially for urban populations with internet access. On the other hand, Microfinance specifically targets low-income individuals or marginalized communities. It includes microloans, savings accounts, and microinsurance. Microfinance aims to empower people economically by enabling them to start businesses, invest, and improve their livelihoods. It centres on financial inclusion, especially for those excluded from traditional banking services.Some online lenders focus on small loan amounts, similar to microloans. Online loans leverage digital platforms, while microfinance can operate offline (e.g., community-based cooperatives). Microfinance emphasizes social goals beyond profit, whereas online loans prioritize efficiency and profitability. However, online loans often lack the social impact focus of microfinance. While online loans serve a similar purpose of providing credit, microfinance has a broader mission of financial inclusion and empowerment.Indonesia’s online lending ecosystem, 'pinjol', comes with a range of risks that borrowers should be aware of. Online loan providers often charge higher interest rates and additional fees compared to traditional banks. This is due to the higher risk they take by lending without extensive credit checks. Borrowers can end up paying significantly more than the principal amount, leading to financial strain.Many online loans have short repayment periods, sometimes just a few weeks or months. This can create pressure on borrowers to repay quickly, which may lead to difficulties if they do not have the funds readily available. Some online lenders may employ aggressive or unethical debt collection practices. Borrowers might face harassment, threats, or public shaming, which can cause significant stress and anxiety.Borrowers are required to share personal and financial information with online lenders. There is a risk of data breaches or misuse of personal information if the lender does not have robust data protection measures in place.While the Indonesian Financial Services Authority (OJK) regulates online lending, there are still many unlicensed and unregulated lenders operating. Borrowers dealing with unlicensed lenders have little recourse if they encounter problems, and these lenders might not adhere to ethical lending practices.Borrowers may take out new loans to repay existing ones, leading to a cycle of debt. This can trap individuals in a continuous loop of borrowing and repayment, exacerbating their financial problems. The popularity of online loans has led to the emergence of fraudulent loan schemes. Borrowers can fall victim to scams, losing money or having their personal information stolen. Some online lenders might not be transparent about the terms and conditions of the loan. Borrowers might be unaware of high penalties for late payments or other unfavorable terms, leading to unexpected financial burdens. Failure to repay online loans on time can negatively affect the borrower’s credit score. A lower credit score can make it more difficult to access future credit or result in higher interest rates on other loans.Unlike the United Kingdom, where financial promotion is tightly regulated, Indonesia lacks stringent rules. Virtually anyone can promote financial services, including social media influencers endorsing online lending platforms. The Financial Services Authority (OJK) has received numerous complaints related to online loans, including disbursement without consent, threats, and abusive billing practices. The rapid growth of online lending platforms has led to illegal lenders operating fraudulently.Law enforcement faces challenges in addressing this issue and protecting victims. While online loans offer convenience, borrowers must be cautious and informed to avoid falling into financial distress. Online loans, instead of being a solid inclusive institution, have the potential to become an exclusive institution that does not educate and claims many victims.Robust institutions foster an environment where social innovations can emerge. Conversely, successful social innovations can lead to institutional reforms. As institutions adapt to accommodate innovations, they become more robust. In turn, robust institutions support further innovations. Robust institutions and Social innovations are like Chicken and Egg, sometimes, institutional reforms pave the way for innovations (e.g., legal changes enabling renewable energy adoption). Other times, innovations force institutions to adapt (e.g., digital platforms challenging traditional media regulations). Robust institutions and social innovations co-evolve, reinforcing each other. Their interplay is essential for sustainable development and societal progress.We have already discussed the importance of strong institutions, in the next episode, we will discuss some of the characteristics of strong institutions, biidhnillah.”Subsequently, Seruni performed a musical piece,Just give me a reason,just a little bit's enoughjust a second,we're not broken, just bentand we can learn to love again *)
Citations & References:
- Daron Acemoglu & James A. Robinson, The Narrow Corridor: States, Societies, and the Fate of Liberty, 2019, Penguin Press
- Timo J. Hämäläinen and Risto Heiskala, Social Innovations, Institutional Change and Economic Performance: Making Sense of Structural Adjustment Processes in Industrial Sectors, Regions and Societies, 2007, Sitra
- Brett King, Bank 4.0: Banking Everywhere, Never t a Bank, 2018, Marshall Cavendish International
*) "Just Give Me a Reason" written by Pink, Jeff Bhasker & Nate Ruess
