From the background above, a question then arises: "Why did the development era in Indonesia's New Order regime fail to achieve miracles like South Korea?" This paper will examine that important question. However, this question and research on this topic was not new. At least there are three primary publications about this topic. First, there are book wrote by one of the prominent Indonesian social scholars, Arief Budiman (1991), with the original title is "Negara dan Pembangunan: Studi tentang Indonesia dan Korea Selatan". This book discussed the political economy of development in both countries, provides an overview the comparative development performance, the role of the colonial legacy, international politics and geo-politics in the development of both countries.
Second, a master thesis from KDI School of Public Policy and Management in 2002 by Poppy Sulistyaning Winanti. The title of this thesis is "A Comparative Political Economy of Development of Korea and Indonesia: Historical-Structuralists Explanation", and an extent of Arief Budiman's book particularly from the historical and structuralist approach. The last one is an article with the title is "Political Economy Determinants of Growth Acceleration: A Korea-Indonesia Comparative Study". This article was published in a journal managed by Indonesian Finance Ministry in 2016, explains utilizing the most similar systems acceleration and the aggregate economic growth in Korea and Indonesia through the several approaches such as the initial conditions, colonial legacy, and external resources. Therefore, this paper will be answering the question from different approach and theory.
3. Fundamental Causes of Economic Growth: Institutions Hypothesis
This paper constitutes comparative research. As Ragin points out, quoted by Stark and Roberts (1998), comparative research can be defined as one that compared large social units, nations, societies, states, cities, or countries. According Stark and Roberts, there are two types of comparative research: the case-oriented approach and the variable-oriented approach. The variable-oriented approach tests the hypothesis by applying statistical techniques such as correlation and regression to variables based on an appropriate set of aggregate case. Meanwhile, the case-oriented approach selects two or more cases and examines them closely to explain some striking difference or differences between (or among) them.
The primary difference between comparative research and other social research methods, like survey and experiment lies in how obtain data. While other methods can collect data through experiment, interview, questionnaire, or observation, comparative research primarily obtains data through documents or library research (Winanti, 2002). Hence, this paper is comparative research, based on the case-oriented approach. Its primary source is in English and Indonesian languages.
For case analyzing, this paper will use the theory developed by Daron Acemoglu to determine the factors that influence a country's economic growth. According to Acemoglu (2009), there are four fundamental causes of economic growth consists of the luck factor, the geography, the culture, and the institutions factor. While all four factors are complementary, Acemoglu, Johnson and Robinson (2002), demonstrates that the primary driver behind the reversal of economic fortunes among former European colonies over the past 500 years was the influence of European colonialism on economic institutions. For understanding the fundamental causes of Indonesian economic growth to obtain generalizable lessons from Indonesian experience and comparison with South Korea experience, we will focus on the institutions or economic institutions factor.
Economic institutions refer to Acemoglu are encompasses different of social arrangements, rules, regulations, laws, and policies that affect economic incentives and thus the incentives to invest in technology, physical capital, and human capital. Specifically, Park (2011) defines government institutions as the policies, regulations, and organizations of the government that are devised mainly to have a proactive role in resource allocations among individual and firms. In the other words, both market institutions and government institutions are considered to be the main coordination institutions in any economy. In accordance with that, Acemoglu have classified the economic institutions into three categories as property right institutions, contracting institutions, and coordination institutions.
To explain of these three institutions, this paper will refer to Acemoglu & Johnson (2005) and Acemoglu (2009) definitions. Property right institutions refer to the rules and regulations that protect individuals and their property against expropriation by the government and powerful elites. Property right institutions ensure that individual have the incentive to invest and improve their property, as they can reap benefits and enjoy the security of ownership. Strong property rights institutions are essential for promoting economic growth, investment, and financial development, as the provide a stable and predictable environment for individuals to engage in economic activities. The measuring tool for property right institutions in this paper is the constraint on the executive score and democracy index by Polite 5, and the political regime index by V-Dem Institute.
Meanwhile, contracting institutions refer to the rules, regulations, and legal framework that govern the enforcement of contracts between individuals and businesses. While property right institutions regulate vertical relationships, contracting institutions regulate horizontal relationships in society and play a role in facilitating economic transactions and financial intermediation. Several measurements can be used for these institutions such as the Index of Legal Formalism and Ease of Doing Business Index by the World Bank. But due to lack of data about Indonesia at the time in those indices, this paper will describe it from the performance of banking and the stock market in Indonesia.
Coordination institutions themselves are instrumental in enabling economic transactions and financial intermediation by regulate financial market and establishing the necessary rules, mechanisms, and infrastructure for coordination and cooperation. These institutions are responsible for coordinating the actions of individuals, firms, and other economic agents to ensure smooth and efficient interactions. To see these institutions, this paper will analyze whether the Indonesian government or market institutions succeeds in playing its role as coordination institutions or not, as Park (2011) sees the same role for the Korean government through the concept of "Korea Inc".
In terms of the period, this paper will examine the governance of the New Order in Indonesia from 1966 to 1998 and, for South Korea, the years 1961 to 1987. This particular timeframe was selected due to its widespread recognition as an era marked by significant development and the establishment of robust economic foundations for each country (especially during the presidency of Park Chung-hee in South Korea), resulting in impressive achievements. Conversely, it is noteworthy that this period also witnessed the presence of similar authoritarian regimes in power in both countries.
