Mon, 21 Jan 2008
Hendri Saparini and Binny Buchori, Jakarta

So the year 2007 is over, which much praise rained on the President's economic team for their achievements in improving Indonesia's fiscal status. But just how true their claims?

The rise in unemployment and the increasing incidence of illness due to malnutrition and poor sanitation indicates that for many people, in particular the poor, economic conditions have worsened. These facts on the ground are reflected in polls and surveys showing that the public has lost faith in the government's capacity to manage the economy.

Significant factors that contribute to this are the government's persistence in its "hands off" policy approach and the implementation of the Washington Consensus. These approaches do nothing to address Indonesia's economic problems. The following examples are evidence:

In 2007, the Yudhoyono-Kalla government did not use fiscal policy to stimulate growth. The implementation of fiscal policy has been consistently poor. This can be seen from the low realization of public investment (more than 40 percent of the budget was not spent), the slow implementation of the people's credit program and the massive amount of local government money, more than Rp 40 trillion, that spent the year parked in Bank Indonesia Certificates (SBI).

The slow implementation of the people's credit program has meant that Rp 1.4 trillion in funds that were available were not in fact released to banks in time for implementation. The large amount of money in SBIs actually imposed a heavy debt burden on Bank Indonesia and also represented a lost opportunity to stimulate economic growth. This is a big mistake given the small number of alternative sources of demand such as private consumption, investment and exports. In this situation, fiscal policy should provide an important source of economic stimulus.

The government has also kept to its hands-off policy in dealing with price rises for essential commodities in 2007. Through the third quarter of 2007, inflation was 12.6 percent (year-on-year). Unlike high income groups, the poor and middle classes spend most of their incomes on essential commodities, particularly food. Sharp price rises for rice, cooking oil, sugar and flour imposed a massive burden on these households.

The hands-off policy has resulted in deindustrialization and the loss of competitiveness in manufacturing. Even such light manufacturing industries such as textiles and wood products are struggling to hold on. Deindustrialization is apparent from the following statistics: the growth rate of the manufacturing sector has fallen, the contribution of manufacturing to the gross domestic product has shrunk, import goods are flooding domestic markets, credit to the manufacturing sector has declined, the number of workers employed in manufacturing has decreased. The growth rate of non-oil manufacturing measured in constant 2000 prices has fallen from 7.5 percent (2004) to 5.9 percent (2005) to 5.3 percent (2006) and to the third quarter of 2007 5.3 percent.

The revitalization of agriculture, fishing and forestry did not get past the idea stage, some rhetoric and a few ceremonial proclamations. The government's hands off policy and the absence of a strategy for the development of small farms meant that only a handful of large corporations have enjoyed windfall profits from commodity price increases. Meanwhile, Indonesia has grown increasingly dependent on imports of essential commodities such as rice, soybean, sugar and maize.

Global price changes have been a disaster rather than a boon for Indonesia's small farmers, most of whom are net buyers of essential foods. For example, the sharp rise in domestic cooking oil prices is a consequence of the preference of palm oil producers for the export market. The government's only response was an ad hoc measure as domestic inflation accelerated. But the root cause of the problem -- namely the domestic supply of cooking oil -- was not addressed.

The government's claim to have achieved growth in the real sector and in particular small- and medium-scale enterprises is demonstrably false. Presidential instruction No. 6/2007 on Policies to Accelerate the Development of the Real Sector and Empower Micro, Small and Medium Scale Enterprises is evidence of the inability of the government to take concrete measures to stimulate economic growth.

This policy instrument was little more than a compilation of the routine bureaucratic activities and administrative plans of various government departments. Even as an administrative reform it could only be regarded as a failure. The target of reducing the number of days required to set up a business to 25 was not realized.

Monetary and banking policy has reduced the purchasing power and living standards of Indonesian households, particularly in the middle and lower income groups. At the moment, savers holding certificates of deposit receive 6-7 percent per year in interest. The after tax rate is just 5.2 percent per year. After bank administrative fees of on average 1-1.5 percent per year savers receive just 4.5 percent. This is below the inflation rate of 6 percent.

The rates are even lower for savings accounts, which pay less than 3 percent per year. They receive negative real interest rates, and therefore must watch their savings fall in value. On the borrowing side, mortgage rates are still above 10 percent per year. This means that the spreads between savings and borrowing rates are very high, averaging 6 percent. The ratio of operating costs to operating revenues is over 80 percent, much higher than the average of 60 percent in other countries. This shows that the banking sector is inefficient relative to other countries.

The hands off policy of the government will not reinvigorate the Indonesian economy, create jobs or improve the living standards of the Indonesian people. In 2008 we need to move beyond image-making to address the real problems facing the Indonesian economy and society.

Hendri Saparini is an economist from Tim Indonesia Bangkit, an Indonesian advocacy group that promotes alternative economic policy. She can be reached at hendrisaparini@yahoo.com .

Binny Buchori is Executive Director of Perkumpulan PraKarsa. She can be reached at bbuchori@theprakarsa.org.




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