Bomb blast may stall recovery<\/p>\n
Puspa Delima Amri, Jakarta<\/p>\n
Shock, anger and frustration are probably three words that
\nbest describe the current mood of many Indonesians. Just when
\nthings seem to be moving along the path towards economic reform
\nand democratic consolidation, another act of terrorism darkens
\nJakarta skies, taking the lives of eight innocent people,
\ninjuring more than 130, and damaging many buildings situated in
\nthe Kuningan business and financial district, where the explosion
\ntook place.<\/p>\n
A surge of sadness and anger has flowed through the city's
\nstreets. People are upset and bitter that this country has become
\nsuch an easy target for terrorist acts. They are tired of seeing
\ninnocent people become the victims of these demonic creatures the
\nmedia calls \"terrorists\".<\/p>\n
But an early look at the market indicators showed that the
\npsychological impact of the blast seemed to have far outweighed
\nthe economic one. Stock prices and the exchange rate, two
\nindicators that mirror instant market reaction to economic and
\npolitical instability, remained relatively flat.<\/p>\n
The blast nonetheless triggered some panic immediately after
\nthe mid-morning explosion, pushing the Jakarta Stock Composite
\nIndex down by some 4 percent, and depreciating the rupiah by some
\n1.5 percent to the U.S. dollar, but the reaction was momentary.
\nAt the end of the day, the stock market index only fell by 0.8
\npercent compared to the previous day. Meanwhile, the rupiah
\nremained largely stable.<\/p>\n
This was not the case after the previous bomb attacks that
\nrocked Indonesia. The Bali bombings in October 2002, and the
\nexplosion outside the J.W. Marriott Hotel in early August 2003
\nhad a significant and immediate impact on the economy. The
\nJakarta stock market index in Bali's case plummeted by more than
\n10 percent, while the rupiah depreciated by more than 3.5 percent
\nto the U.S. dollar. The Marriott incident pushed down the stock
\nmarket index by 1.5 percent. In the case of the Bali blasts, the
\nrepercussions were even more severe, as the tourism sector, a
\nlabor-intensive industry, has suffered greatly.<\/p>\n
This time around, the market reaction was less severe. One may
\nargue that the impact of the blow was mitigated, thanks to better
\nmacroeconomic fundamentals. Compared to the situation in October
\n2002, when the Bali bombings occurred, the current macroeconomic
\npicture is in much better shape. The growth rate has picked up to
\n4.6 percent in the third quarter of this year (compared to 3.6
\npercent in the fourth quarter of 2002), inflation is down to an
\nannualized rate of 6.7 percent (against 10.33 percent), interest
\nrates fell to 7.4 percent (from 13.2 percent) and the stock
\nmarket index is now much higher at the range of 740-780 (against
\n360-400 in the fourth quarter of 2002).<\/p>\n
Another explanation proposed is that market players nowadays
\nare believed to be more \"mature\" in reacting to such events. They
\nare becoming less driven by political motives in formulating
\ntheir decisions. Statements made by officials from Bank Indonesia
\nshow that the central bank is a proponent of this idea.<\/p>\n
Is that really the case? The following argument gives reason
\nto suggest otherwise. Neo-classical economic textbooks tell us
\nthat market players base their decisions on rational
\nexpectations. In other words, they adjust their current behavior
\nto future expectations, including the risks. The fact that
\nJakarta market players remained relatively calm by the end of the
\nday may actually imply that worries of Indonesia being an evident
\nterrorist target have been recognized, and incorporated into the
\ncalculations of risk premiums.<\/p>\n
The real cost inflicted by this incident is the loss of
\ncredibility, particularly in the eyes of the international
\ncommunity. What used to be referred to as \"threats of terrorism\"
\nhas now become transformed into a undeniable fact: That Indonesia
\nis indeed a target of terrorist attacks and that the country is
\nthe home of militant terrorists.<\/p>\n
If investors were only taking a wait-and-see approach in the
\nhope for an improved climate, particularly after the elections,
\nthey are now taking a \"wait, worry and see\" approach. As long as
\nthis credibility problem remains, we can forget about attracting
\nsignificant levels of investment, enough necessary to accelerate
\ngrowth.<\/p>\n
Against this backdrop, can we still say that the economic
\nimpact of the bomb in Kuningan was insignificant? Maintaining the
\nidea that the incident has left the economy unscathed runs the
\nrisk of oversimplification and taking things for granted.<\/p>\n
Consider the following fact. This incident is the third of its
\nkind, in three consecutive years. That's not even mentioning the
\nother explosions that took place in between the three incidents;
\nblasts on a smaller scale that caused less damage. That these
\nattacks can continue is frustrating enough for many.<\/p>\n
It doesn't stop there. Imagine that frustration, coupled with
\na similar wave of irritation felt by many economists and business
\nplayers these days. Much debate has taken place about the
\ndesperate need for Indonesia to attract more investment and boost
\nexports in order to accelerate growth and thereby absorb
\nemployment and eradicate poverty. We have the macroeconomic
\nfundamentals in place, but that the real economy has yet to
\nrecover is beginning to aggravate people.<\/p>\n
For that reason, this incident could not have happened at a
\nworse time, amid our desperate efforts to escape from this low-
\ngrowth low-investment trap that we are caught in. Worse yet, we
\nalso have to deal with a handful of external challenges, such as
\nspiraling world oil prices, the shift of the U.S. towards a tight
\nmonetary policy and the slow-down of the China's economy, all of
\nwhich have implications on the domestic economy.<\/p>\n
To deal with this issue, a two-pronged approach must be taken;
\nthe first, to immediately tackle the political consequences of
\nthe incident. The pressure on the government is high, both from
\nthe domestic and the international community. The country's
\nleaders must show their goodwill and serious commitment to
\ncombating terrorism. There is no room to be complacent about past
\nachievements when dealing with the perpetrators of the Bali and
\nMarriott bombings. Ideas to create an early warning system to
\nprevent such disasters from happening again must also be
\nconsidered.<\/p>\n
The second part of this solution is for the government to
\nseriously continue with its efforts to pursue economic reform. A
\ntall order? Indeed it is, but in this case, there can be no
\ncompromise.<\/p>\n
The writer is a researcher at the Centre for Strategic and
\nInternational Studies (CSIS), Jakarta<\/p>",
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