Change in base year a key turn<\/p>\n
The Central Bureau of Statistics recently announced the change
\nin the base year for calculating the Gross Domestic Product from
\n1983 to 1993. The significance is probably that it is now safe to
\ntalk about seven percent growth and not have to hold one's breath
\nfor fear of overheating, argues noted economist Mari Pangestu.<\/p>\n
JAKARTA (JP): The base year is needed to calculate real Gross
\nDomestic Product (GDP) growth; that is, to measure real growth in
\nproduction and incomes in the economy, one must take out the
\nprice effect. Therefore, the value of production, measured in
\nreal terms, is simply the amount produced in physical quantities,
\ntimes base year prices.<\/p>\n
The revision of the base year itself is not an unusual
\npractice and is undertaken to reflect major turning points in an
\neconomy.<\/p>\n
Between 1983 and 1993 the structure of the GDP in Indonesia
\nhas changed considerably, due to changing external factors such
\nas the fall in oil prices, deregulation and a more open economy.
\nThe share of the manufacturing sector, out of the GDP, has
\nincreased from 12.7 percent to 22.3 percent; the agriculture
\nsector decreased from 22.9 percent to 17.9 percent; and the oil
\nand gas sector decreased from 21 percent to 9.6 percent.<\/p>\n
The choice of the base year should also be based on a year
\nwhere the increase in prices are considered to be stable. Thus,
\nthe years 1989 to 1991 are not considered to be good base year
\ncandidates because this was a period of so called overheating and
\n1992 was a year of tight monetary policy, which led to lower than
\nusual inflation. Even though inflation in 1993 was close to 10
\npercent, it is still considered to be a year of normal price
\nincreases because inflation was caused by supply side factors,
\nsuch as the increase in fuel and electricity rates, rather than
\nexcess demand pressures.<\/p>\n
The question that comes to mind is - so what lies beyond these
\nstatistical changes? The change in the base year has raised the
\ngrowth rate by half a percent, from 6.81 percent (in 1983 prices)
\nto 7.34 percent (in 1993 prices). The most frequent comment one
\nhears is that the government is playing around with numbers and
\nmaking growth look higher (for what ever reason). In this case,
\nthe higher growth figure, in 1993 prices, merely reflects the
\nfact that while some prices have risen and some have fallen (such
\nas oil), for the products included in the GDP over the 1983 to
\n1993 period, the net effect is one of a price increase.<\/p>\n
Another reason for the higher growth is that there are new
\nsectors included in 1993, compared with 1983. That is, sectors
\nthat did not exist or were not significant in 1983. The sectors
\nare mainly in services related to telecommunications, business
\nservices, financial sector services and tourism. For instance, in
\n1983, financial services related to the capital market were very
\nlimited; now it is a significant sub sector.<\/p>\n
Now let us talk about growth itself. The growth of the main
\nsectors in 1994, manufacturing and the major service sectors,
\nwere more or less normal, whereas growth in construction was
\nrelatively high, due to the property sector boom, and in
\nagriculture abnormally low because of the long drought, with rice
\nproduction experiencing negative growth, so that overall
\nagriculture growth was only 0.32 percent in 1994.<\/p>\n
If growth in 1994 was 7.34 percent of 1993 prices, what will
\ngrowth be in 1995? Previous estimates, by both the government and
\nprivate forecasters, was for growth in 1995 to be much better
\nthan in 1994 due to the better world and domestic economic
\nconditions, as well as expectations that the agriculture sector
\nwill rebound. Towards the end of last year and at the beginning
\nof this year, government estimates and private forecasters were
\npredicting a growth of seven percent to 7.5 percent in 1995,
\nbased on 1983 prices. Will this translate into a 7.5 percent to
\neight percent growth in 1993 prices?<\/p>\n
Given the present situation, it is likely that the 1995 growth
\nwill only be slightly better than 1994, so that growth will be
\nabout 7.3 percent to 7.4 percent. The reasons being, first, that
\nthe rebound in agriculture may be less than expected due to the
\npossibility of drought again and the limits posed by availability
\nof cultivated land.<\/p>\n
Second, is that given continued concerns about inflation and
\nnervousness about the rupiah, the Central Bank is likely to keep
\na close eye on liquidity and thus interest rates may still go up.
\nInflation up to March is slightly above three percent, which is
\nlower than the same period last year, but inflationary pressures
\nwill continue to build up due to price increases in cement and
\nconstruction materials, sugar and due to cost increases caused by
\nthe increase in regional minimum wages. There is also still the
\npossibility of international interest rates going up later in the
\nyear. Thus, higher interest rates domestically could slow down
\ninvestments and reduce interest sensitive consumption, not to
\nmention the problems that may arise in the property and banking
\nsectors.<\/p>\n
Third, is that growth in non-oil exports may not pick up as
\nexpected, due to the continued lackluster recovery in Japan and
\nthat realization of export oriented investments may still be
\nslow.<\/p>\n
To end on an optimistic note, 7.3 percent is still a good rate
\nof growth for 1995 and will be mostly driven by the fast growing
\nsectors, mainly manufacturing and services, especially
\ninfrastructure related services, and by a relatively rapid growth
\nin domestic consumption and investment.<\/p>\n
However, the higher growth figure should not mislead us into
\nthinking that everything is rosy. First, what is high or low is
\nrelative, our neighbors are growing at above eight percent and
\nwithout inflationary pressures building up. The homework to
\nreduce structural and infrastructure bottlenecks, increasing
\nproductivity and technological capability remains. The key, as
\nalways, is continued deregulation, removal of distortions and
\ninefficient monopolies.<\/p>\n
Second, the distribution issue - whether it is by income
\ngroup, by size of enterprise and by region - remains a priority
\nissue.<\/p>\n
Third, inflation is still relatively high, to the extent that
\ninflation is a structural problem because of supply constraints
\nthat cannot respond quickly enough to increased demands. This
\nmeans that bottlenecks, such as in infrastructure and inefficient
\nmonopolies in production and distribution, need to be overcome.<\/p>\n
The homework to continue deregulation, increase efficiency,
\nenhance technological capability and ensure equitable
\ndistribution continues to be important. Finally, a priority
\nconsideration is that if one took into account environmental
\ndegradation, will growth remain at 7.3 percent?<\/p>\n
The writer is head of the economics department of the Centre
\nfor Strategic and International Studies and a lecturer at
\nUniversity of Indonesia.<\/p>",
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